Enovix Corporation

Thank you for standing by and welcome to the Novix Corporation's first quarter 2024 earnings conference call. Currently, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, today's program will be recorded. And now, I'd like to introduce 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 first quarter 2024 financial results conference call with us today our president and chief executive officer dr raj taluri chief financial officer farhan ahmad and chief operating officer ajay marathe rajan farhan will provide an overview and then we'll take your questions after the q a session we'll conclude our call before we continue let me kindly remind you that we released our first quarter 2024 shareholder letter after the market closed today It's available on our website at ir.novix.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 that 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, May 1st, 2024, based on information currently available to us. We can give no assurance that these statements will prove to be correct, and we none intend and undertake no duty to update these statements except as required by law. During this call, we'll also discuss non-YEP financial measures, which are not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of the GAAP financial measures to the non-GAAP financial measures in our shareholder letter, which is posted in the Investor Relations page of our website. I'll now turn the call over to Raj to begin. Raj?

Thank you, Charlie, and thank you to everyone joining us today. For our format today, I'm gonna start with a recap of our recent results, how we are progressing against our strategy before I turn it over to Farhan for the financials and the outlook. I'll also have a few closing comments and then we'll take your questions. We're off to a great start in 2024. To recap our recent achievements, first, we delivered a Q1 revenue of $5.3 million, which was above our forecast due to strong performance from the IoT category. And thanks to the higher revenue and favorable product mix, we reported positive non-GAAP gross margins for the first time in the company's history. Second, We completed the factory acceptance testing of our Gen2 Agility line, and the vast majority of the machines are already in Malaysia, and the SAT is well underway, which is the site acceptance test. As a result, we are on track to produce our first battery samples of the EX1M technology this quarter. Now, I'll also note that the FAT for the high volume, the Gen 2 Auto line, is nearly complete. And given that it's based on the exact same process kernels as the Agility line, for the unique and challenging portions of our battery manufacturing process, such as laser dicing and stacking, our yields are already at upwards of 95% in our Gen 2 machines. Big picture, manufacturing is in a great place. We are confident we can scale the Gen 2 process given the amount of rigor we put into getting these qualification steps right. Now let's talk about the customer progress. Let's start with smartphones, the largest portion of the battery market in consumer electronics. We are deeply engaged with market leaders given the value they see in our architecture to enable silicon and increase the battery performance. As we talked about previously, our process has been to work with these OEMs to gather the specific requirements for the smartphone market, and then develop a product that's tailored to the needs of this market. This is exactly what we've done with the EX1M. And I'm thrilled to update you that we have now begun producing samples of EX1M in Fremont for the initial testing, which you can see on the cover of our shareholder letter. It's super exciting for us. Now the samples of EX1M will go out shortly and the customers are really eager to kick off the qualification products of these samples with their products in mind for 2025 launch. What does this mean and where are we with these customers? Now let's take a quick look with this slide. Now what I'm showing on this slide is basically the size of the smartphone business opportunity for us. The smartphone battery leadership opens a $12 billion opportunity for Enamics. If you look at the top bar on the slide, you can see all the OEMs that ship around 1.2 billion smartphones in 2023. The top eight of them represent a billion units, which is 80% of the volume. Now, of the 12 billion lithium ion battery TAM in smartphones, 9.5 billion is among these top eight. Collectively, they produced 280 plus models of smartphones, which means an average smartphone unit volume of, you know, three and a half million units per model. So three or four models of this will take a full line of ours. Now, six of the top eight of these OEMs are going to receive samples from the EX1M smartphone battery from us. So that $7.5 billion of smartphone battery dam is actually represented here. So we're in great shape, as you can see, with the market leaders. Something that was a priority for me when I joined the company last year to focus on the largest part of the battery market. Now the customer interest has extended to conversations with OEMs about formalizing our relationship with them as we started making progress over the course of the last year. Some have expressed desire to be the first to market with products in 2025 and beyond. To that end, I am really pleased today to announce our first development agreement with the top five smartphone OEM by volume. What this agreement reflects is a progression of our technology relationship with this company and a mutual plan from both the company and us to bring out our technology into user's hands. Very exciting development that has happened in the last quarter. And we see similar interest and collaboration from other customers who are also sampling to who we are going to sample with our ES-1M technology in the coming months. Our goal is very straightforward. We begin with a handful of SKUs from this group of customers, ramp EX1M to production in 25, then further differentiate with our EX2M, a battery that samples later in