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spk07: 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 Byland. Please go ahead, sir.
spk01: Welcome to ESS's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhaus, CEO, and Tony Robb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fourth quarter and full year 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 2023 and beyond. The forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ maturely 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 SEC, 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 for both management and investors by excluding certain items that are not indicative of 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's CEO, Eric Dresselhaus.
spk02: Thank you, Eric, and thank you all for joining us for our fourth quarter and full year 2022 earnings call. Today, I'll review our financial results, operational progress, recent wins, and the impact of the Inflation Reduction Act. I'm joined by Tony Robb, who recently joined ESS as our chief financial officer and is joining us for his first earnings call. We delivered 14 energy warehouses in Q4 and 20 for the full year. The 14 EWs in Q4 is a record for ESS, and we're extremely excited to see this growth. Although it is a bit less than the higher end we had targeted, it reflects our increasing ability to navigate a challenging supply environment and drive an upward trajectory in our production capacity. We expect to recognize substantially all of the revenues from the 14 EWs we delivered in Q4 later this year, and I'll let Tony cover that. We finished out the year having made strong progress on our operational initiatives. On the power module front, our target was to end the year at 750 megawatt hours of annual capacity, and we exceeded that, achieving 800 megawatt hours of annual capacity. The team did a great job of getting the fully automated line up and operational and delivering efficiencies across all three lines to help us achieve the additional capacity. During the fourth quarter, we successfully finalized a number of important design for manufacturability initiatives that lowered the labor we used to build EGW. With better processes and a second generation design that is easier to manufacture, we have also been able to dramatically reduce the time required for our final testing process, another key facet of getting our products out the door more quickly. All of this is difficult and complicated work. we started the year with aggressive ambitions to take cost and labor out of each unit we build as we aim to dramatically increase capacity. That effort unfortunately coincided with one of the worst supply environments and tightest labor markets the US has ever seen. ESS persevered and we expanded and strengthened the team. We redesigned a number of assemblies within our EWs to simplify manufacturing while looking to onboard new vendors that we believe could deliver reliably at lower cost and higher volume. We brought on new automated manufacturing processes. We built and trained a team from scratch to help customers deploy our products at their sites. Our technology team has increased the energy density of our electrolytes by 25%, improving our cost per kilowatt hour and increasing performance. Again, this has been hard work, and there have been bumps in the road as we scale a unique patent-protected technology in a fast-growing market that demands a new solution. But we've made significant progress in reducing cost, improving quality across the board. To accomplish this through 2022, we added key leaders across engineering, operations, finance, legal, and customer success that bring deep experience to the challenge of scaling a company for growth and profitability. These new leaders are professional operators, that are accelerating the progress we're seeing at ESS. As a notable example, our customer success team is working collaboratively with customers in the field and has made great progress accelerating the EW commissioning process. For consumers energy, despite temperatures as low as six degrees Fahrenheit at the customer site, the team was able to deliver and test the energy warehouse, a great sign for the team and our ability to manage the process to implement our technology on a customer site. Our internal collaboration between our customer success team and our Wilsonville operations team has played a critical role in this progress. In a virtuous cycle, our customer success team has provided valuable feedback from the customer sites to our ops team on changes they could implement to packaging and delivery to speed commissioning. It's great to see the teams working together to improve the customer experience. I'd also like to share some detail on two very interesting customer wins we recently secured. In the fourth quarter, we signed a deal with Schiphol Airport in Amsterdam, the second largest airport in mainland Europe. Schiphol is driving to be emission-free by 2030 and is looking to replace the diesel ground power units that provide electricity to airplanes while they're at the gates with fully electric versions. In this pilot program, REW will charge these electric ground power units with clean, renewable electricity. At Forward Thinking Airport, Schiphol also leads the tulips consortium of European airports that is working to accelerate the implementation of innovative and sustainable technologies to reduce emissions at airports. I had a chance to visit with the Schiphol team in mid-February and was impressed with their vision and the critical role they believe battery storage will play in decarbonizing airports. We believe this initial installation has the