Innventure - Earnings Call - Q4 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Innventure Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lucas Harper, Chief Investment Officer. Please go ahead.

Lucas Harper (Chief Investment Officer)

Thank you, Operator, and thank you all for joining us for Innventure's Fourth Quarter and Full Year 2024 Earnings Call. My name is Lucas Harper, Innventure's Chief Investment Officer, and joining me on the call today are Bill Haskell, Chief Executive Officer, and Dave Yablunosky, Chief Financial Officer. Earlier today, we issued a press release announcing our financial results, which is available on our Investor Relations website along with a supplemental slide presentation. As referenced on the slide side, we will be discussing non-GAAP financial measures during the call. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and supplemental slide presentation on our website. In addition, certain statements being made today are forward-looking statements that are based on management's current assumptions, beliefs, and expectations concerning future events impacting the company.

These forward-looking statements involve a number of uncertainties and risks, including but not limited to those described in our earnings release, Form 10-K for the period ended December 31, 2024, and other filings with the SEC. The actual results of operations and financial conditions of the company could differ materially from those expressed or implied in our forward-looking statements. I would like to hand the call over to our CEO, Bill Haskell.

Bill Haskell (CEO)

Thanks, Lucas, and thanks to everyone listening today. Innventure is happy to report on our fourth quarter and full year 2024, which proved to be a seminal year in the company's history and our evolution as a growing differentiated technology commercialization platform. We accomplished several key milestones throughout the year, which I'd like to recap. First, both AeroFlexx and Excelsius started delivering commercial product to the marketplace, marking a significant milestone in their commercialization journeys. Both have continued the momentum into this year, and I'll touch on 2025 strategic priorities for each later in my commentary. Second, in October, Innventure closed its business combination with Laurin CW and started trading on the NASDAQ as a public company. As we said in the past, we believe Innventure represents a differentiated opportunity for investors to participate in the expected growth trajectory of our current and future operating companies.

We remain committed to our goal of driving long-term value for our shareholders, and we are only in the very early stages of capturing that value. Third and finally, in December, we announced our collaboration with the Dow Chemical Company and the launch of our fourth operating company, Raffiney. In addition to Procter & Gamble and Nokia, Dow is the third active multinational corporation we've collaborated with in connection with the launch of a new operating company. There are various collaborative opportunities we plan to explore with Dow within the waste-to-value ecosystem, and we very much look forward to the future. As you can see, 2024 was a watershed year at Innventure. We executed well against our 2024 strategic priorities and believe we have positioned the company well for success in 2025. Now, let's dive into updates for each of our operating companies, starting with Excelsius.

As a reminder, Innventure owns a majority of the company, and we consolidate Excelsius's financials. Compared to single-phase water, Excelsius's New Cool systems offer a differentiated cooling solution that can handle higher heat fluxes, lower overall operating expense, and have superior redundancy and servicing flexibility, all while using a dielectric fluid that our testing indicates will not damage GPUs in the event of a leak. All of this can lead to a lower total cost of ownership for the data center operators compared to single-phase cooling systems. As I mentioned, Excelsius started delivering product to the marketplace during Q3 2024 and gained momentum during the fourth quarter. While revenues have yet to scale, the traction Excelsius is generating within the data center ecosystem is impressive. I'd like to start by reviewing the strategic goals that Excelsius set out to accomplish.

Our strategy has always been to lever the reach of global partners to both validate our model and to reach scale. To that end, we have targeted establishing relationships with one or more entities in each of the following four separate groups. Number one, large global OEMs. Number two, hyperscalers. Number three, colocation operators. Number four, AI as a service providers. To date, we have made meaningful progress with companies in all four groups. As communicated in our recent press release, Excelsius signed a three-year master purchasing agreement to white-label its product for a leading global thermal management OEM for sale to its end-user customers and resale to its channel partners. We have also been engaging in discussions with multiple hyperscalers.

To get a sense for the potential for these large global companies, the top hyperscalers collectively have estimated spending over $250 billion for data center development for 2025, and each typically orders equipment at a rate of about 1,000 racks per week. Excelsius has also announced deals with large colocation players, Telehouse, and IM Data Centers, both of which have established innovation centers that will display Excelsius's New Cool solution. We have announced a collaboration with AI as a service provider, Nordic, as well. Importantly, we believe each of these agreements has the potential for expansion as we expect additional orders will follow as the customers validate the technology. We believe that the economics of the Excelsius solution are compelling, the expected benefits for data centers are clear, and market adoption of the technology is starting to gain momentum.

