Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listening 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..

Thank you and welcome to ESS's 2022 First Quarter Financial 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 first quarter of 2022.

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 and beyond.

The forward-looking statements that will be made on this call are based on information currently available to us as of today's date. 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 filings filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, the markets, the economy, and the current geopolitical situation.

You should not rely on our 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 this 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 for both management and investors excluding certain items that are not indicative of our core operating results.

Management uses non-GAAP measures to internally 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. With that, I'll turn the call over to ESS' CEO, Eric Dresselhuys..

Thank you for joining us. Today I will touch on our progress with installations in production and then share some color on the market. Our team made strong progress ramping our manufacturing operations in the quarter. We continue to build and ship energy warehouses, while increasing capacity and lowering unit costs.

In the first quarter, we shipped two energy warehouses to San Diego Gas and Electric and expect to complete our deliveries in the next week, The Cameron Corners micro-grid project.

In this deployment, six of our EWs will be used for energy shifting as well as supporting critical services during power safety shut offs, including a health centre, a library, a fire station, a school, two gas stations and a small retail strip. This is a truly exciting utility grade project that we're honored to help bring to fruition.

While we began 2022 slowed by the supply chain challenge that faced the globe, we have navigated the industry wide challenges and have strong confidence in our trajectory. We remain on track to ship 40 to 50 energy warehouses this year and our internal operation plans are generally proceeding well.

Our efforts to diversify our partnerships with our suppliers are paying dividends. And we are up and running with our new injection molding vendor.

In addition, while our supply chain electronics was less than optimal starting the year, we now feel we have a strong handle on securing the necessary components and expect to deliver on our production schedule.

I am pleased to share that our second semi automated line was delivered this quarter and our team is already working on bringing that online. We expect to see 100% increase from Q2 to Q3 and then a 50% increase from Q3 to Q4. We continue to expect our fully automated manufacturing line to be up and running in Q4.

Additionally, our design for manufacturing cost reduction is progressing well. Combined the automated line and the DFM efforts should lower labor input by more than 80% for each unit shipped, while dramatically improving production throughput.

A strong capacity ramp coupled with significant cost reductions will be instrumental in our efforts to accelerate our path to profitability. Despite the advances we made in supply chain and production improvements, as you saw in our earnings release, we did not recognize revenue in the first quarter.

Although we had a number of units shipped installed and working at the sights of our first customers in Q1, we ran into several unanticipated challenges that delayed our ability to recognize revenue on these units.

While we continue to make considerable progress across the operations of our company, further developing, our delivery and customer success team is a high priority.

Our plan is for this team to engage with each customer early in the contracting phase to understand the deployment requirements and then work with them to manage onsite testing and commissioning.

We believe this team will be critical to ensuring our customers quickly realize the value of our solutions and in the process to accelerating our revenue recognition. We are excited to share that we have recently hired the head of this team and have a number of new hires and existing employees slated to join the team.

As you have probably seen despite considerable macro uncertainty, the market dynamics for long duration storage continue to shift in our favor in a way we simply could not have imagined just a year ago.

Our inbound inquiries only grow more robust each month and we continue to see customers appreciate the unique attributes that make our technologies so capable of solving their grid storage needs. The most recent market news comes from Europe.

With the growing desire for energy independence, we are seeing countries pulling the timing of their carbon reduction goals. Long-duration energy storage installations are integral and the success of a renewable energy centric electricity grid and accelerated investment is following suit.

As an example, in April, the German government approved plans to have renewable energy comprised at least 80% of its energy generation by 2030 with a shift to nearly 100% by 2035. This pulls in their previous goal by 15 years.

Germany also took the significant step of committing to making storage a core part of the plan for the decarbonization of the grid. As a testament to the importance of grid storage to their plan, the German government came together to eliminate key administrative hurdles or its deployment.

They broke out storage on its own and it now joins generation, transmission and consumption as the four activities conducted on the electrical grid. This has the effect of dramatically improving the economics of energy storage on the German grid.

Additionally, Ireland's government pulled in its grid decarbonization goal to produce 80% of its energy with renewable sources by 2030. RWE a German multinational energy company has committed to invest up to €1.5 billion in Ireland, some current projects being developed. We expect to see more EU countries come forward with similar announcements.