this year for product launches in 26. As I have highlighted in the past, there is secular demand for increased battery capacity with every smartphone generation. And InnoVics may be the only company that can help these leading companies, leading smartphone OEMs, keep up with the demand for the higher and higher energy density needs of the batteries because of all the AI applications that are coming into the smartphone, particularly for all the on-device AI applications. So let's recap what products we plan to bring to the market on the next slide. We've shown this slide to you before. EX1 is our current technology that we were sampling last year. EX1M is a new technology that we will be sampling the second quarter of this year. And this technology is comparable on energy density to EX1M, which is quite a bit differentiated from all the cell shipping out there in the market. But we've made a few important advancements to this battery. We've increased our cycle life. We increased our capability to charge fast, both of which are very important in cell phone market. now we plan to sample ex2m which is the generation after this where we continue to make improvements on energy density and cycle life and fast charge capability our r d teams have already started working on ex3m where we will further make improvements over ex2m in all these three vectors energy density faster charge and so on and we our plan is to sample them in 2025 Once we bring a leading smartphone battery to market, our view is that this gives us the entitlement to win in other large parts of the battery market, namely IoT and computing. There is another $12 billion of TAM in those two markets. The reason for this is a smartphone battery has the highest bar of all consumer batteries. The demands of on-device AI are very high, so it needs higher energy density, higher cycle life, people like to keep the smartphone for a while, fast charge rate, they like to charge it quickly and move on. Highest levels of safety, it's a device you carry with you on the time. So when we produce a battery that meets these requirements, all the other markets are entitlements for us. This is actually something, same thing I saw at Qualcomm. When I was at Qualcomm, we built a significant mobile phone business, but very quickly we were able to sell the Snapdragon into IoT businesses after that. Now it should also be not lost on anyone. The logos you saw in the previous slide of the smartphone OEMs are the same logos of some of these customers who are actually leading in some of the IoT markets like wearables and tablets and computers. So proof positive for strategy is once we qualify with the smartphone customer takes our ES1M sample, they're not only qualifying us for smartphones, but also for smartwatches and so on. To this point, we are continuing to make inroads into multiple other IoT customers. We are applying our vertical markets philosophy where we selectively engage with a few high volume opportunities with leading OEMs that are products that take advantage of the higher energy density and better battery performance of EX1M and EX2M. Presently, our commercial team is focused on select IoT design opportunities for both 1M and 2M, with product launches targeted in 25 and 26 for high energy and batteries. So some really meaningful progress here. Now, as we look forward, we're approaching some key milestones this quarter. As production begins in Fab 2, and we get samples of our EX1M going out to the customers. Now let's take a look at our scale-up strategy. We've shown this slide before. Q224 is when we are going to be sampling our first EX1M batteries from our Agility line to some of the smartphone customers and also some IoT customers. Second half of 24 is when our FAB2 will get ready for production. And Q4 of 24, we expect to sample the EX2M, the next generation of the battery. Now that takes more, you know, people take some more time to qualify that, and we expect that to launch to production in 26. In 2025, our goal is to launch multiple smartphones and also IoT customers with our EX1M battery. Now, what does scale look like when we get to launching multiple products with multiple customers in the coming years? This is a slide that we haven't shown before. This is a slide about the smartphone production line unit economics. Our manufacturing R&D team has been very busy at work to reduce the cost of our lines. Now we are targeting the CapExport line to be in the $60 million range in the out years. And we've also targeting now with the experiments we've done to be able to get the throughput to be 1,650 units per hour. What that does is each line has the capability of producing a revenue of $150 million. What we're finding is that as we produce higher and higher energy density batteries with better performance, there is the opportunity to increase the ASP because the customers want a higher energy density battery because that'll help them differentiate the products much better. At that point, we expect our cash gross margin to be in the 50% plus, and we estimate the payback of each of these lines to be one year. So very exciting future here as we get into scale of manufacturing. As you can see, they're making tremendous progress and we have a very clear path and a very attractive long-term financials as we scale this business. Now, none of this would be possible without the collective success of our global teams. From the operations team in Malaysia readying our FAB2, to the team in India reducing our R&D cycle times, to the team in Korea improving our coating capability. Based on this progress and taking advantage of our global footprint, we are now accelerating our plans to identify additional efficiencies as we scale to take advantage of this global footprint of our engineering teams and manufacturing teams. Our plan is now to reduce our fixed costs by more than a third are by more than $35 million annualized by this year end. This significantly reduces our capital needs and accelerates our path to profitability. With that, I'm going to turn it over to Farhan.

