ENOVIX CORPORATION The following discussion and analysis provide information that the management ofEnovix Corporation (referred as to "we," "us," "our" and "Enovix") believes is relevant to an assessment and understanding ofEnovix's consolidated results of operations and financial condition as ofApril 3, 2022 and for the quarter endedApril 3, 2022 and should be read together with the condensed consolidated financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contain forward-looking statements based upon our current expectations, estimates and projections that involve risks and uncertainties. Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.
Business Overview
We design, develop and plan to commercially manufacture an advanced
silicon-anode lithium-ion battery using our proprietary 3D cell architecture
that increases energy density and maintains high cycle life. This enables us to
use silicon as the only active lithium cycling material in the anode. We have
applied an equally innovative approach to develop proprietary roll-to-stack
production tools that 'drop-in' to existing lithium-ion battery manufacturing
lines and increase megawatt hour capacity. Our silicon anode battery
architecture allows lithium-ion batteries to be produced smaller, cheaper and
more efficiently than current alternatives.
To date, we have concentrated our operational effort on researching and
developing the cutting-edge technology behind our silicon-anode lithium-ion
battery. Over the past several years, we have signed agreements to provide
engineering and proof of concept samples to blue-chip companies in the consumer
electronic industry (smartwatches, augmented reality/virtual reality,
smartphones, fire/life/safety radios, laptops). In addition to those industries,
we are pursuing the deployment of our technology with leading global automobile
manufacturers to develop patented battery technology for the electric vehicle
("EV") market.
We currently lease our headquarters, engineering and manufacturing space in
Fremont, California . In 2020, we started procuring equipment for our first high
volume production line ("Fab-1"). The first of this equipment began arriving in
early 2021. Fab-1 is now operational, with first production revenue forecasted
in the second quarter of 2022. In May 2022 , we began ordering our second
generation ("Gen2") production line, which we plan to install at a second
production facility ("Fab-2") in the first half of 2023.
Impact of Coronavirus ("COVID-19")
We closely monitor the impact of the pandemic of COVID-19 on all aspects of our business, including how it will impact our operations. We have considered potential impacts of the COVID-19 pandemic on our critical and significant accounting estimates and have not incurred any impairment losses in the carrying value of our assets as a result of the COVID-19 pandemic. For information on our operations and risks related to health epidemics, including the COVID-19 pandemic, please see the other risks and uncertainties set forth in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.
Business Combination
OnJuly 14, 2021 (the "Closing Date"),Enovix Corporation , aDelaware Corporation ("Legacy Enovix"),Rodgers Silicon Valley Acquisition Corp. ("RSVAC") andRSVAC Merger Sub Inc. , aDelaware Corporation and wholly owned subsidiary of RSVAC ("Merger Sub"), consummated the closing of the transactions contemplated by the Agreement and Plan of Merger, datedFebruary 22, 2021 (the "Merger" or the "Business Combination"), by and among RSVAC, Merger Sub and Legacy Enovix (the "Merger Agreement"), following the approval at a special meeting of the stockholders of RSVAC held onJuly 12, 2021 (the "Special Meeting"). Following the consummation of the Merger on the Closing Date, LegacyEnovix changed its name toEnovix Operations Inc. , and RSVAC changed its name fromRodgers Silicon Valley Acquisition Corp. toEnovix Corporation ("Enovix ").Enovix raised approximately$373.7 million of net proceeds, after deducting transaction costs and estimated offering related expenses. Please refer to Note 3 "Business Combination" to the consolidated financial statements for the year endedJanuary 2, 2022 included in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 , filed with theSecurities and Exchange Commission ("SEC") onMarch 25, 2022 (the "Annual Report"), for further details of the Business Combination.
Comparability of Financial Information
Our future results of operations and financial position may not be comparable to historical results as a result of the Merger.
