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The following discussion and analysis provide information that the management ofEnovix Corporation (referred as to "we," "us," "our" and "Enovix") believes is relevant to an assessment and understanding ofEnovix's consolidated results of operations and financial condition as ofJuly 3, 2022 and for the quarter and fiscal year-to-date endedJuly 3, 2022 and should be read together with the condensed consolidated financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis contain forward-looking statements based upon our current expectations, estimates and projections that involve risks and uncertainties. Actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.
Business Overview
We design, develop and started to commercially manufacture an advanced
silicon-anode lithium-ion battery using our proprietary 3D cell architecture
that increases energy density and maintains high cycle life. This enables us to
use silicon as the only active lithium cycling material in the anode. We have
applied an equally innovative approach to develop proprietary roll-to-stack
production tools for existing lithium-ion battery manufacturing lines and
increase megawatt hour capacity. Our silicon anode battery architecture allows
lithium-ion batteries to be produced smaller, cheaper and more efficiently than
current alternatives.
To date, we have concentrated our operational effort on researching, developing
and commercializing the cutting-edge technology behind our silicon-anode
lithium-ion battery. Over the past several years, we have signed agreements to
provide engineering and proof of concept samples to blue-chip companies in the
consumer electronic industry (smartwatches, augmented reality/virtual reality,
smartphones, fire/life/safety radios, laptops). In addition to those industries,
we are pursuing the deployment of our technology with leading global automobile
manufacturers to develop patented battery technology for the electric vehicle
("EV") market.
We currently lease our headquarters, engineering and manufacturing space in
Fremont, California . In 2020, we started procuring equipment for our first high
volume production line ("Fab-1"). The first of this equipment began arriving in
early 2021. Fab-1 is now operational, and we commenced our planned principal
operations of commercial manufacturing and recorded our first product revenue as
scheduled in the second quarter of 2022. During the second quarter of 2022, we
furthered the design of our second generation ("Gen2") manufacturing equipment
with our suppliers but did not complete ordering. This was due to the
incorporation of our latest learning from Fab-1 and, to a lesser extent, the
incorporation of our BrakeFlow™ technology into the Gen2 equipment. As a result,
we are now targeting full delivery of this equipment in the second half of 2023.
In parallel to our work on Gen2, we continue the site selection process for our
future factory locations. As previously communicated, we anticipate splitting
this capacity increase into two battery cell factories, one in North America and
one in Asia (now known as "Fab-2" and "Fab-3"). Our current goal is to develop
these sites in succession. A domestic factory will allow close collaboration
with our research and development site and access to potential policy incentives
through both the Department of Energy and the Department of Defense . A factory
in Asia will most effectively serve consumer electronics customers with
localized production.
Business Combination
OnJuly 14, 2021 (the "Closing Date"),Enovix Corporation , aDelaware Corporation ("Legacy Enovix"),Rodgers Silicon Valley Acquisition Corp. ("RSVAC") andRSVAC Merger Sub Inc. , aDelaware Corporation and wholly owned subsidiary of RSVAC ("Merger Sub"), consummated the closing of the transactions contemplated by the Agreement and Plan of Merger, datedFebruary 22, 2021 (the "Merger" or the "Business Combination"), by and among RSVAC, Merger Sub and Legacy Enovix (the "Merger Agreement"), following the approval at a special meeting of the stockholders of RSVAC held onJuly 12, 2021 (the "Special Meeting"). Following the consummation of the Merger on the Closing Date, LegacyEnovix changed its name toEnovix Operations Inc. , and RSVAC changed its name fromRodgers Silicon Valley Acquisition Corp. toEnovix Corporation ("Enovix").Enovix raised approximately$373.7 million of net proceeds, after deducting transaction costs and estimated offering related expenses. Please refer to Note 3 "Business Combination" to the consolidated financial statements for the fiscal year endedJanuary 2, 2022 included in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 , filed with theSecurities and Exchange Commission ("SEC") onMarch 25, 2022 (the "Annual Report"), for further details of the Business Combination.
