Enovix Corporation

Thank you for standing by and welcome to today's program, the Inovix Corporation Second Quarter 2023 Earnings Call. After the presentation, there will be a Q&A session featuring Inovix management. With that, I'd like to turn it over to your host for today's program, Charlie Anderson, Senior Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to Inovix Corporation's second quarter 2023 financial results conference call. With us today are President and Chief Executive Officer Dr. Raj Tuluri, Chief Financial Officer Farhan Ahmad, Chief Operating Officer Ajay Murathe, and Chief Commercial Officer Ralph Schmidt. Raj and Farhan will review the operating and financial highlights, and then we'll take questions. After the Q&A session, we'll conclude our call. Before we continue, let me kindly remind you that we released our second quarter 2023 shareholder letter after the market closed today. It's available on our website at ir.anovix.com. A replay of this call will be available later today on the investor relations page of our website. Please note that the shareholder letter, press release, and this conference call all contain forward-looking statements and are subject to risks and uncertainties. These forward-looking statements are based on current expectations and may differ materially from actual future events or results due to a variety of factors. For discussion of factors that could affect our future financial results in business, please refer to the disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, July 26, 2023, based on information currently available to us. We can give no assurance that these statements will prove to be correct, and we do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of the GAAP financial measures to non-GAAP financial measures in our shareholder letter, which is posted on the investor relations page of our website. I will now turn the call over to Raj to begin. Raj?

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Thank you.

Thank you, Charlie. And thank you everyone for joining us today. I'm gonna kick off with a few high-level remarks, and then I'm gonna introduce our new CFO, Farhan Ahmad, who will make a few comments. After that, we have a very special treat for you all today. Our CEO, Ajay Marathe, is in asia today um at our gen 2 equipment vendors and uh we're hoping to get him to show you a video of our latest uh machines and how they're progressing uh before our factory acceptance test next month after that i'll make some closing remarks and then we'll take your questions Now, first, we had a very productive second quarter that included some very key milestones along our journey to scale. First, we produced 22,502 batteries in Fab One. This is exceeding the forecast we made last quarter that we were going to make 18,000 cells this year. So we exceeded that. Secondly, we delivered on the commitment to secure the $70 million non-dilutive financing funding in Malaysia. As a result of that, we're going to lower our CapEx guidance for the year. I'll say a little bit more about that in a little bit. Thirdly, I'm super excited that we actually received a purchase order for our break flow enabled cells for the US Army. Now, this is a great testament to the quality of our product, the reliability of the product, and it's a critical step for us towards our mass production and high volume production. Fourth, I visited several customers in Asia in the last month. I'm super excited and really happy to report that we now have secured engagements with some key smartphone manufacturers, Vivo, Xiaomi, Lenovo, being three of them. Now, Xiaomi and Vivo are the top five global OEMs. Lenovo is Motorola's brand, the number three in the U.S., And lastly, I do want to bring out that we have built out our leadership team some more with a group of individuals that I worked closely in the past at Micron and Qualcomm, and I'm super excited to introduce them to you. On the last note, on that last note, I'd like to let everyone know that Ralph Schmidt sitting on stage here with me has chosen to retire and he'll be leaving the company effective August 11th. And now after a recent career as CEO of multiple tech companies, Ralph did Enovix a great favor in revisiting his roots in sales and setting up the commercialization engine at Enovix over the last two years. I want to thank Ralph for all his support to Innovix. In order to continue his work, we've recruited some world-class talent to commercialize to the commercial and product organization. This includes Vice President of Product Management, Samira Naragi, and Vice President of Sales, Dave Chek, who recently joined us from Qualcomm, where we used to work together. With that, I'm going to let Ralph say a few words. Ralph?

Thank you, Raj. I want to thank you, Raj, TJ and the board for having me as part of the leadership team for such an amazing company. I have been lucky enough to work with TJ for over 15 years and been involved in ramping businesses with him, including Cypress and SunPower and a few others. But Inovix has been the most exciting business opportunity that I've had in my career. And frankly, I've run some pretty interesting tech companies. but um i believe there's just amazing opportunity here um the team that i have you know put together has positively i think impacted the long-term prospects of the company but i've never been involved in a business situation where there's an insatiable demand for a product that has a clear market leadership, and we're engaged with every market leader in the consumer world. So for me, it's a difficult decision to leave, but sometimes kind of life throws things your way, and thus I sort of need to stop and prioritize my health at this point. The go-to-market stewards that Raj mentioned, Dave and Samira, are very experienced and talented. I've known Dave for 20 years. His business acumen and customer engagements are second to none. And it was an absolute honor to work closely with Raj, Ajay, and the entire executive team to progress Inovix to the next stage, essentially the second phase of the company after the technology base was established by the founders. Our customers have validated the technology as sound and have audited actually our business and that it's scaling properly, basically due to the actions of the entire team. So it's been an honor to be a part of it, and I'll continue to cheer from the sidelines. So thanks, Raj.