Thanks, Raj. All the relevant financials are in the quarterly report in the shareholder letter. So I'll kind of keep my comments at a high level and then provide the outlook. For Q1, we delivered revenue of $5.3 million, which was ahead of our expectations. And we also had a first positive non-GAAP gross margin, as Raj mentioned. The EBITDA, the non-GAAP EBITDA came in at a loss of $26.3 million, better than the midpoint of our guidance. And non-GAAP EPS came in at 31 cents loss, a penny better than the midpoint of our guidance. We ended the quarter with $262 million of cash and equivalents. For Q1, the capex was $15 million, and we used about $35 million in operation. Our balance sheet remains strong, and with the reductions that Raj mentioned, it provides us strong liquidity into 2026. As a reminder, we accelerated the depreciation of FAB1 equipment as we converted it for usage for our product development. So in Q1, you see that the R&D expenses had about $18.5 million of accelerated depreciation. This won't occur in Q2. And we expect to return to a normalized level of depreciation expense and operating expenses in Q2. And then we should see reduction in back half of the year and into 2025 as we reduce our spending in high cost geographies as Raj had mentioned. And now for our guidance for the second quarter of 2024, we forecast revenue between 3 to 4 million and adjusted a bit the loss of 26 to $32 million and a non gap EPS loss of 22 to 28 cents. As we have highlighted on the last call, Q2 tends to be the seasonally low quarter for the battery business that we acquired last year, and we expect strong revenue growth from Q2 level in the back half of the year. With that, I'll now turn to Raj.

Thank you, Farhan. As you can see, we have a very, very busy quarter ahead of us as we begin production in Malaysia and begin getting our EX1M samples out of the door to our customers. Customer enthusiasm is very high and our relationships continue to grow stronger. On that note, we have a number of customers in the middle of scheduling visits to our Fab 2 in Malaysia over the summer. And we are planning to have a grand opening of our factory with all the key constituents, customers, investors in about August timeframe. We'll plan to share more details later on. Should be a very exciting event. We are very excited to showcase this facility. And I was there in Malaysia recently, and it's really phenomenal what the team there has done. And it'll be awesome to showcase it to our customers and investors. With that, we can go to questions now. Operator?

We'll now begin our Q&A session. Please note this call is being recorded. If you would like to ask a question, please use the raise hand feature on your screen. If you've dialed in via phone, use star nine to raise your hand. Questions will be answered in the order they are received. please ask one question and one follow-up question at most. We'll now pause for a moment to assemble the queue. Our first question will come from Mark Schroeder of William Blair.

Hey, team. This is Mark on for Jed Dorsheimer. Congrats on the JDA. That's great news. A nice surprise for us. Speaking of them, I know that the target is for a 2025 launch. But does that give you any indication on when you'll need to see a PO to achieve that timeline?

Yeah, the question is on PO for the launch in 2025. You know, in consumer electronics, typically the POs, you know, I've been in this business for a long time. Typically, the POs are placed a couple of months before production. And so from now, we're going to give them samples. They're going to qualify these samples and then give us some feedback. And then we're going to get from them the exact battery size that they actually need. need to go into a phone. Once they decide the phone model, then we need to give them samples in that exact size. Then they go through some more rounds of qualification within that phone. And then when the phone passes all the EVT, PVT, all the tests, and it gets close to production, that's when we actually get the PO. So I'd say it really depends upon the launch, a couple of months before launch time. So I'd say second half of next year. I mean, like summer to second half, probably.

Got it, thanks for the color. And for the follow up, I'll ask another one here is, it seems as though you're using a land and expand model with these customers, right? They all have many different tiers of performance. Do you think that the customer is looking to get you into as a trial in the top tier form or is there, do you think you can be in multiple models by the end of 2026 with this customer?