potential to unlock a huge market opportunity across Europe and beyond. We also signed a deal to deliver two EWs to Turlock Irrigation District. Coined Project Nexus, Turlock Irrigation District will conduct a test installing solar panel canopies over its irrigation canals, a first in the United States. This installation is expected to create the double benefit of producing clean electricity as well as mitigating the evaporation that occurs from irrigation canals, two critical needs in California. In fact, the cooling effect of the water can actually increase the solar panel's efficiency. Funded by the state of California, the pilot project is expected to be underway early this year and completed by the end of next year. This project creates an opportunity for up to 3 gigawatts of our environmentally safe, non-toxic batteries to be paired with 13 gigawatts of potential solar that could be installed over California's canals alone. We are proud to have been chosen to be paired with the solar installation and excited about our opportunity from this innovative approach to decarbonize in the grid. Each of these wins elicits a unique and valuable application for long duration energy storage that represents opportunities for projects that could generate significant additional revenue for ESS. ESS is certainly fortunate to have such a compelling technology to address a critical and burgeoning market with applications so broad that we could not begin to imagine them all today. And as such, ESS has shaped its go-to-market strategy to leverage our unique position in the market. We are focused on customer relationships and applications that, once the technology proves itself in the use case, have the potential for considerable upside. We are excited about these two programs and look forward to the many that come as we strive to help decarbonize the grid. I would like to quickly revisit the anticipated impact that the Inflation Reduction Act, or IRA, will have on ESS and our market. We are still waiting for the IRS to enact the IRA rules, so the full impact likely won't be known until that is done, but we are excited about how discussions around long-duration energy storage programs are accelerating with customers. With customer investment tax credits that could save them up to 50% off our product cost, Coupled with a production tax credit of about $45 per kilowatt hour for ESF, the economic viability of any battery storage project has dramatically improved. I'll give one example. Everyone has likely read stories recently about grid congestion issues across the United States and around the world. With incentives for standalone storage in the IRA, we're getting a lot of interest from traditional utilities to use long-duration storage as a deferral of grid investments. an application ideally suited for our solutions. With proprietary technology based on abundant and inexpensive iron, salt, and water, we believe ESS remains very well positioned to capitalize on the opportunities to come. Moving on to our plans for 2023, we aim to continue the progress we are making across manufacturing operations and market penetration. We built substantial capacity during 2022, but we're hindered from achieving our potential by continuing supply challenges largely across the balance of plant. Our focus in the coming year is clear. We are aiming to strengthen our supply base for consistent, timely delivery at greater scale while driving down costs across labor and cost of goods as we drive toward unit profitability. We also intend to take a responsible approach to growth in the coming year, as we balance delivering product with managing operating costs. We signed landmark deals in 2022, first with SMUD for two gigawatt hours, which has now given us notice to proceed in the first phase of this multi-year project, an ESI AP with potential to be even larger. This in addition to the numerous other initial deployment opportunities that have the potential for considerable upside. We entered 2023 completely booked for the year and believe by the impact of the IRA, we expect to sign deals to book out our capacity in 2024 and beyond. Given the ongoing uncertainties, we will defer providing guidance at this time. We look to provide further updates in the coming quarters. We plan to ramp deliveries and installations throughout the year and remain tremendously excited about how the prospects for the business continue to grow. But given the current environment, we believe it is best to refrain from giving specific guidance for the coming quarters or the year. And before I hand it off to Tony, I'd like to address the short seller report that was released in December. I want to set the record straight. The central claims of the report are that our customer ESI AP is a related party of ours and that it's new manufacturing facility that will complete final assembly of our EW systems in the future is not being built. That is simply not true. Let me be clear, ESS has no ownership interest in ESI, zero, and we would direct you to our SEC filings for further proof. As to the new facility, ESI broke ground last year and site preparations are progressing. The balance of the short seller report is mostly a combination of hearsay, misleading statements of facts we have already shared publicly, and various disparaging statements about members of our team. As the authors clearly stated in the introduction, and I quote, this report and all statements contained herein are the opinions of Grizzly Research LLC and are not statements of fact. We continue to explore our legal options and will vigorously defend ourselves against the false claims made in the short seller report.
