Q2 2022 Enovix Corp Earnings Call

Okay.

Thank you for standing by and welcome to the <unk> Corporation second quarter 2022 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 hub.

For today's program Charles Anderson Senior Vice President of Investor Relations. Please go ahead Sir.

Thank you Hello, everyone and welcome to <unk> Corporation's second quarter 2022 financial results conference call with US today are president and Chief Executive Officer, and co founder Harold Ross and Chief Financial Officer, Stefan Pete Scott.

We will also be joined today by Chief Commercial Officer, Cam deals and Chief Technology Officer, and co founder of shortfall here for the Q&A portion of our call.

Harold and Stefan will review, the operating and financial highlights and then we'll take questions. After the Q&A session. We will conclude our call before we continue let me kindly remind you that we released our second quarter 2022 shareholder letter after the market close today it's.

It is available on our website at IR Dot <unk> Dot com.

A replay of this conference 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 a discussion of factors that could affect our future financial results and 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 August 10, 2022 based on information currently available to US we can give no assurance that these statements will prove to be correct and we do not intend and undertake no duty to update these statements except as required by law.

During this call. We will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

Can find a reconciliation of the GAAP financial measures to non-GAAP financial measures in our shareholder letter.

It is posted on the Investor Relations page of our website.

I will now turn the call over to help to begin Harold.

Thank you Charlie.

Second quarter was a great quarter for <unk> and a major milestone in our evolution as a company.

I wanted to start today by going back to the beginning.

When we started in Opex in 2007, we did so with a belief that there must be a better way to make them out or battery.

One that advanced architecture over material.

On paper, we felt we can improve energy density by as much as 100%.

And deliver the best product in an industry that would have enormous strategic importance.

We knew we had the people they can pull it off from prior companies, where the architecture of our product was our core competency.

But we also knew it wouldn't be the change the fundamentals of how something had been made for over 50 years.

In the spring of 2020, we started ordering the equipment for our first production line.

And get at the building I am sitting here too.

To prepare for the production of our battery.

A few months later.

Covid brought the Waldorf stop.

We could have used that as an excuse for failure.

We didn't.

We just figured out how to get the job done.

Knocking down one challenge at a time.

Resilience is one of the core values of our people.

In February 2021, when we announced plans to become a publicly traded company.

We set an ambitious goal to bring up and qualify our first epic battery production line in the U S and what we call fab one.

And then to deliver our first commercial products and recognize product revenue in the second quarter of this year.

Today I am pleased to report that we accomplished that goal and have since delivered batteries from fab, one to multiple customers and distributors.

It turns out that we were right about batteries, becoming strategically important.

Industry leaders have taken note of <unk> moving into production with a revolutionary product and have become increasingly aggressive in moving forward.

Specifically in the second quarter, we completed tech qual with three Mega cap technology companies, which we refer to as strategic accounts.

Two of these are the same companies that told US we have the best advanced battery they have tested.

And a third told us their goal is to move our technology across our product portfolio quickly.

And we all know that in this business the best product win.

On top of that we completed the initial phases of our product development program in the second quarter with a fourth strategic account after shipping commercial sales of our fab one.

And recognized $5 million in revenue from this customer.

Equally important strategically as the U S Army.

As a critical need for high energy batteries manufactured in the U S.

I am proud to announce that we received a follow on evaluation contract in the second quarter to build and test custom cell for wearable battery packs U S Army soldiers carried a yield.

This opportunity is very large our estimate is that the total U S. Wearable military battery market is approximately $350 million annually based on currently established military program.

We believe our battery can deliver considerable operational advantages for our soldiers.

The same time, providing resiliency of domestic supply.

While we continue to work on moving customers through our final towards orders, we are focused on improving the output of our factor to meet future demand.

We made solid improvement in output and yield during the quarter, but we need to increase our manufacturing yield metrics.

There is no easy path, when bringing up a first epic nine manufacturing lines.

It is a relentless effort of a tenuous improvements.

I'm an operations person at heart.

I have ramp multiple high volume factory.

And I am Super confident we will get the job done.

We are prioritizing fab one improvements in the third quarter.

This includes taking the line down for portions of the quarter to improve individual process modules and install planned battery can vary.

Our goal is to do the needed work in Q3 to position us for the start of our production ramp to close the year.

We're putting all of this learning into our Gen II production line design.

Major portions of Gen. Two are designed to be half the footprint of Gen. One.

