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 the star 1 on your push-button phone. I would now like to turn the conference over to Eric Beiland. Please go ahead, sir.

Welcome to ESS's 2022 Third Quarter Financial Results Conference Call. Joining me on the call today from ESS are Eric Joshua House, CEO, and Amir Maftakar, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the third quarter of 2022. This earnings release is available in 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, partnerships, financial performance, and strategy for 2022 and beyond. Forward-looking 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, issues with our partnerships, inflation, 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 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 both for 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. With that, I will now turn the call over to ESS's CEO, Eric Dresselhaus.

Thank you for joining us. Today, I will discuss our success with current and new customers, our operational challenges and successes, as well as recent market trends we're seeing, including the impact of the Inflation Reduction Act. ESS continued to gain traction across multiple fronts of the business in the third quarter, and the entire team here was thrilled to see our market buoyed by the tailwinds of the Inflation Reduction Act. It's clear that ESS is at an important juncture as a company. We continue to build a cohesive, highly skilled team capable of delivering a differentiated storage technology at scale that is ideally suited to couple with renewable generation in the global drive to carbon neutral. We're doing this in an unprecedented supply environment, just as the market we serve is expanding dramatically. First, I'm pleased to share that ESS has made great progress on our extremely important initiative to expedite the time between product shipment and revenue recognition. On the shipment front, we delivered an energy warehouse to our partner Carousel Energies near the end of Q2 for Sycamore International, a Pennsylvania-based technology recycler that integrated it with a solar array. And we were able to recognize revenue on that unit in less than three months. The commissioning of BW was accompanied by a ribbon cutting ceremony with a congressional delegation in attendance. Importantly, Terrasol placed a follow-on order for another energy warehouse at the Sycamore site to double their storage capacity, a strong indication of the unique value we can deliver. With that said, we have continued to experience supply challenges with a variety of components across the energy warehouse balance of plant. This is driven by the broad-based supply chain issues that are facing so many companies and compounded by our need to purchase in increasing volumes and incorporate new vendors as we scale. Even with this ongoing challenge, we are pushing ahead with production. We continue to build energy warehouses, but the nearly finished units are sitting in our production bay awaiting the parts that are delayed. We expect these units to be quickly completed and tested once we receive the final parts. While we didn't ship as many units in Q3 as we had hoped, we had many others in various stages of completion in the third quarter, and we feel we can ship 20 or more EWs in the fourth quarter. That will leave us below our original target for 2022, but importantly, we still feel confident in our ability to get to our exit run rate by the end of the year. These challenges obscure the progress we are making with our production processes. As a reminder, we generally speak about production in two categories, battery modules, which represent our core intellectual property, and balance of plant. On the battery module side, we now have two semi-automated lines running and have our fully automated line slated to be up and running before the end of the year. As our team works to optimize each of these lines to improve cycle time, scalability, and cost, we now have line of sight to exit 2022 with a capacity greater than our original target of 750 megawatt hours per year. On the balance of plant, we continue to make progress with our design for manufacturability initiatives that speed throughput, improve quality, and lower labor and its associated costs. At the end of the third quarter, We have already cut the labor input to energy warehouses by half from the start of the year and expect considerable additional improvements by the end of the year. We are in the midst of transitioning from batch to scale manufacturing and are optimizing our processes as we grow capacity. Importantly, I want to give a big shout out to the team that is working tirelessly to execute these improvements against the challenging supply backdrop. I would also like to welcome Vince Canino to the team. Vince joins us as Chief Operating Officer in September and brings a wealth of experience leading high-growth manufacturing organizations. I am thrilled to see the many new faces that have joined ESS in 2022 gel with the existing team to drive our progress. It's certainly an exciting time to be at ESS. We continue to make significant progress with customers. As you likely saw, last month we announced a transformative deal with the Sacramento Municipal Utility District, or SMUD. This deal calls for ESS to supply up to two gigawatt hours of long duration energy storage over the next five years in the form of energy warehouses and energy centers. SMUD is a leader in decarbonizing the electric grid. While California's objective is to have a carbon-free electricity generation by 2045, SMUD is targeting 2030, a full 15 years earlier than the rest of the state. Additionally, As another sign of the significance of this transaction, ESS and SMUD will team up with local colleges and universities to establish a center of excellence to educate the workforce needed to install and service the burgeoning long-duration energy storage market. We're thrilled this progressive utility has chosen ESS as their partner as they drive forward with their zero-carbon plan. And as exciting and transformative as this deal is, let's put in perspective in terms of the market size. Smug provides electricity to 1.5 million homes, and this deal will only supply a fraction of their needs. And Smug serves only about 10% of the 15 million homes in California. In fact, California represents roughly one-tenth of the storage power needed in the U.S., which is estimated to be about 50 gigawatts. As utilities and jurisdictions around the world progress their decarbonization plans, it will quickly recognize the critical role of long-duration energy storage in achieving their goals. This deal comes on the heels of the announcement of our supply partnership with Australia-based Energy Storage International Asia Pacific, or ESI. In fact, I was in Australia just last week attending the All Energy Australia Conference and could not have been more impressed with how the entire market is moving forward to drive decarbonization and accelerate the demand for long-duration energy storage. The ESI relationship expands our reach into a new and fast-growing geographic region, one we expect to offer significant opportunities over the years to come. When combined with the SMUD agreement, we've established a meaningful base of business for ESS. And the last time I spoke to you, the Inflation Reduction Act had just passed the Senate. Now that it has been signed into law, it is clear that the IRA will have a dramatic impact on deploying technologies like ours, along with many others, to decarbonize the domestic energy system. We can expect our customers to receive a baseline investment tax credit of 30% for a battery project, and that incentive should increase by another 10% for deploying domestically sourced ESS iron flow batteries. With an additional kicker possible for citing the project in an economic or energy development zone, our customers could receive a total tax credit of 50% or more. These are benefits our customers can access without any application process for the next decade. On top of that, our customers can also apply for certain available grants, and if approved, that can knock more than two-thirds off their total project costs, approaching 70% savings. Additionally, ESS is expected to receive a production tax credit of about $45 per kilowatt hour that we ship, while solar plus storage without incentives was already regarded by many as a better capital investment than other generation options. The combined impact of these initiatives produces a dramatic improvement in the ROI of investing in carbon-free energy projects. Coupled with the increasing prices for storage that we're seeing in the market today, We believe this can provide a considerable accelerant to our growth and profitability objectives. The combination of incentives represents an unprecedented catalyst to our market, both customers and suppliers. We are excited to capitalize on the opportunity it presents. With all of this excitement in our business and the market, it's bittersweet to announce that Amir Mostakar will be leaving ESS. Amir has been a significant contributor to the early development of the company, and we thank him for his many efforts. We are very excited to announce that Tony Robb has agreed to join as our new CFO and look forward to everyone getting to know Tony over the coming weeks and months. We've included details in the press release, but I'll quickly say that Tony brings extensive experience across a range of industries, and we are delighted to have him join the leadership team. And with that, I'll hand it off to Amir to discuss the financials.