Ensurge Micropower ASA (ENSU) Earnings Call Transcript & Summary

Welcome to the Ensurge Q3 2022 preliminary report. My name is Kevin Barber, and I'm the CEO. And I'm very excited with the progress that we've made in the last several months as we'll talk through in the coming slides, both technically as well as commercially as we've introduced a second pillar in our go-to-market strategy, pursuing strategic partners in addition to our commercial customers. First, our strategy. Our focus continues to be to transform the microbattery industry by delivering the first milli-Amp-Hour capacity solid-state microbattery. Our Ensurge microbattery provides unique benefits, including higher energy density, twice that of lithium-ion, which allows more energy capacity in the same space, or a smaller battery for the same amount of energy capacity as well as the ability to customize the form factor, both in length and width and height so it can be optimized for the various wearable and hearable customer device requirements. The benefits of our solid-state architecture versus lithium-ion is that it charges faster. Our data has already demonstrated that we can charge a 90% of rated capacity in 30 minutes. High pulse discharges. That's critically important for wireless communication using Bluetooth communication protocols, and larger and longer charge cycles, extending the life cycle of the battery. All of this is addressing a huge existing market opportunity of 1 billion-plus units across both hearables and a wide variety of wearable applications as well as the connected IoT, another things, sensor markets providing lots and lots of opportunity for us in a growing market to serve unique high-performance applications of batteries. So we've had really great momentum these last 3 months. We shipped our first package battery samples to one of our customers, which is a leading hearing-aid company. This is then the final culmination of the technical work necessary to package our battery cell into a packaged unit and being able to deliver that to a customer for their evaluation. We've already had our first technical meetings with this customer. They're very excited with the progress we've made and the ability for them to now begin to test and look and give us feedback on these initial packaged battery samples. In addition, we shipped packaged battery samples to an innovative digital health device company, who has forecasted demand in Q1 of '23, and we expect to be our first production shipping customer for our stacked production batteries. We shipped high-performing unit sales in coin cell format to 3 strategic partners. We're including 1 world-leading consumer electronics and communications company and 2 world-leading battery manufacturers. We're in discussion with more than 20 new companies wanting our battery offering, each representing over $200 million of product revenue potential. We've also had a strong increase in our production rate of battery cells during this past quarter, which continues to accelerate our learning, our technology optimization, and we expect it to further increase during Q4 this year and during 2023. We are also engaged in contract negotiations with a global leader in the information technology market. This would be a funded technology development that would deliver technology capabilities and attributes that are beyond our current road map. But these are technical objectives that are defined by them, that meet their demands of aggressive wearable device road map that we'll achieve dramatic improvements in both usability and ease of use. And so we're very excited with these conversations that we're having with them to define how we work together using our cell technology to deliver the performance and capabilities they look forward and high-performance microbatteries. And finally, we anticipate these series of conversations we're having with the 3 strategic partners we ship samples to, this fourth strategic partner that we're in contract negotiations with, to begin to start funding our co-development efforts during Q1 of this coming year. We expect to engage in those conversations with the 3 that have received our samples in the coming days. And we anticipate that, that will yield a funding agreement during Q1. Looking backwards into our Q3 financials. We had total of operating expenses and cash adjustments, just under $6.9 million, up from last quarter of $5.9 million. That was driven by 50% of increase in our operating expenses, mostly from R&D activity in the summertime here in California, where electricity costs are higher. We anticipate this to return back to our nominal $6 million a quarter in the coming quarter. So a reminder of our go-to-market strategy. So as we've been discussing since this past summer, not only are we focused on commercial customers, but we have also introduced this concept of strategic partners. We are deeply engaged with 4 of them today with others interested in discussions. As I mentioned, 2 of them are consumer device companies. We're focused on signing funded development agreements with them delivering unique wearable and hearable batteries for their proprietary technology development requirements. And their focus is to leverage our high-energy density core cells, and then work together to find unique ways to package them or to modify them to deliver to their requirements. The product revenue potential from this category of customers is greater than $500 million a year. So huge opportunities for us going forward, both for funding us in our near term as well as the product revenue potential over time. The second category of strategic partners we're discussing with, are battery manufacturers, and we've been engaged with 2 of them, also focused on agreements. But in this case, licensing agreements, primarily with