Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir..

Welcome to ESS's 20-21 Fourth Quarter Fnancial Results conference call. Joining me on the call today from ESS are Eric Dresselhuys, CEO, and Amir Moftakhar, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fourth quarter of 2021.

This earnings release is available on the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2022.

The forward-looking statements that will be made on this call are based on information currently available to us as of today. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.

In particular, those described in our risk factors set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, the markets, and the economy. You should not rely on forward-looking statements as predictions of future events.

All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof. And we disclaim any obligation to update any forward-looking statements, except as required by law. During the call, we will also present certain financial information on a non-GAAP basis.

Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information of the role of management and investors by excluding certain items that are not indicative of our core operating results.

Management uses non-GAAP measures internally to understand, manage, and evaluate our business, and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented within our earnings release. And with that, I will turn the call over to ESS CEO, Eric Dresselhuys..

iron, salt, and water. ESS separates the power from the capacity, which makes us even more economical at longer durations. With zero capacity fade over 20,000 cycles, our technology carries the additional benefit of being environmentally sustainable and non-flammable. Moving on to our fourth quarter results.

While we did not recognize revenue in Q4, we were able to make material progress with customer deliveries, new sales, and ramping our operations. We began shipping our second-generation energy warehouses in the third quarter of 2021, and the first units were delivered to three separate customers and installed in the fourth quarter of 2021.

However, these were our first commercial units to ship, so our revenue recognition process will be slow and deliberate. Initially, revenue recognition will be deferred until customer acceptance has been received for each unit, or until we establish a history of successfully obtaining acceptance from customers.

In the near-term, as our products are new, this is likely to be a longer process than when our products are more mature and we have more history with customer acceptance. We expect to improve our process for recognizing revenue more quickly in the future.

We've learned a lot about how to accelerate our testing, prepare the customer sites in advance, and be more efficient in our startup. These learnings will help us bring up customers ' applications more quickly; not only so that we can recognize revenue, but also so that the customers can receive the remarkable value of our solutions even faster.

While we feel fortunate that the groundswell that has brought long-duration energy storage to the forefront, just as ESS has moved to scale production, that timing has also coincided with unprecedented supply chain challenges, that have slowed our initial shipments at Energy Warehouse’s.

As examples, we faced limitations with some injected molded parts, as well as challenges securing certain electronic components. We're in the process of working through each of these. We are broadening and strengthening our supply base and redesigning PCBs to leverage more widely available components.

Importantly however, we see these as short-term constraints. In the near-term, we have a handle on these issues, and while they caused a delay in our ramp, we believe we can put them behind us and anticipate a trajectory of strong growth.

With that said, it's a great accomplishment by the team to get units to customer sites and pass the heavy regimen of testing that has been demanded of them. 3 units are fully operational and running at a commercial customers campus in Southern California and at Softbank's test bed in Northern California.

Additionally, the first two units we shipped, SDG [Indiscernible]. We're excited to have undertaken this next chapter and continue to prove that ESS ' solution can help solve the grid storage challenges. We also continue to make considerable progress building out the operations of the company.

We doubled our company's headcount in 2021 to 161 and have added almost 25% to that since the end of '21. Importantly, we were able to add Ben Heng as SVP of Engineering. Ben brings broad technical background to the team and has held leadership roles at both SolarCity and Tesla. We are building out our sales team and announcing new customers.

Additionally, we added 54,000 square feet to our Wilsonville facility in the fourth quarter, which helped us double our total footprint to 200,000 square feet in 2021. Given the supply chain environment, we have adjusted our production plan for 2022.

We continue to plan a significant ramp in our Energy Warehouse shipment, as well as commencing shipment of our Energy Center product this year. Although the pace of growth will be considerable from quarter-to-quarter, we expect that the supply chain challenges we faced over the last four or five months will shift our production ramp to the right.

This will represent a little more than a one-quarter shift in our expectations. Amir will share more details on the specifics of the plan. We will proceed with two cost reduction initiatives planned for this year, each of which is independent of our ramp speed.

The first is standard design for manufacturing activities like replacing solder connections with wire harnesses and redesigning PCBs with more common components to cheapen and simplify assembly. The second is to incorporate our advanced automation line to maximize our production capacity by the end of 2022.

These initiatives are expected to lower labor inputs by more than 80%, dramatically lowering unit costs and increasing production velocity and quality.

