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 ofOctober 2, 2022 and for the quarter and fiscal year-to-date endedOctober 2, 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 have started 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 whereas
industry incumbents have historically combined only a modest amount of silicon
(3%-7%) with graphite. We have applied an equally innovative approach to develop
proprietary roll-to-stack production tools for 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 at scale than current alternatives.
To date, we have concentrated our operational effort on researching, developing
and commercializing 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 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, and we commenced our planned principal
operations of commercial manufacturing and recorded our first product revenue as
scheduled in the second quarter of 2022. During the third quarter of 2022, we
continued to work closely with three key vendors to further the design of the
critical path elements of our second generation ("Gen2") manufacturing line.
Over the last six months, together with these vendors, we have significantly
advanced the detailed design of these systems, incorporating the learnings from
our existing lines at Fab-1 in Fremont ("Gen1"), to validate the new Gen2 high
speed equipment design concepts. We placed a purchase order for our Gen2
packaging line and expect to place orders for our Gen2 laser patterning systems
and assembly line in the fourth quarter of 2022. Other non-critical path
equipment will be ordered thereafter. Subject to final technical design and
Board approval scheduled for early 2023, we continue to target full delivery of
our Gen2 equipment in the second half of 2023 followed by our Gen2-compatible
pilot line ("Agility Line") for accelerated product development and
qualification.
We anticipate that this generation of toolset will provide a blueprint for
supporting future licensing and joint ventures with existing customers and
battery companies. We plan to bring additional Gen2 lines up over the course of
2024 in conjunction with the timing of customer programs. We expect that certain
customers may require up to several months to qualify the Gen2 line before
accepting product that is manufactured on that line.
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 fiscal 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. 21 --------------------------------------------------------------------------------
Table of Contents Change in Fiscal Year In the third quarter of 2021, we changed our fiscal year on a prospective basis effective onJuly 1, 2021 and did not adjust operating results for prior periods. A fiscal year calendar typically consists of four 13-week quarters. Our 2022 fiscal year is comprised of four fiscal quarters ending onApril 3, 2022 ,July 3, 2022 ,October 2, 2022 andJanuary 1, 2023 , respectively.
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 in connection with
(a) the sale of silicon-anode lithium-ion batteries and battery pack products
("Product Revenue") and (b) executed engineering revenue contracts ("Service
Revenue") for the development of silicon-anode lithium-ion battery technology.
We commenced shipment of commercially manufactured batteries in the second
quarter of 2022. Our performance and future success depend on several 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.
Q3 2022 Highlights:
During the third quarter of 2022, we made steady operational progress in Fab-1 that allowed us to improve yield while also continuing to ship cells from our production line for qualification programs and pre-production end-product builds. Production cells were shipped to 25 original equipment manufacturers (each an "OEM"), including three "Strategic Accounts" (which we define as "mega cap" technology companies with market capitalizations that exceed$200 billion and that have the potential to useEnovix batteries in multiple product applications), as well as a tier one lithium-ion battery OEM and a top 10 global automotive OEM. InNovember 2022 , we announced a non-binding memorandum of understanding ("MOU") with a Strategic Account to incorporate our cells into wearable, mobile, and computing applications. This follows a purchase order we received from such Strategic Account earlier in 2022, which led to the testing of our cells and culminated in the MOU, which establishes a framework for the deployment and scale-up of our technology across their product portfolio. Our revenue funnel was$1.4 billion at the end of third quarter of 2022, which was comprised of$1.0 billion of Engaged Opportunities and$423.0 million of Active Designs and Design Wins (each as defined below). 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. As of the end of the third quarter of 2022, we have nine Design Wins in the following market applications: wearables (3), industrial/medical (2), mobile communications (1), computing (1) and augmented reality/virtual reality ("AR/VR") (2). Two of our nine Design Wins are with Strategic Accounts and we have opportunities with a total of Six Strategic Accounts at various stages within our revenue funnel.