With increased output.

We had hoped to have finished our gen. Two ordering in Q2, but we extended the design activities to incorporate all the latest earnings from SaaS one.

As well as our breakthrough technology.

We now expect Gen two to be installed in fab two in the second half of 2023.

As previously discussed.

We expect to have a both a domestic and an Asian fabrication in the next several years.

I also wanted to reemphasize that we have multiple path to grow the company.

Including capital light options, such as JV or licensing.

This is the likely path for the electric vehicles market and it may also be a viable path to support the capacity requirements of our roster of strategic breakdown.

Now, let me turn the call over to Stefan who will discuss our financials and after that I will make some closing remarks.

Thank you Howard.

Our detailed financials can be found in our shareholder letter.

I spent my time covering a few high level topics.

We recognized $5 1 million of total revenue in the second quarter.

With one customer accounting for $5 million of service revenue as a result of US completing the initial phases of a product development program.

Our adjusted EBITDA loss in the second quarter was $18 million.

Compared to an adjusted EBITDA loss of $19 4 million in the first quarter of 2022.

Excluding stock based comp our non-GAAP operating expenses in the quarter were $19 5 million.

non-GAAP operating expenses of $19 $4 million in the first quarter of 2022, which also excludes stock based comp.

We closed the second quarter of 2022 with net cash of $385 million.

Down from $408 million in the first quarter of 2022.

Due to $20 6 million of cash used operationally.

And $4 million of cash used on capital expenditure due to the timing of capital equipment purchases.

We expect higher capital spending the rest of the year as.

As we make initial payment for our Gen two production lines.

And continue to outfit fab one for high output.

Now, let's discuss our guidance for full year 2022, we now expect to use between $160 million and $180 million of cash.

Of which we expect roughly half will be capex.

As Harold mentioned, we have extended our timeline to complete the design of our Gen. Two line, which impacts the timing of our cash use.

For revenue we now.

Now expect to recognize between 6 million and $8 million for full year 2022.

We have lowered the top end of the range given we are prioritizing improvements in fab one over shipments in the third quarter.

We are also incorporating our latest view on the cadence of service revenue.

To summarize we achieved our target of recognizing product revenue in the second quarter, we are being thoughtful about spending.

Continue to possess a very strong balance sheet.

And then I'll turn it back to Harris for closing remarks.

Thanks Stephan.

What excites me about our future is not just the massive growth opportunity that lays ahead of us with our breakthrough energy density.

Equally exciting to me or other attributes and features we can deliver that we didn't really fully realized when we started in opex.

Because we changed the battery architecture so radically.

Problems that are difficult for others or not for us.

Having a 100% active silicon anode with good cycle life is.

As an example of this.

But there are other advantages that can be equally if not more valuable.

We announced several of these over the past quarter.

Our architecture by this design delivered exceptional rate and thermal performance important in portable electronics, and critical and EV applications, where fast charging as a major care about.

It also enables compelling safety advancements the first of which we announced earlier this year called break flow.

Today, we announced that our break flow cells passed the nail penetration tests at a dentist power our partner on the U S Army program.

Safety is critical for our soldiers, who typically carry 15 to 20 pounds of batteries into the field.

The inventor CTO stated that quote.

<unk> batteries are the only Nextgen high energy density SaaS to Paas, our nail penetration test end quote.

These are just the start of what we can do what architecture.

Stay tuned to see what else we can do.

As a final note as many of you are aware, our chairman T. J Rodgers is legendary in Silicon valley for its level of technology and explaining in layman's terms.

If you really want to understand why break flow is so important we invite you to check out a video we posted today on our website featuring key jay's explanation of freight flow.

Check out the fireworks at <unk> Dot com forward slash from the lab.

With that I'd like to turn it back over to the operator for your questions operator.

Certainly as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

And our first question will come from Dave Daoud of Cowen Your line is open.

Okay.

Hey afternoon, everyone stay down here.

Thanks for all the prepared remarks, guys just I know maybe what you do in revenue next year isn't really all that important in the Grand scheme of things, but could you maybe just talk a little bit about the.

The Gen two equipment and just kind of Elong gating that design process, I guess expecting that equipment to arrive now in the second half of next year. So what should we expect when should we expect that line to be.

I guess generating some revenue or is it really the first half of 'twenty four just trying to think through the timing there.