Key Trends, Opportunities and Uncertainties
We generate revenue from payments received from our customers based on executed
engineering revenue contracts (the "Service Revenue") for the development of
silicon-anode lithium-ion battery technology. We have not commenced shipment of
commercially manufactured batteries, and thus, no product revenue has been
generated to date. Our performance and future success depend on several
15--------------------------------------------------------------------------------
Table of Contents
factors that present significant opportunities, but also pose risks and challenges as described in the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q.
Q1 2022 Highlights:
During the first quarter of 2022, we achieved two very important milestones.
•
We produced advanced 3D SiliconTM lithium-ion batteries for customers from our first production line for customer qualification. By moving into production in the wearable category, we expect to recognize our first product revenue in the second quarter of 2022.
•
We announced BrakeFlowTM, a breakthrough in advanced lithium-ion battery safety. This critical innovation was possible due to our unique battery architecture, and we believe it puts considerable distance between us and any competitor that plans to meaningfully increase the energy in its batteries. Our revenue funnel was$1.5 billion at the end of first quarter of 2022, which comprised of$1.11 billion of Engaged Opportunities and$371.0 million of Active Designs and Design Wins. Our revenue funnel is defined as the potential value of a full production year for all of the customer projects for which we have been engaged. The components of the revenue funnel are:
•
Engaged Opportunities: Consists of engaged customers that have determined that our battery is applicable to their product and are evaluating our technology.
•
Active Designs: Consists of customers that have completed evaluation of our technology, identified the end-product and started design work.
•
Design Win: Consists of customers that have funded a custom battery design or are qualifying one of our standard batteries for a formally approved product that will use anEnovix cell.
The speed with which we convert our revenue funnel to purchase orders and revenue will ultimately be governed by how fast we qualify customers, improve our manufacturing processes and bring on additional capacity.
Product Development
We have developed and delivered standardized sample (i.e., prototype) batteries to multiple, industry leading consumer electronics manufacturers. External validation of the performance of these samples has led to several Service Revenue contracts between us and these customers. Pursuant to each of these agreements, we are developing custom 3D silicon lithium-ion batteries for specific wearable, mobile computing and communication device applications. The design and development phases and the manufacturing of these custom samples are performed at our headquarters inFremont, California . InJanuary 2022 , we began shipping 3D silicon lithium-ion batteries for qualification to customers. We continue to expect to recognize first product revenue in the second quarter of 2022. InMay 2022 , we began ordering equipment for our Gen2 production line and plan on installing this line in Fab-2 in the first half of 2023. The Gen2 manufacturing line is designed to be faster and require less space than our existing lines at Fab-1 inFremont ("Gen1"). Additionally, in 2022, we plan to order a new pilot line (the "Agility" line) based on this design to respond to increasing customer engagement and a desire to shorten custom-cell qualification timelines. Commercialization Currently, we are building out our Fab-1 at our headquarters inFremont, California . We have commenced deliveries of qualification cells from Fab-1. We have experienced challenges associated with building out Fab-1 including technical issues negatively impacting yield and volume production, and extended shipping times, supply chain constraints and intermittent vendor support during equipment bring-up resulting from COVID-19 travel restrictions imposed by certain countries in Asia. Fab-1 features a first-of-its-kind line for battery production. As a result, we regularly face and overcome new challenges to improve yield and output. Simultaneously, these efforts have provided and continue to provide valuable learning experiences, allowing us to improve our processes and equipment for future lines. With production underway, our focus in Fab-1 is on increasing volumes and yields. The large majority of the process steps that make up Fab-1 operate today at very high yields. A small number are yielding below 95%, and we have a documented plan to drive these to their targeted yields. Delivering to plan is a journey of many incremental improvements that our operations team undertakes daily. These learnings have given us confidence to move forward with purchases for Fab-2. In 2022, we plan to incrementally scale up Fab-1 output from our headquarters inFremont to produce batteries for the wearables market while also making larger cells for customer qualification in the mobile communications and laptop markets.