Yeah, again, like I said, I think we are sampling multiple customers. We've just closed the JDA with one of, you know, what I announced here is JDA with one of them, the development agreement with one of them. But we're working with multiple ones. Typically, my experience in what happens in smartphones, you know, from... what I've done in other companies is that they put you in a model, they see how that is, and before they put you in the model, there is a battery evaluation team that makes sure that they're comfortable with the battery and where it goes. You now become one of the chosen battery vendors for a platform. So it starts with one model, but once you're in that, once you're qualified by the customer, you make a model, that quickly, my experience is, moves into multiple models across different tiers. And again, people typically optimize the battery for energy density for fast charge for cycle life based on the geography in which they're launching a model and the shape and size of the model. So my expectation is that once we get in, the next model should come much, much faster and much shorter qualification cycle.

Great. Thanks, Raj.

Our next question will be from Colin Rush of Oppenheimer.

Thanks so much, guys. You know, as you've gone through the equipment testing and gotten everything installed, and you've talked about, you know, kind of starting out at roughly a 65% yield sort of ratio. Can you talk about, you know, any surprises or, you know, positive, you know, incremental movement as you've gotten through the acceptance testing and gotten everything installed?

I'll let Ajay handle that one. He's here. Sure, Colin. Good question. No, the FAT, as we have been saying, is pretty rigorous process, right? We go through several different, not just the critical to quality parameters, but also the marathon runs, the UPH, uptimes, and yield, of course, right? So no surprises. are expecting high yields, and that's what we are getting at FAT. There'll be more fine tuning that we will continue to do through SAT, site acceptance test. But generally speaking, I'm particularly quite excited about how the equipment has performed in the FAT cycles that we have run. And pretty much most all the FAT for agility is done, and the yields are exactly where we expected, and then some. So no surprises, only on the positive side.

Excellent. And then with the customer engagement, obviously you guys are getting deeper and more intimate with these customers. And the performance specs, I'm sure, on these phones are changing very quickly. Raj, can you talk a little bit about the cadence of that performance and what they're demanding of the phones and how quickly that's changing as we start to see generative AI become a much bigger part of some of the future growth for the phone functionality?

Yeah, what we're noticing is that, you know, customers want higher and higher energy density for one. And secondly, they're asking for batteries with more higher and higher capacity, you know, in terms of 6,000 milliamp hours and higher. You know, I think the reason for that is simply that, you know, the Gen AI is just the battery consumption is like crazy. And you know, when they start using these apps. I think last time I showed some data on YouTube versus ChatGPT versus now DALI and so on. Clear indication from all our customers that they want more energy density, larger batteries, and the ability to charge it quickly and different shapes. But The unfortunate reality is the battery industry hasn't kept up for many, many years. That's why when we come and offer a higher energy density battery, the timing is really good because now is when they actually really need it, and this is the time that we are showing up with a great battery.

Thanks, guys.

Our next question will be from Bill Peterson of JP Morgan.

Hi, good afternoon. Thanks for taking the questions. In the technology and product section of this general letter, you mentioned you're working with two leading smartphone OEMs on launch for next year. Is one of these actually in this development agreement or is that a separate thing? That's the first part of the question. But really the crux of the question is, what's the extent of the relation with the second question? And then you mentioned you have four others to receive samples presumably this year or next year. Is there a potential upside to the two smartphone customer launches? in terms of revenue generation in 2025, or really the rest of the customers you're sampling are more like 26?

Yeah, I mean, so I'll speak to it from my experience and how these things typically work. Typically in smartphones, you know, we mentioned one of the top OEMs that we're working with. Then we're sampling another one and another one. So we will sample, you know, like six of the top eight so far that we have planned. And again, these conversations are going, you know, so people keep asking us for more and more as we get these samples out. And what happens then is it's – some customers may decide – their qualification may go faster because they may decide to put us in a particular phone. They can qualify faster. Some customers maybe a little bit later. So it's hard to tell exactly how many – will be in production next year. But you also got to realize we have limited capacity. So we have to modulate that little bit with how many we can sell to. And so I think it's possible it could be more than two. It just depends on how the qualifications go.