Change in Fiscal Year
In the third quarter of 2021, we made the fiscal year change on a prospective basis effective onJuly 1, 2021 and did not adjust operating results for prior periods. A fiscal year calendar typically consists of four 13-week quarters. Our 2022 fiscal year is comprised of four fiscal quarters ending onApril 3, 2022 ,July 3, 2022 ,October 2, 2022 andJanuary 1, 2023 , respectively. 21 --------------------------------------------------------------------------------
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Comparability of Financial Information
Our future results of operations and financial position may not be comparable to
historical results as a result of the Merger.
Key Trends, Opportunities and Uncertainties
We generate revenue from payments received from our customers in connection with
(a) the sale of silicon-anode lithium-ion batteries and battery pack products,
("Product Revenue"), and (b) executed engineering revenue contracts ("Service
Revenue") for the development of silicon-anode lithium-ion battery technology.
We have commenced shipment of commercially manufactured batteries in the second
quarter of 2022. Our performance and future success depend on several factors
that present significant opportunities, but also pose risks and challenges as
described in the section titled "Risk Factors" included elsewhere in this
Quarterly Report on Form 10-Q.
Q2 2022 Highlights:
During the second quarter of 2022, we reported first revenue, consisting of approximately$5.1 million of service revenue and an immaterial amount from commercial battery cells. Overall, we shipped Fab-1 cells to 10 OEMs and four distributors globally in the quarter. These cells will be used for a combination of prototypes, product qualifications and end products for field trials. Reaching commercial shipments is a major validation point for us. To meet our projected future demand, we believe we need to increase our manufacturing throughput and yield metrics. Meeting our goals will be a multi-quarter endeavor. In the third quarter of 2022, we are prioritizing manufacturing improvements over shipments. This includes taking portions of our first production line down to install planned automated conveyance and implementing throughput and reliability enhancements for multiple process modules. Looking ahead, we target bringing up the assembly section of our second line in Fab-1 by fiscal year-end 2022. We expect to exit 2023 producing annualized output of single-digit millions of units from both manufacturing lines combined in Fab-1. During the second quarter of 2022, we were awarded a follow-on evaluation contract to build and test custom cells for theU.S. Army's Conformal Wearable Battery ("CWB") program. Our partner on the program isInventus Power , who developed the CWB for theU.S. Army in 2010. We estimate that the potential size of the totalU.S. wearable military battery market is approximately$350 million annually based on currently established military programs, of which the CWB program is a majority. We believe that due to our BrakeFlow™ technology, an intra-cell system that increases the tolerance of our batteries against thermal runaway from internal shorts, our cell has the potential to nearly double the energy density of the current CWB while (i) providing a layer of safety that is unmatched in our industry, and (ii) meeting the program's stringent requirements. Our revenue funnel was$1.5 billion at the end of second quarter of 2022, which comprised of$1.09 billion of Engaged Opportunities and$414.0 million of Active Designs and Design Wins. Our revenue funnel is defined as the potential value of a full production year for all of the customer projects for which we have been engaged. The components of the revenue funnel are:
•Engaged Opportunities: Consists of engaged customers that have determined that
our battery is applicable to their product and are evaluating our technology.
•Active Designs: Consists of customers that have completed evaluation of our
technology, identified the end-product and started design work.
•Design Win: Consists of customers that have funded a custom battery design or are qualifying one of our standard batteries for a formally approved product that will use anEnovix cell.
The speed with which we convert our revenue funnel to purchase orders and
revenue will ultimately be governed by how fast we qualify customers, improve
our manufacturing processes and bring on additional capacity.
Product Development
We have developed and delivered standardized sample (i.e., prototype) batteries to multiple, industry leading consumer electronics manufacturers. External validation of the performance of these samples has led to several Service Revenue contracts between us and these customers. Pursuant to each of these agreements, we are developing custom 3D silicon lithium-ion batteries for specific wearable, computing and mobile communication device applications. We have also manufactured batteries incorporating our BrakeFlowTM technology. The design and development phases and the manufacturing of these custom samples are performed at our headquarters inFremont, California . InJanuary 2022 , we began shipping 3D silicon lithium-ion batteries for qualification to customers. We furthered the design of our Gen2 22 --------------------------------------------------------------------------------
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manufacturing equipment with our suppliers during the second quarter of 2022, but we did not complete ordering and we are planning on installing this line in Fab-2 in the second half of 2023. The Gen2 manufacturing line is designed to be faster and require less space than our existing lines at Fab-1 inFremont ("Gen1"). Additionally, after we have ordered the Gen2 production line, we plan to order a new pilot line (the "Agility" line) based on this design to respond to increasing customer engagement and a desire to shorten custom-cell qualification timelines.