Thank you, Ralph. Now, for my remarks today, I'd like to spend a little bit of time actually talking about the InnerX value proposition as it relates to the megatrends we are witnessing in the market today. Now, if it wasn't clear already, news and events in the last few months have driven home the point that there's a ton of investment being made and directed towards AI, artificial intelligence and AI. We've also learned in the past couple of months there are many, many revolutionary computing platforms that are enabled by high-performance cameras, high-performance memories, image processors, sensors, displays that marry all this together along with AI. But it also kind of revealed a dirty little secret in our industry. None of these new devices that are being launched will really deliver on the promise to the end consumer till they have a much better battery. And I want to substantiate that today with a little bit more data on the kind of performance in battery that AI needs. And this is literally why I joined Enavix. Now, first let's talk about AI a little bit deeper. For those of you who don't know, I did my PhD in computer vision and AI, and I've spent quite some time in that area. I asked my team here to, test what the power budget that's needed. If you actually run a true generative AI application on a battery operated device, a smartphone or a laptop, what's this running it on the cloud? Because a lot of people want to run these applications on their device natively because cloud costs a lot of money and there's latency issues and so on. Now we run stable diffusion, which is a very popular text to image generating program. And we found that In 68 minutes, when we ran this program to produce images, the laptop and the laptop died. Now, if you just ran it on the cloud, you could go for 11 hours. But it costs a lot of money to run it on the cloud. You need a subscription. There's privacy issues. The resolution is not high as you want. You already paid for this expensive laptop. You'd like to use it. But the problem is you can't use the hardware very well because the battery goes down. So AI at the edge is where the industry is going, but the AI at the edge will not happen like how we all want it till there's breakthrough in the battery technology. We tried another application, a popular application for photography and for image processing is Adobe Lightroom. Adobe always had a great noise filter where you take a picture in a low light, which happens a lot of times when you're shooting, and then you try to filter the noise out. They had a standard noise filter. And a few months ago, Adobe released an AI powered noise filter. I was actually amazed by how much better the AI powered noise filter was in terms of clearing up the noise. But when we ran the AI's noise filter and we measured the battery draw, that filter needed 30 times more battery. It's actually pretty compelling why the world needs a much better battery to be able to realize these great AI innovations that are coming. I've written a blog on this, and you can look at it at innovix.com slash AI. And I really encourage all of you to check it out so that you can see this data. Now let's talk about mixed reality, another application that's becoming very popular. We had some great mixed reality products announced and soon to be in the market. Now, I go into much more details on this in another blog that's also at inovix.com. I'd like to encourage you to read it. But at a very high level, we've now seen tremendous advances in processes, tremendous advances in memory, displays, sensors, camera technologies that are enabling use cases we've always dreamt of. I mean, having a true mixed reality device is really amazing. But unfortunately, the battery has not kept in pace. Now, this point has actually was further solidified to me recently, you know, when I was in Asia and I was visiting all these customers and I visited some of the customers and I talked to them about NMX battery and asked that, is there a way we can actually start working with them on this? And the interest level I saw from them for advanced battery was amazing to see because they also know that AI moves to the edge into phones, into laptops, into into wearable devices. You just need a better battery because the next generation use cases, it's very hard to support them with the current use cases. Now, I also visited a lot of investors in the last last many months, and one of the questions I get many times is Enel X business model assumes that we will get a premium for our battery technology when we provide this increased energy density to our customers. The question I asked is, why do you think you'll get that? Actually, I'm even more convinced now with all these new devices that come out that are actually not delivering on their performance because of the battery that when we deliver this battery and battery is no longer the barrier for the performance, the supplier who makes the breakthrough in this is the one who will have the right to command the premium price with strong margins. And I truly believe that Enovix has that opportunity. Now, this is not that different from what I've seen in my past life. Over my 30-year career in semiconductors, I watched the price of processors that we sell into phones go from $15 to $65. And they did that because they delivered a better user experience to the end user. phones built in cameras, phones could do video, phones could do, you know, GPS, phones could play audio and the processor got more and more value as it provided more end user experience. I experienced the same thing with displays and cameras and memories. Similarly, as we increase our value in energy density, in cycles, in charge rate, safety, among other things, our customers will be able to take that technology and deliver much more compelling products into the market, which the end users will pay a premium for the performance, which is the premium we believe we will be able to realize. Much like I've done throughout my career, I spent a lot of time with customers, understanding what their needs are, understanding what the key parameters are, and simply put, when they win, we win, and we provide a better battery, they can make a better product, and we get the premium, and they sell better. As I mentioned before, I was super excited by the fact that we are now able to start programs with leading phone OEMs while continuing to advance our design-ins in wearables and in IoT and computers. This collaboration we're establishing with the customers will actually help us understand all the different ways we need to architect the battery to really deliver the great value. With that, I'd like to introduce our new CFO, Farhan Ahmad. Farhan, would you like to say a few things?

Thanks, Raj. I'm thrilled to be here at Enovix, and I would like to thank the entire Enovix team for the warm welcome that I've received so far. I was really attracted to Enovix by its highly differentiated technology that delivers leading energy density across the industry and a team that has a strong track record of operational excellence. The addressable market opportunity here is large. Breakthrough innovation with silicon mindset can help deliver increasingly differentiated products. And like Raj said, I also strongly believe that we can command a premium price and deliver strong margins. I'm looking forward to connecting with the investors and sharing the Enovix story with all of you. And I think it is highly compelling. Raj will touch on the guidance, but at a high level, I aim for Enovix to be a careful steward of shareholder cash and to make the investments to grow this into a great business that delivers strong growth and attractive margin profile. With that, I'll turn it back to Raj.

Thank you, Farhan. It's great to work with you again. As I mentioned earlier today, Ajay is going to join us from Asia. Ajay is going to join us from Asia. He's going to give us an update on our Gen 2 order line as it is getting ready for factory acceptance testing. We're actually going to stream this live from Asia, and we'll see how that works. But Ajay, let's say cut to him.