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) lithium-ion batteries to multiple, industry leading consumer electronics manufacturers with energy densities higher than industry standard batteries of similar size. "Energy density" is measured as the product of the power a battery puts out in watts times the number of hours the battery can put out that power, divided by the volume (size) of the battery measured in liters. The units of energy density are thus watt-hours per liter or Wh/l. As ofOctober 2, 2022 , we estimate that our first technology node, called EX-1, which makes batteries sized for wearables and mobile communications devices, will deliver batteries with 21%-113% greater energy 22 --------------------------------------------------------------------------------
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density than the batteries in several categories of currently available consumer electronics products. Our targeted spec for EX-1 is 714 Wh/l for wearables and 900 Wh/l for our reference size mobile communications devices. We have achieved 714 Wh/l in Fab-1 for wearables and expect to achieve 900 Wh/l for our reference size mobile communications devices in 2024. In 2023, we expect to build cells for mobile communications devices that achieve the EX-1 node energy density but due to their smaller size will be at 882 Wh/l. Additionally, we are now far along with a new technology node we call EX1.5, which sits between our first node, EX-1, and our second-generation node, EX-2. We have hit our EX1.5 target of 772 Wh/l for wearables (965 Wh/l when adjusted to our reference size mobile communications) and these cells were put into cycling during the third quarter of 2022. We anticipate sampling this technology in 2023 to customers, giving us confidence that our architecture will allowEnovix to continue to move off the industry's long-term trend of meager improvements. Our product roadmap also projects that adjusted to our reference size mobile communications device (900 Wh/l in EX-1), the energy density of our batteries will improve) to 1,030 Wh/l by 2024 (EX-2 node) and 1,255 Wh/l by 2025 (EX-3 node). Both the EX-2 and EX-3 product families will introduce an added step-function improvementin Li -ion energy density over the industry. This energy density breakthrough alters a 30-year Li-ion battery industry trajectory of modest (4.2%) annual Li-ion battery energy density improvements through 2021. Assuming this industry improvement rate of 4.2% per year continues, and our estimated greater energy density, it would require approximately five years for the industry to reach energy densities equivalent to our batteries at similar size, based on our contemplated roadmap. To achieve these goals, we plan to drive step-function improvements in 3D cell architecture to increase overall performance efficiency, while also benefiting from the adoption of the higher energy density cathodes that are being continually developed by the industry. Additionally, we estimate that our batteries can deliver higher storage capacity (measured in milliampere/hour, or mAh) compared to industry standard batteries of similar size. As ofOctober 2, 2022 , we estimate that EX-1 node delivers 32%-133% greater end-of-life battery storage capacity (based on end-of-life dimensions) than the batteries in several categories of currently available consumer electronics products. External validation of the performance of our 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, computing and mobile communication device applications. We have also manufactured batteries incorporating our BrakeFlowTM technology. 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 furthered the design of our Gen2 manufacturing equipment with our suppliers during the second and third quarters of 2022. The Gen2 manufacturing line ("Autoline") is designed to be faster and require less space per battery produced than Gen1. Our Gen1 and Gen2 engineering teams have identified and incorporated over 120 process and design improvements into Gen2. Incorporating these improvements is expected to result in upgraded laser patterning systems, higher speed manufacturing of our battery (up to 10x compared to our current capability) and a 6x improvement in changeover time between battery sizes relative to Gen1. During the third quarter of 2022, we placed a purchase order for our Gen2 packaging line and expect to place orders for our Gen2 laser patterning systems and assembly line in the fourth quarter of 2022. Other non-critical path equipment will be ordered thereafter. Subject to final technical design approval and Board approval scheduled for early 2023, we continue to target the full delivery of our Gen2 equipment and installation in second battery cell factory ("Fab-2") in the second half of 2023 followed by Agility Line for accelerated product development and custom-cell qualification. We anticipate that a complete Gen2Autoline that can produce both small and large cells will cost between$50 million and$70 million of capital expenditures and at 80% overall equipment effectiveness ("OEE") will produce just over nine million cells annually once fully ramped. We have separately started the development of a dedicated line for wearables-size batteries that can make four times as many cells.