spk10: With that, I'll turn it over to Tony to cover our results. Thank you, Eric. I'm very excited to be on the team. Less otherwise noted, all numbers we talk about today will be on a non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our investor relations website. As Eric shared, we delivered 14 energy warehouses, which met all the contractual requirements of our customers, including title passing and risk of loss. However, full criteria for revenue recognition under GAAP had not been met as the customers did not take full control of the units, which occurs once the units are transferred via the shipping method. As a result, we did not recognize material revenues in the fourth quarter. Revenue will be recognized based upon contractual shipping terms unless unique customer-specific acceptance terms exist. We remained under development accounting rules in Q4 So the material overhead and labor costs we incurred in producing the products we've delivered fall into OPEX, resulting in zero cost of goods sold. Our non-GAAP operating expenses in Q4 were in line with our expectations at $28.2 million. With that, we reported Q4 adjusted EBITDA of negative $27.5 million. We ended the fourth quarter with $139.8 million in cash and short-term investments. which was well above our prior expectations and puts us on very solid footing from a cash and liquidity standpoint leading into 2023. We plan to take a prudent approach to our ongoing ramp this fiscal year. We are balancing our customer commitments with our desire to scale up our operations in what continues to be a challenging supply environment and our plans to further reduce our cost of goods sold. As we execute our plan in the coming year, We believe we have ample liquidity to operate the business through the balance of this year and into 2024. And with that, I'll open it up for questions.
spk07: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Thomas Boyce with Cowan. Your line is now open.
spk11: Thanks for taking my questions. Obviously, I appreciate you guys aren't giving any guidance for 23 at this time, but I was just maybe wondering if you could kind of walk us through what maybe some reasonable, you know, non-GABCRS margin expectations would be for the energy warehouse. You know, just thinking about the margin profile there now that you have both the semi-automated and fully automated lines up and running. You have the initiatives for design for manufacturing starting to kind of reduce costs. I'm just wondering how we should think about that product.
spk02: Yeah, sure. Thanks, Tom. So, you know, I'll jump in, Eric, here to take that because there's a little bit of history involved. You know, we've been very focused, as you noted, on driving costs out. And we've made, you know, really substantial progress. Our unit costs have been more than halved in the last year, year and a half since I've joined. And I think it's also important to note that when we look at total costs, it kind of comes in four categories as you think about the gap implications. Of course, there's direct materials costs, which we're driving out through improved designs, vendor upgrades, and of course, better volumes. We're taking out direct labor costs that comes from improved design for manufacturability, putting in those automation lines. And we've noted that we've made substantial progress in taking out labor content there. And then, of course, as we get up to normal production operations, we take out scrap and warranty, which is really positive and, of course, reflects in higher quality. The last spin, and this is where it gets a little bit complicated, is that there are indirect and allocated costs, the building, the facility, the supporting teams. Those really self-cure in terms of the margin contribution. as we get to higher and higher volume. So we're talking about driving to unit profitability on the first three, knowing that the fourth category takes care of itself with volume. And we're in a great place with the costs we've come out. We haven't announced a specific target, but I think the way to think about it is we'll cross that line on unit profitability in the next 12 to maybe 18 months on the long side. It's very much the focus of the company. We're watching inflation along the way, but a good piece of news for us is since our product doesn't really have a lot of high volatility commodities in it, we don't have lithium or nickel or cobalt or any of the things that are subject to wild commodity price swings, we have a very clear line of sight to get into that unit profitability.
spk11: Got it. No, I appreciate the color. And then maybe just for my follow-up, Could you talk about some of the challenges around just the manufacturing of the EWs, you know, heading into the end of the year? I believe the original target, you know, in the high end was closer to 20 units. But, you know, what type of supply chain issues or logistical challenges were there? I know, you know, kind of semiconductor supply chain challenges have been kind of a perennial issue. I was just wondering if there were specific shortages that you could highlight that you think will ultimately resolve themselves over maybe the next 12 months.