So as you see the importance of energy storage is growing rapidly. Elon Musk himself also recently posited that for the entire world to transition, transportation, electricity and heating and cooling to clean energy, we will need 300 terawatt hours of storage. We think he's right.

Importantly, the headlines about how the earth will need hundreds of terawatt hours of storage are filtering through to our conversations with customers current and perspective not only about their immediate needs, but also what they expect to deploy in just the next few years.

We're hearing from Blue Chip tier one customers talk about their peers that they will not be able to secure the energy storage capacity they need, because global supply will not be great enough to meet the demand. This is particularly acute for legacy solutions that rely on increasingly scarce rare earth minerals.

In fact, incumbent storage technologies are facing a much more uncertain price curve than they did even six months ago, making our solution one that stores and releases energy with iron, salt and water. All the more attractive and stable and option 2022 will undoubtedly be a transformative year for ESS.

While we have facing challenges in our ramp, we believe we are on track to be the most viable lithium alternative grid energy storage system available. To do this, we will need to continue to hone in scale our manufacturing operations while reducing unit cost.

We expect to have shipped dozens of energy warehouses and have them up and running and multiple customers by the end of the year. We also expect our delivery team to have refined processes for best-in-class high prep and commissioning for our solutions at customer sites. Through all of this, we currently are in and tend to remain well capitalized.

And with that, I'll hand it over to Amir to cover the financials..

Thank you, Eric. Now I'll review our results. Unless otherwise noted, all numbers we talked about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to non-GAAP financial measures on our earnings release, which is posted on our Investor Relations website.

We shipped two energy warehouses and the first quarter to San Diego Gas and Electric and by next week, we expect to ship them our second EW this quarter. This will complete an order for 6 EWs in total that will help SDG&E to power a micro grid that they are deploying to support critical services in Cameron Corners, California.

With regards to the three units we shipped to two other customers prior to Q1, we did not recognize revenue in the first quarter on these units due to continued delays in achieving final revenue recognition hurdles. We are working diligently with customers to complete the process.

In the first quarter, we remained under development accounting rules, so the material overhead and labor costs we incurred and making our products we ship fall into OpEx resulting in zero cost of goods sold. Our non-GAAP operating expenses for Q1 were in line with our expectations at $19.4 million.

With that, we reported Q1 adjusted EBITDA of negative $19.2 million. We ended the first quarter with $213.5 million in cash and short-term investments. In the first quarter, cash used by operations was $19.4 million. The team has done a great job recovering from the challenges we face from supply chain shortages in Q4 and Q1.

While there continues to be broad based supply challenges affecting all manufacturing, we currently do not see any ongoing issues that will impact our ability to deliver on our plan of 40 to 50 energy warehouses this year.

If we ship all of these units and are able to recognize revenue for them in 2022, this would translate to approximately $10 million in revenue this year. However, given our early experience and deliberate approach to revenue recognition, we consider it likely that we will not recognize revenue in 2022 for all of the units we shipped this year.

Importantly, we continue to work closely with our customers on delivery timing, and have not had any order cancellations today. As Eric mentioned, we are also on track to execute the other two operational initiatives we spoke about last quarter, implementing cost reductions and automating our manufacturing line.

These initiatives will work in concert to dramatically lower the labor input into each EW as well as increased factory throughput. We are implementing design for manufacturability improvements in the product that should simplify and hasten product assembly.

We've also taken delivery of our second semi automated line and are working on bringing that up as quickly as possible. Our first fully automated line is still planned to come online in Q4. With these changes, we expect to exit 2022 with 750 megawatt hours per year of production capacity.

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

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

Certainly. [Operator Instructions] The first question comes from Colin Rusch of Oppenheimer. Please proceed..

Thanks so much guys and congrats on getting the unit shipped. But I'm curious to get a little bit more detail about what's the challenge with revenue recognition.

I would love to understand if there is some sort of technical hurdle if this is a time element of just needing to run the units at a certain level if their performance isn't getting up to what has been stated in your kind of sales agreements, trying to just get real granular in terms of what that problem is?.