Commercialization
We commenced deliveries of commercial cells from Fab-1, but we have experienced
challenges associated with bringing up the manufacturing equipment in 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 commenced,
our focus in Fab-1 is on increasing volumes and yields. In the third quarter of
2022, we worked to optimize our first production line ("Line 1") at Fab-1 for
higher yield and throughput, bring up our second production line in Fab-1 ("Line
2"), and complete our learnings for Gen2. Given the wide gap in expected
performance between our Gen1 and Gen2 and the slower-than-expected improvements
on our Gen1
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manufacturing equipment, we have concluded that the incremental effort necessary to drive higher throughput on Gen1 technology is better spent on the critical yield and productivity learning necessary for a strong launch of our Gen2Autoline . We expect Fab-1 improvement activities to extend into 2023, but at a slower rate given the decision to redirect resources to Gen2. The net proceeds from the Merger and proceeds from the exercise of our Public Warrants (as defined under the heading "Common Stock Warrants" in Note 8 "Warrants" of the notes to our condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q) have enabled us to complete and further expand Fab-1, pursue Fab-2, accelerate research and development and undertake additional initiatives.
Market Focus and Market Expansion
According to industry analyst Avicenne Energy's 2019 estimate, the Li-ion battery cell market will grow from$45 billion in 2020 to$75 billion in 2025. Our near-term focus is on the following market applications: wearables (smartwatches, AR/VR, headsets, medical applications, etc.), computing and mobile communications. This high value segment represents an addressable market that is estimated to be$13 billion by 2025, based on our analysis of industry unit forecasts from industry researchers and our estimates of average selling prices of such units. 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, smartwatches built for children, handheld payment terminals, portable routers, and gaming PCs. 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 OEMs and continuing work on our three-year grant with theU.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 nor any deterioration in capital efficiency, 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, as well 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
Revenue
InJune 2022 , we began to generate revenue from our planned principal business activities. We recognize revenue within the scope of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. We generate revenue from our Product Revenue and Service Revenue for the development of silicon-anode lithium-ion battery technology. 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 24 --------------------------------------------------------------------------------
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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. Product Revenue is recognized once we have satisfied the performance obligations and the customer obtains control of the goods at a point in time under the revenue recognition criteria. Product Revenue is recognized in an amount that reflects the consideration for the corresponding performance obligations for the silicon-anode lithium-ion batteries or battery pack products transferred.
Cost of Revenue
Cost of revenue includes materials, labor, allocated depreciation expense, and other direct costs related to Service Revenue contracts and production lines. Labor consists of personnel-related expenses such as salaries and benefits, and stock-based compensation. With our production commenced in the second quarter of 2022, we anticipate that cost of revenues will increase significantly as we optimize our first production line and bring-up our second production line. 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.
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 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 continue to increase 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, travel expenses, 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 expense, net primarily consists of dividends, interest income, 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
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Comparison of Quarter Ended
The following table sets forth our condensed consolidated operating results for the periods presented below (in thousands):
Quarters Ended
October 2, October 3,
2022 2021 Change ($) % Change
Revenue $ 8 $ - $ 8 N/M
Cost of revenue 6,629 104 6,525 N/M
Gross margin (6,621) (104) (6,517) N/M
Operating expenses:
Research and development 13,948 10,301 3,647 35 %
Selling, general and administrative 13,110 8,791 4,319 49 %
Total operating expenses 27,058 19,092 7,966 42 %
Loss from operations (33,679) (19,196) (14,483) 75 %
Other income (expense):
Change in fair value of convertible
preferred stock warrants and common stock
warrants (50,160) 8,460 (58,620) N/M
Interest expense, net - (52) 52 N/M
Other income (expense), net 1,826 (50) 1,876 N/M
Total other income (expense), net (48,334) 8,358 (56,692) N/M
Net loss $ (82,013) $ (10,838) $ (71,175) 657 %
N/M - Not meaningful
Revenue
Revenue for the quarter ended October 2, 2022 was immaterial. As of October 2,
2022 and January 2, 2022 , we had $4.3 million and $7.9 million , respectively, of
deferred revenue on our Condensed Consolidated Balance Sheets.
