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 Bilen. Please go ahead, sir.

Welcome to ESS's 2023 Third Quarter 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 third quarter of 2023. The 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, partnerships, financial performance, and strategy for the remainder of 2023 and beyond. Board 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 on 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 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 a 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 U.S. GAAP and non-GAAP results are presented within our earnings release. With that, I will turn the call over to ESS's CEO, Eric Jesselhoff.

Thank you, Eric, and thank you all for joining us for our third quarter earnings call. Today, I'll review our financial results, Honeywell partnership, customer success, and additions to the leadership team. I am joined by Tony Robb, our CFO. We continue to make solid progress across the business, driving customer deliveries, signing significant partnership agreements, and efficiently managing our resources as we drive to profitability. When we came in somewhat light on revenue in Q3 due to a timing delay with one project, we remained confident in our ability to deliver on the projections we shared last quarter, namely achieving $9 million in revenue this fiscal year. As a reminder of the progress we've made, our year-to-date revenue of $4.7 million is an increase of about 700% from last year. We have sufficient product and demand to be able to deliver on a material increase in revenue in the fourth quarter and achieve our objectives. We are a burgeoning company with large customers and complex projects. Delays that may seem slight or insignificant at our customers can cause shifts when we ship product and recognize revenue in the short term, as happened in the third quarter. But these should even out over time. In late September, ESS entered a transformational partnership with Honeywell, an industrial powerhouse with strengths across technologies and markets that align tightly with those that ESS is pursuing. Recognizing the importance of long-duration storage and ESS's advantages with iron flow technology in solving for a clean energy future, Honeywell first engaged with ESS at the beginning of the year. After exhausting diligence into our operations, customer relationships, and intellectual property, Honeywell became convinced that ESS has developed a truly differentiated technology to serve this market, and we are thrilled to enter into this synergistic partnership. The relationship is wide-ranging, but I will provide a brief recap of the highlights. First, Honeywell plans to incorporate our technology into their clean energy go-to-market efforts and have an initial target to purchase up to $300 million of our product in the coming years. They already put down a $15 million prepayment towards those purchases and have made a direct equity investment of $27.5 million at a 24% premium to ESS's then current stock price, adding $42.5 million to our balance sheet immediately. To Warren's, Honeywell can make further investments in ESS at an even more significant premium, which would add almost $40 million more to the balance sheet. ESS will integrate Honeywell's flow battery IP into our own extensive IP portfolio and will collaborate through a joint development agreement to further progress the technology. In total, we believe this to be an industry-defining relationship. Collaboration is already underway, and we can't wait to share our progress. While we are shipping energy warehouses today, over time we see the majority of our revenue shifting to energy centers, or ECs. Our EC solution utilizes the same patent-protected technology and design approaches the EW, but at much greater scale. Our EC solution is modular and designed to scale to tens of megawatts per installation with greater flexibility and much lower cost per kilowatt hour to enable the utility scale solutions necessary to achieve a carbon neutral grid. We've been developing this product for some time and we're excited that our operations and engineering teams have been hard at work with Portland General Electric building the first energy center right here in Oregon. It's exciting to see this come to life and we expect to be testing in operational EC this quarter. With full commissioning slated for the first half of 24, we believe we are on track to begin shipping ECs to commercial customers in the second half of 2024. We're excited to be bringing the EC to life, a product that we expect will fuel our long-term growth trajectory. On the customer front, I would like to congratulate our Australian partner, Energy Storage Industries Asia-Pacific, or ESI, on their expanded agreement with Stanwell Corporation, a major electricity generator owned by the Queensland government. Announced by the Queensland Premier during her recent State of the State address, Stanwell detailed its intent to develop what will be the largest iron flow battery energy storage system in the world. After deployment of the previously announced initial project, they plan to expand to 150 megawatt installation and have already taken an option to buy up to 200 megawatts per year thereafter. This deal comes on the heels of Energy Queensland's announcement in August that it will deploy a 1 megawatt iron flow battery from ESI in the Wide Bay region to support the development of lithium-ion alternatives. Damwell and Energy Queensland are driving forward in the mission to fulfill the Queensland Energy and Jobs Plans. that will call for three to three and a half gigawatts of storage to achieve the state's target of 80% renewable energy in the grid by 2035. To follow up on our announcement last quarter, we're pleased to share that we finalized the agreement with LEAG for the first phase of our groundbreaking project to bring green baseload energy to Germany. As you'll recall, this project is intended to deliver a 500 megawatt hour iron flow battery system at LEAG's Boxburg power plant site. The installation would create a repeatable building block to support LEAG's objective to create up to 20 gigawatt hours of storage to be paired with solar and local hydrogen production, creating the largest green energy hub in Europe. We continue to enjoy great validation from our existing customer base. We successfully commissioned our first deployment of six energy warehouses at Sacramento Municipal Utility District. These six EWs represent the first phase of an agreement that will deliver up to 200 megawatts of long duration energy storage to support SMUD's aggressive 2030 clean energy vision. As another sign of the progress our customer success team is making, we recently commissioned an EW for Nevada Energy in just two and a half weeks, among the other projects we delivered this quarter. Four of these customers, Honeywell, ESI, LEAG, and SMUD, have signed agreements with ESS that could, if fully realized, result in shipping hundreds of megawatts of storage, which would translate to well north of a billion dollars in total revenue. To realize this potential, we need to balance managing our CAS position, optimizing our operations, and ramping the production of energy centers, which is the best form factor to deliver megawatts of storage most efficiently. To accomplish these objectives together, ESS expects to maintain our relatively modest rate of EW shipments early next year, and then to start delivering ECs in the second half of 2024. We have sufficient power module capacity in place today to meet our 2024 demand, and we'll look to add additional capacity late in 24 to enable further ramping into 2025. As you can tell, we're excited about the great progress we're making as we ramp the business, but the progress is not always linear. I want to share that the collaboration we have with San Diego Gas and Electric at the Cameron Corner site has ended. The project was conceived several years ago, and as we built it out, the parties recognized a mismatch related to the specific technical requirements at the site, and we jointly agreed to move on at the end of the quarter. I will admit this is a disappointing outcome, but a reflection of the transformation of ESS as a company. We are now delivering EWs to customers, largely recognizing revenue upon shipment and seamlessly commissioning our technology at customer sites. We sincerely appreciate the collaboration with SDG&E and hope to find new opportunities to work with them in the future. We continue to build out and strengthen the ESS team. I am pleased to welcome Harry Quarles to the board and Jeff Labaca as our chief commercial officer. Harry assumed the role of chairman and brings vast strategic, financial, and operational experience to help guide ESS in our continued progress. Jeff will run all of our go-to-market efforts and will leverage his experiences from numerous leadership positions running sales and marketing, including five years at Enphase, to drive our revenue growth. And with that, I'll turn it over to Tony to cover our results.