spk02: Yeah, sure. Well, most of the challenges have been on the balance of systems. So it's not the core stack, battery stack part of it. It isn't the balance of system. It is the things that have been problematic have really skipped around. So chips, as we've talked about in the past, are an issue. Anything with power electronics has got supply chain challenges. We've had some smaller challenges with things like pumps that I think are mostly resolved. Part of what we've tried to do, and I think we felt much better at the end of the quarter and going into this quarter, is that as we move through and upgraded to more reliable, more scalable vendors, we hope that we've laid in enough visibility to take care of those problems going forward. We didn't see anything that we felt was a systemic problem or was going to be an ongoing drag. It's just the kind of the chipping away of individual components that seem to have issues
spk07: uh and then and then resolve themselves got it appreciate it jump back thank you thank you for your question your next question comes from the line of colin rush with oppenheimer your line is now open hey there this is andre on for colin
spk04: With the completion of the automated line installation, can you give a sense of what the yields are looking like so far and the rate of improvement that you guys are seeing?
spk02: I think too early to put a specific number to it because we just commissioned the line, so we're ramping up its production through this quarter. We still have our semi-automated lines, which are carrying most of the load in the near term, but it was certainly sufficient quality. that the team officially commissioned the line and signed off from our vendor partner who was helping us set it up. So we feel very good about the path that it's on.
spk03: Got it. Thanks.
spk04: And just as a follow-up, could you give us a sense of trend lines for OPEX spending?
spk10: Yeah, I think, hi, this is Tony. So at this point, I think we haven't provided any guidance in terms of what that might look like going forward. But if you take a look at where we were in the fourth quarter, we feel like that's a fairly adequate level of spend. the change between third and fourth quarter, there was too much of a change there. So we're looking to maintain.
spk03: Great. Thank you so much.
spk07: Thank you for your question. Your next question comes from the line of David Sunderland with Baird. Your line is now open.
spk05: Hey, guys. Thanks for taking my question. I wanted to ask about I wanted to ask about any challenges you may have had with validating the technology to customers, and then stemming from that, if a few of these bigger deals like SMUD and the Amsterdam airports have kind of been proof points, or if you've seen any uptick in demand following those.
spk02: Sure. Well, I'll take that, Dave. So we talked about the biggest challenges that we've had in the field that we've been working through is how our product interfaces with kind of the grid or third-party system. But there's a lot of complexity that we've had to work through over the course of the year to demonstrate not just the core performance of our product, but really how it interacts with other people's products. So that's been a chunkier process than we had expected, but I think we've moved through it pretty well. And some of the more recent units in particular that we've shipped here in the States to folks in commercial applications or some of the units that have shipped down even as far away as Australia have performed quite well. And the time to commissioning, as I alluded to in my prepared remarks, has really started to shorten. So that's, we think, fantastic. The interest has peaked quite a bit. I think it's a combination of some of the announcements and people seeing the different use cases for long duration storage and where it comes into play. I don't frankly think a lot of people think of something like the Schiphol Airport and said, wow, that was an obvious application that I expected for long duration storage. Yet when they understand what the application requirements are and how our technology is really uniquely well suited because of its safety, reliability to be in an airport environment, the response we get is, wow, that's obvious. Now that you say it, it makes perfect sense. The last thing I'd say is that there has been a big uptick in interest relative to the Inflation Reduction Act. But as I mentioned earlier, it would be great to get the final rules in terms of the IRS's administration out the door, because we have had some people You know, where we're getting into conversations and planning projects, but they're hesitant to, you know, to go to, you know, full commitment until they know what those IRS rules are.
spk05: Thank you. That's very helpful. And actually, your second bit on the IRA there took away a big part of what I was going to ask for a follow-up. But any visibility you have into when you are going to realize those benefits, if it's direct pay, or how you incorporate those benefits into future contracts, or any read, I guess, on when we might know more. Thank you so much. Yeah, sure.