The change in production ramp is in no way a reflection of the demand for our products, our confidence in our production capability, or the overall trajectory of the business, but rather a prudent adjustment to our ramp in response to macroeconomic conditions.

This adjustment will have the added benefit of allowing us to implement cost reductions over fewer units shipped, thereby minimizing cash burn. Importantly, we've been in close communications with our customers, and shared the news of our new delivery schedule.

To date, we have not had a single cancellation, and our customers remain committed to the units they have ordered. Finally, I would like to welcome Claudia Gast to the Board of Directors. With over 15 years of strategic and financial experience across leadership roles at Fortune 100 companies and investment firms.

Claudia brings valuable experience in bringing hardened industrial products to market and scaling commercial organizations. Claudia will replace Shirley Speakman of Cycle Capital who led an early-stage investment in ESS. We also want to thank Shirley for her years of commitment to ESS, and her valuable contributions.

And with that, I'll turn it over to Amir to take us through the financials..

deliver the units our supply will allow, execute the cost-savings programs that were already in flight, and make the necessary CapEx investments to maximize our production exit velocity at the end of 2022. Let me touch on each of these.

First, despite our supply chain delays, we will continue with a strong ramp of our Energy Warehouse production in 2022. As a result of these delays, our planned shipment schedule is now a little more than one quarter later than we have previously expected. We remain on track to deploy our first Energy Center product in this fiscal year.

Given our experience at early deployments and some legacy contractual terms in existing deals, we believe we will see a varied level of delay between shipments and revenue recognition. In our current process, we performed factory acceptance testing for ECW at our Wilsonville facility ahead of shipping units to a customer.

Once received, we installing Commission these units when the customer side is ready. Finally, we perform additional acceptance testing protocols at the customer site, followed by a formal customer acceptance. For our early deployments, we expect revenue recognition to follow customer acceptance.

As we build a track record of successful installation and acceptance, we expect customer acceptance and revenue recognition to occur more quickly. Given our new ramp schedule, we now expect to ship between 40 and 50 Energy Warehouses in 2022, all of which are contracted at this point.

If we ship all of these units and are able to recognize revenue for them, this would translate to approximately $10 million in revenue. Second, we will execute plans to reduce our cost of goods sold in each unit.

A significant portion of our cost reductions are design improvements that are not dependent on our scale, but reduce labor input and lower total production time. As Eric alluded to, these are designed for manufacturability initiatives we had already planned for this year.

And third, as we shared last year, we ordered an automation line to dramatically expand our power module manufacturing throughput, a critical cost to ramping capacity. We expect this line to be up and running in late 2022.

With each of these production improvements, design for manufacturability and automation, in place with a healthy supply chain backdrop our annual production throughput is expected to expand dramatically to 750 megawatt hours by the end of 2020, more than three times where we started the year. This would allow us to continue rapid growth into 2023.

To reiterate an extremely important point, we have been very open with our customers about our delivery timing, and we have not received a single cancellation among our booked orders, nor have we seen any slowdown with ongoing customer conversations.

I think this speaks to the value proposition ESS brings to our customers as well as the long-term strategic importance of implementing long-duration storage in our applications.

Given our current plan and the assumption that we will remain under development accounting for the full year, we expect our operating expenses to come in at about $100 million.

As we execute our plan in the coming year, we have more than ample liquidity to run the business and expect to end the year well in excess of $120 million of cash on the balance sheet. And with that, we can open up the line for questions..

At this time. I would like to remind everyone in order to ask a question, please [Operator Instructions] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jed Dorsheimer from Canaccord Genuity. So, Jed, please go ahead when you're ready..

Hi. Thanks, guys. Wondering if you could just elaborate and provide some more details on the specifics of the customer acceptance. It sounds like three of the five are actually running. So, what specifically needs to be achieved for that acceptance to occur for the rev rec. Thanks..

Sure. Thanks, Jed, I'll take it. You're right. We've shipped a number of units. At two of the sites, the units have gone through the full installation, commissioning system startup, and actually, as of the time of this call, one of those units is totally completed with its revenue recognition process, so that's full testing and customer sign off.

Another one we expect to be done in the next days to maybe a week. And then for some of the other units still, or being delivered, they'll go through that start-up routine and then they go through this very rigorous, complete testing when that's done. The customer signs off, and we'll get rev rec at that time..