Yes. Thanks, Gabe this is Harold for that question. So.

Just kind of some perspective right I mean, we're very focused on improvements around fab one this year.

That line will be the work horse of our output next year.

We have.

Made sure we put all of the learning from Fab, one and our Gen. One lines into Gen. Two I mean, the way we think about Gen. Two it's really the innovation of kind of profitability and growth for this company and.

We got to make sure we get that exactly right. We've actually been working on those tools pretty deepen designed for over six months. So they progressed a long ways, but we want to make sure we capture kind of that last learning on fab one.

So you are right I mean, our current outlook is there.

Those tools will land in the second half.

Theres a chance those could come into production at the end of the year, but I think the safer assumption as they start producing revenue in the first half of 'twenty four.

Our current view, obviously, we will be working.

As much as we can to try to pull that in but I would think about next year is really being more of a SaaS one event from a revenue standpoint.

Got it thanks Harold.

That's helpful and then.

Maybe just shifting gears a bit obviously, it looks like Theres a lot of <unk>.

Demand for.

<unk> is obviously a great thing.

You mentioned you completed the tech qual with those three strategic so could you maybe.

Just just give us a little bit a color on visibility into I guess, what happens next with those three strategic when could we maybe see that.

Kind of move into the active design in design win bucket.

Yes, sure I'll talk a little bit and then maybe have Cam comment I mean.

One of the things that's maybe been a bit startling to us is kind of fab. One has come up is how how.

How strongly these large strategic companies have been running to push the ball forward. So we've been really thrilled with that progress.

And engagement at the highest levels with some of these companies.

And during the quarter, we actually ship.

<unk> sells from fab one to two of those large strategics, which we think is.

Okay, Great Ellman and <unk>.

Each one of these in principle could generate enough demand to kind of fill us up for a number of years. So it's a tremendous opportunity it's great to see them really pulling.

Then.

Also in their mind kind of getting through the tech Qual part and then realizing we got a functioning factory it really puts us in a whole new conversation with them.

And I'll, let cam talk a little bit of a kind of how he thinks those kind of relationships move forward.

Yes sure. Thanks, Thanks, Harold Yes, so Gabe.

If you recall last quarter, we announced.

Pretty important announcement with one of these strategic accounts I think the story with the other three is similar I mean these companies are.

I would say very sophisticated about how they evaluate technologies.

The hurdles they setup to then move forward into product and then ultimately into production and so we.

We view these tech calls as being essentially the major technology validation point for.

For these companies and what that means is that they've they have been.

Testing ourselves some of them for for years actually.

And we've reached a point, where we meet the requirements and essentially the their requirements and their business process to move forward into kind of product development. So yes as you as you follow those those.

And the progress of those accounts forward, we expect those to move into the active design design win categories over time and then ultimately.

If we're successful there.

Production.

Just kind of a note on the overall environment I mean, Harold alluded to this in his comments, but.

There's definitely been a real acceleration in.

The urgency of.

Of these customers these potential customers and how they are behaving with respect to the programs we are working with them on.

We think thats, probably triggered by the commercial milestones that we've met because to reach that stage you have to.

Really go through essentially all of the different pieces of your business. The technology has to work the products has to work. It has to be reliable you have to meet certifications you have to meet quality you have to be able to manufacture it and so as they see that happening here.

<unk>.

It makes them move with increased urgency towards capturing the value that our battery like this can can produce.

We're definitely seeing a mentality shift where these large companies.

Our thinking about battery as being a strategic lever in their businesses.

Can affect essentially everything that their products ultimately do in terms of performance in terms of form factor et cetera.

For the longest time, there hasnt really been a way to compete on battery and we think it's an exciting time for us because.

This is really to our knowledge the first real breakthrough battery to make it to market and it's being recognized as such by by these companies.

Awesome, Kevin really helpful. Thanks, everyone.

Thanks Gabe.

And our next question.

Will come from Bill Peterson.

Of Jpmorgan Your line is open bill.

Okay.

Yes, hi, thanks for taking my questions if I could first start off with the COO.

Throughput and yield improvements that you have going on.

Can you shed some more light on what's what's going on is it for example cell to cell repeatability.

Reliability or meeting I guess.

<unk> consistently metrics such as energy does see a cycle like this.

Trying to get a feel for whats needed to be improving I guess, maybe most importantly is do you know what the issues are so that so we have a good line of sight that maybe just here in the next quarter or so you can get past these issues.

