Enovix Corp

NASDAQ:ENVX

Earnings Call Transcript 2022-Q2

[Operator]

Thank you for standing by and welcome to Enovix 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 conference will be recorded.

And now I'd like to introduce your host for today's program. Charles Anderson, Senior Vice President of Investor Relations. Please go ahead, Sir.

[Charles Anderson, SVP, IR]

Thank you. Hello everyone and welcome to Enovix Corporation 's second quarter 2022 financial results conference call. With us today are President, Chief Executive Officer, and Co–Founder, Harrold Rust, and Chief Financial Officer, Steffen Pietzke. We will also be joined today by Chief Commercial Officer, Cam Dales, and Chief Technology Officer and Co–Founder, Ashok Lahiri for the Q&A portion of our call. Harrold and Steffen will review the operating and financial highlights, and then we'll take your questions. After the Q&A session, we'll conclude the call.

Before we continue, let me kindly remind you that we released our second quarter 2022 shareholder letter after the market closed today. It's available on our website at ir.enovix.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 the information currently available to us. We can give no assurance that these statements will prove to be correct and we do not intend and undertake no duty to update these statements except as required by law.

During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. You can find a reconciliation of the GAAP financial measures to non-GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website.

I will now turn the call over to Harrold to begin. Harrold?

[Harrold Rust, President, CEO and Co–Founder]

Thank you, Charlie. The second quarter was a great quarter for Enovix and a major milestone in our evolution as a company. I want to start today by going back to the beginning. When we started Enovix in 2007, we did so the belief that there must be a better way to make the modern battery, one that advanced architecture over materials. 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 that could pull it off from prior companies where the architecture of our product was our core competency, but we also knew it wouldn't be easy to 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 gutted the building I'm sitting in to prepare for the production of our battery. A few months later, COVID brought the world to a 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 was 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 [indiscernible] eye battery production line in the US at what we call Fab-1 and then to deliver our first commercial products and recognize product revenue in the second quarter of this year.

Today, I'm pleased to report that we accomplished that goal and have since delivered batteries Fab-1 from multiple customers and distributors. It turns out that we were right about batteries becoming strategically important. Industry leaders have taken note of Enovix moving into production with a revolutionary product and have become increasingly aggressive in moving forward.

Specifically in the second quarter, we completed tech calls 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 the 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 wins.

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 from Fab-1 and recognize $5 million in revenue from this customer.

Equally important strategically is the US Army who has a critical need for high energy batteries manufactured in the US. I'm proud to announce that we received a follow-on evaluation contract in the second quarter to build and test custom cells for wearable battery packs, US Army soldiers carry into the field. This opportunity is very large. Our estimate is that the total US wearable military battery market is approximately $350 million annually based on currently established military programs.

We believe our battery can deliver considerable operational advantages for our soldiers while at the same time providing resiliency of domestic requirement. While we continue to work on moving customers through our funnel towards orders, we are focused on improving the output of our factory 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 of a kind manufacturing line. It is a relentless effort of continuous improvements. I'm an operations person at heart. I have ramped multiple high volume factories in my career, and I'm super confident we'll get the job done.

We are prioritizing Fab-1 improvements in the third quarter. This includes taking the line down for portions of the quarter to improve individual process modules and install plan battery conveyance. 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 this learning into our Gen2 production line design. Major portions of Gen2 are designed to be half the footprint of Gen1 with increased output. We had hoped to have finished our Gen2 ordering in Q2, but we extended the design activities to incorporate all the latest learnings from Fab-1, as well as our break flow technology. We now expect Gen-2 to be installed in Fab-2 in the second half of 2023. As previously discussed, we expect to have both a domestic and an Asian fabric location in the next several years.

I also want to reemphasize that we have multiple paths 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 pick down.

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

[Steffen Pietzke, CFO]

Thank you, Harrold. Our detailed financials can be found in our shareholder letter. I will spend 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 up from non-GAAP operating expenses of $19.4 million in the first quarter of 2022, which also excludes stock-based com.

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 used on capital expenditure due to the timing of capital equipment purchases. We expect higher capital spending the rest of the year as we make initial payments for our Gen-2 production line and continue to outfit Fab-1 for higher 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 Harrold mentioned, we have extended our timeline to complete the design of our Gen-2 line, which impacts the timing of our cash use.