Yeah. And my follow-up is actually kind of related to that. So I guess for this year, we should assume you're going to have your, your, your high volume line. Is that line still more than a 1350 UPH? I think 9 million units support, or can this existing line already do up to 1650, which I guess would infer more like 11 million units. Just, I'm trying to understand if that's just what we should assume for your volumes for the foreseeable future. And then, you know, kind of related, I mean, when, When at this point do you think that we should consider putting more lines into the system at this sort of 60 million per clip? I presume a 25 timeframe or how to think about the CapEx cadence for this year and next year?

i let i let aj handle the first part and i'll talk about the second part about the second line sure the the first line as just as a reminder is as we said it is a universal line which can be adapted very quickly uh to the smaller cell size to the larger cell size so you know we have been talking about that so you can expect 1350 uph we have clocked it with marathon runs on this line at 1350 at fat uh which is what you know the hvm fat is also underway as you know uh with you know uh so 1350 nine and a half million roughly batteries a year for the first line is how we should model it from second line onwards it's both things are happening we are speeding up the line we are removing some of the bottlenecks We are looking at exactly how the machine is behaving in terms of what can be condensed, what can be combined and that type of thing. And that's where we are getting 1350 to go up to 1650 and also cost reduce the line as Raj talked about earlier in his presentation.

Yes, it should add a little bit color to the second line and so on. I think the first thing I want to mention is that as we have gotten deeper and deeper into building these lines and manufacturing, a line's not really a monolithic thing, right? So there's, you know, the first part of the line where we do dicing is the zone one with the lasers. Then there's the stacking. And then there is actually the, you know, the putting into the pouch and so on. Then there's the formation at the back end. Each of these parts has a different lead time. and a different amount of capacity that we need to put in. So what we are looking at right now is, you know, what really exciting piece of work, which I have a lot of experience coming from places like Micron, is to figure out what is the customer qualification? How is that going? What's the demand? How is that shaping? Which models are we getting into? How many customers are coming in? And then figure out, which parts of the line have to be ordered earlier, which can be ordered later to make sure that we balance the lead time of the procurement. But at the same time, we do it in such a way that the capacity ramps in sync with the customer qualifications. So stay tuned for that as we work through it this year.

Can Farhan speak to how to think about CapEx for this year and maybe high level thoughts into next year?

So yeah like you look for this year, no change from what we have said before just topics for this first line and then into next year, we will as it will be tied together with how the demand ships up and you know just related to how the. qualifications go and based on that we will order the lines. It's probably too early. We don't guide CAPEX because you know it's flexible. We want to be flexible and maintain the flexibility.

And the other thing is, as I mentioned, I think Jay and his team have come up with a way to cost reduce the line. So we need to make sure we order the right things in the right way. And because the first one is a universal line, so we knew what we wanted to do there. We have the flexibility. But the second line on, you know, as it is smartphones we're going after, we can narrow that window down of the shapes that need to change. That gives us higher throughput. That gives us lower cost and so on.

Yeah, and I will just add one thing, Bill, to your question. In terms of thinking about the cost of the line, in the 2026 timeframe, you should think of that as 60 million. And this year, obviously, first line was a lot more expensive than that. The 2025, if we order, it'll be closer to 60, but it won't quite be there because not all the cost reductions would be, projects will be completed by then.

Okay, thanks. That's clear. Thank you.

Our next question comes from Derek Soderberg of Cantor.

Yeah. Hey, guys. Thanks for taking my questions. So just I've got a question on the shareholder letter. You guys were talking about the two smartphone customers. In April, you produced the first internal samples. I'm curious beyond sort of the FAT and SAT associated with the equipment. Do you still need to pass internal battery cell qualification before shipping samples this quarter? Or is it a scenario where once you get SAT for the agility line, you're ready to ship samples? I'm just wondering what else you have to do on the battery side to start shipping samples?

Yeah, absolutely. So, you know, look, there is two aspects of qualification. One aspect of qualification is, you know, making sure the machines are working right, like FAT, SAT and so on. But then there is the testing of the battery to make sure that, you know, it is safe and it goes through all the testing of safety and it meets the cycle life and it meets the performance requirements, it meets the fast charge and so on. So we are doing that now in parallel. And once we do that, that's when we will ship the batteries. Because what you don't want to do is ship the batteries without being fully tested to the customers, because you don't want to see any surprise at the customer side when they test it. So you want to test it like how the customers test it, which is what's been really interesting for me is that we are now able to get all these test criteria of how they would actually test So now we are testing them exactly like how they would test after they got them. Once we've had all the tests and everything is good from the manufacturing line, they can go without that. But we first need to make sure the early samples go through all of that test.