Commercialization
We have commenced deliveries of commercial cells from Fab-1, but we have experienced challenges associated with bringing up the manufacturing equipment in Fab-1, including technical issues negatively impacting yield and volume production, and extended shipping times, supply chain constraints and intermittent vendor support during equipment bring-up resulting from COVID-19 travel restrictions imposed by certain countries in Asia. Fab-1 features a first-of-its-kind line for battery production. As a result, we regularly face and overcome new challenges to improve yield and output. Simultaneously, these efforts have provided and continue to provide valuable learning experiences, allowing us to improve our processes and equipment for future lines. With production commenced, our focus in Fab-1 is on increasing volumes and yields. In the third quarter of 2022, we are prioritizing manufacturing improvements over shipments. This includes taking portions of our first production line down to install planned automated conveyance and implementing throughput and reliability enhancements for multiple process modules. In 2022, we plan to incrementally scale up Fab-1 output to produce batteries for the wearables market while also making larger cells for customer qualification in the mobile communications and laptop markets. The net proceeds from the Merger and proceeds from the exercise of our Public Warrants (as defined under the heading "Common Stock Warrants" in Note 8 "Warrants" of the notes to our condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q) have enabled us to complete and further expand Fab-1, pursue Fab-2, accelerate research and development and undertake additional initiatives.
Market Focus and Market Expansion
Our near-term focus is on the following market applications: wearables
(smartwatches, AR/VR, headsets, medical applications, etc.), computing and
mobile communications. We are actively sampling to potential customers in these
markets and have design wins in each. We have also engaged with new customers in
product applications, such as action cameras, portable gaming, smartwatches
built for children, handheld payment terminals, portable routers, and gaming
PCs.
We believe focusing on these categories ahead of EVs is the right strategy for
any advanced battery company because of the economic and time-to-market
advantages. Entering the EV battery market requires billions of dollars of
capital to build Gigafactories, offers lower prices per kWh than mobile
electronics and demands long qualification cycles. We believe the best approach
is to start in premium markets where we can leverage our differentiated
technology and solidify our manufacturing process while driving toward
profitability At the same time, we are seeding our entry into the EV battery
market by sampling batteries to EV original equipment manufacturers ("OEMs") and
continuing work on our three-year grant with the U.S. Department of Energy to
demonstrate batteries featuring our silicon anode paired with EV-class cathode
materials. Our goal is to translate this work into partnerships (e.g., joint
ventures or licensing) with EV OEMs or battery OEMs in order to commercialize
our technology in this end market.
Access to Capital
Assuming we experience no significant delays in the research and development of our battery nor any deterioration in capital efficiency, we believe that our cash resources, including the net proceeds from the completion of the Merger, are sufficient to fund the continued build out and production ramp of our Fab-1 manufacturing facility inFremont, California and lease or purchase and retrofit an existing facility elsewhere as our Fab-2 for growth.
Regulatory Landscape
We operate in an industry that is subject to many established environmental
regulations, which have generally become more stringent over time, particularly
in hazardous waste generation and disposal and pollution control. While we
expect certain regulations under
adopted, facilitate market demand and revenue growth, other potential
regulations, if adopted, could result in additional operating costs.
