Ensurge Micropower ASA

OSE:ENSU

Earnings Call Transcript

[Kevin D. Barber, MD & CEO]

Welcome to Ensurge 2021 Full Year and Q4 Preliminary Report. My name is Kevin Barber. I am the CEO of Ensurge, and I'm excited that you're spending time getting an update on the progress we've made in the past year and this past quarter. Ensurge is focused on delivering a superior replacement into an existing large 1 billion unit market that delivers superior energy density, longer lifetimes, flexible form factors and an inherently safe chemistry of solid-state lithium micro batteries. Solid-state lithium batteries is a huge investment theme around the world as battery technology continues to progress. Ensurge is uniquely focused on the micro battery markets, where we are focused on the 1 to 100 milliamp-hours set of opportunities that are represented by the hearing -- hearables, wearables and IoT markets. We bring to the market a really novel architecture that is based on our proven roll-to-roll stainless steel manufacturing technology as well as proven solid-state chemistry that has been in place for now these past many years. Once fully ramped, our current factory footprint based on full factory utilization can deliver about USD 100 million per year in EBITDA, representing a really huge financial return for the investment in our opportunities going forward. Our cash flow breakeven can be achieved at about 4 million units per year within our existing line. And during 2021, we entered into multiple customer agreements, including a Fortune Global 500 wearable customer and 2 of the global top-tier hearing aid customers. We have over 10 Tier 1 OEMs awaiting samples. And in the coming slides, I'll talk about additional customer agreements we've announced these last several months. And finally, our commercialization is on track, and we expect that our initial production ramp will begin during this late calendar year 2022. I'm really proud of the progress the team has made here at Ensurge this past year. In 2021, we've made significant progress across multiple fronts. On the technology area, we have validated our battery cell performance with our roll-to-roll tools and deposition technologies on ultrathin 10-micron steel rolls, which enables the unmatched energy densities as well as validating our path to being able to deliver production scale using our roll-based manufacturing capability. Second, taking those cells and now building batteries, we've demonstrated the ability to build stacked batteries using our new cell stacking equipment with our roll-based unit sales, both of those together allowing us to deliver milliamp-hour class micro batteries, where no other solid-state micro battery producer has been able to deliver. On the commercial side, we've made significant progress. We're signing a Fortune Global 500 company in the wearables market as well as agreements with 2 global leaders in the medical hearables market. On the team, we've appointed a globally recognized energy storage innovator, Dr. Shirley Meng, to our company Technical Advisory Board, and she is deeply engaged with our technical team and the company to help us make the progress going forward with our technology. Internally, we've hired 2 industry veterans: Vijay Parmar as our VP of Sales and Marketing; and Jay Tu as our VP of Operations, both of whom bring significant and relevant experience to both micro battery applications in the IoT and hearables and wearable markets as well as roll-to-roll manufacturing experience and operational knowledge. We've rebranded our company this past year. We're now Ensurge Micropower ASA, better reflecting our purpose to enable and energize innovation for our customers. And now as we enter into 2022, our focus remains and will continue to sharpen to focus on converting current and new customer agreements into our initial production ramp at the end of Q4 2022. We continue to broaden our customer activities. Even in this past several months, the number of enthusiastic customers that we have engagements with is growing, customers that see the opportunity to deliver differentiated products with the batteries that we can deliver to them and the applications they're trying to meet. We then will enter into qualification of our technology with these customers, which will then enable operational ramp and delivery of production batteries. And so in parallel, our activity will be to continue to establish our operational readiness for the ramp of these deliveries, including some incremental equipment capacity additions. Financially, our full year '21 financials ended the year with USD 6.8 million in cash. We had normalized adjusted operating expenses of just $4.7 million and our capital expenditures of $800,000. Since the end of Q4, we've entered into 2 new customer agreements, the first of which was entering the digital health market with a customer agreement with a leader and innovator in the digital health applications. Our agreement includes delivering customized micro batteries, which we expect to start in the fourth quarter of 2022. This agreement includes delivery production this year. It's not just samples. And we will be receiving several milestone-based payments to deliver them the customized size and capacity that their application requires. We see this as part of a greater trend of the proliferation of digital health and remote patient monitoring, especially in light of COVID as well as the prior existing trend for remote health monitoring. We expect the overall market of this digital health monitoring market to be over hundreds of billions of dollars over the next few years, and the digital health devices we can enable is at the center of many of these solutions. These devices have unique and stringent power requirements that include flexible form factors that we can deliver, faster charging with solid state chemistry can do better than lithium-ion with high current draw and as well as our higher energy density and longer life cycles. The second most recent announcement that we've just made is with an industrial IoT market. A company -- as a Fortune 500 manufacturing capital equipment company, they're looking for customized micro batteries that are really optimized for their application. This customer also will pay us several milestone-based payments for this customization. It has unique attributes that require wide temperature range of applications, longer shelf life and really fast charging. And so this is an example of a really unique application in the industrial IoT market that we're really excited about with this Fortune 500 company. So to come back, so our focus is delivering superior solutions that bring unique solutions to these hearable, wearable and IoT applications. We will be addressing with our small and thin and