The net proceeds from the Merger and proceeds from the exercise of our Public Warrants enable us to complete and further expand Fab-1, pursue Fab-2, accelerate research and development and undertake additional initiatives.
16--------------------------------------------------------------------------------
Table of Contents
Market Focus and Market Expansion
Our near-term focus is on the following market applications: wearables
(smartwatches, AR/VR, headsets, etc.), computing and mobile communications. We
are actively sampling to potential customers in these markets and have design
wins in each. We have also engaged with new customers in product applications,
such as action cameras, portable gaming and smartwatches built for children. We
believe this strategy will allow us to deliver energy densities years ahead of
the competition.
We believe focusing on these categories ahead of EVs is the right strategy for
any advanced battery company because of the economic and time-to-market
advantages. Entering the EV battery market requires billions of dollars of
capital to build Gigafactories, offers lower prices per kWh than mobile
electronics and demands long qualification cycles. We believe the best approach
is to start in premium markets where we can leverage our differentiated
technology and solidify our manufacturing process while driving toward
profitability At the same time, we are seeding our entry into the EV battery
market by sampling batteries to EV original equipment manufacturers ("OEMs") and
continuing work on our three-year grant with the U.S. Department of Energy to
demonstrate batteries featuring our silicon anode paired with EV-class cathode
materials. Our goal is to translate this work into partnerships (e.g., joint
ventures or licensing) with EV OEMs or battery OEMs in order to commercialize
our technology in this end market.
Access to Capital
Assuming we experience no significant delays in the research and development of our battery, we believe that our cash resources, including the net proceeds from the completion of the Merger, are sufficient to fund the continued build out and production ramp of our Fab-1 manufacturing facility inFremont, California and lease or purchase and retrofit an existing facility elsewhere as our Fab-2 for growth. Regulatory Landscape
We operate in an industry that is subject to many established environmental
regulations, which have generally become more stringent over time, particularly
in hazardous waste generation and disposal and pollution control. While we
expect certain regulations under
Components of Results of Operations
Service Revenue
Service Revenue contracts generally include the design and development efforts to conform our existing battery technology with customers' required specifications. Consideration for Service Revenue contracts generally becomes payable when we meet specific contractual milestones, which include the design and approval of custom cells, procurement of fabrication tooling to meet the customer's specifications, and fabrication and delivery of custom cells from our pilot production line. Within the existing Service Revenue contracts, the amount of consideration is fixed, the contracts contain a single performance obligation, and revenue is recognized at the point in time the final milestone is met (i.e., a final working prototype meeting all required specifications) and the customer obtains control of the deliverable. During all periods presented, we did not recognize any Service Revenue as final milestones were not yet met.
Cost of Revenue
Cost of revenue includes materials, labor, allocated depreciation expense, and other direct costs related to Service Revenue contracts. Labor consists of personnel-related expenses such as salaries and benefits, and stock-based compensation.
Capitalization of certain costs are recognized as an asset if they relate directly to a customer contract, generate or enhance resources of the entity that will be used in satisfying future performance obligations, and are expected to be recovered. If these three criteria are not met, the costs are expensed in the period incurred. Deferred costs are recognized as cost of revenue in the period when the related revenue is recognized.