Cost of Revenue
Cost of revenue for the quarter endedOctober 2, 2022 was$6.6 million , compared to$0.1 million during the quarter endedOctober 3, 2021 . The increase in cost of revenue of$6.5 million was attributable to$3.7 million of labor costs,$2.4 million of allocated depreciation expense and other miscellaneous direct costs since we commenced our production in the second quarter of 2022. As ofOctober 2, 2022 andJanuary 2, 2022 , we had$1.5 million and$4.6 million , respectively, of deferred contract costs on our Condensed Consolidated Balance Sheets. In the execution of satisfying the single performance obligation per the existing 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. In the beginning of June of 2022, we completed construction of our first production line and placed this equipment in service. As a result, we began depreciating this production equipment over its estimated useful life. We also began capitalizing inventory and recognizing factory overhead expenses in cost of revenue, which are largely fixed overhead costs (idle costs) that were previously recognized in research and development expenses. We expect equipment depreciation and idle costs to continue to increase from the second quarter of 2022 going forward. A full quarter of depreciation and idle costs was included in the third quarter of 2022 and no such costs were included in the corresponding period of 2021. In addition, we anticipate our factory overhead expenses will continue to increase in the next 12 months as 26 --------------------------------------------------------------------------------
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we continue to hire additional personnel to support the build-out of additional production lines and maintain our new manufacturing facilities.
Research and Development Expenses
Research and development expenses for the quarter endedOctober 2, 2022 were$13.9 million , compared to$10.3 million during the quarter endedOctober 3, 2021 . The increase of$3.6 million , or 35%, was primarily attributable to an increase in our research and development employee headcount resulting in a$1.5 million increase in salaries and employee benefits, a$2.1 million increase in stock-based compensation expenses, a$0.8 million increase in subcontractors costs and a$0.7 million increase in tooling and materials, which were partially offset by decreases in other miscellaneous research and development expenses as some of the overhead costs were classified as cost of revenue in third quarter of 2022 instead of research and development expense in the corresponding period in 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter endedOctober 2, 2022 were$13.1 million , compared to$8.8 million during the quarter endedOctober 3, 2021 . The increase of$4.3 million , or 49%, was primarily attributable to an increase in our selling, general and administrative employee headcount resulting in a$0.6 million increase in salaries and employee benefits and a$2.5 million increase in stock-based compensation expenses. The remaining increase of$1.2 million was primarily comprised of a$1.7 million increase in legal and professional fees, a$0.8 million increase in subcontractors costs and a$0.4 million increase in insurance expense, which were partially offset by decreases in marketing, recruiting and other miscellaneous expenses. We anticipate that our overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support and maintain our new manufacturing facilities, as well as for our operation expansion.