OK. Thank you, Raj. I hope you guys can hear me OK. It's an exciting time here. I'm sitting here at one of our suppliers. As you can see in the background, there's a lot of equipment. You're wondering what is this equipment? What is it doing? Why am I excited? Six in the morning, I'm talking with a lot of energy, but there's a reason for it. Gen 2 equipment, which we have been working on, as you have heard, we have reported, we have made a lot of progress on the Gen 2 equipment. I want to show you personally what progress we have made here on the line so you can see it for yourself and hopefully can get the same confidence that I have now. know build uh in terms of where we are right now okay so let's first go three or four important steps in what i'm going to show you right now in the battery making right so one of the first steps is laser patterning but that's done you know in other equipment here what we have is equipment which takes the laser pattern rolls puts them on these what i call the stacker we have seven stackers here on the line five of them stacking mid stack electrodes uh and two of them doing the end stacker so all of these are in a debug mode right now as we as we speak and you know we'll show you the next important step so you can see this machine is is becoming more and more real and you know soon we'll be in the debug mode you can see in between here as well as you know some of the overhead stuff the transportation and access from machine to machine these machines or this equipment this line is made for very high uph 1350 uph to be precise and has very little labor content in it uh roughly 25 people per shift running and making 9 million batteries in a year that's the that's the kind of rated speed that we are working on Each of these machines is built with inline metrology, very low human touch, making sure what we produce is at a very high yield. The next equipment I wanted to show you here, take a glimpse of it, It's in the debug mode and cycling. As you can see, the parts are moving. This is really the AO print, very important step in attaching aluminum oxide film on the side of the cells, which basically insulates the cathode anode. The next step is to measure the cathode to anode offset, making sure that's within the tolerance of the of what we need. Then this equipment right here is what is called the aoe or the constraint attack so you can see now we're going to open it again it is cycling you can see it's in the debug mode and again you know all built with linear motors granite a block inline metrology very low human touch and very high uph and you can see the the this is the inline baking of or curing uh the next step i want to show you is is the constraint attach process. As you know, the constraints in our battery are the most important pieces of material, basically, that we get from a supplier, which are which has a glue film attached to it. And then this card, this card right here, rolls, docks into this machine. And now you can see what's going on inside this machine. This is a constraint attach. Attaches on one side, goes to the other side, attaches the second. Very highly accurate, very highly precise, you know, placement. And again, inline metrology. So this is the constraint attach tool. And the last one I want to show you again, which is again, very exciting for us, Here we can see, again, the cycling going on from the other side of the machine. But the bus bar insert tool, which has been in Gen 1, has been a problem. We're learning from the Gen 1 issues that we have had, why we weren't able to do much higher speed. This basically takes care of that. This is a bus bar insert tool, which basically inserts the bus bar at a very high speed, flips it, and and completes the cell. So this again, all this equipment will show you in a panoramic view now. It's completely in a debug mode and ready for what is called a factory acceptance test. Factory acceptance test is the most important step in the equipment, procurement equipment process. And after this, it goes and ships to Malaysia, where we have announced today our site in the Penang Science Park. So that's the glimpse. This gives me the confidence. that the equipment is real it's working for people who uh wanted to actually get this was a good idea for me to just come here since i'm spending the time here anyhow to to do this live and show you you know what's going on with the gen 2 equipment okay so over to you raj thank you

I hope that was useful for all of you and you shared the excitement. we all have and you can see the excitement in ij's face and the team's face there um we've been working super hard to actually build these machines and uh and the last time that i went up there a month ago i gave a small glimpse of it but now you can see they're real we're building them up and factory acceptance is on track so uh we're super excited by that and uh looking forward to giving you more updates as we continue to make our journey uh to scale now um i want to um talk about our outlook uh for the third quarter 2023 we are forecasting um that we will produce approximately 36 000 units uh from our fab one uh our plan for the rest of the year uh is to make as many small cells as needed to support the commercial launches of the customers and also qualifications of the customers that have designed in our product from from fab one But we also want to focus on higher value projects and higher value opportunities that we've recently come across that have come to us from building larger cells and with break flow, a technology that's very, very important and provide safe batteries to U.S. Army and the other customers. Now, we noted that the total size of the US Army order for a pre-production cell is a pre-production cells that they're going to put into early prototypes of their best is nearly six hundred thousand dollars for this year, predominantly in Q4. But this is just the first step in what we hope will be a very significant business in the in the multiple tens of millions of dollars in the years to come. And that's why we are super, super excited by this opportunity. And we're working on making these things happen in our fab one. Now let's talk about our cash use. For the full year of 23, we're now going to lower our full year cash use guidance from the 240 million to 190 million. This is mainly because of lowering our capex forecast from 120 to 70 million due to the Malaysia transaction and YBS. And this some more benefit of the YBS transaction we'll realize next year. We've entered into a manufacturing agreement with YBS, and they're our assembly subcontractor. At a high level, YBS is financing $70 million towards the first Gen 2 Autoline, the one that Ajay just talked about, and with funding they're obtaining from the OCBC Bank. Now, in closing, we are preparing for our high-volume production in Malaysia, As the facilitation of FAB2 is underway, we hired a lot of strong team in Malaysia, and that team members have come here to FAB1 and undergone our training on the equipment in Fremont. Now, we are really looking forward to updating on the progress over the rest of the year. With that, let me open up for any questions. Operator?

We will now begin the Q&A session. Please note that this call is being recorded. Before we go to live questions, we're going to read the two most highly voted questions submitted by shareholders ahead of this call during the call registration. The first question is, out of the 180,000 batteries being produced this year, what percentage is for testing and what percentage is made for end use?

Yeah, absolutely. You know, when we, as I mentioned, we are getting to another 36,000 batteries in the next quarter. When we make these batteries, these go into our customers for basically testing the new products that will come out next year. Some of them are used by our customers for products we expect to launch later part of the year. And for those products that actually go to the later part of the year, we need to build some inventory to make sure that the customers are comfortable when they go to production that we have enough supply. It's really hard for us to say what percentage is actually for the customers going to production and what percentage is for testing. You know, honestly, we've had so much opportunities now coming our way, particularly with the new large sales opportunities that we are focusing some of our resources also on making sure that we can support that for the U.S. Army.