Yes. Hi, Colin. This is Amir. Good to talk to you again. So I'd say on the rev rec, you're touching on a few of them, right. There is no real one thing. I think previously we shared that some of these are legacy contracts that we may have written a little bit differently have we issued them now. So I think there is some contractual things.

There are certainly some customer site learnings that we've had through the process. I think, in general, we're working through those challenges. I do not share any of the technical hurdles. We feel good about how those are progressing. We intentionally are being deliberate with revenue recognition.

And I can say working closely with our customers this quarter, we feel very good about our progress. And I definitely look forward to updating you on the next call in terms of our progress on rev rec..

Okay, that's helpful. And then can you talk a little bit about the pipeline? Obviously, there – I think we're in line with you in terms of the demand growth and need here.

But can you talk a little bit about the growth in the number of customers' total pipeline of products that you're looking at? And how many of those are standalone storage versus solar plus storage?.

Sure, Colin. Eric here. Thanks for taking the time. The pipeline continues to grow, as you say, a lot of the demand is coming from Europe, as we indicated. So although the domestic pipeline is growing as well, we've seen a real surge in the last quarter of interest out of Europe.

Most of that is not standalone, most of that is combined solar or wind plus storage. That seems to be the biggest driver right now as the driver – as the market driver goes for energy independence.

I think standalone storage still has a lot of applications, but both domestically and overseas, it's a combination of decarbonization and energy security goals. The total pipeline remains in line with where we were before about $7 billion in total opportunity.

What we are seeing is it's trying to pull in a little bit from a timing perspective in part driven to supply chain challenges with alternatives. So, we're working to get our capacity ramped up to address that as fast as we can..

Okay, thanks, guys. That's helpful..

Thanks..

Thank you. The next question comes from George – oh, my apologies, from Thomas Boyes of Cowen..

Thank you so much for taking my questions. Maybe just a quick one just on Energy Center versus Energy Warehouse kind of given the delay in the revenue recognition is.

Can we still expect Energy Center systems maybe in the 2023 timeframe? Or is that something that's kind of a little bit longer out now that we're focused more on Energy Center?.

No, we still expect that 2023 Energy Centers being deployed and made operational, so no change to the plan there..

Got it. And obviously, it's nice to see the improvement supply wise with injection molding. Just there are shortages for – on the semiconductor side. What kind of components shortages were there? Was this specific type of MOSFETs or anything like that? Any color there would be helpful..

I am not – in terms of – I'm not sure exactly which chips, where the shortage is, so I probably am not going to do a good job with that. What we found in general, we feel very good about where we are now in terms of meeting our near-term production goals. The challenge, of course, in general has been it's a game of Whac-A-Mole.

Small components and things that are generally not issues keep popping, kind of popped up. So we're just trying to be mindful of having firmer agreements with all of our suppliers across the whole of the supply chain, but no major issues today..

Got it. And then just one more around Europe and none of the kind of the projected units for this year are earmarked for that market, correct. This is something that would be resumed would probably be at more for 2023, okay..

Yes, I think, it depends a little bit on exactly the number of units we ended up shipping this year. I mean, we do have a couple of units. We do have units slated to go to Europe and some of those may ship to Europe this year. So we would expect that it's both the 2022 and 2023 thing that we will be shipping units to Europe..

Great. I appreciate the insight. I will hop back in queue..

Thanks, Tom..

Thank you. The next question comes from George Gianarikas from Baird..

Just like in high school, all over. Thanks for taking the time guys. Good afternoon..

Good afternoon..

A couple of questions. So first, when you look at the landscape, clearly, there couldn't be a more opportune time for your solution, given what's happening with lithium supply with lithium prices. I'm curious as to what the conversations are like that you're having. Your pipeline sounds like it's been stable, but the phone must be ringing.

Just can you share any anecdotes around pricing on the pipeline around – just conversations you've had with potential customers, anything you could share would be helpful. Thank you..

Sure. Eric here. I'll take that. And with a name like Dresselhuys, George, I experienced the same thing over the years. So you're right. The phone is ringing off the hook. We don't put any of the earliest kind of stage of inquiries from the market into our pipeline until they're more qualified.