flexible form factors with these higher energy densities. We'll be delivering batteries that are superior to lithium-ion by leveraging our proprietary intellectual property and our unique technology platform. Our micro battery market focus remains into this hearable segment, a very large market, including both hearing aids and wireless headphones. It includes medical wearables, which includes health monitoring as this some recent customer announcement -- digital health represents, whether that's worn on the wrist, whether it's on the finger or whether it's inside the ear; expanding into the sports and fitness wearable market; and now this announcement in our IoT connected sensors market, whether it's environmental sensors and buildings or manufacturing. We see that as a really growing market going forward. So today, this is a really large market, and we see it growing even larger that it's a $10 billion TAM, well beyond what we can serve and really endless amounts of opportunities for us to grow. So going down a little bit deeper, and the hearables market is made up of 2 subset markets: First is the true wireless market. In 2024, it's expected to be over 500 million units, which would then represent 2 batteries per unit or over 1 billion batteries. Typically, the energy capacity required by this market is between 40 and 70 milliamp-hours, right in the sweet spot of our target markets. All of them rechargeable, and the huge trend that's driving this is increasing health content and as well a convergence with hearing assist technologies. There's many customers here opening the opportunity for Ensurge to gain traction across the Tier 2 and other markets as well as the top 2 and delivering the value propositions of smaller sizes and longer lifetimes. And then the traditional hearing aid markets is about 23 million units forecasted in 2024. We see that as requiring lower energy capacities, about 15 to 25 milliamp-hours, and where we have 2 existing customer announcements that we've made this past year. The IoT connected sensors market is a very diverse market that's growing and substantial in size. Over 200 million units in 2024 is forecasted within this 1 to 50 milliamp-hour capacity. The trends that are enabling this is the increasing use of 5G communications as well as in combination with energy harvesting being able to put sensing with a micro battery with energy harvesting into a stand-alone unwired application that can provide a wide range of applications. And what we see that's terribly unique is the industrial temperature range as our most recent announcement requires that solid-state chemistry can deliver in a superior fashion, long shelf life and enabling operation at slow discharges and slowed charging cycles. And so we see this as really a huge opportunity for us in the coming months and years. And finally, the diverse wearable applications, whether it's patient monitoring, our smart rings, smart apparel, smart contact lenses. There's just a tremendous number of companies doing a wide diversity set of applications to meet the needs of the wearable applications. And all of them benefit and really, in some cases, can only get off the ground with the application of solid-state batteries. It's driven by form factors, the safety, the temperature range and the longer charge cycles that can only be met by solid-state technology. So how is Ensurge delivering on this market opportunity? And it's through our novel architecture, which includes 4 key elements: First is Ensurge's proven ultrathin steel substrates. I mentioned in 2021 we've demonstrated entitlement cell energy on this ultrathin 10-micron steel with our roll-to-roll equipment that's critically important in delivering our differentiated technology and that -- at maximizing our volumetric energy density. In our past, our company has reliably shipped millions of units of EAS units until we know how to manufacture on steel with our equipment in our current factory. We then bring on top of this ultrathin steel an established chemistry of the anode-less solid-state chemistry that was invented in the 1990s. It's proven to deliver long life cycles and proven to be a fundamentally safe chemistry. We then take the cells that we've manufactured on these rolls with steel with the solid-state chemistry, and we then take the cells and stack them into a flexible form factor we can customize for our customers with enabling thin form factors and can deliver then a final product, a stacked battery. And then we have an existing installed $40 million scale-up roll-to-roll factory that uniquely provides us a cost-effective path to high volume as well as supports the technology road map that we are on. So when we put all of those 4 pieces together, it allows us to deliver a superior performance micro battery at production scale. So the product we are focused on delivering will deliver twice the energy density of lithium-ion, 2 to 3x the recharge cycle life, twice the charging speed, it's inherently safe compared to lithium ion, and this form factor can deliver a wide range of shapes of rectangles and ultrathin formats that is more flexible and customizable than typical round lithium-ion button cell that you see on the left of the slide. And along the bottom, you can see conceptually the manufacturing flow of rolling -- scale with roll-to-roll fabrication, singulating those cells and stacking them and encapsulating them in a final battery and then ultimately, our micro battery product platform in multiple sizes and shapes on the far right. So finally, we're excited on the progress we've made. We're focused on winning in this huge and growing existing market with our steel technology, our stacking and our scale; delivering solid-state lithium rechargeable micro batteries that are superior; and energy density, lifetime safety versus existing lithium-ion batteries while delivering customizable form factors. We're focused on an existing set of markets that have a 1 billion unit TAM, $10 billion addressable market in the hearables, wearables, sensors markets. And we have so far announced multiple customers, while we are currently in negotiations with additional customers. We're excited about the enthusiasm that the customers have brought to us with our product strategy and what we can deliver to the market. We have barriers to entry with extensive intellectual property as well as our manufacturing know-how and how to do Thinfilm roll-based manufacturing. We have our existing production-grade factory that we can deliver on initial production and add to capacity over time. And this business model delivers a highly profitable business, with EBITDA potential with our existing facility of about USD 100 million. So with that, thank you, and I appreciate your time, and I'll open it to questions.