The second question is, what needs to happen for a qualifying customer to announce that they will be locking a contract to use Inovix batteries?

Yeah, actually, Ralph, do you want to take that? I know you're pretty close to that.

Thanks, Raj. Yeah, so I think Raj described very well how right now we're going to market with customers where they're building some products early. And we're expecting some releases of lower volume products in the second half of this year based on the amount of products, the amount of cells that we can produce. Most customers, you know, I should say some customers will allow us to announce, you know, them using our batteries and some will not. So it's, you know, unclear exactly how many and in what timeframe. But they will not do that until they have these products available, you know, either publicly or available for sale. And so that, you know, should be coming later this year.

We will now go to the queue. Questions will be answered in the order they are received. Please ask one question and one follow-up question at most.

We will now pause a moment to assemble the queue. Our first question comes from Derek Soderberg from Cantor.

Yeah. Hey, guys. Thanks for taking my questions. And Farhan, congrats on the new role. AJ, I wanted to start with you. I'm curious, how many proof of concepts do you have left to complete? And then can you talk about some of the unique challenges that are associated with factory acceptance testing compared to the proof of concepts? Like what's sort of the risk that parts of the equipment that pass the proof of concepts do not meet the requirements under the factory acceptance testing? Can you help us understand some of that?

Sure, absolutely. So we have actually run more than 40 plus uh proofs of concepts on you know call it 13 14 different pieces of equipment uh all most of them ran pretty good after one two learning cycles um some of them do come back actually in the design uh and then get redesigned like there were a couple of examples which i looked at yesterday uh which were in the redesign mode which i have completed uh to do proofs of concepts I would say under 10 are required actually further before the factory acceptance test is complete. And so, yeah, that's where we are right now. Most of the important ones are completed and actually ran to the expectation. One or two came back and, you know, we had to redo the design.

Got it, got it. And as my follow-up, Ralph, sad to see you go and best wishes to you, but wanted to ask a bit more about some of the AI applications using 30 to 50% times the battery capacity with some of these applications. It seems like potentially you might need five, six, seven or more large battery cells. Is that the case for some of these applications and some of the inbound? uh requests that you're getting um and you know are some of these customers and laptops uh saying that you guys are the only ones who can potentially enable some of these applications uh just as uh you've said with some of the ar vr stuff um is that the case uh thanks

Yeah, I can take that. So, you know, the points I wanted to make were, number one, I think customers are now realizing that the applications that are coming in that people want are so compelling that the current battery technology is not able to keep up. I'll give an example. You know, if you do the noise filter, like using some Lightroom and you use AI noise filter, it's almost impossible to go back to using a traditional noise filter. I mean, you just... There's no going back because you kind of see what's possible. And by the way, Lightroom also runs on smartphones. So you will see the same problem that when you start using it, you get used to it. There's no going back. So what this is doing is this is actually very early stages. I mean, it's probably the first time that I've actually anybody has put data out there that I know of, of what, how much the battery is consumed when you run an AI application. So I think our customers are also realizing that. I think it's going to be, it's going to happen in one of two ways. Either they're going to buy more batteries, you know, like as you mentioned, but the problem with more batteries is the form factor gets destroyed. You know, it becomes bigger, heavier, fatter, and so they don't want to do that. So that's when we have an advantage that we can either provide increased energy density and keep the same form factor but provide more energy and help them reduce the form factor and provide them same energy. So it's happening in one of two different ways. But it's hard to say exactly how many more batteries would be needed. But I can definitely say that it's going to be a lot more than what we expected just because of the applications that are coming down.

Thanks.

Our next question comes from Colin Rush from Oppenheimer.

Thanks so much, guys. Can you speak to the strategy around rolling out the standard sell, the depth of customer interest, and how that potentially impacts revenue ramp as some of your customers look at that standard sell gain out into the market?

Go ahead.

yeah so um we we're trying to replicate what we see in some of the other battery segments in in the marketplace today and that is in the pouch cell it's very unusual to to see a standard cell but we've had enough customer interest across many different iot applications that we see that as a viable way to go to market Typically what you see when you do a general availability like that, it's usually smaller customers that can't, you know, afford or be able to drive a custom cell size. So we're seeing quite a bit of uptake, you know, on this standard cell that we're putting out there. And you will see, you know, others in the future that will be of different sizes, et cetera.

Yeah, maybe. I'm just going to add a little bit more color. It's very similar to what I've seen when I was at Qualcomm when we ran the IoT business from a vertical business when you go into something called a horizontal business where you don't really know the customer. They buy through a distributor. They buy a small number of units. What happens is they're a lot more willing to adjust the form factor to accommodate the standard cell we have, whereas a very high volume application like a smartphone or like a you know, like a watch. People would want to put the perfect size battery to eke out the maximum amount of energy they can get out of that. But unless you have a large volume, people are not going to be willing to make a custom cell for them. So what we did with general availability announcement is to support all those other smaller volume per socket opportunity, but still give them this higher energy to sell. That's kind of what the strategy was. And I think it's a popular strategy in semiconductors and people make DSPs or processors and so on. It hasn't been done as much in batteries, but I really felt that we have a great product and we should try to get more people to use that. And one thing I found is those customers may actually end up moving from there to a high volume opportunity as their products do well, and they may come back to us and ask for more custom sell.