So that we expect that that number will move as the opportunities move through the process. The driver is really two things colliding at the same time.

The first is that the need for storage is becoming more apparent and as I mentioned in the prepared remarks in places like Germany, people have realized that they need to clean up some of the regulatory or structural issues to help accelerate the adoption of storage, because of its importance to energy transition in general.

You do that at the same time that the supply chain for alternative technologies is getting tougher and that's the two things that are colliding. That has had an impact on price. At this point, lithium really sets the market price for storage, and then everybody indexes off of lithium's price.

So with the lithium price kind of declines, reversing and really meaningful price increase is starting to hit the market. That is resetting the market price for all types of storage and we're beneficiary of that..

And maybe going back, it was okay to the revenue recognition question. Can you share any incremental insights there? I mean, is the product up and running? Is it storing energy, anything that you could share that would give us comfort just around the functionality of the products you already shipped? Thank you..

Yes, George, this is a Amir. To your questions, yes and yes. I think look the focus early on was definitely hyper focused on the product. I think what we're finding is connecting the product to the grid, has certain dynamics. Different customer sites have different dynamics. So there has been a lot of focus there.

As Eric mentioned in his prepared remarks, we spent a lot of time really around the customer delivery organization and just making sure that those processes and challenges are met. And as I reiterated before, I feel very, very positively about the progress that we've made so far this quarter on that front.

So I would say we're feeling good about the direction it's moving..

Thanks gents..

Hello..

[Indiscernible] the same thing..

We lost the operator..

I am here..

This is Josh.

Can you hear me?.

Yes. Hi, Joe. We can hear you..

I don't know what's happened. That's weird. Okay. Well, I'll go ahead.

How are you guys?.

Yes, good. Good, Joe.

How are you?.

I was just like randomly saying hello. That's totally weird. Anyways, just to drill down on this more – obviously, you've got the performance in rev rec issues for the units that are out there. But you're saying we're not – because it's it may. And so you've got units in the field now.

You're saying that given the challenges we face, we're unlikely to see revrec on those units at any time during 2022.

Is that what you're saying?.

No, I think if you are talking about my prepared remarks where we've said that we plan on shipping 40 to 50 units this year? I think the intent of my prepared remarks was to communicate that, given our intentional revrec process, it's likely that there'll be some of those units that are not recognized in the 2022 year, not that the early units that we shipped would not be recognized..

Okay.

Well, then the obvious question, if we're trying to get from kind of the nitty-gritty of what's going on here with the units that are on the ground, is when it might be reasonable to expect those early units to begin manifesting as revenue?.

Yes, like I said before, we feel very positively about the progress we've made with those specific units this quarter. And definitely look forward to updating you on the exact timing of that on the next call. .

Okay, and just then, I guess, on an ongoing basis, do you guys have some plans, maybe to kind of update us a little bit about what the different hurdles are here that are preventing revenue recognition? Just kind of wondering what your strategy is around communicating on this issue going for?.

Sure. I think we've shared before that we intend to be very purposeful and deliberate early on, but that as we get our legs under us, both from a product standpoint, which we currently feel good about and the customer delivery site standpoint, which, again, we're making a lot of progress on this quarter.

We plan on pulling that revenue recognition process earlier and earlier in the process. So we'd be happy to kind of keep you updated as we develop that, that timing. .

Okay. And then just from a working capital standpoint then I’m just curious about how this works. I mean, the cash level not a huge problem this quarter.

But if you've got a situation over the course of the year, where you're ploughing, call it the equivalent of 40 to 50 units of energy warehouse out there and only recognizing a fraction of that for revenue, what does that mean from a working capital standpoint? And I think on the back of that, I might ask, do you have some kind of target cash balance that you're thinking about for the end of the year?.

Yes, so a few things to unpack there. So I think we're still very comfortable that we would end the year with more than $120 million in cash and cash equivalents. So I think that's one piece of it.

In terms of our working capital needs, in our cash burn, I think, it's important to differentiate between the revenue and kind of how we get cash on some of these deals. Obviously, right now, on the revenue recognition standpoint, we expect that to happen very late in the process. I would say that cash received by the company happens earlier.

