Enovix Corp. — Q1 2023 Form 10-Q
Reporting period: Fiscal quarter ended April 2, 2023; comparisons are with the quarter ended April 3, 2022, unless otherwise noted. Enovix designs, develops and manufactures silicon-anode lithium-ion batteries. Commercial production began in 2022, but the company remained at an early manufacturing and commercialization stage.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $21,000 | $0 |
| Cost of revenue | $12.2 million | $0.5 million |
| Gross margin | $(12.2) million | $(0.5) million |
| Research and development | $23.7 million | $12.7 million |
| Selling, general and administrative | $27.3 million | $11.9 million |
| Operating loss | $(63.3) million | $(25.1) million |
| Net income (loss) | $(73.6) million | $42.7 million |
| Net cash used in operations | $(25.6) million | $(19.7) million |
| Capital expenditures | $3.0 million | $10.5 million |
| Free cash flow (company-defined, non-GAAP) | $(28.6) million | $(30.1) million |
- The 2022 profit reflected a $67.8 million gain from a decline in warrant fair value. In Q1 2023, warrant remeasurement instead produced a $12.8 million expense, contributing to the year-over-year swing in net results. The Q1 2023 warrant valuation was Level 3 and based on a model with significant unobservable inputs.
- Q1 2023 costs included $29.2 million of stock-based compensation, including $21.1 million related to equity-award modifications following management departures. Research and development and SG&A also included one-time severance and related charges.
- Cash and cash equivalents were $293.8 million at April 2, 2023, versus $322.9 million at January 1, 2023. Working capital was $276.1 million; accumulated deficit was $458.4 million. Current assets were $301.2 million and current liabilities $25.1 million.
- There was no interest-bearing debt outstanding at quarter-end. After quarter-end, Enovix issued $172.5 million principal amount of 3.0% convertible senior notes due 2028, with approximately $165.7 million in net proceeds. The notes are unsecured and convertible; the filing describes potential dilution and cash-settlement risks.
- Liabilities included $61.9 million of warrant liability. Operating lease liabilities totaled $8.9 million.
Material changes and operating developments
- Revenue remained nominal despite commercial shipments beginning in 2022; Q1 2023 revenue was just $21,000. Cost of revenue increased as production-line depreciation, labor and factory overhead were recognized following the start of production.
- Operating expenses more than doubled year over year, driven partly by executive departures, higher headcount and stock-based compensation. Cash used in operations increased by $5.9 million from the comparable quarter.
- Management reported producing 12,500 wearable-size cells in Q1, above its 9,000-unit forecast and 2.8 times Q4 2022 shipments, citing improved Fab 1 yields and productivity. Production volume does not itself establish customer acceptance or profitable commercial scale.
- The company’s stated revenue funnel was $1.46 billion: $744 million of Engaged Opportunities and $718 million of Active Designs and Design Wins. Management cautioned that conversion depends on customer qualification, manufacturing improvements and added capacity; the funnel is potential full-production-year value, not contracted revenue.
- Enovix’s board approved the Gen 2 Autoline design in March and the company placed orders for Gen 2 equipment and a higher-speed Agility Line. It signed a non-binding LOI for a Malaysia Fab 2 site; the building is described as having space for four lines with projected capacity of 38 million to 75 million batteries annually, depending on battery size.
Outlook, risks and contingencies
- Management expects operating losses and negative operating cash flows for the foreseeable future, with research and development, SG&A and manufacturing costs expected to rise. It expects cash, including the subsequent note proceeds, to cover funding needs for the next 12 months, based on anticipated spending. Longer-term funding may require additional debt, equity or strategic arrangements.
- Management plans to target portable electronics markets—IoT, mobile and computing—before pursuing EV opportunities. It intends to begin mobile-cell production in Fab 1 in 2023 and install the Agility Line by year-end 2023; BrakeFlow production on Gen 2 was targeted for 2024. These are plans, not assurances.
- Key risks include achieving adequate manufacturing yield, throughput, reliability and cost; delays in installing and qualifying new lines; customer qualification and conversion of design wins into volume orders; supplier and materials availability; product safety, performance and warranty exposure; and the need for additional capital.
- Open purchase orders and contractual commitments were approximately $81.9 million at April 2, 2023, up from $22.7 million at January 1, 2023. The company also reported approximately $59.5 million of additional Gen 2 equipment purchase orders placed in April.
- Legal matters include wage-and-hour class actions and securities class-action complaints alleging misstatements concerning manufacturing scale-up. Enovix said it intends to defend the claims; it could not reasonably estimate losses, if any, for the securities matters. The company stated it did not believe the known legal matters would materially affect its financial position, liquidity or results.
- Management concluded disclosure controls and procedures were effective at a reasonable assurance level as of April 2, 2023. The filing also notes prior material weaknesses had been remediated and no first-quarter material weakness was identified.
Important facts for investors to verify
- Whether reported cell output translates into improving yields, customer qualification, repeat orders and material revenue.
- Whether the Malaysia Fab 2 site, local financing and Gen 2 line installation proceed on schedule and within budget, and whether projected capacity is achievable.
- How quickly the $1.46 billion revenue funnel converts into purchase orders and recognized revenue; funnel value is not backlog or guaranteed sales.
- Cash burn, capital spending and liquidity against the company’s 12-month funding estimate, including the use of note proceeds and the need for further financing.
- Potential dilution, conversion or cash-settlement effects, and debt-service obligations under the 2028 convertible notes and capped-call arrangements.
- Manufacturing, product-safety and customer-qualification risks, as well as outcomes or potential costs of the disclosed litigation and purchase commitments.