Okay, thanks so much. And then, guys, on the material supply chain, you know, we're seeing, you know, some dislocation, whether it's on the cathode side or even now with styling gas and some of the silicon side. Can you talk a little bit about how your customers are engaging with those supply chains and some of those material procurements and preparing for what looks like a potentially steep ramp as you get through 2024 into 2025?

You're talking about battery materials?

Are you talking about... Yeah, exactly, both anode and cathode materials.

Yeah, you know, actually, I've been fortunate to spend a lot of time with a lot of battery material suppliers in the last month or two. And what I found is that, you know, there's a lot of innovation going on. And the number of people who are now coming out and saying, we got a better silicon anode or, you know, we got a better cathode. And for us, it's super exciting. I mean, there's, you know, there's a lot of announcement coming up with, you know, a company in australia i saw recently company in england recently so the supply chains of the material production in both anodes and cathodes is diversifying a little bit more and a lot more innovation going on there um you know of course quite a bit because of the huge ev uh opportunity that a lot of people see but for us it's tremendous because we are able to take advantage of all the investment that's going in into those spaces and use those anodes and cathodes which are uh best suited for us in our battery architecture and take advantage of that and provide much higher energy density, much better cycle life, much better fast charge capability. So I think it's really exciting time for us. And the diversity of the supply chain is also helping us because we are not able to work with multiple suppliers and that helps us in our cost of goods too.

Okay, I've got a couple of follow-up questions, but I'll take them offline. Thanks, guys.

Thank you, Colin.

Our next question comes from Bill Peterson from JP Morgan.

Yeah, hi, good afternoon and nice to see things are on track with that too. Farhan, welcome to the team and good luck in the role. And Ralph, good luck in your retirement. My first question is I wanted to, uh checking on the smartphone announcements like to get a better understanding by what you mean with the term engagements i mean do you have these volume purchase agreements or it's pricing set i mean i i could these be for new form factors and i guess should we think of these large batteries for smartphones as custom parts are you looking to standardize these parts

Yeah, a lot of questions in that. Firstly, you know, most smartphone products will be custom products in the sense that, you know, every smartphone maker's battery is a specific size. Now, close enough to the other ones, but specific. One of the key areas that we are seeing a lot of opportunity is actually in in an area called foldable phones and flip phones. As you might recall, this has become a very popular category now, particularly in China, because it just provides a much larger display that you can use. And the advantage is you can run multiple applications at the same time. With 5G, you can have different windows open running at the same time different ai applications in different one people love that people love that form factor now a flip gives you a smaller device that you can put in your pocket without compromising on display a fold gives you A regular sized device, but with twice the display. So both the form factors are very popular. The problem, though, is that to support such a big display, you need one battery on each side. So a flip typically needs one battery on the back and one battery in the front and folds in the middle. A fold needs two batteries, one on each side. The advantage we have with the InnoX battery technology is at least what the customers were telling me when I met them was, hey, it's now possible to take one InnoX battery and replace two of those batteries. So now you can actually have a flip phone where the top is really thin, for example. Now, when you fold it, it's much smaller and much thinner. Or you can have a foldable phone. The problem with the foldable phone today is that it's twice the thickness of a regular phone. You can now put one battery or two thinner batteries from InnoX that can actually make that foldable phone the same form factor as a regular phone. So that's one example of where customers are using. In terms of engagements, typically the way this works is we are working on what is the form factor, what time frame in the launch, what size battery do they need, how do they charge it, how do they discharge it, which processor does it connect to, when do we need to give them samples, when we do make the first demonstration. So it's kind of like an engagement that typically would happen with a processor, with a memory, which I'm very familiar with over the last many many years so super exciting and super exciting to see that they're all going on the same path of how i've gone before and all these customers also make wearables so the same battery technology can also be used in the wearables and some of them also make notebooks so it's a it's kind of a broad brush strokes uh opportunity for us across all of them

Great. Nice to see the interest there. Also, you mentioned that about your confidence to get premium prices, and you mentioned that there's a lot of investors asking about your ability to achieve that. Another thing we also hear from investors is how to think about your cost structure, you know, vis-a-vis competitors in Asia. So, you know, I guess today, how should we think about the current Gen 2 line with the current throughput? the current cost structure around 50 million as well as the current material set you know how does that compare to high volume competitors today and maybe more importantly like what opportunities do you have in terms of driving down line costs increasing throughput and material optimization in order to close the gap with your high volume competitors

Yeah, absolutely. So I answered this question a couple of times on investor calls. I am happy to go through it again. Typically, the cost in a battery making is majority of the cost, like 60 percent or even higher is material cost. And these are anode cathodes, electrolytes, separators and and so on. now currently our cost structure is clearly not where it should be and uh it probably won't be where we want it to be even when we build like one line so you have to get to scale you know build batteries in the tens of millions to really get those purchase agreements to the part where the material cost is uh is very very uh competitive and we are finding that uh now as we start building our factory you know aj and his team uh he's got a terrific supply chain team and he's hired some very strong um you know uh supply chain and also um you know material procurement people that are getting those costs down um and so so in that sense the comment i want to make is as we ramp into volume the material cost will come down and we are seeing a lot more competition as i mentioned now in the in the in the whole material stack so we are able to you know dual source or even you know multi-source in in some of these to get the cost down the other one is uh the cost of the machines itself um and aj and his team have done a lot of work in um figuring out what aspects of the machinery we can further cost reduce. For example, when we talked about this first line, which is the line we are building, it's a universal line in the sense that it can make batteries from very small watch batteries to much bigger smartphone or laptop batteries. But as we are making progress in design wins with our customers, we will be able to optimize those lines so that the line cost comes down. But the variability of the battery side it needs to make may not have to go all the way from very small to very big. It could be a big battery, maybe 10% variation of that, so we can support all the smartphone cells for example on that line and another line could run much higher throughput and support the watch cells so we are in the middle of that of how to optimize the lines in terms of line cost and line throughput and also in terms of how to get the material cost down i'm very optimistic that long term it's going to be very uh healthy healthy gross margin business as we get scale and as we get lines more and more optimized to end products yeah thanks for sharing insights and best wishes to farhana and ralph

Thank you, Bill.