Sure. Thanks, Bill Yeah, Let me, let me talk about that so.

Some of you may or may not know I'm kind of a manufacturing guy at my car, it's kind of what I've done my whole life.

So kind of because of that I've got pretty high expectations for what I think manufacturing where it needs to be.

And I'll be Frank we are not not to those expectations yet.

That said I'm encouraged that our trajectory.

We've been making good progress.

If you think about our line.

First of all I want to start by saying, we don't have reliability problems with our devices. We have in light deals issues that we're working on right and these end up being.

Primarily things, where youre working on tweaking equipment throughout the line to make the product better and to reduce fallout throughout the line, but the stuff that we get out is 100% meet customer specs.

So let me maybe give a little bit of color just as an example on that.

There is a point in a process, where we apply what we call our constraint.

On our on our cell that's a critical thing that makes the silicon work.

And that's that's a welded part of our device, we I would say when we started up that equipment last year that equipment was running somewhere below 80% in terms of yield so 20% of the parts at that step didn't make it through because we have a very high threshold for all those wells looking good and over the last.

Several quarters, we successively have driven that and up to 90%, 95% and in the current quarter to 98% right So and I.

You know in some ways, maybe I'd love to tell you is just one thing in the end of the day. It said that it was ending up probably being 20 small incremental things we had to do.

To make that process better none of which were magic none of which were science. Its just a bunch of at the end of the day kind of tweaking and Thats really what yield improvement in manufacturing, it's like I mean, my experience in manufacturing before through several companies that were very high volume as that is kind of this endless not endless, but long state long game of just fixing one thing.

Another and I'm, saying, we're making those improvements it's just going to take.

Several quarters trying to get that stuff done so I'm super optimistic I don't see anything out there I'd say is a showstopper.

We just have to keep our heads down.

Make those improvements.

It's something that I pay a lot of personal attention to because it just kind of in my DNA.

And I think we've got exactly the right people here that are going to get that pulled off so I am super bullish.

On that path forward and I think we will see.

Quarter over quarter improvement in those things as we move forward.

Yes, that's helpful color it sounds more I don't know blocking and tackling versus discovery or development. So that's encouraging.

The second part is if we look at the next call it year and a half we will be relying on SAB one too.

To support these strategic customers of which.

Obviously, it sounds like Theres strong demand I guess, how do you balance that.

Across these customers.

Clearly limited supply here in the next like I said, maybe youre.

Plus and then how should we think about the potential I don't know if its unit opportunity or.

Kilowatt hours or revenue, but try to understand what you could supply.

In this interim phase before the next two to two fabs.

Yes, I mean, you're right I mean, we're very focused on fab, one and improving its output as we get into next year. If that's one of the reasons, we're super focused on when it's early days.

I think.

You had a couple of questions in there in terms of kind of balancing customers.

These are kind of early days. So we're actually we're trying to engage with customers that are the customers we want to grow it right.

And.

Theres always some balancing there.

And.

And we kind of constantly look at night and day to day basis I think at this point, we're able to make those engagements we want to there may be some point in the future. We have to do some down selection, but I don't think we're there yet.

Your second question is kind of what does that out but look like.

I think our.

We will give some kind of official guidance as we get into our Q4 call about next year, but our current thinking is fab.

Fab one on its own between a couple of lines. We have here is producing something in the single millions digit units. This next year and depending on the product that is there is a range of revenues that can be and so we will give some more clarity on that in the future, but we.

We're going to maximize fab one.

Get that learning into Gen, two and get that Gen. Two in my.

Our lineup as soon as we can.

Okay. Thanks for the additional color.

Thanks Bill.

Thank you and our next question will be coming from Colin Rusch of Oppenheimer.

One moment collyn.

Guys can you talk a little bit about the impact of the freight flow technology on pack cost volume and especially what that means for your entrance into the EV market.

Yes, sure maybe I'll start on that and then hand, it over to Chuck for some comments.

We're super pumped about this breakthrough thing I think the industry is starting to catch on as well as investors.

One of the big highlights this last quarter as we said.

<unk>, where the break flow to R. R.

Our partner for the U S Army program.

And you can imagine they are experts at abusing cells, right and they've subjected ourselves to nail penetration task, which is.

As a proxy for other types of impairments I would say.

And.

And I don't remember the exact quote but the basic quote from them was this is the only high energy density so they'd ever tested that.