We are also excited about Excelsius's recent announced product line expansion, which can help serve the needs of large players in the data center market. This includes the launch of a 250-kilowatt multi-rack cooling system, helping Excelsius serve the ever-increasing need for higher rack power densities across a broadening set of end-market use cases. We believe the design of this product can scale even higher, and we are excited about the company's sophisticated product roadmap. We expect these innovations will help the company maintain a leading position in the two-phase direct-to-chip liquid cooling market. We look forward to sharing more as we progress through 2025, but needless to say, we are proud of what Excelsius has accomplished to date and expect many additional achievements from Excelsius in the quarters and years ahead. Now, shifting to AeroFlexx, which, as a reminder, is carried on our balance sheet as an equity-market company.

Similar to Excelsius, Aeroflex started delivering product to the marketplace during 2024 and is gaining momentum that we believe sets the company up for a pivotal 2025. Earlier this month, Aeroflex announced a partnership with Spectrum Brands for their Firmator Dishedding Ultra-Premium Pet Shampoo product. The Aeroflex design should help improve the overall customer experience with a sustainable solution that uses up to 66% less plastic than rigid bottle alternatives. This is a significant development for Aeroflex and one that is indicative of the broader conversations Andy and his team are having with potential customers. Packaging companies are not solely focused on volume and price. Sustainability, performance, and total cost of ownership all play a large role in the decision-making process, and potential customers need to audit the packaging facilities to ensure the products meet all of their criteria. This makes two other recent announcements critically important.

First, as we mentioned on our last call, AeroFlexx received the highest standard and rating under the Brand Reputation Through Compliance Global Standard, or BRCGS, and is certified as AA grade. This represents the fourth consecutive year the Westchester manufacturing site has achieved the highest rating, which is an important credential MNCs look for in a packaging supplier. Second, AeroFlexx recently achieved two important International Organization for Standardization, or ISO, certifications. These ISO certifications hold significant value for organizations and brand owners with clear policies surrounding product quality and performance. These credentials provide verification that AeroFlexx's production process meets ISO standards, and coupled with the BRCGS certification, exemplify AeroFlexx's exceptional quality and consistent approach to manufacturing. These certifications open up the aperture of potential customers that AeroFlexx can target to further establish itself within the $400 billion packaging market.

In addition, Aeroflex launched its partnership with Chemipac in Europe, which was originally announced back in June of 2024. Aeroflex deployed its proprietary filling machine directly at Chemipac's production site to facilitate adoption of the technology across Europe. This strategic partnership positions Aeroflex to help address growing demand for sustainable liquid packaging solutions in the broader European region. While product deliveries have yet to start, this milestone establishes a global footprint, localizing the ability for European customers to do business with us. We are proud of this momentum and look forward to seeing what Andy and his team do next. Now, let's move to our latest operating company, Raffiney, which is focusing on opportunities in the waste-to-value space. In mid-December, we launched Raffiney and announced its collaboration with Dow.

In January, we hosted a call where Bill Grieco, Raffiney's CEO, did a deep dive into the Dow collaboration and the technology that Raffiney intends to commercialize. We'd encourage everyone to give that a listen as it provides valuable detail around the plastic waste-to-value market opportunity, incumbent technologies, and Raffiney differentiators. To quickly frame why we are so excited about the opportunity, less than 9% of global plastic waste generated each year is recycled. Raffiney is focused on the 240 million tons of plastic waste that are typically landfilled or incinerated annually. The scope of this unmet market need is a key reason that we're focused on commercializing what we believe will be an economically viable recycling solution. Our solution to that problem uses a proprietary advanced recycling process licensed from VTT Technical Research Center of Finland to convert minimally sorted, low-cost mixed plastic waste to dropping chemicals.