Thank you. Our next question comes from George DeAnarchos from Canaccord.

Hey, everyone. Thanks for taking my questions. First, maybe to focus on anything new that's happening with the EV opportunity. You specifically mentioned in the release of fast charging based on the structure of the batteries you're building. So any updates that would be appreciated. Thank you.

Yeah, as I mentioned, we're making steady progress in that area. We now were able to further quantify as we fast charge, what is the benefit of our architecture in terms of fast charging. And as I mentioned last time, we are working with a couple of EV OEMs in working with the material stacks that they would like and how we can put them in our architecture and get them some samples. It's moving, and I don't have any new milestones to share today, but I'm optimistic that we'll be able to give more data before the end of the year.

Thanks. And maybe as a follow-up, just to focus on the capital structure, you lowered your capital needs for this year. Can you sort of remind us what 2024 looks like and what the requirements will be for you over the 12 to 24-month period? Thank you.

Okay, I'm going to get Farhan to take the call, and it's for CFO.

So, yeah, we're not guiding to CapEx needs for next year, but what I can tell you is that we have a lot of things going on next year. We will be completing the Gen 2 line. We also have the Agility line also coming in. So CapEx will be higher than this year, but not guiding to CapEx. You have to wait until end of the year, and then we'll probably be able to share more.

our next question comes from alex potter from piper sandler great uh thanks guys so maybe just a quick follow-up on that one i know maybe you can't uh specify in terms of specific numbers here but um maybe qualitatively i know that you're you're focused initially on the agility line uh and then getting the first lines up and running in malaysia but i'm wondering if you've begun Sort of contemplating when you'll start building additional, maybe dedicated high volume and customer specific lines in Malaysia, as well as how much those lines will cost. And like I said, I know you don't have to maybe put a fine point on exactly a dollar number there, but are you at least having conversations with customers about when they can expect deliveries from custom lines like that? And in your mind, have you started thinking about what those will cost and when you'll start building those lines?

Yeah, so I think we talked about this before. So mainly, you know, our customers are now in multiple form factors, right? I mean, we have customers in smartphones, we have customers in laptops, we have customers in watches, and we have to optimize the line for each of those. Now, again, we are now working at different models. Like when you talk about a line, the line has multiple zones. That's the other thing you got to remember. You know, some of the zones are laser machines, which maybe we can... you know, optimize for multiple ones. Some of the lines are more, as Ajay mentioned, constrained stuff. Then there's zones that do buffering, you know, and, you know, things like that in the back end. So we're now trying to figure out the right optimization where we leave most amount of flexibility for us in terms of satisfying all three of these markets. But at the same time, we're financially also optimal in terms of not making just universal lines for all of that. I mean, we, you know, so I think that's where it's going. I wish I had a more precise answer for you, but I think you'll have better visibility as the year goes along. But rest assured, we're having all of those conversations you mentioned with our suppliers on which are the long lead-term months, which one we get sooner, and which one we get later, and so on.

Okay, and then maybe just a follow-up to that. In terms of who will pay for these new lines and how those lines will be financed, I know that there's sort of multiple different options. You could get your customers to help pay for it. There might be price concessions associated with that or dilution associated with that. How far along are you in those discussions regarding how funding will be arranged for these new lines beyond the initial several lines that you already have planned?

Yeah, so I mentioned when I first took over this job that there are three options for us in capital raise. The first one clearly was that we are going into Asian countries where people want us to be there and there's the ability to get favorable funding options because those countries want us to put our factories there and bring the technology there and provide jobs. And as you can see from the announcement today, we were able to deliver on that. uh the second one i mentioned was that uh whenever um opportunity arises and the capital markets uh help us you know we will we will work on raising capital and we've done that and we've capitalized the company with uh with the convert earlier in the year the third one i mentioned is that customers would like to fund some of our lines and uh and as i mentioned uh you know that will come with some um you know some uh um i guess things associated with you know um you know margin, price, and so on. All three are open. And honestly, at this time, we don't have to make one of those decisions because we have capitalized the company. And with the most recent announcement with YBS, we have some more runway. So Farhan's here now and he's going to figure out the right optimal path to get the CapEx for the next stuff. Okay.

Sounds like a perfectly easy job. Thanks. Thanks very much. And welcome, Farhan. Looking forward to working with you.

A reminder. a reminder if you have a question you may use the raise hand feature at the bottom of the zoom interface if you join by phone you may dial star 9 to raise your hand and star 6 will allow you to unmute our next question comes from gabe dowd from kallen hey thanks everyone thanks for taking the time um i was hoping uh raj could you maybe

Give us an update on the MOU that was announced last November for smartwatch program. Is there any notable progress that you could comment on today?

Yeah, I guess maybe Ralph can comment on that. I think he was involved in that MOU.

Yes. So it wasn't necessarily specifically for smartwatch, but using our technology and multiple platforms moving forward. And, you know, we have made progress there where the customers have been qualifying the product, you know, and it's just an ongoing process for us. We should see some outcome of that either, you know, next year, most likely into 24 or 25 from a volume production perspective. But, you know, it's progressing along sort of as we expected it to.