Pass this test, which is a pretty compelling statement, obviously in that field, where people are getting shot at features like that are super important but I think also if you think about even consumer space and some of the history. There Brightcove is also super valuable and I think our customers are.

Very excited about that certainly the military is.

We posted this video on the website.

That.

People can get a little sense of how that works that T. J kind of narrowed it for us I encourage people to look at that but I'll, let Chuck talk a little bit about kind of the technology piece of that in a bit more because it's it's one of these features of our battery that we.

We can uniquely do.

It was very exciting to us and Thats really a function of our different architecture. So Chuck why don't you add some color to that yes. Thanks Harold.

So.

Harold talked about the impact on the consumer.

The army of course.

Safety is.

Primary consideration into other markets and I think your question was specifically.

Our EV cells and yes those.

<unk> is really interesting to EV customers also because as everybody knows I believe that as that is a primary factor.

And.

Consideration on how these customers look or how these Oems looked at low cap safety. So they are I think.

Really interested in this technology.

And really it is something that is uniquely enabled by our technology by our architecture.

Answer another part of your question.

Has really.

Negligible impact on the cost.

And.

The productivity of the line.

There is some minor modifications that have to be made.

Okay. So my question is really wondering about.

Cost reduction at the pack level, but we think we can take that offline.

I'm, assuming that you're going to be able to save the customer some cost.

At the pack level.

So thats helpful. Thanks, Thanks for that.

Just in terms of the things that you guys are balancing the two.

Frames around this so.

Understand right it sounds like Youre working through some engineering reengineering on the line.

Also talking to a number of customers and looking at how you serve the relatively large following on demand and thinking about what those contract terms are.

If you look at identifying the final locations for the capacity expansion and work through timing on some of those engineering plans as well as some of those contractual elements, which may include some prepayments how should we think about getting that information and is that something that you will make an announcement on is that something you'll just give updates on around the quarterly call and kind of when.

Can we expect things to get.

Clear here is that how much <unk> event or is that more by the end of the year.

Colin This is Stefan thanks for the question you need to think about it on.

Product revenue side.

These are early days and we're living with Peel arrangements, which we really like because obviously that gives us a lot of flexibility.

From the.

Service revenue perspective. These are complex development programs, which we typically don't disclose terms and as we progress through our strategic accounts, but we will update you as we go along through those terms when we get to more substantive.

Contract arrangements that would set off like appeal base.

Arrangement.

And the timeframe for finishing the engineering for the following plants is that something that you guys feel like you're you are closing in on that.

And that up or is that going to be more closer to the end of the year.

No I think Collin this is harold.

We've been kind of in detailed design mode on some of the fab two equipment probably for at least a quarter. So they're pretty far along I mean, maybe you can say, we're kind of polishing the apple, but we wanted to get some of these last.

Last improvements and from fab one into that so I mean, I would view that we're going to move forward with Gen. Two you know in the next several weeks, it's not it's not that far off.

And that would allow us to Atlanta that equipment in the second half half of next year. So it's pretty mature I already but we want to make sure. This is perfect right. It's really our of engine of growth going forward.

Perfect. Thanks, so much guys.

So.

Yes.

And our next question will come from G. Richard of Northland capital markets.

Yes, Thanks for taking my question and congratulations on the tremendous progress you made in the quarter.

Mike My first question is on the revenue split in the quarter was that $5 million.

Milestone payment from your first strategic customer Thats.

Using your battery in the watch.

And.

How many other customers made up the other 100000 of revenue.

Stephen why don't you take that.

Thanks for the question.

From.

From a product revenue perspective that amount is immaterial pretty small we shipped to a couple of customers. The majority is.

Service revenue and.

For me <unk>.

Zion perspective, we finished.

Design, we deliver production units in that close to all of that launch.

Relevant program for that one strategic customer.

John can jump in a little bit.

Keith so.

No.

Total, we shipped to 10 different customers and for distributors discuss sorry.

And.

Among those two of those were two strategic accounts.

One of those strategic accounts was the one that was closing out the $5 5 million.

So if that answers your question directly.

Got it.

Is the $5 million from the from the watch company.

No.

So we announced last quarter.

Our strategic rate that you are pointing out that.

Their first product with us would be a smartwatch the $5 million as a separate company is separate.

Project, and we're actually not at Liberty to really talk about what the application is there.