Got it. And then as my follow up, I'm curious what the reasons were. To sign a development agreement with you guys, what were the reasons that that specific OEM had for signing today? Was it something they finally felt comfortable with on the production side? Was it just a little bit more time working with your battery technology? Curious if you could talk about that. And then, do you think there's some potential for this customer to provide funding? for production someday. You know, if you guys were to sort of hit a certain criteria with the technology or production, just curious if you could share some more info on that deal, thanks.

Yeah, absolutely. So, you know, we gave many of these customers early samples from our Fremont line, which I mentioned before. We would give them small samples. They're testing them. They're in different stages of testing. They have gone through most of that testing now, and they see what they're able to get. They came, and many of these customers came and visited us in Fremont and saw how we manufactured the batteries, convinced themselves about the viability of the manufacturing, and then they felt like... they want to work closely with us to actually even further optimize the battery so that it works well in their phone models. Because you got to remember, every one of these customers use the battery slightly differently, right? And I think that is something that's not so obvious from outside. People don't just take a battery and slap it in the phone. So they kind of figure out how do they fast charge? What algorithm do they use to fast charge? How much energy density do they use? And how does it work at different temperatures? And you know, What size do they keep and what different shape do they use? So there's a lot of proprietary know-how at these customers and how they use the battery. What this agreement does is it allows them to share with us all that information so that we can customize our battery to their actual specifications. And that's super exciting because now we're actually building something that when it's done and works will fit in the particular forms that they are looking at. And I expect similar things to happen with other customers.

Our next question comes from Anand Varha of Loop Capital Markets.

Yeah. Hey, thanks guys. Yeah. Good afternoon. Thank you for taking the questions and congratulations on the progress. It's really great to see. I guess Raj, just, I guess sticking with capital, can you walk through like how you're thinking about raising capital? And I guess, you know, Farhan gave some context by year, you know, how to think about CapEx per line in the coming years. But like, how should we think about timing and what are the various methods that you have to raise capital with? And I have a quick follow up. Thanks.

Yeah, I think the previous question, I didn't answer the second part. As we discuss these agreements with the customers, we are clearly getting you know, offers from them to see what can they do financially with us to actually get to the next level. So those conversations are also happening. And we're also talking to some governments about that. So I let Farhan add more color to it. But yes, those are happening now as we make more progress on our batteries.

Yeah. So, you know, in terms of the funding for the lines, I don't think it's going to be a big challenge once we have the qualifications in the bag and the customers on the other side ready to buy the batteries. And as Raj mentioned, we have customers that have expressed, even without asking, a desire to pay if needed to make us successful and make the factories bring them up. So those conversations are happening. We are also talking to sovereign wealth funds and things like that to see if we can get more funding. Where the stock is right now, it's not at a level where I can have support of the board to consider any further capital. And we also don't feel that it's anywhere close to the price that we would consider raising capital here. And with the actions that we have taken to reduce our cost, we have a fairly long runway. We have made very dramatic cuts to our cost structure. And so we can have long runway before we need to raise capital.

That's great context, Farhan. Thanks. Thanks so much. And the quick follow-up is, and maybe this is for Ajay, there is, in the prepared remarks, guys, there is some mention of 90% yields at this point in time, I guess. Yeah, Farhan, I thought you could sneak that in. I mean, Ajay thought you could sneak it in. But can, yeah, just clarification of that, and then are you still on, you know, sort of on track for 90% yields by the end of the year with the Yeah. Yeah. Thanks.

Yeah. Thanks. I knew somebody would, uh, would catch up to that and, uh, and ask that question because, you know, we're quite proud as where we are in terms of you at FAT, like, uh, I mentioned earlier, some of the tricky processes that we have, obviously, as some of you are closer to it, you know, the lizard icing and stacking process, which is in the front end. And that typically is where we, you know, in gen one, at least we lost a good amount of yield and that's where we feel very confident now that we have even in the first shot fat when we did the fat not only the 25 parameters of ctqs were looking very good more than 1.1 1.3 cpks so for people who are close to that that's upwards of 95 yield in in those processes alone Right. So we have, again, like I said, you know, operations guy gets pretty excited actually when, when you see anything that is about 95%. So that's where we are right now. We will only get better. And with the very confident about what we talked about, about yields by the end of the year.

Excellent. Great context. Really appreciate it. Thanks guys.