spk02: Sure. So I'll tell you what we know, which is that the announcements that have come out, public announcements that are available, have indicated there will be further indication here at the end of March. I don't know that that will be final rulings, and it may be different across the two parts. So just to reiterate, there are two parts of the IRA that were really the most impactful to us. There are a number of other benefits as well, but the two most important ones are the investment tax credit that our customers will qualify for and then the production tax credit that we will qualify for on the production tax credit we feel those rules are pretty straightforward and we have such a high domestic content requirement and we've been doing this you know for for years now as we ramp up so we don't feel there's any risk on that we're accruing right now for any units that ship we are keeping track of How many units we've built and how many units we've shipped on the assumption that we will get our production tax credit for those units and that we will have direct pay available to us because the law has been pretty clear on that. What's been a little bit more complex are some of the rules around things like the domestic content or economic development zone adders to the IPC. So you may recall that the base load of the ITC is about 30% and now does include standalone batteries as well as batteries when they're deployed with solar or wind. But that 30% number goes to 40% and then on up to 50% or more based on qualifying for the domestic content header or for these economic and energy redevelopment zones. And those are the rules that people are most curious because they're new So there really isn't as much kind of history to go point to. So I think once those rules are clarified, that will help give people the comfort to move forward.
spk03: Thank you.
spk07: Thank you for your question. Your next question comes from the line of Joseph Osha with Guggenheim. Your line is now open.
spk08: Hey there, guys. Thanks for taking my question. I've got a few here. The first, you know, Eric, you talked about capacity and exiting the year at 800 megawatt hours. I'm curious, the previous plan had been to continue expanding that number. Might we assume from the tone of your comments that you're going to slow that pace of manufacturing expansion?
spk02: Yeah, I think at least as it relates to stack manufacturing, we've done a really good job with the three lines and now have plenty of capacity for a bit of time. So I think we'll focus on ensuring that we've got capacity to build out more systems in addition to that and then keep a track of how the backlog is booking up. There is a lead time for automation equipment that you have to be sensitive to. So if you order new automation equipment it doesn't show up the next day. So you're really planning on where the puck's going to be, you know, 12 months into the future. And so that's the one caveat I put to your comment.
spk08: Okay. All right. Well, that's helpful. Thank you. The second question, just to drill down on your comment about the 14 units. So those are going to be recognized in Q1 as revenue. Is that correct?
spk10: yeah hey this is tony so those are going to be recognized in 2023 um so these units uh you know as the company's been working aggressively to get get those units out at the end of the year um we met you know contractual uh terms legal terms to transfer uh title and risk of loss to the customer at the end of the year uh they are under various different types of contractual terms. The exact timing of when that revenue will be recognized will occur in the year. However, basically, for us to recognize revenue on those units, the control of those units must pass fully to the customer, and that either occurs when the customer picks it up from our dock all the way to once it gets on the ship or truck or train all the way to the point where it could be arriving at the port for that customer. So there's various timings that impact when that revenue will be recognized and it will be in 2023.
spk08: Okay. And can you remind me of who those units were headed for?
spk10: I think what we've disclosed so far is that there's units that were going to ESI and to Schiphol Airport. I believe all that's been published so far.
spk02: And some of them in the Q4 units were the CMS unit, which was also announced as part of the delivery.
spk08: Correct. Okay. And then the last question for me before I jump back in queue, if you look at the rate of cash burn here, Obviously, you spent some, you know, you've been building some stuff, and it sounds like that's slowing down, that you've burned, you know, about $100 million, you know, since the December quarter of last year. That's probably not sustainable, given, you know, what it sounds like I'm hearing about this year. So, can we assume that you're going to take some steps to attenuate that rate of cash burn?
spk10: Yeah, look, I think... If you think about that cash burn, a lot of that is ramp-up of manufacturing, yields rework, scrap, and material used on earlier units and warranty costs associated with those as the company ramped up the business. And our objectives this year are going to be to focus on reducing the cost of the unit and continuing to improve yields uh and and reducing our scrap rates so so obviously a big push for us will be to be a lot more efficient with how we manufacture which is a big point of our a big usage of our cash okay thank you thank you thank you for your question next question is from the line of chip moore with ef hutton your line is now open
spk06: Hey, good evening. Thanks for taking the question. I wanted to follow up maybe on that last one. Joe's question, you know, you talked about driving towards unit profitability, I think, over the next 12 to 18 months. Maybe just expand on key initiatives there. Is it sort of the blocking and tackling on some of the things you just talked about or anything else we should take into account?