But based on kind of how we define our strategic.

Each of these companies has multiple applications.

That could put a battery in too.

Got it.

Understand thank you very much and then Harold.

As you think about getting the single million units.

Exiting 2023 run rate.

How do you think about that ramp is it going to be a linear ramp is going to be exponential is it going to be a little start stop.

How do you think about.

Ramping up the volume and sort of what that looks like as you progress.

Yes, I think I would view that.

Q4, it starts but its still early days on that ramp I think I think if you look throughout next year.

I would say I don't I Wouldnt view, it as exponential I would kind of linear through the year.

You'll see it.

I think youll see some slope, there, but not not not nothing I would call exponential throughout the year I don't think.

Okay.

Makes complete sense.

If I could just sneak one more in.

Given some of these major strategic customers want.

We will need a lot of volume.

Have you guys had any discussions with them in terms of licensing or GBS.

Where might that be.

I think it's still pretty early days in that I think.

For all of these guys.

What's critical to them initially as validating the technology convincing themselves. We have a production line is working so we're kind of through that.

Our view is that first step for a lot of these guys who is going to be putting our product in one of their products are battery right is the first point.

And then we'll see where that takes us I mean, some of those things may happen in the future.

But right now we're trying to be a product company camp can give a little bit maybe more color on that as well.

Yes, I think thats about right.

In terms of the stage, but it's certainly fair to say that.

Uh huh.

Pretty much across the board with the with these types of strategic account that is part of the discussion with them. It's part of the.

They are.

We view that as a fairly normal course of business, we've positioned ourselves both from a technical and a production.

How we've designed our manufacturing process, we've specifically positioned ourselves to be in to.

To be in a situation, where we can enable that to happen.

If you think about.

Large runner.

Smartphone or laptop I mean, these are hundreds of millions of units.

And none of those large products really have a single source ever and so we expect that in fact, it's part of our long term business model, it's not necessarily in our financial projections, but strategically it's in our model and we think it's a great option.

For us going forward and we think it can really leverage.

The technology, we built.

Perfect. Thank you so much.

Thank you.

And our next question will come from it.

Anthony Stoss of Craig Hallum.

Your line is open.

I'm, sorry, operator, you cannot hopefully Anthony Stoss Craig Hallum.

Harold just to follow up on your comment about ordering the equipment in the next several weeks kind of give any indication that you think the tweaks you are going to do here in Q3, and the production lines of yogurt should we assume that there will be some production revenue in Q3 or can it zeroed out and just assume as of Q4 and then second question is.

Lots of traction with potential customers, where are you seeing that most trashes. It watch sized batteries phones laptops across the board any color would be appreciated.

Yes. So thanks for that question. So from here on your first question I would view that.

<unk> output is pretty low in Q3, we really are focused on getting all of the improvements done too.

The ramp in Q4.

What we're what we're shipping out of Fab run right now is.

Kind of are we have a wearable cell that we've designed to kind of sit and do a lot of sockets. That's what's out there. So I think thats thats, where youre going to see early in the year, that's going to get traction and I think theres a lot of interest. So we shipped that sell out to 10 plus customers in the first and the second quarter.

That said, we're also going to be you know we're also working on larger yourselves out of our second line.

And Cam can talk a little bit if I kind of have some of those things are progressing.

Sure happy to do that Tony.

So.

We've always sort of thought about how that business grows going from wearable cells to mobile communication to laptops, that's kind of the logical progression in terms of our product development and launch and I think that's how we'll see it rollout.

Harold is correct I think in the near term in terms of numbers of companies and products. It is heavily weighted towards wearables today, because that product is ready to go it's on the market. It's qualified so.

We're seeing a lot of activity there.

But as we think about and as I think about the strategies that the strategics are taking with us.

They really all are kind of taking a similar approach where they start with one product category to essentially prove the not the not so much the technology, but our ability to scale it and produce it with quality and each of the each of the companies we're working with.

Interestingly enough is chosen and kind of a different product to go after first.

So we like that approach we think it's we think it's great it really diversifies.

Where the business is going and then in the long run we expect and our goal is to is to develop multiple products with these guys and they can all each one of them could probably take essentially all of our volume for the foreseeable next couple of years.

If they wanted to do that and if we allowed that to happen, which probably wouldn't be in our direct interest to be so concentrated and so we're trying to spread it out.