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Components of Results of Operations
Revenue
InJune 2022 , we began to generate revenue from our planned principal business activities. We recognize revenue within the scope of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. We generate revenue from our Product Revenue and Service Revenue for the development of silicon-anode lithium-ion battery technology. Service Revenue contracts generally include the design and development efforts to conform our existing battery technology with customers' required specifications. Consideration for Service Revenue contracts generally becomes payable when we meet specific contractual milestones, which include the design and approval of custom cells, procurement of fabrication tooling to meet the customer's specifications, and fabrication and delivery of custom cells from our pilot production line. Within the existing Service Revenue contracts, the amount of consideration is fixed, the contracts contain a single performance obligation, and revenue is recognized at the point in time the final milestone is met (i.e., a final working prototype meeting all required specifications) and the customer obtains control of the deliverable. Product Revenue is recognized once we have satisfied the performance obligations and the customer obtains control of the goods at a point in time under the revenue recognition criteria. Product Revenue is recognized in an amount that reflects the consideration for the corresponding performance obligations for the silicon-anode lithium-ion batteries or battery pack products transferred.
Cost of Revenue
Cost of revenue includes materials, labor, allocated depreciation expense, and other direct costs related to Service Revenue contracts and production lines. Labor consists of personnel-related expenses such as salaries and benefits, and stock-based compensation. Capitalization of certain costs are recognized as an asset if they relate directly to a customer contract, generate or enhance resources of the entity that will be used in satisfying future performance obligations, and are expected to be recovered. If these three criteria are not met, the costs are expensed in the period incurred. Deferred costs are recognized as cost of revenue in the period when the related revenue is recognized.
Research and Development Expenses
Research and development expenses consist of engineering services, allocated facilities costs, depreciation, development expenses, materials, labor and stock-based compensation related primarily to our (i) technology development, (ii) design, construction, and testing of preproduction prototypes and models, and (iii) certain costs related to the design, construction and operation of our pilot plant that are not of a scale economically feasible to us for commercial production. Research and development costs are expensed as incurred. To date, research and development expenses have consisted primarily of personnel-related expenses for scientists, experienced engineers and technicians as well as costs associated with the expansion and ramp up of our engineering and manufacturing facility inFremont, California , including the material and supplies to support the product development and process engineering efforts. As we ramp up our engineering operations to complete the development of batteries and required process engineering to meet customer specifications, we anticipate that research and development expenses will increase significantly for the foreseeable future as we expand hiring of scientists, engineers and technicians and continue to invest in additional plant and equipment for product development, building prototypes and testing of batteries. We are establishing a research and development center inIndia that will initially focus on developing machine learning algorithms.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel-related
expenses, marketing expenses, allocated facilities expenses, depreciation
expenses, executive management travel, and professional services expenses,
including legal, human resources, audit, accounting and tax-related services.
Personnel related costs consist of salaries, benefits and stock-based
compensation. Facilities costs consist of rent and maintenance of facilities.
We are expanding our personnel headcount to support the ramping up of commercial
manufacturing and being a public company. Accordingly, in addition to
non-recurring costs associated with the Business Combination and anticipated
costs of being a public company, we expect our selling, general and
administrative expenses to increase significantly in the near term and for the
foreseeable future.
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Table of Contents Other Income (Expense), net Other income and expense, net primarily consists of dividends, interest expense, fair value adjustments for outstanding convertible preferred stock warrants and fair value adjustments for outstanding common stock warrants.
Income Tax Expense (Benefit)
Our income tax provision consists of an estimate for
income taxes based on enacted rates, as adjusted for allowable credits,
deductions, uncertain tax positions, changes in deferred tax assets and
liabilities and changes in the tax law. We maintain a valuation allowance
against the full value of our
believe the recoverability of the tax assets is not more likely than not.
Results of Operations
Comparison of Quarter Ended
2021
The following table sets forth our condensed consolidated operating results for
the periods presented below (in thousands):
Quarters Ended
July 3, 2022 June 30, 2021 Change ($) % Change
Revenue $ 5,101 $ - $ 5,101 N/M
Cost of revenue 5,739 112 5,627 N/M
Gross margin (638) (112) (526) N/M
Operating expenses:
Research and development 15,827 9,523 6,304 66 %
Selling, general and administrative 11,566 4,548 7,018 154 %
Total operating expenses 27,393 14,071 13,322 95 %
Loss from operations (28,031) (14,183) (13,848) 98 %
Other income (expense):
Change in fair value of convertible
preferred stock warrants and common stock
warrants 26,400 - 26,400 N/M
Interest expense, net - (135) 135 N/M
Other income (expense), net 496 15 481 N/M
Total other income (expense), net 26,896 (120) 27,016 N/M
Net income (loss) $ (1,135) $ (14,303) $ 13,168 (92) %
N/M - Not meaningful
Revenue
Revenue for the quarter ended July 3, 2022 was $5.1 million , which was comprised
of $5.1 million of Service Revenue and an immaterial amount of Product Revenue.