Core revenue, we now expect to recognize between $6 million and $8 million for full year 2022. We have lowered the top end of the range given via prioritizing improvements in Fab-1 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 and continue to possess a very strong balance sheet.

I will turn it back to Harrold for closing remarks. Harrold,

[Harrold Rust, President, CEO and Co–Founder]

Thanks, Steffen. 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, our other attributes and features we can deliver that we didn't really fully realize when we started in because we changed the battery architecture.

So radically problems that are difficult for others are not for us having a 100% active Silicon nano with good cycle. Life is an example of this, but there are other advantages that could be equally, if not more valuable. We announced several of these over the past quarter, our architecture by its design delivers exceptional rate and thermal performance important in portable electronics and critical and EV applications where fast charging is a major care about it also enables compelling safety advancements.

The first of which we announce early this year called break flow today, we announced that our break flow cells pass the nail penetration test at Inventus power. Our partner on the us army program, safety is critical for our soldiers who typically carry 15 to 20 pounds of batteries into the field. The Inventus CTO stated that quote Novis batteries are the only next gen high energy density cells to pass our nail penetration test and quote.

These are just the start of what we can do with architecture. Stay tuned to see what else we can do as a final note. As many of you're aware our chairman, TJ Rogers is legendary and Silicon valley for his love of technology and explaining it 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 TJ's explanation of break flow, check out the fireworks at aic.com/from the lab.

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

[Operator]

[Operator instructions] And our first question will come from Gabe Daoud of Cowen. Your line is open.

[Gabe Daoud, Cowen Inc.]

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 Gen-2 equipment and just kind of elongating that, that design process and I guess expecting that equipment to arrive now in the second half of next year.

So when should we expect, when should we expect that line to be I guess generating some revenue. Is it really like the first half of '24? Just try to think through the timing there.

[Harrold Rust, President, CEO and Co–Founder]

Yeah. Thanks Gabe. This is Harrold. Thanks for that question. So, just kind of some perspective, right? We're very focused on improvements around Fab-1 this year. That line will be the workhorse of our output next year. We have made sure we put all of the learning from Fab-1 and our Gen-1 lines into Gen-2.

The way we think about Gen-2, 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 deep and 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-1.

So you're right. our current outlook is that those tools will land in the second half. There's a chance those could come into production at the end of the year, but I think the safer assumption is they, they start producing revenue in the first half of '24. That's kind of our current view. Obviously we'll be working as much as we can to try to pull that in, but I would think about next year as really being more of a, a Fab-1 event from a revenue standpoint.

[Gabe Daoud, Cowen Inc.]

Got it. Thanks, Harold. That's helpful. And then maybe just shifting gears a bit, obviously looks like there's a lot of demand for free your batteries is obviously a great thing and you mentioned you completed the tech wall with those three strategic, so could you maybe just give us a little bit a color of visibility into, I guess, what happens next with those three strategic? When can we maybe see that kind of, kind of move into the active design or design one bucket?

[Harrold Rust, President, CEO and Co–Founder]

Yeah, sure. I'll talk a little bit and then maybe have cam come in. one of the things that's maybe been a bit startling to us is kind of fab. One has come up is how, how strongly these large strategic companies have been wanting to push the ball forward.

So we've been really filled with that progress and engagement at the highest levels with some of these companies. And, during the quarter we actually ship shift cells from Fab-1 to two of those large strategies, which we think is a great omen and 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. And then, also in their mind kind of getting through the tech quo part and then realizing we've got a functioning factory, it really puts us on a whole new conversation with him. And I'll let cam talk a little bit about kind of how he thinks those kind of relationships move forward.

[Cameron Dales, General Manager & Chief Commercial Officer]

Yeah, sure. Thanks, Harrold. Yeah. 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. These companies are I would say very sophisticated about how they evaluate technologies the hurdles they set up to then move forward into product and then ultimately, into production. And, and so we view these tech calls as being essentially the major technology validation point for these companies.

And, what that means is that they've, they've been testing ourselves, some of them for, for years actually. And we've reached a point where we meet, we meet our, their requirements and essentially their requirements and their business process to move forward into kind of product development.

