ESS Tech, Inc.

Welcome to ESS Tech Inc's first quarter 2023 earnings call and operational review. Please be advised that our remarks today, including the answers to your questions, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include, among others, matters that we have described in our earnings release, as well as our filings with the SEC, including our annual report on Forum 10-K and our quarterly reports on Forum 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we may discuss certain non-GAAP financial measures. including adjusted net income and adjusted EBITDA. Reconciliations of these measures to the closest gap measures can be found in the earnings release we issued today. With that, I'll turn the call over to Eric Dresselhaus, ESS's CEO. Eric?

Today, I will make some opening remarks about the quarter, followed by a deeper dive on our business operations. Many of you have expressed interest in learning more, so I'm excited to have Vince, Ben, Mark, and Tony on the call today to spend some extra time updating you on our progress. As you have likely seen by now, our financial results related to revenue recognition in Q1 did not meet our expectations. As you may remember from our previous call, we gained momentum at the end of 2022 with increased energy warehouse shipments and had hoped to start recognizing more revenue for these shipments sooner. We were able to recognize revenue for two units in Q1. One of those was delivered to Schiphol Airport in Amsterdam, and we've been pleased with the excitement generated from its delivery. However, while 10 of the shipped units have arrived in port, due to delays with that project, they are still awaiting final delivery. This means that we have yet to recognize revenue for those units. We have also built nine additional energy warehouses in Q1 for that project, but given the project delays, we are waiting to ship the units until we receive clarity on project timing. Although we are optimistic that the project schedule will recover quickly, we have strong demand for our solutions and are confident we can rework schedules and place these units with other customers if needed. We are in the early stages of the growth trajectory of ESS, and while project delays are an unfortunate reality in our industry, this was particularly disappointing given the timing, where we are as a business, and how it affects our predictability. We are making important progress scaling the business. As you know, we are transitioning from batch to scale manufacturing. As is typical for emerging technology companies, we are balancing near-term financial performance with our long-term focus on building a commercial powerhouse in energy storage. While we know the former is important, The latter will ultimately determine our long-term success and the potential to generate shareholder value. We've learned a lot over the last 12-plus months, made significant improvements to all facets of our business, and have a clear set of focused initiatives that we'll execute in 2023 to capitalize on the significant market opportunity for long-duration storage. Demand trends remain strong, and we are confident we will be an integral part of solving for a zero-carbon energy grid. The initiatives we are focused on for the remainder of 2023 are being put in place to help us not only capture the revenue opportunity we see, but also to allow us to drive down costs and move the company toward profitability. These initiatives fall into four key areas. First, scaling our manufacturing capacity, including ramping automation and injection molding processes. Second, improving our supply chain quality and outsourcing non-core components. Third, optimizing our product designs through the simplifications of the electrical and plumbing installations. And fourth, reducing the time to commission our solutions at customer sites. These initiatives are critical to our long-term success and are designed to help us shorten our path to profitability. Now let me turn it over to Vince Canino to provide some additional detail on our scaling and supply chain initiatives.

Thanks, Eric. I joined ESS in October, and I've spent my career scaling manufacturing operations and delivering precision products for major manufacturers, including GE and Trane. As you may know, our energy storage system incorporates four main technologies, battery modules, proton pumps, electrolyte, and the balancer system. Each technology can be scaled for high precision and low cost. Of those four, the heart of our intellectual property is in our battery modules and proton pumps. These are what give our iron flow battery its unique advantages for long duration storage. Equally important are the electrolyte and balance of system. Our electrolyte, where the energy is stored, is low-cost, non-toxic, and the elements that make it up are readily available. We are working to scale the production of this proprietary recipe as we optimize the transportation of this material due to its weight and volume. With the balance of system, we are focused on optimizing the integration of many components, which are mostly plumbing and electronics. Our balance of system is very much like a washing machine. but with more stringent requirements for reliability. The parts are not complicated or limited in supply. It's just a matter of orchestrating the assembly to achieve the best system efficiency and durability. If we look deeper into the construction of our battery modules, we find an interesting challenge, especially in the space of injection molding. 67% of our battery module is made up of precision non-metal parts. Of that 67%, 70% have very strict tolerances. When you apply that to a large injection molded part, it takes craftsmanship and collaboration to consistently deliver these parts in spec. Expertise in tool design and perfecting the right parameters during the injection molding process is paramount. Once you have the tooling and automation dialed in, you have a process with scale and repeatability which can be sustained. We have made great progress on this front already, with a focus on what we call the stack frame. We build up many of these stack frames together with a battery module. Since they are approximately three feet long, our injection molding suppliers were having challenges delivering to our specifications. Think of it this way. If these parts are being stacked on top of each other, and we are off by just one-tenth of a millimeter, we could easily be out of total spec by over 10 millimeters or about a half an inch over the entire length of the stack. But we've worked through tool designs, materials, and processing techniques and now have parts that consistently meet our stringent tolerances. Let me give you another example focused on the end plate on the power module. This end plate transmits the electricity to and from the energy cell stacks. In the past, we would have this component machined. In addition to the high cost of precision machining, the raw material stock is also very expensive due to the nature of its thickness. Today, we are now manufacturing this part using an injection molding process, which lowers the cost by one-third, but also provides us a highly repeatable and consistent part. Through the remaining quarters of 2023, there are three key areas which were focused to drive improved results. Supply chain, inventory management, and data management systems and manufacturing automation. All are equally important, but for right now, I'd like to discuss some of the supply chain improvement strategies we have on our radar to help drive costs down and improve quality. One example is our supply chain for electrolyte. We have developed a multi-pronged set of strategies to expand volume production in combination with driving down costs and maximizing energy capacity. As in all energy storage and renewable technologies, electronics also play a major role in performance and cost. Collaborating with firms that not only have the industry knowledge in the DC space, but also the ability to scale and lower production costs is key. This is an area we have found significant success in. But having strong supply base is only part of the equation. ensuring they are providing the best components at the best price is meaningless unless they are of high quality. This is where our supplier quality team intimately integrates with product engineering to drive the highest quality and repeatability at scale. We have been actively building this team out and giving them the best measuring systems, tools, and processes to ensure our suppliers' quality is consistently high. I will now turn it over to Dr. Benhang to walk you through some of the progress we are making on automation and product design.