Our next question comes from Gus Richard of Northland Capital Markets.

Thanks for taking the question. I'm just curious on when you'll start sending samples to customers from FAB2 and how quickly that can ramp. Will you start to send samples out of FAB2 in Q3 or will that have to wait until Q4?

No, it'll definitely be Q3 from Fab 2. We are gearing up to finishing up the FATs. Like I said, done. We are going to finish up SAT here in Q3. But the samples definitely in going to the same customers that we, Raj and Farhan, have talked about in Q3.

Yeah, so just add a little bit more color. We are making samples now of this EX1M here. So those will go out to the customers first. And so they'll start doing some testing and so on. Meanwhile, we'll also start building on our side. And as they start testing, they give us some more feedback and, hey, we'd like this tested, that tested. And we're going to do all those tests also of the samples that come out from Penang. And then we will send them those in Q3.

Just a quick clarification, Farhan reminded me. So first batteries out of FAP2 still happening here in Q2, right? Which is what we have been talking about and we're confirming that that's going to happen. But fully tested batteries, as Raj pointed out, to go to the customers after all the safety testing, after everything that is relevant to the customer going out will be in Q3, early Q3.

Got it. And then are you still, you're still sampling customers out of, Fremont and sort of what's the volume that you're able to ship to customers at this point? Was that a significant portion of Q1 revenue?

No, no, these are not big volumes. These are, you know, hundreds of samples. As you guys know, we don't have a manufacturing, high-volume manufacturing line here. We mainly have an R&D line with which we can make some samples. But, you know, we don't have to ship a lot because it's mainly for, you know, testing and make sure they're okay. But ultimately, customers want samples from our agility line, which, as I mentioned, you know, we're super excited. The FIT is all done, and the machines are all almost there in Penang. So in a short order, we'll be getting samples from there.

Thanks so much. Our next question comes from George from Connacord.

Hey, everyone. Thank you for taking my question. Appreciate it. Wondering if you can update us on what's happening with materials-related conversations, companies like Group 14. Specifically, if you can help us better quantify the performance improvement you bring to sales relative to those using conventional cell construction with their material. There seems to be still an active debate in the marketplace. Thank you.

Yeah, I mean, you know, look we we are a material agnostic company and we're using different kind of materials um you know luckily we now also have a have a um you know a graphite battery that route jet makes uh so we can are we also able to um figure out how to improve those batteries with some amount of this new newer silicon that we can put on top of that uh everything we've seen um you know, between 5 and 8%. If you put any more than that, the battery swells up. So the only architecture that I know of that can actually allow people to use more of silicon in a battery is the InnoVIX architecture. And we're, you know, at any reasonable amount that actually meaningfully increases the energy density. And that's what we're focused on. And we use, you know, 100% active silicon. So as different kinds of silicon materials come out, We are happy to use them, test them, and they all have, you know, properties like longer cycle life, you know, different kinds of fade, different kind of fast charge and so on. But to get the high energy density, we absolutely feel we need the Inovix architecture to constrain the swelling of silicon.

Our next question comes from Ben Johnson of Piper Sandler.

I don't have a question at this moment.

Our next question comes from Chris Souther of B Reilly.

Hey guys, it seems like we're getting more confident on the economics more. We're learning about the manufacturing process and pricing strategy here. We've talked about customers potentially financing future lines. Does the less than one year payback change that approach where it makes more sense for you to finance yourselves or? you know, just make it more attractive to customers to potentially finance? Can you kind of walk through, you know, how that, you know, decision-making process is evolving here?

Yeah, look, that's definitely a big consideration on whether to take customer financing or not. We've also talked to Asian banks in terms of project financing options. So I think if we have signed agreements with demand confirmed and economics that are attractive. I don't think it will be a very difficult choice for us to get financing for project financing. And so whether we take customer financing or we go project financing will really depend on the economics. And I think the important thing really is to understand fundamentally what's driving the model, right? And when you look at it, we give really unmatched energy density. If you look at EX2M, it's far superior to anything that's on the roadmap that's out there from any of our competitors. And, you know, customers see that. and we already know what the pricing is for the sort of the high-end batteries and with that pricing and with some premium which we think will be justified for our differentiated performance and given that we are only game in town I think we can get to the financial performance that I described along, assuming that, you know, all the cost reductions that RJ is targeting, we are also able to execute on it. So I think like, you know, it's, we have all the pieces to get to that model and we just have to execute towards getting that.