spk02: yeah uh thanks for the for the question chip i think it's really a lot of blocking and tackling it's some of it as i said comes from volume uh and some of it comes from the design improvement so it's that the balance uh which is the blocking and tackling balance is to um you know implement the upgraded uh designs would make it more manufacturable improves quality and then as we hit those and implement each of those changes, the profitability story of each unit gets better, which narrows that loss gap, and we kind of cross over somewhere outside of 12 months from now. But it's not a cliff, right? It ramps down over time as you approach the crossover point. And I should point out, it doesn't end there. Then we just keep driving and driving to keep taking costs out as we ramp up volume, and that's what builds the margin story of the company.
spk06: Yeah, makes sense. Thanks, Eric. And maybe one on IRA incentives. You know, you did a good job talking about the dynamics there, I think. I guess specifically, I thought I'd read that the DOE was going to do some funding for some demonstration projects in the space. I think it was like a 50% cost share. Is that an area you think you'd be active in, or is that not as relevant for you guys?
spk02: Yeah, well, the way I think we would be active in that, we've looked at some of those funding buckets. Our approach would be to partner with an end user to apply for the money together. So in our view, since we don't want to be kind of an owner-operator-developer, I wouldn't probably go and apply for a grant to do a project that's an ESS-owned, ESS-operated project. But what I would do is get together with, you know, a municipal commercial customer, a developer, and look at a project that would qualify for grant funding where our technology would be involved and incorporated into the project.
spk06: Got it. Okay. Makes sense. And maybe just a last one, you know, back to, I think you mentioned, you know, sort of lead times on automation, automation, automation equipment, you know, not being overnight. When, when would you have to make a decision? Let's say, you know, we get some more clarity on, on some of the Iris stuff and demand really takes off, you know, is that sort of like a six month decision or any way to handicap that? Thanks.
spk02: I mean, I think it's at least a six, probably closer to a nine-month decision. And I haven't, I will profess, I haven't looked into all of the potential mechanisms for, you know, acceleration and expediation of those kinds of things. The good news is that a lot of the, you know, the way that the industry works, a lot of the project plannings tend to be, you know, nine to 12 months out into the future anyway. So we do get really pretty good visibility of into the shipment plans and the customer deployment plans. And so I think that it won't be a constraint to us in terms of building the capacity to fill it out based on the planning time horizons of the industry.
spk06: Yeah, that's perfect. Yes, you can align it to maximize the investment. Okay, thanks.
spk07: Thank you for your question. Your next question comes from the line of Chris Cash with Loop Capital. Your line is now open.
spk09: Yeah, good afternoon. Mostly follow-up to some of the discussion items here. I'm just curious on the comments around cash burn and just as you look to, as you call this, and crossover to break even, I'm assuming you're factoring in production tax credits. Any way to quantify how much you anticipate that will diminish the cash burn? And curious if you know yet, will you be getting those for, you know, for the kilowatt hours that you've manufactured to date? Or is it, you know, so including inventory, or does it have to be capacity that's shipped or recognized on a gap basis? Any color on that?
spk02: Yeah, sure. Well, I can tell you what we know, but you've hit, Chris, a great point on why everybody's so anxious to get the details of the IRS rules out, because the details matter, and they probably matter more at the IRS than they do most places, right? So what we expect, what we believe is that the production tax credit for us is about $45 a kilowatt hour, at unit rated capacity. So it's a little bit of a derivative of each of our battery cells. And important to point out, the production tax credit in our case applies to the battery cell. So the actual energy storage unit balance of plants in this case doesn't matter. And that's $45 a kilowatt hour. And what we know for sure is that it's something that is shipped to a customer. It has to be shipped to a third party. And that clock started on 1-1 of this year. So anything that we build or ship, even if we built it before, but if we ship it and that transaction takes place after the first of the year should count towards the production tax credit. I don't believe there will be any direct lines to accounting rules. I think that's a very different category, but I think you will have to prove that you sold it to a third party.