[Ståle Bjørnstad]

Thank you, Kevin. There's a few questions from the audience that I would like to ask you. And then just first, there's a few questions regarding the samples. Because you have been somewhat delayed with shipments of full operating samples by year-end 2021, what is the progress? And when do you expect these samples to be shipped?

[Kevin D. Barber, MD & CEO]

Yes. It's a very important question. Thank you. So the update that we gave recently was -- it still remains the case that we -- our focus on delivering the functional samples in the short term. I'll give you an update. But the 2 key areas we've mentioned is we are focused on advancing our packaging process optimization as well as our focus on our overall battery integration. And I'm happy to say that we've made tremendous progress these last weeks in the packaging process optimization that we have been working on only these last few months since we received the packaging equipment in Q3 and was able to begin work in Q4. We've made tremendous progress on the packaging process these past weeks that are enabling us to build more and more stacked batteries. Second, we have significantly increased our cycles of learning, which means we're building now hundreds of units a week to perform various experiments to optimize the process. And so we're learning at a faster rate. And then finally, the overall battery integration, we've made significant progress in that regard in identifying process improvements on the battery cells and how they interact as we stack them. And so that is across the board a significant progress. So where we are now is we still expect to be able to deliver these initial samples to our customers in the very short term. It's difficult for me to give an exact week as the exact timing is not that exactly predictable. But the reality is we've made incredible progress and we're very clear on the remaining work we need to do to deliver customers' samples.

[Ståle Bjørnstad]

Thanks. And sort of another question here is that are these samples that we have been talking -- or you have been talking about and -- are they aimed for specific customers? I ask the question because you have signed contracts with new major customers in Q1 2022 and it looks like these customers are not waiting for specific samples.

[Kevin D. Barber, MD & CEO]

Yes, it's a really good question. So it's a little bit complicated. So -- but the simple answer is that we have announced that we're working on an 8-millimeter by 8-millimeter size battery. That is the baseline that we've been developing. That is the samples that we will deliver to most of the customers that will meet their needs to evaluate and assess our battery performance. So most of the samples will deliver and will be the initial samples that I've been speaking about will be still based on these sizes that I've mentioned. However, as we have announced several of our customers want different sizes, and we will, in the very near term, be making those sizes as well. Each of those customers want to see the 8x8 as well. So it's not in replacement of that activity. But for the customers that want to go into production shipments this year 2022, the focus and the priority is shifting quickly to their customized sizes. So that will be going on in parallel in these next several months.

[Ståle Bjørnstad]

And the last question sort of regarding samples. How important is it really to have samples to get -- or to get to the position to sign contracts in the near future? The question is again related to the situation where you have got new customers without having the samples ready.

[Kevin D. Barber, MD & CEO]

Well, yes. And so that's -- I think we will continue to sign customers to agreements without needing the samples. As I mentioned, we're in discussions with several of them even now beyond what we've announced so far. However, the samples are required by all of the customers to validate the technology and the batteries that we are delivering to them so that they can give us follow-on contracts to deliver more than what their current contracts specify. Some of our customers are paying us milestone payments to do a custom battery and then have provided sample requirements in their contract. We have one customer, as we've announced, that have given us production quantities in their contract. We have other customers who have only contracted us with samples. And so we will then -- each customer will be specific to wanting the follow-on contract to be based on what their needs are after they've had a chance to evaluate the sample. So in summary, we have this first customer that has production orders that is on a customized battery. In addition, we have customers wanting specific quantities of samples to begin with. And we have other customers that have entered into agreement to just accept the initial samples themselves.