Raffiney plans to take waste from food trays, plastic wrap, storage bins, detergent containers, and other household plastics and convert them to sustainable chemicals that today come from barrels of oil, in turn reducing the overall net need for oil production. The process targets conversion of abundant, low-cost plastic waste to valuable chemicals at an expected high yield. The company is only a few months old, but Raffiney has hit the ground running. First, they are building an impressive team. In addition to Bill Grieco and Adam Javan, Raffiney hired Dr. Ignacio Palu Rivera as Chief Technology Officer, who brings over 25 years of experience in the chemicals and fuels industries. Second, the team established plans with VTT for bench and pilot-scale experiments for optimization of olefin gas production from plastic waste.

These experiments are currently being conducted using plastic waste that are potential feedstocks for the initial production plant that Raffiney plans to build. VTT also started experiments on Raffiney's behalf for liquid production that have been promising. Additionally, the Raffiney and Dow teams are beginning to develop project plans for defining product quality, site selection, and integrating the conversion process with steam cracker operations. Looking ahead, while we don't expect the company to generate revenue for a few years, we thought it would be helpful to discuss three key strategic priorities for Raffiney over the next several quarters. Number one, engage an engineering, procurement, and construction partner for the first plant design and delivery. Two, demonstrate viability of fluid bed conversion of mixed plastic waste to liquid product at VTT pilot scale. Three, finalize initial site selection and feedstock sourcing for the first plant.

Executing on these priorities will set the company up for future success, and we are excited to watch the company develop. Now, I'll provide an update on the pipeline of multinational corporation relationships in our funnel. We started 2024 with two ongoing MNC partners, Procter & Gamble and Nokia. We ended the year with three, adding Dow in collaboration with our launch of Raffiney. Beyond that, there is a diverse and evolving set of MNCs that continually share opportunities with Innventure for us to evaluate. Given this, we don't plan to disclose MNC numbers on a quarterly basis moving forward. Instead, we will communicate relevant developments to the market as they happen. Rather than focusing on quantity, the quality of the opportunities has always been paramount, and we continue to see quality increase as our relationships evolve.

Based on relationships with just three MNCs, Innventure has launched four companies since inception. PureCycle Technologies was the first Innventure operating company, and it is now a public company with an enterprise value of approximately $1.5 billion. As previously communicated, Innventure took the company public in 2021, and we no longer have an economic interest in PureCycle. As we evaluate opportunities, we look to create companies that we believe have the potential to reach similar target enterprise values above $1 billion. To close, 2024 was a milestone year for Innventure and marked the beginning of our journey as a public company. I am incredibly proud of all the hard work exhibited by the entire Innventure team and the teams across our family of operating companies. The momentum we've seen early in 2025 is invigorating, and we expect this year to be an inflection point for revenue growth.

With that, I'd like to turn the call over to our Chief Financial Officer, Dave Yablonsky, to review our financials. Dave.

Dave Yablunosky (CFO)

Thanks, Bill, and thanks to all joining today. Innventure ended 2024 with total revenue of $1.2 million, primarily representing the first commercial sales at Aeroflex. As Bill mentioned, both Raffiney and Aeroflex began generating revenue in 2024, and we expect revenues to continue to grow in 2025, with most of the growth occurring in the second half of the year. Adjusted EBITDA was a loss of $27.9 million in 2024, driven by cost of sales and R&D expense at Raffiney, marketing expense as Raffiney grows, non-recurring professional services, legal fees, and consulting fees related to the business combination, and higher G&A at both Raffiney and Innventure resulting from our transition from a private company to a public company.

A reconciliation of adjusted EBITDA to net loss is shown in the appendix of the earnings presentation. Now, a brief discussion on tariffs. Like most companies across many different industries, we're still evaluating the impact tariffs may have on our business. At this point, we don't expect tariffs to have a material impact on our ability to grow revenue and scale our operating companies. While Innventure is a buyer of materials like aluminum and copper and other electrical components, the company's tier one supply chain is largely North American based, so Innventure is relatively protected from any direct impact tariffs may have. For Aeroflex, the company continues to pursue U.S.-based raw material suppliers, and all production is currently done in the U.S. The impact of tariffs on the Chemipac partnership is also not expected to be material, as Chemipac distribution will be focused within the broader European region.