spk10: Tony, I was just going to add in that we factored into our cash burn assumption. Any benefit of that? So anything that we could realize this year would be a net positive for us.
spk09: So upside to the cadence that you sort of communicated in terms of the cash burn, it sounds like. Okay. That's the third thing, if I had that right. And the other follow-up I had was, yeah, got it. The other follow-up I had was on the benefits from the IRA with respect to just the commercial momentum behind the market's development and Just curious, I understand you're not really comfortable or in a position to provide guidance given all the dynamics, but can you just talk about the nature of the engagement with customers and how that's manifested in either discussions or backlog or funnel? Any way to quantify that or characterize that sort of market development, if you will, from an engagement with potential customers?
spk02: Sure. So the way I guess I would describe it is, and I would certainly hope that everybody would appreciate that nothing about providing guidance at this point in any way, shape or form is a diminishment of our enthusiasm, excitement about how the market is growing, because it really has been a fantastic ramp up in the interest across the board. And I should add, because I don't think we said anything in the prepared remarks. You may have seen that Australia has announced an IRO-like incentive program, and there has been progress made in the last, you know, 35, 40 days in Europe to have a similar incentive program. And I think it'll look different in the details, but directionally the same in Europe. So there is a ton of tailwinds coming in to build market momentum around that. We haven't dimensionalized uh a total pipeline kind of impact yeah because it frankly those if the numbers kind of get crazy big and i'm more for my sense two cents uh focused on the things that are more progressed through the uh through the sales process um what i can tell you for sure is that with ira and the and the uh and the investment tax credit you're now opening up use cases that before people might not have thought to be cost effective. And the one that I mentioned earlier, I think is really worth calling out. We were at a conference last week where, or two weeks ago, excuse me, where CalISO, the operator of the California grid, hosted a panel on using batteries as a deferral for T&D investment. And utilities are now looking at energy storage, which could go into their rate base, at a very favorable set of terms because of the investment tax credit as a deferral towards T&D investments on their side. Those were conversations that we just weren't having a year ago before the IRA came onto the scene. So it's not maybe orders of magnitude of growth, but it's multiples of growth in terms of the interest in the use cases. And we just have to keep moving through the process to continue to, you know, move those to the sales funnel and ultimately move them to deals.
spk09: That's helpful, Collar. Appreciate that. One last one. You mentioned the revenue recognition in calendar 23 for what's going to ship. Is that a prelude to emerging from development accounting or am I completing, you know, two different considerations? Thanks.
spk10: Well, sort of, yeah, they are. Obviously, as you recognize revenue over time, it doesn't make sense to remain in R&D accounting, but there are two different criteria to transition. So, they're not linked together, but our expectation from an R&D accounting transition is that we will be transitioning this year. And there's some more work for us to do to determine the appropriate timing, but we're still expecting to transition this year.
spk09: Right. And that's what I was really getting at. And then when that happens, would there be sort of a pro forma reset to as if this happens? Let's just say it happens in, I don't know, the fall. Would there be a pro forma reset to recast the entire calendar year?
spk10: on uh you know on a post development accounting basis thank you yeah i think that's a determination that um we still need to work through in terms of what actually is reflected depending on the timing of when we transition but at a minimum it won't be out of perspective right
spk03: Thank you for your question.
spk07: Again, if you would like to ask a question, press start and the number one on your telephone keypad.
spk03: There are no further questions at this time.
spk07: Mr. Dresselhaus, I pass the call back over to you.
spk02: Thank you. And thank you all for joining us for the call. We couldn't be more excited about the progress we're making in the business. And we look forward to giving you further updates on our subsequent calls.
spk11: Thanks a lot, everybody.
spk03: This concludes today's conference call.
spk07: You may now disconnect.
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