the possibility of funded development agreements. They're focused on the same market, wearables, hearables and IoT, and we see them as a potential channel for our technology as well as a licensor to build our technology. And given the size of the market, their product revenue potential is also greater than $500 million per year. So in summary, this commercialization of technology came from their interest that what we were doing was so exciting and so unique, they wanted to look at our core cell technology to work together on unique batteries. They will either involve upfront or ongoing NRE and equity investments and may involve licensing or it may involve both NRE and licensing. And certainly, by the time we come to the manufacturing of these new technologies, we would be in discussions to provide manufacturing rights through either a royalty and/or investment financial model. So we're very excited about with new strategy and the progress we've made in just a short period of time, and we'll continue to make progress here. And then the commercial customers continues to focus on wearables, hearables in the industrial IoT markets, delivering innovative solutions. We continue to focus on our 5 signed agreements. As I just mentioned, we've shipped stacked batteries to 2 of them this past couple of months, with more than 2 dozen more of this engaged across both wearables and IoT companies. And altogether, the product revenue potential for them is greater than $200 million per year, which is in excess of what the San Jose facility, when fully equipped, would be able to produce building full production batteries. So we have a very full pipeline with very interested customers. The model -- the business model in this case, is to deliver customized complete batteries where customers need performance or form factors that are simply not available today using lithium-ion. We see dramatic interest in fast-charging, higher energy density, and the ability of form factor customization to be the 3 things that we get common, high interest in from these customers were engagement. The business model is the shipment of sales, to manufacture batteries and a classic sales process with some modest entry for development of those unique customized batteries. So just a reminder of our architecture that remains very innovative, we do not see others pursuing this combination of fundamental technologies that starts with the use of ultra-thin steel substrates that deliver high energy density, high mechanical strength. There's a great advanced over alternatives such as ceramic and silicon. We bring our innovative cell stacking and packaging technology, which continues to maximize and deliver high energy densities. It continues to provide an ability to customize the height of the package and the capacity of the package in the battery. And then finally, the ease of use to mount the battery onto the device using a direct printed circuit board connection because of the way our battery is architecting. Our chemistry is analysts, which provides low cost with a proven chemistry that has been around since the 1990s, demonstrated to deliver greater than the 1,000 cycles. And then finally, we have our existing roll-to-roll manufacturing facility, which provides for high throughput and low cost within a conventional manufacturing environment. So it's this combination of these 4 items, that delivers our unique architecture, our unique ability to provide performance with form factor flexibility into this really large market, which we are able to deliver scale. Expanding on that, our value propositions of -- the benefits of our battery drive both the strategic and our customer engagements. It's a safe chemistry, solid-state compared to lithium-ion. Our ultrathin steel provides form factor flexibility. The solid-state chemistry provides temperature tolerance, which is very exciting for customers wanting to embed our battery into molded plastic devices. You can imagine got eyewear needing to have batteries in the glasses, wanting to have the ability to put the battery inside of that. That's not available with lithium-ion, and solid-state allows that form factor to be delivering. High energy density with our ultrathin steel differentiates us for watt-hours per liter at high discharge rates, which is really important for the wearable markets wanting to have the minimum amount of time off of the human body, and then fast charging for rapid charging of the battery. So just in summary, twice energy density compared to lithium-ion button cells, 2 to 3x the charge cycle life, twice the speed of charging with a safe chemistry and the ability to enable unique, and products as you see on the bottom right. So in summary, we're continuing to focus on delivering the first solid-state milli-Amp-Hour and [ 10's ] milli-Amp-Hour microbatteries. Our road map fits a very large $1 billion market. When our San Jose facility is full of equipment, it can deliver $100 million in annual EBITDA with our experienced leadership and management team. We're targeting the hearables, wearables and IoT markets. That is an existing billion-unit market, multiple dollar billion market, which improves our -- the existing applications, and we can enable new ones that are not possible without our batteries. We bring a novel architecture that is unique. And we're getting really ready to deploy with the amazing and significant progress we've made in the short 2.5 years since we have started down this journey in mid-2020. We anticipate to do early production at the very end of Q4. As I mentioned, our first customer forecasting demand is demand in Q1 of 2023, and so we would need to begin initial production at the very end of this quarter. So that brings me to the end. I want to thank you for that, and I'm going to open it up to questions.