So yeah, as you, as you follow those, those the progress of those accounts forward, we expect those to move into the active design win categories over time. And then ultimately if we're successful there into production and just kind of a note on the overall environment, Harrold alluded to this in his comments, but there's definitely been a real acceleration in the urgency of these CU, these potential customers and how they're behaving with respect to the programs we're working with them on.

We think that's probably triggered by the commercial milestones that we've met because, to reach that stage, you have to really go through essentially all the different pieces of your business. The technology has to work, the product 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 it makes them move with increased urgency towards capturing the value that a battery like this can produce. And we're definitely seeing a mentality shift where these large companies are, are thinking about battery as being a strategic lever in their businesses.

It can affect essentially everything that their, their products ultimately do in terms of performance, in terms of form factor, et cetera. And for the longest time there hasn't 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 kind of the first real breakthrough battery to, to make it to market. And it's being recognized as such by these companies.

[Operator]

And our next question will come from Bill Peterson of JPMorgan. Your line is open Bill.

[Bill Peterson, JPMorgan]

Yeah. Hi. Thanks for taking my questions. If I could first start off with the throughput and yield improvements that you have going on. Can you shed some more light on what's going on?

Is it for example, sell to the cell repeatability reliability or meaning, I guess, consistency consistently metrics such as energy density or cycle life, just trying to get a feel for what's needed to be improved, I guess maybe most importantly is do 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.

[Harrold Rust, President, CEO and Co–Founder]

Sure. Thanks Bill. Yeah, let me talk about that. So I don't, some of you may or may not know I'm kind of a manufacturing guy at my core. 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're not to those expectations yet.

That said, I'm encouraged at our trajectory. We've been making good progress. if you think about our line one, first of all, I want to start off by saying we don't have reliability problems with our devices. We have in deals, issues that we're working on, right and these ends up being primarily things where you're working on tweaking equipment throughout the line to make the product run better and to reduce fallout throughout the line. But the stuff that we get out is a hundred percent meets customer specs.

So let me maybe give a little bit of color just as an example on that there's a point in our 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 a welded part of our device.

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 thresholds for all those wet looking good. And over the last several quarters, we successively have driven that in up to 90%, 95%, and then the current quarter to 98% right.

So, and in some ways maybe I'd love to tell you just one thing in the end of the day, it's ended up, 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. It's just a bunch of the end of the day kind of tweaking. And that's really what yield improvement in manufacturing is.

Like my experience in manufacturing before through several companies that were very high volume is that it's kind of this endless, not endless, but long, long game of just fixing one thing after another. And I'm seeing, we're making those improvements. It's just going to take, several quarters time to get that stuff done.

So I'm super optimistic. I don't see anything out there. I say as a show stopper we just have to keep our heads down and make those improvements. It's something that I pay a lot of personal attention to because it's 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 I'm super bullish on that path forward. And I think, we'll see, quarter over quarter of improvement in those things as we move forward.

[Bill Peterson, JPMorgan]

That's helpful color sounds more, I don't know, blocking and tackling versus discovery or development, so that that's encouraging, I guess the second part is, if we look at the next sort of call a year and a half will be relying on, on Fab-1 to know to support these strategic customers of which, obviously it sounds like there's strong demand, I guess.

How do you balance that demand across these customers with clearly limited supply here at the next, like I said, maybe, year-over-year plus, and then how should we think about the potential? I don’t know if it's unit opportunity or kilowatt hours or revenue, but try to understand what you could supply in this interim phase before the, the next two fabs.

[Harrold Rust, President, CEO and Co–Founder]

Yeah. You're right. We're very focused on Fab-1 and improving its output as we get into next year. That's one of the reasons we're, super focused on how, when it's early days. I think you a couple 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 the customers we want to grow with right and there's always some balancing in there and we kind of consciously look at that a 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 output look like? I think our we'll give some kind of official guidance as we get into our Q4 call about next year. But our current thinking is, Fab-1 on its own between the couple lines we have here is, is producing something in the single million digit units, this next year.