Thanks, Dan, but if I can actually direct to follow up last question to you are you still able with the pausing of the plant optimization here in Q3 or are you still able to satisfy demand for your customers for both Q3 Q4 units.

No we can't satisfy demand for customers at all now or even next year or the year. After I mean, theres definitely an allocation of that has to happen.

That said can I meet my goals out of what I need to do in Q3, and Q4, yes, and my goals really are around primarily around <unk>.

And setting us up for volume as the as the production capacity comes online.

Alright, thanks, guys.

One moment.

And our next question will come from Ananda Baruah of loop capital. Your line is open Ananda.

Hey, yes, thanks, good afternoon, guys and congrats on all the unique today.

Yes, just a couple if I could.

Going back to the remarks, you guys made about strategic accounts seeing a real acceleration in urgency.

The commercial milestone that you said were the catalyst for that.

As their own commercial milestones in the work with you or does that also include you guys see any commercial milestones of nonstrategic accounts.

Now seeing.

Sort of the efficacy of the product.

Yes, I think theres, probably some of both of that but like all I can kind of give some color yes.

Yes.

That's a good question.

The way we see it is.

Each of these companies have their own rigorous process for testing or ourselves and and.

Convincing themselves.

The validity of the technology and the products right.

Thats kind of its own.

Let's say business process that moves along what we mean by an acceleration is.

Dave.

It's kind of a trigger for them when they see the company go commercial.

So that was a big milestone for this last quarter.

Commercial product going out of the factory and when they see that it's a trigger a trigger for them.

It makes them realize that this thing is going to go and then everybody is worried about.

Maintaining a competitive advantage and so you get into this competitive dynamic where where people start to get a fear of missing out because there's a limited amount of.

Capacity and.

Relative to the opportunity there that's going to be true for I think some time now so that's kind of what we meant by it being a trigger.

It's really.

I think look battery technology is always very difficult to understand all the little nuances and caveat some details of.

How does it work and whether it works and when you actually get commercial units out the door to real customers.

Essentially answered all of those questions.

And so it's a big deal.

Yeah, absolutely how are many of our customers view view the achievement of those milestones.

Okay. That's helpful guys, that's it and so I guess.

Would it be based on what you guys have experienced internally in conversation sort of in the kind of places that probably like acceleration and urgency.

<unk>.

Would it be also your opinion there is a possibility basically.

I don't know what the right. The right description is here, but like move that.

The faster pace now given that urgency.

Some of these.

Some of these production qualification.

Yeah, that's what we're saying by acceleration, we think that the.

The engagements are moving at a faster pace than I think.

We also mentioned maybe in the prior call that we had a press release where you.

One of these large strategic said they want to try to move us across their entire product line as soon as possible right.

They're going to be probably pulling on us pretty hard I would say.

Yeah definitely a sense of urgency now.

That said of course, none of those companies will short circuit there.

They are quality and process for developing quality products, but.

Yeah.

Just motivation to go as fast as possible.

That's helpful Understood and then just a quick follow up here on.

On the army now congrats on that so what would be now the key milestone we're enabling.

From where you are right now.

Forgot your volume with them.

Yeah sure so.

What we announced today was what's called Phase III and phase four of the overall program.

Phase, one and two we announced that guest.

So about a year ago and the purpose of phase one and two was for the army to test.

Our standard products.

Verify our claims on.

On performance in terms of energy density cycle life safety Harold mentioned, the nail pen penetration testing that they do.

And given the results of those tests they they chose to move forward with with this follow on contract.

The purpose of this contract is for us to configure basically our ourselves.

In the right form factor and designed to fit into the existing CW be the conformal wearable battery pack. This is the this is the multi cell pack that goes into a soldier vest.

So build cells that fit into that then do the integration with the with the pack and then do some pack level testing, okay. So thats kind of this space next.

We would move into essentially field trials with real tax going out in the field on a trial basis.

With with.

Soldiers and then next beyond that would be essentially volume production.

Awesome.

Any care to guess what the next two phases at key steps, how long that could take.

Roughly.

Our expectation is that.

It's a few years.

The army.

Has a rigorous process, we're going through we will start to see what we consider to be meaningful revenue, though.

Before were in full scale production, because there's a lot of work that goes into the field Trialing and there is some volume associated with that now that all said.

It's not necessarily normal time, so I would say with respect to this type of a program.

Part of the reason why there is really excited about what we're doing is the product but.