Got it. Thanks. And you mentioned the supply chain and in particular chips. I know the containers were an issue at one point, but the chip issue sounds like that's a bigger I guess near-term. Headwind.

Are there any others that you see as potential supply chain headwinds, or have all of the other ones been resolved and it's just about the redesign of the PCB?.

Yeah. Thanks. Good memory. We have -- at one-point last year, we were having delays in getting shipping containers, but we were able to work through that. We've got plenty of containers now. On the chips, we're, we think, through that problem now.

We had to do some redesign; it slowed us down back in the fall, but we've got alternative solutions now when we've pre -bought stock to not have that be a constraint. But you call out the right thing, which is these come up and you just have to work through them as they come up.

So, at this -- as we sit here today, we feel good about having the supply that we need, and as we said in the release, we're working hard to ensure that we have alternative sources of supply so we have a bit more robust supply chain at every turn..

Great. Last question for me, then I'll jump back in the queue.

Given the learning curve that you've gone through or continue to go through with the EW, I'm just wondering, has that changed any of the expectations around the EC either positively or negatively as you think about that and what you know now versus a year ago?.

I think modestly positive inclinations towards the EC in the sense that we're just getting more experienced of all of the interface to our systems with renewable systems or grid systems out in the field. So, the more experience we get, the faster we get at a return. And so, I think that'll help with ECs as they come out online later this year..

Thank you..

Thank you.

Thank you, Jed. You now have the next question from Colin Rusch of Oppenheimer. Colin, please go ahead..

Thanks so much.

Can you talk a little bit about how much of manufacturing process is left because at this point as you move towards automation, is all the engineering done or is there still some work to be done process [Indiscernible] labs?.

I think the engineering is done for the automation line that's coming online here this year. So, I don't see any engineering on our side. Of course, we have partners working with us that are building out the line so that design is complete. We're just waiting for all of the components of the automation to arrive..

Okay. That's helpful. And then as you build this pipeline of business and you look at the pricing environment, we're seeing prices go up on lithium-based solutions. Generally, there's going to be a tight environment for supply with chemical storage for a number of years.

I'm just wondering about your pricing power here and how you're thinking about the pricing model as you go forward..

Sure. Well, I think our pricing approach has always been trying to work on really being focused on a value approach. What's the value of our solutions versus the alternatives, versus doing nothing? And so, to that extent, as lithium prices have not only stopped declining, but starting to go up a little bit.

I think that might give us a little bit of pricing power. But really for us, it's more about making sure that our total value proposition is being appreciated out by the customers..

Okay. That's the point. Perfect for notifying. Thanks, guys..

Thank you..

Thank you. Your next question comes from the line of Thomas Boyd of Cowen and Company. Sir, Thomas, your line is open..

Excellent. Thank you for taking my questions. Just the first one I was wondering if you can give us an update [Indiscernible] with the booking’s composition look like for 2023, how much has been awarded? How much is still being negotiated? And really what's in kind of a qualification phase..

Good question, Thomas. Right now, with just given the shift in production schedule that we're seeing in 2022, we're not guiding towards what's booked, awarded, or negotiating right now in 2023. As Eric alluded to, we continue to have healthy, robust conversations with customers. We do anticipate the EC shipments starting this year.

I think you'll see that shift in 2023 with the continuation of our EW product and the introduction of more EC projects. But at this time, we're not guiding to what's booked or awarded for 2023..

Understood. Then would it be fair to categorize maybe that pipeline, is it still around $8 billion as it was in 3Q? I know obviously that things have continued to expand as far as overall demand. So, I was just wondering about an update there..

Yeah, so what we've shared is that our global opportunities are in that $8 billion range of customers that we've connected with for named projects that we have either exchanged some type of information such as an NDA or participated with them in in an RFP that there is no shortage of those opportunities. And that pipeline remains robust.

And now it's about our execution through that pipeline for both the EW and EC products..

Great, and I appreciate it. A last one if I could sneak in really quick.

Just what is the feedback that you've gotten from customers who have received the second-generation unit that maybe have also had a chance or opportunity to work with kind of that first-generation unit?.

I think there's a lot of excitement around it. As we said, it's really a more ardent product, it's just at every turn [Indiscernible] products in terms of its delivery and its performance. So, people are excited about that.