Change in Fair Value of Convertible Preferred Stock Warrants and Common Stock Warrants
The change in fair value of common stock warrants of$(50.2) million for the quarter endedOctober 2, 2022 was attributable to an increase, 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"). The change in fair value of common stock warrants of$8.5 million for the quarter endedOctober 3, 2021 was attributable to a decrease, during the quarter, in the fair value of the Private Placement Warrants. As ofOctober 2, 2022 , there were 6,000,000 common stock warrants outstanding and no Legacy Enovix convertible preferred stock warrants outstanding. 27 --------------------------------------------------------------------------------
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Comparison of Fiscal Year-to-date Ended
The following table sets forth our condensed consolidated operating results for the periods presented below (in thousands):
Fiscal Years-to-Date Ended
October 3,
October 2, 2022 2021 Change ($) % Change
Revenue $ 5,109 $ - $ 5,109 N/M
Cost of revenue 12,883 1,847 11,036 N/M
Gross margin (7,774) (1,847) (5,927) N/M
Operating expenses:
Research and development 42,506 25,413 17,093 67 %
Selling, general and administrative 36,545 17,500 19,045 109 %
Total operating expenses 79,051 42,913 36,138 84 %
Loss from operations (86,825) (44,760) (42,065) 94 %
Other income (expense):
Change in fair value of convertible
preferred stock warrants and common stock
warrants 44,040 3,679 40,361 N/M
Interest expense, net - (187) 187 N/M
Other income (expense), net 2,344 (38) 2,382 N/M
Total other income (expense), net 46,384 3,454 42,930 N/M
Net loss $ (40,441) $ (41,306) $ 865 (2) %
N/M - Not meaningful
Revenue
Revenue for the fiscal year-to-date ended October 2, 2022 was $5.1 million ,
comprised of $5.1 million of Service Revenue and an immaterial amount of Product
Revenue. Service Revenue was primarily attributed to the satisfaction of our
final performance obligations for and our deliveries of (a) pilot cells and (b)
battery packs to two customers under our Service Revenue customer contracts.
Customer A represented $5.0 million of our total revenue for the fiscal
year-to-date ended October 2, 2022 .
A portion was previously recorded as deferred revenue on our Condensed
Consolidated Balance Sheet. As of
Cost of Revenue
Cost of revenue for the fiscal year-to-date endedOctober 2, 2022 was$12.9 million , compared to$1.8 million during the prior fiscal year-to-date endedOctober 3, 2021 . The increase in cost of revenue of$11.0 million was attributable to$4.7 million of labor costs,$3.3 million of allocated depreciation expense and other miscellaneous direct costs since we began our production in the second quarter of 2022. As ofOctober 2, 2022 andJanuary 2, 2022 , we had$1.5 million and$4.6 million , respectively, of deferred contract costs on our Condensed Consolidated Balance Sheets. In the execution of satisfying the single performance obligation per the existing 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. In the beginning of June of 2022, we completed construction of our first production line and placed this equipment in service. As a result, we began depreciating this production equipment over its estimated useful life. We also began capitalizing inventory and recognizing factory overhead expenses in cost of revenue, which are largely fixed overhead costs (idle costs) that were previously recognized in research and development expenses. We expect equipment depreciation and idle costs to continue to increase from the second quarter of 2022 going forward. Approximately four 28 --------------------------------------------------------------------------------
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months of depreciation and idle costs was included in the fiscal year-to-date endedOctober 2, 2022 and no such costs were included in the corresponding period of 2021. In addition, we anticipate our factory overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support the build-out of additional production lines and maintain our new manufacturing facilities.
Research and Development Expenses
Research and development expenses for the fiscal year-to-date endedOctober 2, 2022 were$42.5 million , compared to$25.4 million during the prior fiscal year-to-date endedOctober 3, 2021 . The increase of$17.1 million , or 67%, was primarily attributable to an increase in our research and development employee headcount resulting in a$5.5 million increase in salaries and employee benefits, a$5.5 million increase in stock-based compensation expenses, a$3.5 million increase in subcontractor costs and a$1.7 million increase in tooling and materials. The remaining increase was primarily due to travel expenses and other miscellaneous research and development expenses, which were partially offset by a decrease in overhead costs that were classified as cost of revenue starting inJune 2022 instead of research and development expense for the prior fiscal year-to-date of 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year-to-date period endedOctober 2, 2022 were$36.5 million , compared to$17.5 million during the prior fiscal year-to-date endedOctober 3, 2021 . The increase of$19.0 million , or 109%, was primarily attributable to an increase in our selling, general and administrative employee headcount resulting in a$2.6 million increase in salaries and employee benefits and a$8.8 million increase in stock-based compensation expenses. The remaining increase of$7.6 million was primarily comprised of a$5.1 million increase in legal and professional fees, a$2.5 million increase in subcontractors costs and a$1.6 million increase in insurance expense, which were partially offset by decreases in marketing, recruiting and other miscellaneous expenses. We anticipate that our overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support and maintain our new manufacturing facilities, as well as for our operation expansion.