And depending on the product, that is, there's a range of revenues that could be. And so we'll give some more clarity in that, in the future, but we're going to maximize Fab-1 get that learning into gen two and get that gen two line up as soon as we can.

[Operator]

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

[Colin Rusch, Oppenheimer]

Can you talk a little bit about the impact of the break flow technology on pat cost volume, weight and safety, and especially what that means for your entrance into the EV Marco?

[Harrold Rust, President, CEO and Co–Founder]

Yeah, sure. Maybe I'll start on that and then hand it over to Ashok for some comments. We're super pumped about this break flow thing. I think the industry is, is starting to catch on as well as investors. one of the big highlights this last quarter is we sent sales with a break flow to our, our partner for the us army program.

And you can imagine their experts at abusing cells, right? And they subjected ourselves to nail penetration tests, which is a proxy for other types of impairments, I would say and I don't remember the exact quote, but the basic quote from them was this is the only high energy density cell they've ever tested. That's pass this test, which is a pretty compelling statement, obviously in, 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 break flow is also super valuable. And I think our customers are very excited about that. Certainly the military is and, we posted this video on the website so that people can get a little sense of how that works, that TJ kind of narrated for us. I encourage people to look at that.

But I'll let, I should talk a little bit about kind of the technology piece of that a bit more, because it's one of these features of our battery that we can uniquely do. Which I think is very exciting to us and it's really a function of our different architecture. So, so why don't you add some color to that? Yeah,

[Ashok Lahiri, Chief Technical Officer & Co-Founder]

Thanks Harrold. So, Harrold talked about the impact and the consumer and the army of course safety is of primary consideration into other markets. And I think your question was specifically about EV cells and yes, this technology is really interesting to EV customers also because as everybody knows, that is a primary factor in consideration on how these customers look or how these OEMs look at safety.

So they are, I think equally interested in this technology and really it is something that is uniquely enabled by our technology, by our architecture and answer another part of your question. It has really a negligible impact on the cost and the pro productivity of the line. There is some minor modifications that have to be made.

[Colin Rusch, Oppenheimer]

Okay. Yeah. My question was really wondering about cost reduction at the pack level, but we can, we can take that offline. I'm assuming that you're going to be able to save your customers some cost at the pack level. So that's helpful, but thanks for that. Just in terms of the things that you guys are balancing and, and the timeframes around this. So if I understand, right, it sounds like you're working through some engineering re-engineering on the line.

You're also talking to a number of customers and looking at how you serve the, the relatively large follow of demand and thinking about what those contract terms are. I guess it's, if you look at identifying the final locations for the capacity expansion and, 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?

Is that something that you'll make an announcement on? Is that something you'll just give updates on around the quarterly call and when can we expect things to get, a little bit clearer here, is that have a three Q event or is that more by the end of the year?

[Cameron Dales, General Manager & Chief Commercial Officer]

Thanks for the question. You need to think about it on product revenue science. These are early days and we are living with PO 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 we will update you as we go along through those terms when we get to more substantive contract arrangements there outside of like a PO based arrangement

In the timeframe for finishing the engineering for, for the following plants. Is that something that you guys feel like you're, you're closing in, on the wrapping that up, or is that going to be more closer to the end of the year?

[Harrold Rust, President, CEO and Co–Founder]

No, I think Colin, this is Harrold. We've been kind of in detailed design mode on some of the Fab-2 equipment probably for at least a quarter. So they're pretty follow along. Maybe they were kind of polishing the apple, but we want to get some of these last improvements in from Fab-1 into that. So, I would view that we're going to move forward with Gen-2 in the next several weeks.

It's not that far off. And that would allow us to land that equipment and the second half of half of next year. So it it's pretty mature already, but we want to make sure this is perfect, right. It's really our engine and growth going forward.

[Operator]

And our next question will come from Gus Richard of Northland Capital Markets.

[Gus Richard, Northland Securities, Inc.]

Yes. Thanks. For taking my action. And congratulations on the, tremendous progress you made in the quarter. My, first question is on the revenue split in the quarter, was that $5 million milestone payment from your first strategic customer. That's was that $5 million milestone payment from your first strategic customer that's using your battery and the watch and how many other customers made up the other a hundred thousand of revenue step and why don't you take that?