So, those two pieces are separate for us.

And then lastly, just in terms of the burn, I think, what you can expect to see from us, as we're working on the design for manufacturability initiatives and the cost out initiatives to balance deploying significant product in the field with doing so at a time where we've already realized some of those cost savings.

So we're trying to balance that to make sure that our cash burn is appropriate, and that the longevity of the company is very strong..

Okay, thank you very much. .

Maybe the operator will come back here..

Thank you. The next question comes from Chris Kapsch of Loop Capital Markets..

Yes, good afternoon. I think you alluded to in your formal remarks notion that if you could structure your contracts differently than you have in the past that you would do that and pointing to this revenue recognition point.

So the question is, I guess what – can you share with us what the attributes or the inclusions in those contracts that would be different? Are you in the process of incorporating those new characteristics into any new deals that are being negotiated? And if you were able to retroactively apply those to the existing contracts, would the systems that you've shipped be recognizing revenue today?.

Yes, so a few things. So I wouldn't be comfortable going into the exact specifics of various customer contracts. I will tell you that there has been a lot of focus in this area. And the new contracts that we’re either in the process of signing or have signed definitely are more aligned to our internal processes. So that part is underway.

And the combination of our processes here with the way that we've structured the contracts, I would say that if we were starting out today, that I would anticipate that the revenue recognition process would have happened much faster than then we've seen play out. And again, that's a function of a lot of things.

Part of it being our own processes, part of it being the delivery realities, and part of it being customer sites grid connectivity. But again, I think if we were starting from square one today, that process would have happened much quicker, and we feel very good about how that's trending..

Okay, and if I can just follow-up on sort of a different take on the other question that was posed about just your system, these are the sort of the incumbent, if you will, the lithium ion energy storage systems that you would compete with.

So in the in the EV space, clearly a theme has emerged, where the projections of demand over the next decade, essentially, from the – passenger car sector, whether there's now doubts about that growth CAGR just from the absence of availability of enough battery materials, including lithium, and that underpins, of course, this strong pricing cycle for lithium.

But I'm just curious if the extent that you are seeing more interested in your systems, is it a function of that changing paradigm? Or is it more about just greater awareness of your solution? Or is it this emerging need and demand for a longer duration storage solution? Thank you..

Yes, sure Chris. Eric, here, I'll take that because it's a great question. And the answer is a little complicated, in that the answer was all of the above. It's the really the confluence of those elements you talked about, that I think, is driving the interest in the solution.

It starts with regulatory and policy goals for de-carbonization, and energy security. That remains the number one driver. And as people have become aware that these solutions exist, and they've started to appreciate the value of longer duration, energy storage, that event alone was all that was happening. And I think we feel really good about things.

You take that now combined with the shortage of the alternative solutions, specifically lithium, and that helps to drive increased demand.

And then I think the third thing that comes up is safety and sustainability, which have been on the table from the very beginning, are now getting a lot more attention as we increasingly have two things, one fires that have happened with large scale lithium batteries out in the field.

And the second is an increasing drive towards total carbon and total kind of environmental impact of solutions. We get a lot more inquiry now of people who are worried about those safety implications or kind of end-of-life disposal problems than we did even six months ago..

That's helpful. Eric. Actually, I was going to ask about because, I think, just in the last week, there has been more evidence of safety issues with, I think, a large scale tire, I think, in Korea with a lithium system installed lithium system.

So it's going to ask if the anticipated benefit from the reinsurance – how should I put, paradigm that you have, if that's actually translating into a competitive advantage as you as you engage with customers? Thanks..

Yes, so I think that's right. There was a player announced in Korea, there was also one in Arizona a couple of weeks ago. So it is a regular part of the news now and people are paying more and more attention to it.

So yes, the short answer is, I think, the safety benefits and the durability benefits of our solution are getting more attention than they did before. It really, like a lot of things in a new emerging market comes down to education, that these things build momentum as people understand them on an increasing and deeper level..

Thanks for the color..

Thank you. There are no further questions registered at this time. So that concludes the conference call today. You may now disconnect..