Operating Expenses
Research and Development Expenses
Research and development expenses consist of engineering services, allocated
facilities costs, depreciation, development expenses, materials, labor and
stock-based compensation related primarily to our (i) technology development,
(ii) design, construction, and testing
17--------------------------------------------------------------------------------
Table of Contents
of preproduction prototypes and models, and (iii) certain costs related to the design, construction and operation of our pilot plant that are not of a scale economically feasible to us for commercial production. Research and development costs are expensed as incurred. To date, research and development expenses have consisted primarily of personnel-related expenses for scientists, experienced engineers and technicians as well as costs associated with the expansion and ramp up of our engineering and manufacturing facility inFremont, California , including the material and supplies to support the product development and process engineering efforts. As we ramp up our engineering operations to complete the development of batteries and required process engineering to meet customer specifications, we anticipate that research and development expenses will increase significantly for the foreseeable future as we expand hiring of scientists, engineers and technicians and continue to invest in additional plant and equipment for product development, building prototypes and testing of batteries. We are establishing a research and development center inIndia that will initially focus on developing machine learning algorithms.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel-related expenses, marketing expenses, allocated facilities expenses, depreciation expenses, executive management travel, and professional services expenses, including legal, human resources, audit, accounting and tax-related services. Personnel related costs consist of salaries, benefits and stock-based compensation. Facilities costs consist of rent and maintenance of facilities.
We are expanding our personnel headcount to support the ramping up of commercial manufacturing and being a public company. Accordingly, in addition to non-recurring costs associated with the Business Combination and anticipated costs of being a public company, we expect our selling, general and administrative expenses to increase significantly in the near term and for the foreseeable future. Other Income (Expense), net Other income and expenses, net primarily consist of interest expense, fair value adjustments for outstanding convertible preferred stock warrants and fair value adjustments for outstanding common stock warrants.
Income Tax Expense (Benefit)
Our income tax provision consists of an estimate for
Results of Operations
Comparison of Quarter Ended
The following table sets forth our condensed consolidated operating results for
the periods presented below (in thousands, except share and per share amount):
For the Quarters Ended
April 3, 2022 March 31, 2021 Change ($) % Change
Operating expenses:
Cost of revenue $ 515 $ 1,631 $ (1,116 ) (68 %)
Research and development 12,731 5,589 7,142 128 %
Selling, general and
administrative 11,869 4,161 7,708 185 %
Total operating expenses 25,115 11,381 13,734 121 %
Loss from operations (25,115 ) (11,381 ) (13,734 ) 121 %
Other income (expense):
Change in fair value of
convertible preferred stock
warrants and common stock
warrants 67,800 (4,781 ) 72,581 N/M
Other income (expense), net 22 (3 ) 25 N/M
Total other income
(expense), net 67,822 (4,784 ) 72,606 N/M
Net income (loss) $ 42,707 $ (16,165 ) $ 58,872 (364 %)
18--------------------------------------------------------------------------------
Table of Contents N/M - Not meaningful Cost of Revenue Cost of revenue for the quarter endedApril 3, 2022 was$0.5 million , compared to$1.6 million during the quarter endedMarch 31, 2021 . From time to time, we enter into Service Revenue customer contracts. Service Revenue from these customer contracts was deferred as ofApril 3, 2022 because we had not delivered the final working prototype (the single performance obligation) nor had the customer taken control of the deliverable. The estimated final delivery date of these Service Revenue contracts is within the next twelve months. In the execution of satisfying the single performance obligation per the existing Service Revenue contracts, certain costs are recognized as an asset if they relate directly to a customer contract, generate or enhance resources of the entity that will be used in satisfying future performance obligations and are expected to be recovered. If these three criteria are not met, the costs are expensed in the period incurred. Deferred contract costs are recognized as cost of revenue in the period when the related revenue is recognized. The decrease in cost of revenue of$1.1 million , or 68% was due to the timing of when costs attributable to a specific contract with a customer were incurred. As ofApril 3, 2022 andJanuary 2, 2022 , we had$4.5 million and$4.6 million , respectively, of deferred contract costs and$7.9 million and$7.9 million , respectively, of deferred revenue on our Condensed Consolidated Balance Sheets.