For Raffiney, we also do not expect tariffs to have a significant impact on the business. The company's plan is to build plants in the U.S., source plastic waste feedstock domestically, and sell both the liquid and gas products to domestic off-takers. It is important to say we remain committed to our goal of creating long-term shareholder value and are confident in how the company is positioned as we move through 2025. Moving now to our recently announced transactions, all of which strengthen our capital position. First, on March 24, 2025, Innventure completed a private placement of Series C preferred stock in the aggregate amount of approximately $28.9 million.

The Series C offering was designed to accommodate certain persons interested in investing in the company on terms similar to those of the Series B preferred round that closed in October 2024, as well as strengthen the Innventure balance sheet by converting founder and other related party debt into Series C preferred shares. Specifically, we issued 275,000 preferred shares for cash proceeds of $2.75 million and issued 300,000 Series C preferred shares pursuant to an agreement with one of our advisors. In addition, Executive Chairman Mike Otworth, Chief Strategy Officer John Scott, and other related parties terminated approximately $18 million worth of Innventure and AeroFlex debt in exchange for approximately 2.3 million Series C preferred shares, resulting in an annual interest expense savings of approximately $3 million.

We believe this demonstrates a strong commitment from our founders and reiterates their belief in Innventure's goal to drive long-term value creation for our shareholders. Second, on March 25, 2025, Innventure entered into a securities purchase agreement with Yorkville for convertible debenture issuances in an aggregate principal amount of up to $30 million. We expect to issue $20 million of debentures in a closing scheduled to occur within the next few days and to issue an additional $10 million of debentures later in the second quarter, subject to satisfaction of certain closing conditions. I'd like to close by reiterating our previously stated capital allocation priorities. We've said it before, discipline and risk mitigation is part of our DNA, and we'll take that approach as we look to scale our operating companies.

We will aim to pace capital investments with revenue visibility and be highly focused on cost management to minimize early-stage operating expense. Again, this is a key benefit of our closed-loop model as our collaborations with multinational corporations are designed to help reduce operating risk. We will also focus on supporting our operating companies with the ultimate goal of funding growth off of our own balance sheet. We believe that our operating companies have strong growth potential, and by maintaining long-term control, we'll have the opportunity to unlock significant shareholder value over the long term. Finally, as we continue to scale and launch new companies, we plan to consolidate their cash flows at the Innventure level. Because of this, we may ultimately look to return a portion of the excess capital to our shareholders. That concludes our prepared remarks.

We believe there are many exciting things on the horizon for Innventure, and we look forward to executing our strategy and delivering value to our shareholders. Now we'll open up the call for Q&A.

Operator (participant)

Thank you. At this time, we'll conduct a question-and-answer session. As a reminder to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chip Moore of Roth Capital Partners. Your line is now open.

Chip Moore (Managing Director and Senior Research Analyst)

Morning. Hey, everybody. Thanks for taking the question. I wanted to maybe ask on Associates if you could expand a bit on those four groups you mentioned, and I guess particularly the global OEMs and hyperscalers.

Just maybe give us a sense of how those discussions have been evolving here in recent months.

Bill Haskell (CEO)

Hey, Chip, this is Bill, and thanks for the question. First, I would say that on the OEM agreement, that is a contract that we have, and it does have some conditions in it that include effectively hard contracts for take or pay, and then some benchmarks to obtain certain exclusivity provisions in the agreement. That is a deal that we were under contract for for a white label product, as we have described in our information. We are quite excited about it. The scale of this, the scale of both the OEM, who has asked us not to name them at this stage, but the scale of the OEM and their demands in the marketplace are quite substantial.

The agreement that we've drafted, I mean, I can't imagine that they would have entered into something that they didn't believe was going to result in at least thousands of racks of equipment or larger, which is very significant to us from a revenue standpoint. On the hyperscalers, we've had literally dozens of meetings with various hyperscalers, so we're quite optimistic that going forward, we will end up with some firm commitments from those groups. As you may know, Chip, the competition in the space is principally, I would say, the old way of doing things. Of course, most people are using air today. We've got some that are using single-phase water, and there are dozens and dozens of contractors in that space, but there are only two, to our knowledge, ourselves and one other, in the two-phase direct-to-chip.