I think frankly the other thing that's probably come up since the first-generation products were shipped, is that the awareness of the market need for longer duration is more well-known, more acute today. So, people see the same product or same functionality, and they're more excited about it, than they've been before.

One of the more surprising things that at least to me that we've heard when we shipped two of the Energy Warehouse s down to a customer in Southern California. And there's a video of this, I think on the website. The units were installed right next to the building.

And people when they think about batteries, they think about something that's got to be remote, it's got to have a big safety perimeter because with Lithium that's what you do.

And I have just been amazed at how many people see that picture and they're drawing hits the table and they can't believe that you can install long-duration storage in that easier package. It gets hoisted into place. The system is brought up and they can be installed so close to a building.

And so, with the wildfires and other kind of safety issues that you've heard out in the marketplace. That's the number one thing we hear about from people when they see the installation happens..

Excellent. Appreciate the call to address the questions. [Operator Instructions]. We now have the next question from Jayson Osha of Guggenheim. Your line is open..

Hi there.

Hi Eric?.

Hello there, how are you?.

I'm good. Just a couple of questions here to go back to the guidance in that $10 million in revenue.

And I believe that core waited to 50 EW units, is that -- that's what you said, right?.

Yeah. That's right..

Okay. Now is the idea that those 50 -- those would all be 50 units that were actually recognized for revenue? Or is it more that you're going to have 50 units out by the end of 2022, but only some of those would actually have manifested as revenue at that point? I just want to understand what's being said here..

Yes. So, what we've said is we expect to ship that many units. How the rev rec will play out as we alluded to in the call is a little hard to predict. If they would all get rev rec or where that cut-off would be depends a little bit on time and how much we're able to accelerate the commissioning process to move through the revenue recognition process..

So that 50 units is units that you'd like to have in the field by the end of the year and some of those will be recognized and some modest.

Is that the best way to think of it?.

Well, I would tell you that certainly we would expect the vast majority of them to be recognized. There will be a question of whether they could all be recognized or not..

Okay. That's fine. And just a follow-up on Jed's question. Obviously, the EC is a different thing. Can we expect to see any of the larger form factor EC is in the field in 2022..

As you said, we expect to start shipping units this year. Again, same question on revenue recognition. We’ll be -- get fully revenue recognized within the year. We've at this point not made claim to that, but we do expect to ship -- start shipping units this year.

And as we've said, we expect that that ramp up will continue more dramatically as we get into '23..

Sure. Got you. That makes sense. And then just seems out some folk’s stuff here. New one you'd mentioned that you're expensing a 100% of -- essentially a 100% of the cost of some of these units that are in the field awaiting recognition.

When you talk about that, a 100 million in OpEx for 2022, does some of that a 100 million includes the absorption of potential product costs that are out there but not recognized yet, or is that all like real OpEx?.

Yeah, good question. So as long as we're under development accounting, the OpEx would also include the product costs and future inventory purchases were making for future quarters or future years will all be expensed in that period. So that OpEx number includes the inventory and purchases for those products..

Okay. Good.

Would you care to break that $100 million down in terms of that product absorption versus like R&D and the normal course of business OpEx run-rate?.

Yeah. We've not guided to that and wouldn't comment on that right now. I think as we get our fully automated line up and running and the cadence of shipments finds its way to a more normal state of business, we could provide more guidance on that..

Okay. And then the last question from me -- sorry to beat you guys up.

When you do recognize revenue, does some of that OpEx reverse back to COGS or do you just add revenue with 100% fall-through or how does that actually work?.

So, we'll wait until we get to that point. I mean, there's certainly the opportunity to recognize revenue without the COGS recognize the revenue, and then the COGS would match the revenue or go to formal inventory accounting where you would see that. And we will guide on that when we get to that point..

Okay. Thank you very much..

Thank you, Joe..

Thank you. There are no questions at this time. Mr. Erik Dresselhuys..

Well, thank you all for joining the call today. In summary, we're more excited than we've ever been to be delivering our solutions in contribution to the global effort to de -carbonize the energy system. Governments and corporations have set ambitious goals and we are extremely well-positioned to help them meet those needs.

As a well-funded public company, we now have the resources to make that vision a reality. In the coming months, we encourage you to mark our progress with announcements on customer shipments, new projects, and continued expansion of our production facilities.

Until then we thank you for your time today, and we look forward to keeping you apprised of our progress..

This concludes today's conference call. You may now disconnect your lines..