Research and Development Expenses
Research and development expenses for the quarter endedApril 3, 2022 were$12.7 million , compared to$5.6 million during the quarter endedMarch 31, 2021 . The increase of$7.1 million , or 128% was primarily attributable to an increase in our research and development employee headcount resulting in a$2.3 million increase in salaries and employee benefits, a$1.6 million increase in stock-based compensation expenses and a$1.3 million increase in subcontractor costs. The remaining increase of$1.9 million was primarily due to the increased facility and IT costs, tooling and materials and other miscellaneous research and development expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter endedApril 3, 2022 were$11.9 million , compared to$4.2 million during the quarter endedMarch 31, 2021 . The increase of$7.7 million , or 185% was primarily attributable to an increase in our selling, general and administrative employee headcount resulting in a$2.7 million increase in salaries and employee benefits and a$2.5 million increase in stock-based compensation expenses. The remaining increase of$2.5 million is primarily comprised of a$1.9 million increase in legal and professional fees and other miscellaneous expenses.
Change in Fair Value of Convertible Preferred Stock Warrants and Common Stock Warrants
The change in fair value of common stock warrants of$67.8 million for the quarter endedApril 3, 2022 was primarily attributable to a decrease, during the quarter, in the fair value of the 6,000,000 common stock warrants that are held byRodgers Capital, LLC (the "Sponsor") and certain of its members (the "Private Placement Warrants"). As ofApril 3, 2022 , there were no Legacy Enovix convertible preferred stock warrants outstanding. For the quarter endedMarch 31, 2021 , there was a change in fair value of$4.8 million of the Legacy Enovix convertible preferred stock warrants resulting from an increase in Legacy Enovix's enterprise value during the quarter endedMarch 31, 2021 . The change in the fair value of the convertible preferred stock warrants and common stock warrants was recorded as other income (expense), net.
Non-GAAP Financial Measures
While we prepare our condensed consolidated financial statements in accordance
with GAAP, we also utilize and present certain financial measures that are not
based on GAAP. We refer to these financial measures as "Non-GAAP" financial
measures. In addition to our financial results determined in accordance with
GAAP, we believe that EBITDA, and Adjusted EBITDA, and Free Cash Flow (each as
defined below), are useful measures in evaluating our financial and operational
performance distinct and apart from financing costs, certain non-cash expenses
and non-operational expenses.
These Non-GAAP financial measures should be considered in addition to results
prepared in accordance with GAAP but should not be considered a substitute for
or superior to GAAP. We endeavor to compensate for the limitation of the
Non-GAAP financial measures presented by also providing the most directly
comparable GAAP measures.
We use Non-GAAP financial information to evaluate our ongoing operations and for
internal planning, budgeting and forecasting purposes. We believe that Non-GAAP
financial information, when taken collectively, may be helpful to investors in
assessing our operating performance and comparing our performance with
competitors and other comparable companies. You should review the
reconciliations below but not rely on any single financial measure to evaluate
our business.
19--------------------------------------------------------------------------------
Table of Contents
EBITDA and Adjusted EBITDA
"EBITDA" is defined as earnings (net loss) adjusted for interest expense; income
taxes; depreciation expense, and amortization expense. "Adjusted EBITDA"
includes additional adjustments to EBITDA such as stock-based compensation
expense; change in fair value of convertible preferred stock warrants, common
stock warrants and convertible promissory notes; loss on early debt
extinguishment and other special items as determined by management which it does
not believe to be indicative of its underlying business trends. EBITDA and
Adjusted EBITDA are intended as supplemental financial measures of our
performance that are neither required by, nor presented in accordance with GAAP.
We believe that the use of EBITDA and Adjusted EBITDA provides an additional
tool for investors to use in evaluating ongoing operating results and trends,
and in comparing our financial measures with those of comparable companies,
which may present similar Non-GAAP financial measures to investors.
However, you should be aware that when evaluating EBITDA, and Adjusted EBITDA,
we may incur future expenses similar to those excluded when calculating these
measures. In addition, the presentation of these measures should not be
construed as an inference that our future results will be unaffected by unusual
or nonrecurring items. Our computation of EBITDA and Adjusted EBITDA may not be
comparable to other similarly titled measures computed by other companies,
because all companies may not calculate EBITDA and Adjusted EBITDA in the same
fashion.