Most of the large players have already indicated that it's inevitable that we'll get there and have a requirement for that, some now, some later. I think we're well-positioned with both the hyperscalers, the OEMs, and then the AI as a service providers. As I mentioned, we've had a contract that we announced, and we're in discussions with others that have fairly substantial kind of chip sets that they need cooling for. Overall, quite bullish. I feel like this business is really at an inflection point, and I'm more optimistic than I've been ever with respect to where Associates is.

Chip Moore (Managing Director and Senior Research Analyst)

Great. Thanks, Bill, for that. I guess.Sorry, go ahead. Yeah. Oh, I was going to say to your point. Yeah. Yeah.

I was going to ask about that inflection point, and then particularly as it relates to sort of back half of this year, you gave some commentary there. Maybe just dovetail that with some of those conversations you're having.

Bill Haskell (CEO)

Will in the case of the OEM, we expect that ramp to begin in the second half when the white label product would be available in the marketplace. They obviously can't sell it until it's finalized, and that's really more on their side than ours. I think we have a—I mean, excuse me—a product that we've already developed for them. We need to go through UL and a few other certifications, but by and large, we have a product that we could put in the marketplace pretty readily.

Sometime in the second half of the year, that'll be available for sale, and that would begin the ramp there, which, again, I would expect to be relatively steep. Timing's always challenging to predict, particularly right now as the market is very volatile and there's a lot of uncertainty and nervousness kind of across the board. Overall, quite bullish on what the second half of the year looks like, not only for Associates but also for Aeroflex.

Chip Moore (Managing Director and Senior Research Analyst)

Got it. That's helpful. Yeah, I haven't noticed any volatility. I guess as a follow-up there, I did notice on Associates on their website, there is, I think, a major contract manufacturer and a pretty large global thermal management OEM listed on there. Just wondering if that is new or something I just hadn't noticed in the past.

Bill Haskell (CEO)

Yeah.The OEM is what we've discussed, and that is the global OEM. I'm not aware that they've named the contract manufacturer.

Chip Moore (Managing Director and Senior Research Analyst)

W as there a name of one on the website or?I thought I saw maybe Celestica on there.

Bill Haskell (CEO)

That's certainly a possibility. I'll defer to them to answer the question, but we can think about that. Yeah. We certainly are engaged with various contract manufacturers to be able to accommodate the scale, particularly of the hyperscalers that they sell through to. The kind of orders that we would anticipate there are very substantial, and so we need a contract manufacturer by our side to be able to accommodate the kind of volumes that we would expect.

Chip Moore (Managing Director and Senior Research Analyst)

Understood. If I could sneak one more in, maybe on Aeroflex, you announced that pet shampoo product. Just have a think about that.Is that sort of an early stage testing on the shelf, limited markets, and then what's the potential opportunity with that customer?

Bill Haskell (CEO)

Yeah. Look, I think it's smaller so far to your point that you can go buy it on Amazon today if you want to, and it's out there and available. It has both kind of an online element to it as well as kind of a meaningful commercial scale contract for us, which is not the first, but it's the largest to date, and we would expect larger ones, not just from them to follow on orders, but quite a queue of folks that are interested in it. All of these various certifications that we've been announcing and continue to announce are really critical, particularly to the large CPG companies.

They all require not only ISO certifications but various certifications along the way in order for them to be able to place an order. It is just kind of one of the hurdles you have to go through. There is one yet to be achieved. I think it is fairly close in time, a month or two away, and we expect that to kind of unlock some various orders that are pending that certification.

Chip Moore (Managing Director and Senior Research Analyst)

Gotcha. Perfect. Thanks, Bill. Maybe just one last housekeeping question. It looked like Aeroflex stake went up to 38%. Did that increase? Would you be looking to take that majority at some point? Is Associates still the same ownership position? Thanks.

Bill Haskell (CEO)

Yeah. Associates is where it was before. We did increase our ownership stake in Aeroflex. We converted some debt into equity to increase our stake.

We do have a mechanism potentially to be able to get to a majority ownership in Aeroflex down the road, so that remains to be seen. There is a pathway, I would say, to achieving that at some point in the future if we decide to do it.

Chip Moore (Managing Director and Senior Research Analyst)

Very good. Okay. Thanks very much.

Bill Haskell (CEO)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from a line of Nihad Jokichi of North America Capital Markets. Your line is now open.