[Ståle Bjørnstad]

Okay. Thanks. Then regarding -- or discussing a little bit the market size that you're addressing. You have over 12 months sort of increased the size of the market that you are addressing. Have you seen any increased interest from customers so that, I mean, in general, that customers are reaching out to you over the last 6 months based on -- that the market is also increasing?

[Kevin D. Barber, MD & CEO]

The answer is yes. We have increasing rate of inbounds. As our name has gotten out, as we've made progress with our strategy, the number of inbounds are increasing a lot. We have been -- a week doesn't go by that we don't get multiple inquiries that -- range and interest level, but we are having increasingly broad engagements across all of the markets that we're speaking about. So there's no question that the amount of inbound interest is increasing, number one. Number two, the market size, in our estimation, we have seen -- we have more opportunity than we initially had estimated when we started this journey. And so the market opportunity that we see in this micro battery space of 1 to 100 milliamp-hours that we've set for ourselves is much larger than we had initially sized, and that is a result of the number of applications that are entering into this micro battery space. And so we see both. Both increasing interest in Ensurge as well as this unique market space. The micro battery size that we've defined is a really huge and growing segment. So we're excited about both. And then finally, as we've stated in our written reports and I've said in other presentations, our customers are really enthusiastic about what we're endeavoring to deliver to the market. They're looking for better batteries. They're looking for the performance attributes that we can meet, and they're looking for the flexibility of form factors that we can deliver.

[Ståle Bjørnstad]

So just a question here is sort of when you get in contact with the potential customers, what sort of are the questions/hurdles to climb before you get a contract signed?

[Kevin D. Barber, MD & CEO]

Yes. So good question. So they will begin to want to understand who we are. They want to understand the technology and our capability at some basic level, nothing too deep. But -- and then the conversation quickly turns to what problem do they need addressed? What does their system, their device required that they currently do not have met by current conventional batteries? And so each of these customers have different priorities. Some want more energy density. Some want longer cycle lifetimes. Some want more flexible form factors. Some want higher charging speeds. So these care-abouts are a really important part of our conversation with them in the first several meetings. What is it that their system, their device requires? What is it that we can do to work with them to meet their needs that our platform, our solid-state technology, our form factor flexibility can uniquely provide to them? If they're looking for a standard battery that is in the same form factor and the same performance of lithium-ion, that's probably not a good customer fit for us. They're -- they can be satisfied by the current battery market. And so the important part of the conversation is what is it that they need that is a differentiatable deliverable we can provide to them? And then once we've had that conversation, the conversation moves to, what does that battery look like? What do they want their process to be? Whether they want samples at the current size, they want samples of the new size, what do they want their evaluation process to be? And then we begin contract negotiations to represent our agreements together to move forward together.

[Ståle Bjørnstad]

Thanks. And then the last question for today is that there is a focus on supply chain constraints around the world currently. Do you see any challenges for Ensurge Micropower with that respect in the coming months?

[Kevin D. Barber, MD & CEO]

Yes, it's been a challenge. It will continue to be a challenge. I think it's one that we've managed in the big picture really quite well. So I'll give you the 2 big categories that can impact us. One is the materials. So that's the steel itself as well as the other materials that we use in our manufacturing process. We have been very proactive in working with our suppliers to understand their capabilities, their lead times, their constraints, and we have been ordering material sufficiently and with enough lead time that we've managed with the supply chain challenges to manage that. We had some challenges early on that was not quite a year ago, maybe 9 months ago, with some materials that were new to us and new suppliers that took a little time to get started because of supply chain logistics, shipping. It wasn't so much the availability of the materials. It was really the shipping and logistics have been challenging. And now we've gotten to the system that we know how to manage that and so I think it's fine. So on the material thing, I don't see any major risk. We will continue to monitor that. The second area is equipment. Equipment has been a little bit more challenging than materials. Where we see a challenge has been mostly that when we need field support that involves sending the technicians or engineers from our equipment suppliers to our factory to help us with any specific matters that we need, with COVID travel restrictions, that's been a little bit of a challenge. We have found ways to work around that with video and other remote technologies and so we've succeeded to overcome all of those challenges. But at times, that has cost us days here and there. And so we will continue to optimize that. So I will not say it is not a challenge. But overall, it has not been a major factor for us in the past, and we'll continue to be focused on managing it going forward.

[Ståle Bjørnstad]

Okay. Thank you, Kevin. That's all the questions from me.

[Kevin D. Barber, MD & CEO]

Well, thank you, Ståle, for the questions. And then finally, I want to thank all of you listening with your interest. And for those of you who are investors, thank you for your commitment, and I look forward to giving an update in the coming weeks and months and quarters ahead. Thank you so much.