Change in Fair Value of Convertible Preferred Stock Warrants and Common Stock Warrants
The net change in fair value of convertible preferred stock warrants and common stock warrants was comprised of a change in fair value of common stock warrants of$44.0 million for the fiscal year-to-date period endedOctober 2, 2022 and a net change in fair value of common stock warrants and convertible preferred stock warrants of$3.7 million for the prior fiscal year-to-date endedOctober 3, 2021 . For the fiscal year-to-date period endedOctober 2, 2022 , the change in fair value of common stock warrants of$44.0 million was attributable to a decrease in the fair value of the 6,000,000 Private Placement Warrants. OnFebruary 22, 2021 , all 10,160,936 Legacy Enovix's Series D convertible preferred stock warrants were exercised at$0.01 per share for a total of$0.1 million . The increase in the fair value of the convertible preferred stock warrants, up toFebruary 22, 2021 , was due to the increase in Legacy Enovix's enterprise value throughout 2020 and the first quarter of 2021. The change in the fair value of the convertible preferred stock warrants of$4.8 million was recorded as other expense for the prior fiscal year-to-date endedOctober 3, 2021 . This change was partially offset by a decrease in fair value of$8.5 million of common stock warrants for the prior fiscal year-to-date endedOctober 3, 2021 .
Non-GAAP Financial Measures
While we prepare our condensed consolidated financial statements in accordance withU.S. generally accepted accounting principles ("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. 29 --------------------------------------------------------------------------------
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 loss on a GAAP basis to the Non-GAAP EBITDA and Adjusted EBITDA financial measures for the periods presented below (in thousands):
Quarters Ended Fiscal Years-to-Date Ended
October 2, October 3, October 3,
2022 2021 October 2, 2022 2021
Net loss $ (82,013) $ (10,838) $ (40,441) $ (41,306)
Interest expense, net - 52 - 187
Depreciation and amortization 2,995 687 4,795 1,062
EBITDA (79,018) (10,099) (35,646) (40,057)
Stock-based compensation expense 8,699 3,042 22,117 6,717
Change in fair value of convertible
preferred stock warrants and common stock
warrants 50,160 (8,460) (44,040) (3,679)
Loss on early debt extinguishment - 60 - 60
Adjusted EBITDA $ (20,159) $ (15,457) $ (57,569) $ (36,959)
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):
Fiscal Years-to-Date Ended
October 2, 2022 October 3, 2021
Net cash used in operating activities $ (60,903) $ (34,514)
Capital expenditures (31,366) (31,509)
Free Cash Flow $ (92,269) $ (66,023) Liquidity and Capital Resources
We have incurred operating losses and negative cash flows from operations since inception throughOctober 2, 2022 and expect to incur operating losses for the foreseeable future. As ofOctober 2, 2022 , we had cash and cash equivalents of$349.0 million , a working capital of$338.0 million and an accumulated deficit of$373.6 million . Prior to the Business 30 --------------------------------------------------------------------------------
Table of Contents
Combination, we had financed our operations primarily from the sales of convertible preferred stock, borrowing from convertible promissory notes, and borrowing from the Secured Promissory Note (as defined under the heading "Related Party Loans" in Note 11 "Related Party " of our notes to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). 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 fiscal 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 8 "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.
Material Cash Requirements
As ofOctober 2, 2022 , we had cash and cash equivalents of$349.0 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 will continue to increase. For the fiscal year-to-date endedOctober 2, 2022 , we purchased$31.4 million of 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. See more discussion on contractual obligations and commitments section. 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 as well as potential strategic arrangements. 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.
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