[Steffen Pietzke, CFO]

Thanks for the question. From a product revenue perspective, that amount is immaterial pretty small. We ship to a couple of customers. The majority is service revenue, and from a design perspective, we finished design, we delivered production units that closed out at large development program for that one strategic customer.

So I can jump in a little bit too to on that. So total, we shipped to 10 different customers and four distributors, Gus, sorry. And among those two of those were two strategic accounts. One of those strategic accounts was the one that were, was closing out the five, 5 million that if that answers your question directly.

[Gus Richard, Northland Securities, Inc.]

Got it and is the $5 million from the watch company?

[Steffen Pietzke, CFO]

No. So we announced last quarter a strategic rate that, that you're pointing out that their first product with us would be a smart watch. The $5 million is a separate company, separate project and we're, we're actually not at Liberty to really talk about what the application is there. But based on the, kind of how we define a strategic, these, each of these companies has multiple applications that they, they could put our battery into.

[Gus Richard, Northland Securities, Inc.]

Got it. I understand that. 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 it going to be exponential? Is it going to be a little start, stop, how do, how do you think about ramping up the volume and sort of what that looks like as you progress?

[Harrold Rust, President, CEO and Co–Founder]

Yeah, I think I would view that, Q4, it starts, but it's still early days on the ramp. I think, I think if you look throughout next year. I wouldn't view it as exponential. I would view it as kind of linear bit through the year. See it. I think you'll see, some slope there, but not, not, not nothing I would call exponential throughout the year. I don't think.

[Gus Richard, Northland Securities, Inc.]

Okay. That makes complete sense. And if I could just sneak one more in given some of these major security customers want we'll need a lot of volume. Have you guys had any discussions with them in terms of, of licensing or JBS, where might that be?

[Harrold Rust, President, CEO and Co–Founder]

I think it's still pretty early days in that I think for all of these guys, what's critical to them initially is validating the technology, convincing themselves. We have a production line that's working. So we're kind of through that. Our view is the first step for a lot of these guys is going to be putting our product in one of their products, our battery, right. Is the first point and then, we'll see where that takes us. some of those things may happen to 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.

Yeah and I think that's about right in terms of the stage, but I, it, it's certainly fair to say that pretty much across the board with the, with these types of strategic accounts, that is part of the discussion with them. It it's part of they view that as a fairly normal course of business, we've positioned ourselves both from a technical and a production, sort of how we've designed our manufacturing process.

We've specifically positioned ourselves to be in a situation where we can enable that to happen. If you think about large runner smartphone or laptop, 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 it strategically it's in our model. We think it's a great option for us going forward. We think it can really leverage the technology we built.

[Operator]

Thank you. And our next question will come from Anthony Stoss of Craig Hallum. Your line is open.

[Anthony Stoss, Craig Hallum]

I'm sorry, operator cut off. You cut off. Hopefully it's Anthony's Stoss, Craig Hallum. Harold, just to follow up on your comment about ordering the equipment in the next several weeks, kind of give an indication that you think the tweaks you're going to do here in Q3 and the production line will be over. Should we assume that there will be some production revenue in Q3 or, or kind of zero it out and just assume it's in Q4.

And then second question is, lots of traction with potential customers, where are you seeing that most trash? And is it watch size batteries, phones, laptops, cross the board, any color would be appreciated.

[Harrold Rust, President, CEO and Co–Founder]

Yeah. So thanks for that question. So from a you on your first question, I would view that, the production output is pretty low in Q3. We really are focused on getting all the improvements done to, start the ramp in Q4. What, we're shipping out of fab run right now is kind of our, we have a wearable cell that we've designed to kind of fit into a lot of sockets that's what's out there.

So I think that's what you're going to see early in the year. That's going to get traction. And I think there's a lot of interest we ship that sell out to 10-plus customers in the first -- in the second quarter. That said we're also going to be, we're also working on larger cells out of our second line. And Cam can talk a little bit about kind of how some of those things are progressing.

[Cameron Dales, General Manager & Chief Commercial Officer]

Yeah, sure. Happy to do that. Tony. Yeah. So we've always sort of thought about how the 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 roll out. Harold's correct. I think in the near term, in terms of numbers of companies and products it's 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 the similar approach where they start with one product category to essentially prove not so much the technology, but our ability to it and, and produce it with quality.

