ESS Tech, Inc.

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. At that time, if you have a question, you will need to press star 1 on your push-button phone. I would now like to turn the conference over to Eric Bylin. Please go ahead, sir.

Welcome to ESS's 2021 Fourth Quarter Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhaus, CEO, and Amir Mafikar, 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 for both 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 US GAAP and non-GAAP results are presented within our earnings release. And with that, I will turn the call over to ESS's CEO, Eric Dresselhaus.

Thank you, and welcome to ESS's first earnings call as a public company. I will start today's call by giving you some context on the market, then share some details on our fourth quarter performance and product deliveries, and then discuss our go-forward plan. after that i will hand off to amir to discuss financials and our outlook 2021 represented an unprecedented transition not only for ess but also for long duration storage the forecast for long duration storage at the beginning of the year were dwarfed by those exiting the year and the momentum is not slowing it has become abundantly clear that scalable safe grid storage that lasts for more than four hours is imperative to moving to a clean energy future. In the past, storage has meant lithium-ion because it was the only available technology. Now, with continued proliferation of intermittent renewables like solar and wind, the need for storage that can discharge over six, eight, and even 12 hours has become imperative. The acceleration of storage installations supporting longer durations and more varied operating environments and use cases is the catalyst for the industry to move from legacy technologies to those that were tailor-made for these applications. And it's easy to find evidence of this transition in the news on a regular basis. Just last month, California dedicated $380 million to support long duration energy storage projects over its next two fiscal years. These funds are targeted to support grid reliability, adding resilience against emergencies such as wildfires, certainly applications of lithium ion is not suited for. Our project with San Diego Gas and Electric is a great example of this coming to life. Long duration storage paired with renewable generation to provide resiliency to critical infrastructure while also helping to safely decarbonize the grid. In November, the newly formed Long Duration Energy Storage Council released a study with McKinsey delineating the needs for long duration energy storage, focusing on the need for storage that can discharge for more than eight hours. Among the findings, the authors concluded that by 2040, LDES needs to be scaled up to 400 times present day levels to between 85 and 140 terawatt hours of capacity, which would require between 1.5 and 3 trillion in investment. Leading companies such as Microsoft, Google, Shell, Rio Tinto, and dozens of others have joined the council, highlighting the importance these large energy users and producers place on long-duration storage and its place in driving the energy transition. And finally, earlier this month, the state of California approved plans to add over 25 gigawatts of renewables and 15 gigawatts of storage by 2032, effectively raising the state's renewable portfolio to 73%. But this is not some promised land off in a distant future. The inbound inquiries we receive continue to rise and the quality of the opportunities behind those inquiries is improving as well. These are organizations that know that the future entails a move away from lithium ion. And although we have only recently begun to build our sales and marketing efforts, we already have direct visibility through customer relationships into vast opportunities that have grown almost exclusively from inbound inquiries. There is an undeniable need to solve for long duration storage. And while the flood of LDS demand has brought new technologies into the fray, we remain confident that we have the best solution across cost, reliability, safety, environmental friendliness that can be deployed in the market today and comes with UL certification for battery modules, energy storage systems, and fire safety. We believe the design work that got us to this point was ingenious. Our iron slow battery technology is relatively simple to build reliable and has at its core very inexpensive input components for a grid storage system, iron, salt, and water. ESS separates the power from the capacity, which makes this 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 of energy warehouses. As examples, we faced limitations with some injected molded parts, as well as challenges securing certain electronic components. We are 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 regiment of testing that have been demanded of them. Three units are fully operational and running at a commercial customers campus in Southern California and at SoftBank's testbed in Northern California. Additionally, the first two units we shipped to SDG&E are awaiting testing. We're excited to have undertaken this next chapter and continue to prove that ESS's 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 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 shipments as well as commencing shipments 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 soldered 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 unit shift, thereby minimizing cash burn. Importantly, we have 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. Thank you, Eric.