Another part of the reason is that this would be domestically produced and there really are very limited choices for company's battery cell production companies in the United States and so we're very well positioned there and if you just kind of think about what's happening in the world.

Around security of supply and where our current supply chain for lithium ion batteries are coming from that's not necessarily the most stable part of the world today and so.

You can rest assured that.

They are smart people on both sides of the Io the highest level, who are really worried about this and trying to figure out ways to accelerate it.

That's super helpful. Thanks.

Thanks, a lot.

All CRP before that thank you.

Thanks.

Thank you.

And our next question comes from Mark Cohosts of Alder Lane.

Thanks for taking my life.

Well. Thank you have a couple of comments and throw a few questions in there first of all probably one of the best calls I've heard from anyone in a couple of years, given how trying and difficult the world. The World is unlimited demand is a pretty good thing to have.

So I talked to a couple of UBS customers. These mega guys and Harold can you comment on this one of them said that without the <unk> battery our product would not exist.

Can you talk about that that concept are you seeing this with others.

And to me when I look at these greater than $200 billion enterprises that would be.

Apple.

Samsung.

This book tax law.

And maybe another one I am missing so does that.

Those names do they fit the bill that's one.

Question, two and finally Cam can you talk about the bake off in auto that's going on when can we expect to see something what that business model looks like.

Finally, just really well done guys. I mean this is just a substantial improvement in our prior calls and I'm very proud of you and proud to be part of this deal.

Hey, Thanks for that Mark I appreciate the nice comments.

Youre right I think if you think about these large strategics.

They all have products some of which we probably know about some of which we don't which are sitting in backlog.

Sure.

Waiting for a battery that's good enough to make them happen I mean, there might be other challenges as well right but.

If you think about the last 20 years product designers have been told time and time again, you can't do this because you didn't have a battery power rates, so having a battery as good as ours unlocks a lot of those things and make them possible.

So some of these private ourselves doesn't even know about these are pretty cagey companies.

I would say that there's there's obviously one emerging market kind of the next computing market and they are aware that product itself is just massively challenge from battery life and you know what we've mentioned in the past when we've heard from a number of players in that space is that.

The only battery that they see that really makes that product work is ours right. So that's a pretty strong endorsement for how critical we are to something thats kind of really not out there yet and we feel.

Excited to be.

A company that has something that can make that happen and b that powerful in the world. So I think thats. One one example of that and I'll, let cam kind of talk about your second question.

Okay, Hey, Mark.

Yes, I think your question was pertaining to.

What's what.

What's happening on the EV front, and how do we view that.

No question.

Question, two was Apple Facebook Tesla Samsung did.

Did those names fit that greater than 200 billion dollar bill.

And my my guessing in that neighborhood property I know you can't mention customers, but I can so I'm guessing.

Guessing in the REIT lakes there.

My question too.

And then three is about the auto.

Alright.

<unk> to what we've said is that we are working with them with a number of what we call strategic accounts and we have defined them to be market caps over $200 billion.

And capable of using our battery in multiple product categories and so.

That's pretty easy to to Google what that means I think.

There's a there's a handful of companies that fit that bill.

On the EV side.

Yeah actually it's kind of exciting times, we launched <unk> mobility, which is its own business unit and team.

I guess last quarter officially.

And.

That team is chartered with.

Essentially converting the success we've had in this technology development in the consumer market to a real product that we think is extremely well positioned technically.

To help move the electric vehicle.

Mission forward and so as part of that as you can imagine we're very actively meeting with.

Worldwide Oems all over the world.

And we think we're going to have an opportunity to be able to kind of.

Choose the right partner for Us and there is a whole.

Number of considerations that go into that from technical fit to their strategy to culture.

What our judgment as of their ability to win and so I think things are moving along there quite nicely.

When can we expect to see something on that you think.

Yeah that one.

It's harder to say just because theres, a theres lots of different things that go into.

And so our ability to say something publicly but.

Just rest assured that.

We're having very interesting discussions now.

That we hope will play out fine.

And finally to.

The sell side out there you guys don't have an easy job.

But some of you can't even see the forest through the trees and Youre. So myopic focus look a little broader on what can happen here.

Best product for what these guys do wins.

Always is one and it will win so some of your guys' questions are just beyond insane.

Just be a little more broader in scope I would I would suggest.

Thank you.

Thanks Mark.

Thank you.

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