And each of the companies we're working with, interestingly enough has chosen kind of a different product to go after first. So we like that approach. We think it's, we think it's great. It, it really diversifies where the business is going. And then, in the long run we expect and our goal is to develop multiple products with these guys and they, they could all, each one of them could probably take essentially all of our volume for the foreseeable next couple of years. If they, if they wanted to do that and if we allowed that to happen, which probably wouldn't be in our, our direct interest to be so concentrated. And so we're trying to spread it out.

[Anthony Stoss, Craig Hallum]

Thanks, Cam if I could actually direct a follow up last question to you, are you still able with the pausing of the plant, the optimization here in Q3, are you still able to satisfy demand for your customers for both Q3 and core Q4 units?

[Cameron Dales, General Manager & Chief Commercial Officer]

No, we can't satisfy demand for customers at all now or even next year or the year after. Right, there's definitely an allocation 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 quals and setting us up for volume as the as the production capacity comes online.

[Operator]

And our next question will come from Ananda Baruah from Loop Capital. Your line is open, Amanda.

[Ananda Baruah, Loop Capital]

Hey, yeah, thanks. Good afternoon guys. And congrats on all the good news today. Yeah, just a couple, if I could going back to the remarks you guys have made about strategic accounts, seeing a real acceleration and urgency, the commercial milestones that you said were the catalysts for that, are those their own commercial milestones in the work with you? Or does that also include you guys, any commercial milestones and non-strategic accounts? Are they now seeing the sort of the efficacy of the, of the product?

[Harrold Rust, President, CEO and Co–Founder]

Yeah, I think there's probably some, both of that are like all at cam kind of give some color. Yeah. Hey that's a good question. The way we see it is each of these companies have their own rigorous process for testing our ourselves and convincing themselves of the validity of the technology and the products, right. And that that's kind of its own.

Let's say business process that moves along. What we mean by an acceleration is they, it, it's kind of a trigger for them when they see the company go commercial and so, that was the big milestone for this last quarter commercial product going out of the factory. And when they see that it's a trigger, it's a trigger for them and it makes them realize that this thing is going to go, and then everybody's worried about, maintaining a competitive advantage.

And so you, 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 caveats and details of, of how does it work and whether it works and when you actually get commercial units out the door to real customers, you've essentially answered all of those questions and so it's a big deal and that's absolutely how our, many of our customers view the achievement of those.

[Ananda Baruah, Loop Capital]

Okay. That's helpful context. And, and so I guess, would it be based on what you guys have experienced internally in conversation sort of in the context of that call, like acceleration and urgency, would it be also your opinion that there's a possibility that they sort of like, I don't know what the right, the right description is here, but like move at a faster pace now, given that urgency to complete some of these some of these production qualifications.

[Harrold Rust, President, CEO and Co–Founder]

Yeah. That's what we're saying by acceleration. We think that the engagements are moving at a faster pace and I think, and on we also mentioned maybe in the prior call that, or we had a press release where, one of these large said they want to try to move us across their entire product line as soon as possible right.

So they're going to be probably pulling on us pretty hard, I would say. Yeah, definitely sent the urgency. Now that said, of course, none of those companies will short circuit their quality and, and, process for developing quality products. But there's motivation to go as fast as possible.

[Ananda Baruah, Loop Capital]

That's helpful. Understood. And then just a quick follow up here on, on the army now to make congrats on that. So what, what would be now the key milestones remaining from where you are right now to, to going into production volume with them?

[Cameron Dales, General Manager & Chief Commercial Officer]

Yeah, sure. So, what we announced today was what what's called phase three and phase four of the overall program. Phase 1 and two, we announced that I guess about a year ago and the, the purpose of phase one and two was for the army to test the, our standard products verify our claims on performance in terms of energy density, cycle, life safety.

Harrold mentioned the nail pen penetration testing that they do. And given the results of those tests, they, they chose to move forward with this follow on contract. And the, the purpose of this contract is for us to configure basically our ourselves in the right form factor and design to fit into the existing CWB the conformal wearable battery pack.