Our next question comes from Sean Milligan of Janney.

Hey, Raj, thanks for taking my question. I hopped on a little late, so sorry if you already addressed this, but I think on the last call, you talked about kind of a 9- to 12-month qualification timeline for the smartphone customers. And I saw in the press release, you know, starting to deliver samples, the 6 of 8 and 2Q. Just curious if you could comment on that 9- to 12-month qual time and know is that from delivery of first sample like final sample like how do we think about the qualification time and sort of the um i guess the iterations of samples that may go to them if that's happening concurrently in that whole timeline or not

Yeah, I mean, look, we are able to deliver some samples now from Fremont, and those, you know, we will be sending them soon. As I said, we're producing them. You saw on our shareholder letter some of the pictures of what EX1M batteries. The customers will do some testing with them, so they'll get a feel for what it does and so on. But ultimately, they want samples from our high-volume manufacturing, I mean, from our agility line from Malaysia to really start the call process. So that we mentioned earlier. is when we start shipping in two queue, we produce the first one, send three queue, produce the next one. So you can think of nine to 12 months from this summer when we start shipping samples, right? That's why I was saying later half of next year is when we expect to see those productions happen. Now, will a few customers do them sooner? I hope so. But that's not what my experience has been with batteries. It typically takes that time because they're very careful. Battery is something that people want to make sure it's 100% safe and so on. But that's for the first launch. Like I mentioned, once we get there, it's qualified by their technology teams, it's qualified by their sourcing teams, and we're in the system. The next products can come much faster. So the first one is the one that takes 10 to 12 months.

Okay, so would the idea be that, sorry, so just trying to understand, like with the smartphone customers, maybe like with their main sales season, like would you hope that you would have, you know, volumes in commercial phones like the second half of next year? Or is it more like the first half of 26 and you would be building inventory kind of the second half of next year to serve, you know, that 2026 launch?

Our target is to have them in phones in second half of next year. You know, that's what we're working towards, yeah.

Our next question comes from Tim Moore of EF Hutton.

Thanks. Thanks. And my first question is, Now that you inked the development agreement with a top five volume smartphone OEM, I'm wondering if you maybe could share a little bit more color and detail on how you evaluate and what hurdles you might be applying for allocating future capacity to customers in 2026 and beyond. In other words, really, how do you go about prioritizing your capacity that's going to be coming on based on proposals that come across your desk from other customers?

I mean, this is early stages, right? I mean, I think this is not, you know, this happens all the time. So, you know, it'll really depend upon which phone models and which customers and how much we get prioritized and are we on multiple models at one customer or one model at each customer and so on. It really will depend upon how the rest of this year goes and how early part of next year goes. It's a little too early to talk about prioritizing customers.

Okay, that's helpful. And all my other strategic and operational questions were already addressed, so I'm I was just wondering, just one financial question for the income statement for the rest of the year. How should we think about, you know, accelerate depreciation and R&D showing up in the next few quarters? Is that probably going to occur until you maybe lap the acquisition late October?

No, so the accelerated depreciation, just as a reminder, was associated with the restructuring that we did in Fremont, where we announced that we are going to stop the manufacturing activities in Fremont for the small cell and, you know, plans to move high volume production to Malaysia. So at that time, we had really taken accelerated depreciation in Fremont. And so we had said that it would be over a two-quarter period, so Q4 and Q1. And we disclosed that in Q1, $18.5 million were included in the R&D expenses. And that will not repeat in the Q2. So basically you take like your Q1 R&D run rate, subtract 18 and a half million, that gives you a baseline. And from that level, that's kind of where you should start. And we should probably be around similar level and then decline for operating expenses, we should decline after that because of the further actions that we announced today. Does that answer your question? That's helpful.

Yeah, it does. It does. I thought it would last two quarters, but I just want to double check and try to factor in the extra cost savings. So that clarifies everything. Thank you. That's it for my question. Thank you.

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

Thank you everyone for your questions and thank you for tuning in. Before we wrap, I want to highlight that we'll have a live stream of AMR Ask Me Anything on our YouTube channel on Monday, May 6th. If your question didn't get answered today, please feel free to submit your questions for next week. And we look forward to what should be a great dialogue. And thank you once again.