Yeah, one comment I'll make, Gabe, is that clearly that MOU is one thing that we talked about, but after coming back from Asia recently, it's just a tremendous amount of interest in our technology and products from many, many customers with large volume opportunities. So we just have to get the qualifications done and build our factories to satisfy the demand that's coming up.

Kelly Blue Book is your trusted pricing, fixing, and instant cash offering car shop. KBB.com it.

Got it. Got it. Great. That's helpful. That's helpful. Thanks, guys. And then just a quick follow-up, and I know this probably doesn't matter today, but if you ship 10,000 cells and 2Q generated for 2,000 in revenue, it implies a little over $4 in an ASP versus you previously discussed $5 for the small cells. I'm just curious, maybe what's driving the delta there?

I mentioned before, you know, sales are going into customers that actually we are sampling. Sometimes we don't charge for samples because we'd like for them to use our products and test and validate and then, you know, move forward. Sometimes we charge a lot for samples. And so you can't just multiply the revenue number, take the revenue number, divide by the units and get an ASP. That's probably wouldn't give you an accurate answer. This is early stage production and this is really customer qualifications. And so that's not a good time. That's not a good way to calculate ASPs. But I can tell you this much though. We feel very good about our ASPs because the value we provide. And that's something I'm even more encouraged now than ever before.

Yep. Understood. Thanks guys.

Our next question comes from Ananda Barua from Loop Capital Markets.

Hey, guys. Yeah, thanks for taking the questions. Appreciate it. And Farhan, welcome. Looking forward to working with you, Ralph. Sorry to see you go. Really enjoyed working with you. Hey, Raj and Ajay, how are you? Yeah, just a couple, just real quickly. With regards to Fab 2, Gen 2, and getting it going between now, and I guess is it still April timeframe you're expecting to have initial production product out? Should we expect from you to update us on certain milestones in between the earnings calls? And what might those sorts of things be that we could expect from you, if there is anything? And then I have a quick follow-up.

Yeah, absolutely. The date is till mid-April to get samples from our Gen 2 line in Malaysia that we can send to our customers. And the big next milestone is factory acceptance in next month. And IJ Field's confidence is out there. And we hope to be able to give you an update on that when that's done. then we have milestones on when the agility line comes in, I think you'll see that. And then we'll have milestones and when equipment goes into, into our Malaysia facility, now that we got the contract contract done, you know, we have a site and we have people and all that, um, that'll be really good to see. Um, yeah, I think, uh, lots of, uh, lots of exciting things to report as the year goes by.

All right. Awesome. That that's helpful. And then just, just quick follow-up, uh, How should we think about aspirations for EV MOUs as you move through the years? Is this year still, is that still a goal that you have in mind? And do you need to, I know, I think there's been conversation about actually getting an EV battery sample made also. Is that something that's necessary for EV MOUs to occur? Thanks.

Yeah, I mean, that is absolutely the goal. I mean, honestly, I think our challenge right now is the number of opportunities we have. You know, this army opportunity that's came up, you know, the EV opportunity that is making good progress. And then we announced the general availability of the cells. We have customers qualifying those things. We have the Malaysia line coming up. It's just really a question of sequencing all those things in the right time fashion so that it's most profitable for the company. That's absolutely the goal, but we kind of have to balance all the stuff we got going on now, so.

Awesome. Thanks. That's helpful. Appreciate it. Thanks, guys.

Our next question comes from Sean Milligan from Janney. Star six will allow you to unmute, Sean.

Hey, guys. Thanks for taking my question. I guess the first question is, how can we think about a FAB2 ramp in terms of once you get this first Gen 2 auto line in and running and start to see some production orders, how should we think about the ability to add additional lines at a pace, like is it one per quarter, one every six months? What's a realistic pace for us to think about that, you know, come 25, I guess 26?

Yeah, look, I mean, if we wanted to, we could build four universal lines and build them as quickly as we can. But as I mentioned before, that's not a very good strategy because we want to optimize the line for the customer. And that's where we are spending all of our customer opportunity. so that we get the most amount of margin for each product. We are working feverishly on what are the long lead pole issues so we can get working on those. We are working on how to optimize the line even more so that each subsequent line costs lesser. So those are all things we are working through and I hope to be able to give you more color as the year goes by on how we plan to do that in 24 and in 25. So at this point,

i don't have much more details than what i mentioned last time okay and then with um since the ybs announcement is out uh the 100 million and that covers the basically the facility plus the first line can you talk about how many lines you think you can ultimately fit in that facility

Yeah, that facility itself has space for four lines. And we are facilitating, you know, we're making sure the facility can hold in terms of electricity, dry room, and all that kind of stuff up to four lines. And that is super exciting. So we got that worked out and we got the first line going in. Now we're just trying to figure out, you know, the sequencing of the next few lines, you know, as profitably as we can.

Okay, great. Thank you.

Our next question comes from Gus Richard from Northland Capital Markets. Gus, feel free to use star six.

Yes, thanks for taking my question. Can you talk a little bit about where you are with commercial terms with YBS and have those been nailed down at this point?

Yeah, we signed the manufacturing supply agreement. So I think it's nailed down, signed by us, signed by them. And that puts in all the terms there in terms of exactly what the uplift is and how it comes and so on. So the terms between us and YBS are signed.

Okay. I appreciate that. And then I just want to make sure the agility line is still expected to be up and running. in November of this year or by year end and be able to produce samples for customers?

Yes, that's still on track. We believe by year end we'll have that, yes. So we are building on two lines, really. We're building the agility line. We're also building the, you know, line one of the Gen 2.

Right, right. And line one of Gen 2, the rated throughput's 9 million units per year.

Nine million of the bigger batteries or 18 million of the smaller batteries, nine point something, but roughly round numbers, yeah.