Service Revenue was primarily attributed to the satisfaction of our final
performance obligations for and our deliveries of (a) pilot cells and (b)
battery packs to two customers under our Service Revenue customer contracts.
Customer A represented $5.0 million of our total revenue for the quarter ended
July 3, 2022 .
A portion was previously recorded as deferred revenue on our Condensed
Consolidated Balance Sheet. As of July 3, 2022 and January 2, 2022 , we had $2.9
million and $7.9 million , respectively, of deferred revenue on our Condensed
Consolidated Balance Sheets.
Cost of Revenue
Cost of revenue for the quarter ended July 3, 2022 was $5.7 million , compared to
$0.1 million during the quarter ended June 30, 2021 . From time to time, we enter
into revenue customer contracts. The increase in cost of revenue of $5.6 million
was due to the timing of when costs attributable to specific contracts with
customers were incurred. As of July 3, 2022 and January 2, 2022 , we had $1.3
million and $4.6 million , respectively, of deferred contract costs on our
Condensed Consolidated Balance Sheets.
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In the execution of satisfying the single performance obligation per the existing revenue contracts, certain costs are recognized as an asset if they relate directly to a customer contract, generate or enhance resources of the entity that will be used in satisfying future performance obligations and are expected to be recovered. If these three criteria are not met, the costs are expensed in the period incurred. Deferred contract costs are recognized as cost of revenue in the period when the related revenue is recognized. In the beginning of June, we completed construction of our first production line and placed this equipment in service. As a result, we began depreciating this production equipment over its estimated useful life. We also began capitalizing inventory and recognizing factory overhead expenses in cost of goods sold, which are largely fixed overhead costs (idle costs) that were previously recognized in research and development expenses. We expect equipment depreciation and idle costs to increase from the second quarter level going forward given full quarter versus partial quarter recognition. In addition, we anticipate our factory overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support the build out of additional production lines and maintain our new manufacturing facilities.
Research and Development Expenses
Research and development expenses for the quarter endedJuly 3, 2022 were$15.8 million , compared to$9.5 million during the quarter endedJune 30, 2021 . The increase of$6.3 million , or 66% was primarily attributable to an increase in our research and development employee headcount resulting in a$2.2 million increase in salaries and employee benefits, a$1.9 million increase in stock-based compensation expenses and a$1.2 million increase in subcontractor costs. The remaining increase of$1.0 million was primarily due to increases in tooling and materials, depreciation, and travel expenses, which were partially offset by other miscellaneous research and development expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the quarter endedJuly 3, 2022 were$11.6 million , compared to$4.5 million during the quarter endedJune 30, 2021 . The increase of$7.0 million , or 154% was primarily attributable to an increase in our selling, general and administrative employee headcount resulting in a$1.5 million increase in salaries and employee benefits and a$3.8 million increase in stock-based compensation expenses. The remaining increase of$1.7 million was primarily comprised of a$1.2 million increase in legal and professional fees, a$0.6 million increase in subcontractors costs and$0.5 million increase in insurance expense, which were partially offset by a decrease in marketing and other miscellaneous expenses. We anticipate that our overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support and maintain our new manufacturing facilities, as well as for our operation expansion.