Thanks, Kevin. I have some questions here regarding -- or questions that I got from the audience. And the first question is that Ensurge didn't issue a week ago, Kevin. And what are the plans to fund operation and the CapEx need of the company going forward?

Yes. It's a very important question. So there's 2 paths that we're running in parallel. First, we're currently working with our strategic partners, and discussing them to fund our ongoing operation, either through upfront fees or monthly payments. And as I've mentioned, we anticipate having one in place during Q1 2023. So that we see as an important part of the equation to be part of our funding. In addition, we're aiming to raise equity in the U.S., into the U.S. subsidiary to fund the expansion of the facility. As we move increasingly from technology development into early production and scaling manufacturing, and then as we look to expand capacity, we'll need to plan how to expand and fund that expansion. And so we look to raise money in the U.S. to do that. And so we're working hard today to get a U.S. banker in place to help us with that.

So when we're talking about CapEx to expand the manufacturing capabilities, what is the time line for getting this new equipment ordered and finally installed for manufacturing within your facility in San Jose?

Yes. I would anticipate it. We would be able to order equipment, the long-lead equipment, in early 2023, and than our ability to expand our capacity in San Jose would then be in place in 2024. So that is what we'd expect in terms of the capacity for much of the critical equipment that takes time to order, it takes time to install that equipment and then certify it and qualify it that it matches the performance we've developed with our existing equipment. So that is about a 1-year timeline from initial placement of the orders.

So in 2023, we will or Ensurge will use the current equipment in place to grow this manufacturing and sales and then move into the additional equipment in 2024.

That's correct. Yes. That's exactly right. We have -- the pilot line we have today has meaningful capacity. We have a full pilot line of roll-to-roll equipment. We have our initial set of packaging equipment. So we would expect our initial revenue of product to come from that existing equipment. So yes, 2023 will be initial revenue, largely with our existing equipment.

Okay. So then -- could you say some more in detail? I know it's kind of difficult here, but sort of in detail regarding the business plan of Ensurge, sort of will you going forward, license out technology, will you outsource production, will -- for sure, also produce batteries in-house or battery cells in-house? But how do you see that develop? I'm not asking for a specific mix, but sort of more of your views on how to deal with the different demands from the market.

Yes, it's a great question. It's one that's quite complex but let me attempt to answer that. First, we will start with sending batteries, fully produced in San Jose as a way to demonstrate the technology as commercial with our pilot line. So with our -- largely with our existing capacity, we would expect to do that in-house. But as volumes increase, as we just discussed, as we leave 2023 and go into 2024, and we have more demand. We have more agreements and more customers who want our batteries. That is when we have choices that we can make. And I would expect the 2 go-to-market strategies to be important here. One is the commercial customers and the second is the strategic partners. I think we can expect that on the commercial customer side, they would not be in the position early days to want to license. They're going to want us to deliver or have been delivered finished batteries. And so we would then either need to be able to increase the capacity to meet their needs in San Jose or we would need to license and/or outsource that final manufacturing of the batteries to expand our ability to deliver to the capacity or to the demand that our customers are providing. So I think those are the 2 choices we'll have in 2023 as we get beyond our initial volume. For the strategic partners, it's a different model. Because in each of their cases, we're talking about working with them on unique technologies, and with their requirements. So and most likely, it will involve us providing the core cells at the beginning and working with them to finish the cells with either their own ability to do that in some cases, like the battery companies or when it's consumer device companies licensing, and they may have other partners that would manufacture for them the back end of the packaging of the battery. But I believe it will be, in the case of the strategic partners, increasingly a licensing model, an outsourced manufacturing model of the battery that we produced the cells using our roll-to-roll equipment. So that, I think, is the 2 paths for that type of customer. But I think we'll need to let more time unfold to allow clarity on which of those paths we follow, or it's very likely we'll end up following more than 1 path. We may end up doing more packaging for customers and more licensing for some strategic partners. So I do anticipate we'll end up with a blend of those choices. But that's how I'm thinking about the business models, and how they relate to how we'll do manufacturing, both internally and externally.