This, Raj, just to clarify, the first line is a universal line, right? So we've given up a little bit on the UPH optimization. So this first universal line will build nine and a half million batteries of any kind.

That's correct.

That's correct.

Thank you for that.

Okay. Thank you for the clarification. Yes. Thanks for the clarification. That's it for me. Thank you, Gus.

Our next question comes from Chris Souther from B Reilly.

Hey, thanks for taking my question here. Maybe on the production from Fab 1, came in ahead of the target in the second quarter, targeting 36,000 in the third quarter. Are we still targeting 180,000 for the full year or is the acceleration of some of the larger laptop phone batteries change that target? Are there any specific things you'd call out we would need over the next few months to hit 180,000 if that's what we're still looking for? And is there any significant expectation from the agility line this year?

Yeah, great question. We absolutely, with the way the manufacturing is going on, Ajay and his team have done a phenomenal job. We can make those 180,000 batteries if we wanted to at this point, absolutely. That's the goal. But now that we have these opportunities for higher value, from both these larger cells for the army and for laptops and other areas. And, you know, as the question was asked, what do we do about the EV stuff? We're getting a few other ones and we only have one fab here and the agility line is coming. So based on how quickly the agility line comes in and how to optimize the ones, the fab here, we're going to update you on exactly what we want to do for the rest of the year. But it's a good mix problem we have that we have more

opportunities to work on and we have to make sure we want to build the right ones okay makes sense um and then on the customer side i appreciate the color on um some of the you know larger phone and laptop customer engagement um if we go back to the customer funnel plan for for 2023 that you provided on the january 3rd presentation i just wanted to see how you think you're tracking uh as far as you know accounts moving towards some of those later stages, you know, P1K, P10K, and any metrics you could provide breaking down the 737 million in active design and design wins by where we are in some of those milestones.

Yeah, Ralph, you want to take that?

Yeah, so we haven't really shown that graph again, but you've memorized some of the milestones very well. So yeah, we are moving customers from what was called kind of QS100, which is sort of very early sampling stages, into that P1K, which is the production 1,000 units or more. and um and that's sort of um you know the the path till we get to you know real revenue and high volume which again based on how many units were were getting out of the fab happens you know later this year and then into next year as well So we've got, as Raj has pointed out, we've got plenty of opportunities stacked in that pipeline. It's a matter of us getting the right mix of the right amount of product, which is why you're seeing us not ship all of our units that we put together as we build up a little bit of inventory for some of these customer product launches moving forward. But the funnel is progressing well. And even the front end of the funnel, which, honestly, because we have so much opportunity, we've spent less time on. We're getting a bunch of new customers coming in with new opportunities that keep increasing the funnel.

Appreciate the details.

Congratulations on your retirement year. Thanks, guys. Thanks. Thank you.

Our next question comes from Tim Moore from EF Hutton. Star 6 will allow you to unmute, Tim.

Thanks. Plan the equipment.

line video walkthrough tonight was insightful yeah my main question is you know you're clearly innovating and pushing the envelope on energy density and lighter weight batteries you know more than just the us army is going to appreciate that are you seeing more customers or prospects maybe appreciate the roughly 50 percent lift in more amp hours i know that's a wide range for capacity but you know whatever it is compared to their technology that they've previously been using. I'm just wondering if the awareness by customers for the amp hour list from your offerings or even marketing accelerating by you is starting to really shine through the last couple of months and accelerate.

Yeah, I mean, absolutely. The customers truly appreciate the fact that we're providing more energy density. And again, this is really driven by the new applications that they see coming that need much more battery. I think that is just a classic of what's happening. I mean, I wrote in my blog, if you see, For example, the new Apple mixed reality headset, you can see two-hour battery life. I mean, it'd be beautiful if you could get that to four hours or six hours or eight hours. So we are seeing that across the board. And also as AI moves from the cloud into the edge, you just need more and more because of the immediacy. So the energy density is totally appreciated. I think as our customer engagement is moving to the next level where we have joined programs with them, they're testing our batteries, they're putting them in the form factor, we are also gaining a lot more appreciation for the various, how should I say it, the different parameters over which you have to optimize the use of a battery, for example. We need to provide energy density. We also need to provide cycle life. We also need to provide the ability to charge really quickly. We also need to provide the ability to get into the heat fast, charge and discharge at different voltages. So we're just moving to the next level of the customer engagement where we are really able to work closely with them on how the battery fits in the framework, how it interacts with the processor, how it interacts with the OS. It's just a... fascinating to see and we're able to roll that now back into our product roadmap so our next generation batteries when they come out with the next generation technology they will be even more optimized to all these different requirements in addition to providing higher energy density which is really the transition of the of the of the technology just add a little more that's really I think

I was just going to say, you know, we shouldn't lose sight of, you know, what was sort of announced in this and, you know, as far as this quarterly release goes with the, you know, with Raj's involvement in some of these mobile phone customers, mostly out of China, being much more aggressive and actually allowing us to talk about them as being, you know, customers and being involved. They're the ones seeing the absolute need for this uplift. because to the points that raj has been making all day is you know they need to enable features and they just can't do it with the existing technology that exists out there so they are pushing very hard and want to partner with us to to make that a reality and mostly in mobile platforms today yeah thank you thank you for the highlight yep that's a terrific color and i'll save my remaining questions for offline later today thanks

There are no further questions at this time. With that, I'd like to turn it over to Dr. Raj Tillery for closing remarks.

Yeah, thank you everybody for listening to us and thank you for all your questions. Really exciting times and a great quarter. Looking forward to speaking with all of you again next quarter. Thank you.