Change in Fair Value of Convertible Preferred Stock Warrants and Common Stock
Warrants
The change in fair value of common stock warrants of$26.4 million for the quarter endedJuly 3, 2022 was attributable to a decrease, during the quarter, in the fair value of the 6,000,000 common stock warrants that are held byRodgers Capital, LLC (the "Sponsor") and certain of its members (the "Private Placement Warrants"). As ofJuly 3, 2022 , there were 6,000,000 common stock warrants outstanding and no Legacy Enovix convertible preferred stock warrants outstanding. 26 --------------------------------------------------------------------------------
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Comparison of Fiscal Year-to-date Ended
The following table sets forth our condensed consolidated operating results for
the periods presented below (in thousands):
Fiscal Years-to-Date Ended
July 3, 2022 June 30, 2021 Change ($) % Change
Revenue $ 5,101 $ - $ 5,101 N/M
Cost of revenue 6,254 1,743 4,511 259 %
Gross margin (1,153) (1,743) 590 (34) %
Operating expenses:
Research and development 28,558 15,112 13,446 89 %
Selling, general and administrative 23,435 8,709 14,726 169 %
Total operating expenses 51,993 23,821 28,172 118 %
Loss from operations (53,146) (25,564) (27,582) 108 %
Other income (expense):
Change in fair value of convertible
preferred stock warrants and common stock
warrants 94,200 (4,781) 98,981 N/M
Interest expense, net - (135) 135 N/M
Other income (expense), net 518 12 506 N/M
Total other income (expense), net 94,718 (4,904) 99,622 N/M
Net income (loss) $ 41,572 $ (30,468) $ 72,040 (236) %
N/M - Not meaningful
Revenue
Revenue for the fiscal year-to-date ended July 3, 2022 was $5.1 million , which
was comprised of $5.1 million of Service Revenue and an immaterial amount of
Product Revenue. Service Revenue was primarily attributed to the satisfaction of
our final performance obligations for and our deliveries of (a) pilot cells and
(b) battery packs to two customers under our Service Revenue customer contracts.
Customer A represented $5.0 million of our total revenue for the fiscal
year-to-date ended July 3, 2022 .
A portion was previously recorded as deferred revenue on our Condensed
Consolidated Balance Sheet. As of July 3, 2022 and January 2, 2022 , we had $2.9
million and $7.9 million , respectively, of deferred revenue on our Condensed
Consolidated Balance Sheets.
Cost of Revenue
Cost of revenue for the fiscal year-to-date ended July 3, 2022 was $6.3 million ,
compared to $1.7 million during the prior year-to-date ended June 30, 2021 . From
time to time, we enter into revenue customer contracts. The increase in cost of
revenue of $4.5 million , or 259% was due to the timing of when costs
attributable to specific contracts with customers were incurred. As of July 3,
2022 and January 2, 2022 , we had $1.3 million and $4.6 million , respectively, of
deferred contract costs on our Condensed Consolidated Balance Sheets.
In the execution of satisfying the single performance obligation per the
existing revenue contracts, certain costs are recognized as an asset if they
relate directly to a customer contract, generate or enhance resources of the
entity that will be used in satisfying future performance obligations, and are
expected to be recovered. If these three criteria are not met, the costs are
expensed in the period incurred. Deferred contract costs are recognized as cost
of revenue in the period when the related revenue is recognized.
In the beginning of June, we completed construction of our first production line
and placed this equipment in service. As a result, we began depreciating this
production equipment over its estimated useful life. We also began capitalizing
inventory and recognizing factory overhead expenses in cost of goods sold, which
are largely fixed overhead costs (idle costs) that were previously recognized in
research and development expenses. We expect equipment depreciation and idle
costs to increase from the second quarter level going forward given full quarter
versus partial quarter recognition. In
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addition, we anticipate our factory overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support the build out of additional production lines and maintain our new manufacturing facilities.
Research and Development Expenses
Research and development expenses for the fiscal year-to-date endedJuly 3, 2022 were$28.6 million , compared to$15.1 million during the prior year-to-date endedJune 30, 2021 . The increase of$13.4 million , or 89% was primarily attributable to an increase in our research and development employee headcount resulting in a$6.1 million increase in salaries and employee benefits, a$3.4 million increase in stock-based compensation expenses and a$2.7 million increase in subcontractor costs. The remaining increase of$1.2 million was primarily due to the increased facility and IT costs, tooling and materials, travel and depreciation expenses, which were partially offset by other miscellaneous research and development expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year-to-date period endedJuly 3, 2022 were$23.4 million , compared to$8.7 million during the prior year-to-date endedJune 30, 2021 . The increase of$14.7 million or 169% was primarily attributable to an increase in our selling, general and administrative employee headcount resulting in a$2.1 million increase in salaries and employee benefits and a$6.3 million increase in stock-based compensation expenses. The remaining increase of$6.3 million was primarily comprised of a$3.1 million increase in legal and professional fees, a$1.7 million increase in subcontractors costs, a$1.1 million increase in insurance expense and other miscellaneous expenses. We anticipate that our overhead expenses will continue to increase in the next 12 months as we continue to hire additional personnel to support and maintain our new manufacturing facilities, as well as for our operation expansion.