Nihad Jokchi (Acting CEO)

Yeah. Thank you. Got a few questions myself. First of all, I don't believe I see a 10K filed yet. When do you guys actually expect that to be filed? Or if I missed it, just let me know I missed it.Yeah.

Bill Haskell (CEO)

Yeah. No. Hi. This is my supervisor. Yeah.

Nihad Jokchi (Acting CEO)

Go ahead, Bill. Or you want me to take it? Sure.

Bill Haskell (CEO)

We expect the 10K to be filed in the next few days. It's routine. No significant issue there.

Nihad Jokchi (Acting CEO)

Okay. Great. Then product revenue for the quarter, I do not see an actual explicit disclosure on the product revenue, but I think you did have it on the September quarter. Can you give us a sense as far as what was actually product revenue for the December quarter?

Bill Haskell (CEO)

That is you again, Dave.

Dave Yablunosky (CFO)

I mean, if you would repeat the question, please, to make sure I got it.

Nihad Jokchi (Acting CEO)

Yeah. I am looking for product revenue for the December quarter, and I am thinking that is something you can disclose because I believe it was disclosed for the September quarter.

Dave Yablunosky (CFO)

Right. I think we will disclose that in our 10K filing with the details. Primarily, we have Associates consolidated, and the revenue represents Associates. A little bit of management fees for managing the ESG fund.

In general, primarily, the revenue number you'll see in our financial statements at this point in time will represent Associates.

Nihad Jokchi (Acting CEO)

Okay. Got it. And COGS was up about 3.8x Q2. Would it be fair to believe that that's a pretty good proxy for how much product revenue was up Q2 as well?

Bill Haskell (CEO)

I think we're looking for somehow. Yeah. Yeah. I mean, I would just say. Exactly. We're building some inventory in anticipation of sales. We have the ability internally to manufacture a decent number of racks of equipment per month, but we wanted to build some inventory so we could be responsive to customer contracts as they represent themselves. I wouldn't draw too much correlation between the cost of materials at this stage and the revenue. They'll obviously reconcile each other at some point.

Dave Yablunosky (CFO)

That's right.Just to add to Bill's comments, I mean, there's some period costs in there that get amortized over certain numbers of units. Also, the amortization of the intangible asset that we had to book as a result of the business combination agreement, that's through purchase price allocation. Some of that hits cost of goods sold as well.

Nihad Jokchi (Acting CEO)

Got it. Okay. That's super helpful. In the September quarter, you basically had one sort of proof of concept delivery. Could you help quantify how many proof of concepts did you deliver during the December quarter?

Bill Haskell (CEO)

Yeah. We're not wanting to provide that information, principally for competitive reasons. What we don't want people to do is be able to sort of kind of back into the cost per system and margins and those sorts of things. Again, principally for competitive reasons.

We have certain customers that do not want us to disclose many contract details. I think what you will want to look at overall will be the trend over the next few quarters and just look at the kind of trajectory of the revenue growth. Again, trying to not obscure, but trying not to show too much information that would impact us in a negative way competitively.

Nihad Jokchi (Acting CEO)

Okay. Great. Rather understood. That makes sense. In your slide deck, you talk about on the Associates, some of the Associates' accomplishments, doubling the heat capacity removal with this most recent test. What enabled that doubling of that heat capacity? Was it some implementation of a new technology, or was it just simply getting access to higher wattage thermal simulators?

Bill Haskell (CEO)

It's a combination of things, but principally, I would just say engineering improvements, design improvements that allow us to get a higher heat flux. Because it's not just the total heat per socket. It's the heat flux, the watts per square centimeter that you can remove because you've got chips of a bunch of different formats. If you're really trying to measure the effectiveness of the technology, then heat flux is a good measure that kind of makes everything apples to apples. Yeah, we are getting access to kind of the latest round of chips to test, but we can also simulate higher heats. We have a capability to simulate much, much higher heat than what is available in the marketplace. We continue to test the limits of where we think the technology can go.

We're, I think, well ahead of the next couple of generations of chips that we even anticipate coming out of the marketplace based upon looking at the product roadmaps of the various chip suppliers. We feel very confident that we can manage whatever heat loads they can produce chips for. That's really important because single-phase water, that kind of drops out in the not-too-distant future in terms of its capability to remove that kind of heat. I mean, if you look at some of the information that's been put out by some of the larger players, they've all indicated that two-phase direct-to-chip is going to be required at some point for certain chip sets. Water will just reach its limitation because it's kind of linear with the amount of water you can pump through the cold plate.