And a follow-up question there. If you were to license the technology, how would you be able to protect your IP in that sense?

Well, it's a very good question, Ståle. It is actually the key challenge with the licensing model, and one that will take time to ensure that we protect. So I think that's a big part of the nature of the discussions we're having for the agreements is how to protect and ensure our intellectual property is protected. We have been filing patents, but the more important is actually the know-how that you don't put in the patent, is how you actually do the details that, as we've talked about in prior calls, are very important details to make the integration of the battery of how we use steel and how we deposit the LiCO and the LiPON materials and how we package that and make the package function properly. The know-how is what's critical. And so being able to transfer an outsource a packaged device and teach them, how do you protect that? I think it is a very critical element to the discussions. It has been done before in the technology market. It can be done, but it is a critical element of how we need to work through how to protect that. Who we work with will matter a lot? Where they're located and their manufacturing facilities will probably influence us. But it is a very good point, Ståle, the intellectual property protection as a key part of enabling the licensing or outsourcing business models.

Thanks. And just a question from one of your shareholders, the facility in San Jose, and I know we're jumping around a little bit here, but that's the way it is. The facility in San Jose, how many battery cells is the potential to manufacture in that specific facility?

Yes, it's a very good and very important question. It is difficult to give a specific number because the number of cells depends on the capacity of the cell. So the bigger the capacity of the cell, the fewer we can do. But to give you a sense of it, I would give 1 billion cells as a nominal target for the San Jose facility when fully equipped with the front-end process equipment. And so that footprint, we know how that -- the maximum of that can fit into the building. It could be less than that if the capacity of the batteries on average is higher than we're forecasting, or it can be much more than that if the capacity of the batteries is less than we're forecasting. But I think 1 billion cells per year is a reasonable kind of midpoint of what we can produce in San Jose.

And just a follow-up on that sort of specific question. If we should compare it to package batteries, you have said you have given some numbers on the gross margins or the contribution margins there. Do you think that sort of the contribution/gross margin will be the same or different from the packaged battery of the unit sales manufactured in the facility.

Yes. I think the answer is yes. I do expect them to be similar. The nature of them are similar, the front end and the back-end material, the contribution of material cost -- in the front end, that's the steel, that's the targets for the deposition and the back end, that's the packaging materials. When you look at the cost contributors, they're similar. And then you have the yield element you have to take into account. And then you have the capital equipment per unit. And in our modeling, I would expect -- while the pricing will be lower for just doing the cells only, the percent gross margins on contribution margin and gross margin will be similar to the numbers I've talked about before on product gross margins, which are gross margin in the 60% range. contribution margins approaching 80% range, given the high capital-intensive nature of the business model and the variable cost nature of the business model. So that's -- I would predict a sell-only business model would have similar gross margins.

This is another interesting question here. The person is asking about the competitive landscape, we discussed this before, but maybe use some comments on it, the competitive landscape as well as the market characteristics in the battery cell market. Has it changed? That's number one. And I think that the second question, which is more -- is also a good question. Moreover, why didn't the market hear about this cell unit market, which -- and the strategic partners, which we started to announce contracts with this summer? And so in general, why have the company given so little information about this market before, and July, August this year?