Change in Fair Value of Convertible Preferred Stock Warrants and Common Stock
Warrants
The net change in fair value of convertible preferred stock warrants and common stock warrants was comprised of a change in fair value of common stock warrants of$94.2 million for the fiscal year-to-date period endedJuly 3, 2022 and a change of in fair value of convertible preferred stock warrants of$(4.8) million for the prior year-to-date endedJune 30, 2021 .
The change in fair value of common stock warrants of
fiscal year-to-date period ended
the fair value of the 6,000,000 Private Placement Warrants.
OnFebruary 22, 2021 , all 10,160,936 Legacy Enovix's Series D convertible preferred stock warrants were exercised at$0.01 per share for a total of$0.1 million . The increase in the fair value of the convertible preferred stock warrants, up toFebruary 22, 2021 , was due to the increase in Legacy Enovix's enterprise value throughout 2020 and the first quarter of 2021. The change in the fair value of the convertible preferred stock warrants of$4.8 million was recorded as other expense for the prior year-to-date endedJune 30, 2021 .
Non-GAAP Financial Measures
While we prepare our condensed consolidated financial statements in accordance
with GAAP, we also utilize and present certain financial measures that are not
based on GAAP. We refer to these financial measures as "Non-GAAP" financial
measures. In addition to our financial results determined in accordance with
GAAP, we believe that EBITDA, and Adjusted EBITDA, and Free Cash Flow (each as
defined below), are useful measures in evaluating our financial and operational
performance distinct and apart from financing costs, certain non-cash expenses
and non-operational expenses.
These Non-GAAP financial measures should be considered in addition to results
prepared in accordance with GAAP but should not be considered a substitute for
or superior to GAAP. We endeavor to compensate for the limitation of the
Non-GAAP financial measures presented by also providing the most directly
comparable GAAP measures.
We use Non-GAAP financial information to evaluate our ongoing operations and for
internal planning, budgeting and forecasting purposes. We believe that Non-GAAP
financial information, when taken collectively, may be helpful to investors in
assessing our operating performance and comparing our performance with
competitors and other comparable companies. You should review the
reconciliations below but not rely on any single financial measure to evaluate
our business.
EBITDA and Adjusted EBITDA
"EBITDA" is defined as earnings (net loss) adjusted for interest expense; income
taxes; depreciation expense, and amortization expense. "Adjusted EBITDA"
includes additional adjustments to EBITDA such as stock-based compensation
expense; change in fair value of convertible preferred stock warrants, common
stock warrants and convertible promissory notes; loss on early debt
extinguishment and other special items as determined by management which it does
not believe to
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be indicative of its underlying business trends. EBITDA and Adjusted EBITDA are
intended as supplemental financial measures of our performance that are neither
required by, nor presented in accordance with GAAP. We believe that the use of
EBITDA and Adjusted EBITDA provides an additional tool for investors to use in
evaluating ongoing operating results and trends, and in comparing our financial
measures with those of comparable companies, which may present similar Non-GAAP
financial measures to investors.
However, you should be aware that when evaluating EBITDA, and Adjusted EBITDA,
we may incur future expenses similar to those excluded when calculating these
measures. In addition, the presentation of these measures should not be
construed as an inference that our future results will be unaffected by unusual
or nonrecurring items. Our computation of EBITDA and Adjusted EBITDA may not be
comparable to other similarly titled measures computed by other companies,
because all companies may not calculate EBITDA and Adjusted EBITDA in the same
fashion.