Below is a reconciliation of net income (loss) on a GAAP basis to the Non-GAAP
EBITDA and Adjusted EBITDA financial measures for the periods presented below
(in thousands):
For the Quarters Ended
April 3, 2022 March 31, 2021
Net income (loss) $ 42,707 $ (16,165 )
Depreciation and amortization 448 141
EBITDA 43,155 (16,024 )
Stock-based compensation expense 5,238 1,418
Change in fair value of
convertible preferred stock
warrants and common stock
warrants (67,800 ) 4,781
Adjusted EBITDA $ (19,407 ) $ (9,825 )
Free Cash Flow
We define "Free Cash Flow" as (i) net cash from operating activities less (ii)
capital expenditures, net of proceeds from disposals of property and equipment,
all of which are derived from our condensed consolidated statements of cash
flow. The presentation of non-GAAP Free Cash Flow is not intended as an
alternative measure of cash flows from operations, as determined in accordance
with GAAP. We believe that this financial measure is useful to investors because
it provides investors to view our performance using the same tool that we use to
gauge our progress in achieving our goals and it is an indication of cash flow
that may be available to fund investments in future growth initiatives. Below is
a reconciliation of net cash used in operating activities to the Free Cash Flow
financial measures for the periods presented below (in thousands):
For the Quarters Ended
April 3, 2022 March 31, 2021
Net cash used in operating activities$ (19,689 ) $ (8,610 ) Capital expenditures (10,451 ) (7,141 ) Free Cash Flow$ (30,140 ) $ (15,751 )
Liquidity and Capital Resources
We have incurred recurring operating losses and negative cash flows from operations since inception throughApril 3, 2022 and expect to incur operating losses for the foreseeable future. As ofApril 3, 2022 , we had cash and cash equivalents of$408.2 million , a working capital of$398.1 million and an accumulated deficit of$290.4 million . Prior to the Business Combination, we had financed our operations primarily from the sales of convertible preferred stock, borrowing from convertible promissory notes, borrowing from a secured promissory note. In connection with the Business Combination inJuly 2021 , we raised approximately$373.7 million of net proceeds, after deducting transaction costs and estimated offering related expenses. Please refer to Note 3 "Business Combination" of the notes to the consolidated financial statements for the year endedJanuary 2, 2022 included in the Annual Report for more information. InDecember 2021 , we received$77.2 million of gross proceeds from the exercises of the Public Warrants (as defined under the heading "Common Stock Warrants" in Note 7 "Warrants" of the notes to our condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q), which were being traded in the Nasdaq Global Select Market ("Nasdaq"). InJanuary 2022 , we received$52.8 million of net proceeds from the exercise of the Public Warrants. We plan to use the proceeds from the exercises of the Public Warrants for general corporate purposes. 20
--------------------------------------------------------------------------------
Table of Contents
Material Cash Requirements
As ofApril 3, 2022 , we had cash and cash equivalents of$408.2 million . We currently use cash to fund operations, meet working capital requirements and fund our capital expenditures. In fiscal year 2022 and over the next several years, we expect that our research and development expenses and selling, general and administrative expenses to continue to increase. For the quarter endedApril 3, 2022 , we purchased$10.5 million for property and equipment. We will continue to increase our property and equipment purchases in the near future to support the build-out of our manufacturing facilities and our battery manufacturing production. Based on the anticipated spending, cash received from the Business Combination and net proceeds from the exercises of the Public Warrants, and timing of expenditures, we currently expect that our cash will be sufficient to meet our funding requirements over the next twelve months from the date this Quarterly Report on Form 10-Q is filed. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and future debt financings, and access to other public or private equity offerings. We have made our estimates on historical experience and various other relevant factors and we believe that they are reasonable. Actual results may be differ from our estimates, and we could utilize our available capital resources sooner than we expect.
© Edgar Online, source