Nihad Jokchi (Acting CEO)

Yep.No doubt about that, that water-cooled one-phase direct liquid cooled has its limitations. Bill, you did mention something about watts per square meter. I wasn't sure if you were saying that you had actually. Square centimeter.

Bill Haskell (CEO)

Square centimeter. Yeah. I'm sorry.

Nihad Jokchi (Acting CEO)

Sorry. Watts per square centimeter. Yeah. But was that a statement of saying that you had increased the heat flux withdrawal in terms of watts per square centimeter, or was it more a statement that you were able to expand the amount of square centimeters that you can cool, and that's what got your watts removal up?

Bill Haskell (CEO)

Yeah. It's a bit of both. I mean, we can build these various plates that sit on top of the chips at kind of whatever configuration is required. And as you know now, there are four-way and eight-way GPUs.

You have to build kind of some fancy plates to sit on top of all of those combined. It really is, I would say, the engineering improvements that we have, others that we're pursuing to continue to crank up the actual heat flux, which is, again, watts per square centimeter.

Nihad Jokchi (Acting CEO)

Great. Okay. Moving on to AeroFlexx, you announced Firmator as a customer as part of Spectrum Brands. I think in the early days, you also had a dog shampoo, Mighty Mutt, and I believe that's a different brand owned by a different private equity group. Do you see basically the pet care vertical being basically your first vertical that will reach critical mass?

Bill Haskell (CEO)

Not necessarily. I mean, it's certainly one of the marketplaces that we're pursuing.

I think oil is likely to be a pretty significant player, kind of gear oil and motor oil for recreational vehicles and so forth. That seems to be a pretty aggressive area right now for us that we're pursuing. There are others, just baby shampoos, kind of home care, that kind of line. There's a lot of interest in that as well. Really, we're covering a lot of different verticals in terms of having client interactions with customers in a lot of different verticals across the board. If I had to bet on one, I would say in terms of 2025 kind of penetration, oil would be a good guess.

Nihad Jokchi (Acting CEO)

Great. That's a helpful color.Finally, could you just tell us what was the actual OpEx rate, the non-GAAP OpEx rate for the December quarter, and where do you expect that to head for the March quarter here?

Dave Yablunosky (CFO)

That's a good question. Hey, this is Dave again. Yep. Hey, if you look at the OpEx in the press release, as I said in my remarks, I mean, that contains a lot of costs from the business combination agreement and other elements going forward. I don't think we want to really get into too many details of specific cost lines in OpEx, but rest assured, it'll be lower. Our run rate will be lower going forward. I guess what I'm trying to get at is that obviously it's going to go up as we progress in scale, right? But I have it at $13 million in the September quarter. I'm sorry.

Rather, I have a baseline rate of around $6 million a quarter, and I'm not sure if that's really a good baseline rate. If you could give any sort of guidance there, that would be appreciated. I think when we put our 10K out, there'll be more detail in there for sure about operating expense. There'll be more breakouts on the business combination expense, etc. I just think at this point in time, I'm not ready to get into that kind of detail. You could look at last year as a proxy. We expect to keep OpEx as low as we possibly can. Now, excluding cost of goods sold, right? I'm talking G&A, sales and marketing, and R&D, right? That's what we're talking about.

Bill Haskell (CEO)

It's baseline fixed cost. We intend to manage it.Frankly, we would even like to find ways to optimize that cost and perhaps even reduce. I think we ought to wait for the 10K to come out.

Nihad Jokchi (Acting CEO)

Okay. I'll yield the floor. Thank you for taking my questions.

Bill Haskell (CEO)

Thanks, Nihad.

Operator (participant)

Thank you. This concludes the question-and-answer session. I'll now turn it back to Bill Haskell, Chief Executive Officer, for closing remarks.

Bill Haskell (CEO)

Great. Thank you all. We really appreciate you listening in and the questions. We look forward to kind of the next update going forward here, which will be sometime in the middle of May, I believe. Thanks again.

Operator (participant)

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.