Below is a reconciliation of net income (loss) on a GAAP basis to the Non-GAAP
EBITDA and Adjusted EBITDA financial measures for the periods presented below
(in thousands):
Quarters Ended Fiscal Years-to-Date Ended
July 3, 2022 June 30, 2021 July 3, 2022 June 30, 2021
Net income (loss) $ (1,135) $ (14,303) $ 41,572 $ (30,468)
Interest expense, net - 135 - 135
Depreciation and amortization 1,352 234 1,800 375
EBITDA 217 (13,934) 43,372 (29,958)
Stock-based compensation expense 8,180 2,257 13,418 3,675
Change in fair value of convertible
preferred stock warrants and common
stock warrants (26,400) - (94,200) 4,781
Adjusted EBITDA $ (18,003) $ (11,677) $ (37,410) $ (21,502)
Free Cash Flow
We define "Free Cash Flow" as (i) net cash from operating activities less (ii)
capital expenditures, net of proceeds from disposals of property and equipment,
all of which are derived from our Condensed Consolidated Statements of Cash
Flow. The presentation of non-GAAP Free Cash Flow is not intended as an
alternative measure of cash flows from operations, as determined in accordance
with GAAP. We believe that this financial measure is useful to investors because
it provides investors to view our performance using the same tool that we use to
gauge our progress in achieving our goals and it is an indication of cash flow
that may be available to fund investments in future growth initiatives. Below is
a reconciliation of net cash used in operating activities to the Free Cash Flow
financial measures for the periods presented below (in thousands):
Fiscal Years-to-Date
Ended
July 3, 2022 June 30, 2021
Net cash used in operating activities $ (40,299) $ (15,142)
Capital expenditures (14,473) (20,573)
Free Cash Flow $ (54,772) $ (35,715)
Liquidity and Capital Resources
We have incurred operating losses and negative cash flows from operations since inception throughJuly 3, 2022 and expect to incur operating losses for the foreseeable future. As ofJuly 3, 2022 , we had cash and cash equivalents of$384.7 million , a working capital of$371.8 million and an accumulated deficit of$291.6 million . Prior to the Business Combination, we had financed our operations primarily from the sales of convertible preferred stock, borrowing from convertible promissory notes, and borrowing from the Secured Promissory Note (as defined under the heading "Related Party Loans" in Note 11 "Related Party " of our notes to our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). In connection with the Business Combination inJuly 2021 , we raised approximately$373.7 million of net proceeds, after deducting transaction costs and estimated offering related expenses. Please refer to Note 3 "Business Combination" of the notes to the consolidated financial statements for the fiscal year endedJanuary 2, 2022 included in the Annual Report for more information. InDecember 2021 , we received$77.2 million of gross proceeds from the exercises of the Public Warrants (as defined under the heading "Common Stock Warrants" in Note 8 "Warrants" of the notes to our condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q), which 29 --------------------------------------------------------------------------------
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were being traded in the Nasdaq Global Select Market ("Nasdaq"). In January
2022 , we received $52.8 million of net proceeds from the exercise of the Public
Warrants. We plan to use the proceeds from the exercises of the Public Warrants
for general corporate purposes.
Material Cash Requirements
As ofJuly 3, 2022 , we had cash and cash equivalents of$384.7 million . We currently use cash to fund operations, meet working capital requirements and fund our capital expenditures. In fiscal year 2022 and over the next several years, we expect that our research and development expenses and selling, general and administrative expenses will continue to increase. For the fiscal year-to-date endedJuly 3, 2022 , we purchased$14.5 million for property and equipment. We will continue to increase our property and equipment purchases in the near future to support the build-out of our manufacturing facilities and our battery manufacturing production. Based on the anticipated spending, cash received from the Business Combination and net proceeds from the exercises of the Public Warrants, and timing of expenditures, we currently expect that our cash will be sufficient to meet our funding requirements over the next twelve months from the date this Quarterly Report on Form 10-Q is filed. We believe we will meet longer-term expected future cash requirements and obligations through a combination of available cash, cash equivalents and future debt financings, and access to other public or private equity offerings as well as potential strategic arrangements. We have made our estimates on historical experience and various other relevant factors and we believe that they are reasonable. Actual results may be differ from our estimates, and we could utilize our available capital resources sooner than we expect.
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