This is the multi-sale pack that goes into a soldier vest. So build cells that fit into that, then do the integration with the pack and then do some pack level testing. Okay. So that's kind of this phase next. We would move into essentially field trials with, real packs going out in the field on a trial basis with soldiers and then next beyond that would be, essentially volume production.

[Ananda Baruah, Loop Capital]

Awesome. Any care to guess what the next two phases, next few steps, how long that could take roughly?

[Harrold Rust, President, CEO and Co–Founder]

Our expectation is that, it's a few years, it's the army, has a rigorous process of going through we'll start to see what we consider to be, meaningful revenue though. And before we're in full scale production, because there's a lot of work that goes into the field trailing and there's some volume associated with that now that that all said it's not necessarily normal times, I would say with respect to this type of a program, a part of the reason why they're 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 companies, batteries sell 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 supply and where our current supply chains for lithium batteries are coming from, that's not necessarily the most stable part of the world today. And, and so you can rest assured that there's smart people on both sides of the aisle, the highest level who are really worried about this and, and trying to figure out ways to accelerate it.

[Ananda Baruah, Loop Capital]

That's super helpful context. Thanks a lot. I'll see before there. Thank you.

[Operator]

Thank you. And our next question comes from Marc Cohodes of Alder Lane Farm.

[Marc Cohodes, Alder Lane Farm]

Well, thank you. Have a couple 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 years and 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 you, these customers, these mega guys, and, and Harold, can you comment on this? One of them said that without the OVS battery, our product would not exist. Can a, you talk about that concept, are you seeing this with others? And to me, when I look at these greater than 200 billion enterprises, that would be place of apple, Samsung, Facebook, Tesla, and maybe another one I'm missing. So does that do those names? Do they fit the bill? That's one that question two.

And finally, Cam, can you talk about the bake off in OTO? That's going on? When can we expect to see something, what that business model looks like and, and, and finally just really well done guys. This is just a substantial improvement of prior calls and I'm very proud of you and proud to be part of this deal.

[Cameron Dales, General Manager & Chief Commercial Officer]

Hey, thanks for that, Marc. I appreciate the nice comments. You're right. I think if you think about these large strategic, they all have products, some of which we probably know about some of which we don't, which are sitting in back closets waiting for a battery. That's good enough to make them happen. 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 don't have the battery power. Right. So having a battery as good as ours unlocks a lot of those things and make them possible. What, some of these we probably ourselves don'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 of AR where that product itself is this massively challenged from battery life.

And what we've mentioned in the past, and 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 as ours, right? So that's a pretty strong endorsement for how critical we are to something that's kind of really not out there yet. And we feel excited to be, a company that has something that can make that happen and be that powerful in the world.

So I think that's one example of that. And I'll let Cam kind of talk about your second question. Yeah. Okay. Hey mark. Yeah, I think your question was pertaining to, what's happening on the EV front and how do we view that?

[Cameron Dales, General Manager & Chief Commercial Officer]

No, no question two was Apple, Facebook, Samsung, do those names fit that greater than $200 billion bill? Is that, am I, am I guessing in that neighborhood property? I know you can't mention customers, but I can. So am I, am I guessing in the right lakes there that's my question too. And then question three is about the auto.

Sorry, question two. What we've said is that we are working with a number of what we call strategic accounts and we've defined them to be market caps over $200 billion and capable of using our, our battery in multiple product categories and so yeah, it's pretty easy 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, it's kind of exciting times, we launched a Novus 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 and the consumer market to a real product that we think is, 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, 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's a whole, number of considerations that go into that from technical fit to their strategy, to culture to their, to what our judgment is 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,

[Harrold Rust, President, CEO and Co–Founder]

That one's harder to say just because there's lots of different things that go into our ability to say something publicly, but just rest assured that we're having very interesting discussions now that we hope will play out and finally, 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 you're so myopic and focused.

Look a little broader on what can happen here, because best product for what these guys do win. It always has won and it will win. So some of your guys' questions are just beyond insane. So just be a little more broader in scope, I would suggest. Thank you.

[Operator]

Thank you. I'm showing no further questions. This concludes today's conference. Thank you for participating. You may now disconnect.