Yes. So I think the starting point is to recognize the market we're focused on. We're focused on the microbattery market, serving the applications that use milli-Amp-Hour capacity batteries, which we've identified as the wearable and hearable markets. That's very different than the electric vehicle market. In the electric vehicle or the large battery markets, the concept of building cells and having a company build a cell and then selling it to a different company that does the pack that puts the cells together and builds the packs. That's a very well-known business model in the large battery market. That model does not exist in the microbattery market. That idea there is no one doing cells for a microbattery. It's by the technical nature of the way the battery is built for a liquid electrolyte, either lithium-ion button cell or whether it's lithium polymer pouch, which are the 2 types of batteries we compete with for these wearables and hearable markets. There is no business model. There is no market that sells the cell as a separate element to finishing a battery. And so that has not been up until recently, our focus because that is not an existing market. That is not the nature of the business model in the marketplace today. And then technically, the way we build the battery is innovative. We're just now developing how to package. And so it's early days. It's early days to separate cell manufacturing from package manufacturing. But then come along, some strategic companies in discussions we were having and they brought this concept based on their interest that they have their own technology, and they would be interested in this idea of separating the cell from the way the sales are packaged. And so given that is what they were interested in discussing, that was what they were interested in evaluating what the core potential of our steel and our LiCO/LiPON analyst architecture can deliver on roll-to-roll equipment. That is where the demand, where the interest came from, from our customers. And I think that's really important because we have been listening to our customers engaged in the market throughout these last 2 years in adapting and adopting where we need to meet those market requirements. And so first, the market doesn't exist. The market doesn't separate these concepts today. And so that market concept needs to be created. And we've been focused on delivering to existing markets. It is a large opportunity, however, because these strategic partners represent sizable opportunities in their own right. The business model is one that with the right partner can be over time made to work. And so that is why we're excited about it, but that is also why it's a recent conversation and now very much part of our strategy.

Okay. And then a last question here, Kevin. So we have been working with Ensurge for some years coming from sort of what you say for building a battery and battery cells from scratch. And the question here is, how do you see your current competitive position? That's number one, after sort of this have been ongoing for 2.5 years. Number two, I think you have said a little bit about this, but still, we can sum it up here on this question, the overall interest demand for Ensurge solutions that means packaged batteries and battery cells and sort of overall, what do you expect as a CEO for Ensurge from 2023?

Yes. That's a great final question. So Yes. Just a little history. I think it is worth noting that it's been just 2.5 years. That may in some world sound like a long time, but in the technology market, it's not a long time. And we have made amazing progress, the technical team has made amazing progress. Our commercial engagements made a lot of great progress in the short period of time, and we've innovated on elements that just simply didn't exist. The idea of battery [indiscernible] steel, the idea of stacking batteries and making them work together. The idea of delivering the performance benefits that the market really wants. And so I'm really excited with what we've started since essentially an announcement in February of 2020, in our first private placement in the summer of 2020, and we come now to the end of 2022 having made amazing progress. So I want to start with the context. I think the second on the competitive position, each quarter, we give an update on the number of customers we're talking to. And then it's only been growing of customers who see needs for better batteries that see their energy density needs, they see the need for faster charging, they need shapes that simply aren't available that they can't build the product that they want to build. And so we're now talking about more than 2 dozen commercial customers. We're talking about 4 strategic partners. And so we have a lot of competitors in the lithium-ion space clearly very capable and very strong and very successful, and they will continue to be. But we want to offer an alternative that is better for those customers who need a better solution. And so our competitive position is clear, and I think it's very strong. There are no other solid-state solutions that are able to deliver milli-Amp-Hour capacities. And so I think it's a very exciting position. The interest is high. The demand is high. And so that is to come to your final element of your question, what do I expect as we now are getting ready to enter into 2023. Having made the technical progress we've made we're not done technically. I don't want to imply that we're done. We have a lot more work to do technically, to improve yields, to improve consistency, to further optimize, particularly the details of the processing to make it more and more manufacturable. So I think in the big picture, the theme for 2023 is that evolution, the evolution from the core technology to increasingly more and more the manufacturability of the technology enabling higher throughputs, enabling higher yields, enabling to scale the production as we're able to deliver more and more volume. And so that then finally enables into increased customer demand and increase revenue within the capacity of our existing facility and equipment until we're able to add more capacity or find external sources to increase our capacity. So 2023 is -- in kind of in a summary, 2 big themes I would add -- sorry, 3 big themes. One, to continue along with the strategic partner engagement; to continue with our manufacturability improvements; and finally, to expand and deepen our customer pipeline. And so those would be the 3 areas that we'll continue to focus on.

Thank you, Kevin. That was all the questions from me, for today.

Well, thank you, Ståle, for the questions. And thank you all for listening. I'm very excited with the progress, and I look forward to continue to give you updates as we continue to make progress on our strategic partner initiative with our commercial customers and with our technology and manufacturing progress. So thank you, and have a great rest of your day.