Thank you for joining us today. All participants are currently in listen-only mode. We will have a Q&A session later. I will now hand the conference over to our host, Erik Bylin. Please proceed.

Welcome to ESS Second Quarter of Fiscal Year 2024 Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhuys, CEO; and Tony Rabb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the second quarter of fiscal year 2024. The 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 2024 and beyond. The forward-looking statements are also 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 filings filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, 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 today 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 US 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. With that, I'll turn the call over to ESS CEO, Eric Dresselhuys.

Welcome, and thank you for joining us today. Our business and the long-duration energy storage market continue to gain momentum. In the last quarter, we've observed ongoing regulatory support for the deployment of over eight-hour duration storage, along with funding announcements that will enhance adoption and deployment of our technology, solidifying our leadership in this area. In the second quarter, we expected to ship more units, but a key partner faced delays in the final approvals and funding. We had planned to ship around 12 additional Energy Warehouses last quarter for those projects, but those plans changed. Based on the latest information from our partner and the end customer, we now anticipate shipping and recognizing revenue for those units in the third quarter. We appreciate your patience as we work through these frustrating delays, as any changes in project timing significantly affect our quarterly results. Nevertheless, we are committed to our strategy and expect to increase revenue in the latter half of the year as we reduce costs and enhance our capacity. I'm excited to share that we're finalizing a groundbreaking agreement with the Export-Import Bank of the United States for up to $50 million in funding. This support will allow us to maintain a strong balance sheet while expanding operations. Under the Make More in America Initiative, this funding can be utilized immediately to bolster our cash position, borrowing about $10 million this year for previously installed capacity and the addition of Line 2, which is projected to triple our production capacity to over 1 gigawatt hour of battery capacity annually. We recently celebrated our growing manufacturing capacity with dignitaries, including Senator Ron Wyden and EXIM Vice Chair, Judith Pryor, here in Wilsonville. This event followed a visit from the Conservative Climate Caucus, demonstrating that reducing our carbon footprint through American-made long-duration energy storage is a bipartisan effort. Their support underscores the importance of scaling, as we will need a significant amount of long-duration energy storage. Electricity demand is rising dramatically in the US and globally as we strive to electrify everything, driven by technologies like generative AI. The Federal Energy Regulatory Commission indicates that US electricity demand is projected to grow by 4.7% annually, equating to 38 gigawatts of growth by 2028, with expectations for large customers to seek clean energy. Legislators are listening, resulting in new mandates for long-duration energy storage in states like California, Michigan, and New York, as well as globally. Our mission at ESS is to ensure a reliable, cost-effective, and decarbonized electricity system, and we were pleased to contribute to a recent New York Times discussion on grid reliability. Our customers are leading the charge toward the future, with our iron flow technology positioned as the most proven long-duration energy storage option available. These proof points are essential as they showcase the value of our solutions across various applications, unlocking future projects with these clients and serving as a catalyst for building on over $1.5 billion in potential projects. Earlier this year, we successfully launched our first system at Schiphol Airport in Amsterdam, which replaces diesel ground power units. I'm happy to report that we began operations in Q2, as the system now charges ground power units. This serves as significant validation of our technology's safety, meeting stringent aviation standards and showcasing the versatility of our batteries. Recently, the California Energy Commission awarded a $10 million grant for our long-duration battery storage project with the Sacramento Municipal Utility District. SMUD has signed a 2-gigawatt hour framework agreement with us, and we have already delivered the first phase. The CEC's funding, coupled with additional investments in SMUD, will finance Phase 2, implementing a 3.6 megawatt eight-hour iron flow battery. With SMUD aiming for a carbon-free power portfolio by 2030, they are taking concrete steps toward reaching the 13.6 gigawatts of energy storage needed in California by 2032. At the end of May, Burbank Water and Power celebrated the commissioning of their first long-duration energy storage system at an event attended by local officials. BWP is another progressive California utility recognizing the importance of pairing long-duration energy storage with renewables to reach their decarbonization targets. Our Energy Warehouse is integrated into BWP's EcoCampus and connected to a 265-kilowatt solar array, which can power around 300 homes. We are excited to play a vital role in this transition, and it's rewarding to see Burbank eager to promote their project, including a planned VIP tour in September. We are also pleased to announce that Indian Energy, alongside the CEC and the Department of Defense, has selected our iron flow batteries to showcase long-duration energy storage technologies for utility-scale resilient microgrids. This program aims to demonstrate the potential of our solutions in providing energy security to remote communities and military bases. In the coming months, our project partners anticipate showcasing various applications for the California energy market, including solar peak shifting and ancillary services, before transitioning to commercial operation. Now, I'd like to update you on our Energy Center project with Portland General Electric and our transition to production manufacturing. We have completed the production and testing of the inaugural Energy Center and have been cycling it to refine operations while testing it against diverse operating demands. Our unit has successfully transacted over 140-megawatt hours in energy in recent months. We are thrilled to see our iron flow technology quickly transition into a scaled-up version thanks to our engineering and production teams. Building the units is just one aspect of market readiness; certifications are crucial for our customers. Ensuring our solutions are safe and can withstand challenging environmental conditions is vital for adoption. We mentioned previously our achievement as the first non-lithium grid battery to receive IEEE 693 certification, a seismic rating essential for deploying new systems as critical infrastructure across the US. This certification is crucial for long-duration energy storage in California. Soon, we expect to achieve UL 9540 certification for the Energy Center, which addresses fire safety for energy storage systems. Obtaining both IEEE 693 and UL 9540 certifications is essential due to the ongoing incidents with lithium storage facilities. This progress demonstrates the viability of our Energy Center for broader deployment and diverse environments. As a result of our advancements, we have integrated several design improvements from our first Energy Center to enhance manufacturability and started production of our second unit for PGE in July. We anticipate completing this unit by our next earnings call, with grid interconnection and a handover to PGE expected to follow shortly after. Simultaneously, we are well-prepared to begin manufacturing the first Energy Centers for commercial delivery in August. To facilitate our upcoming shipments to Tampa Electric and SMUD, we have strengthened our operations and assembly lines to meet the production needs and volume expectations. We have previously discussed our strategy for 2024, which involves moderating our builds and shipments in the first half and increasing them in the second half as we progress with our cost reduction initiatives. This plan remains in place, and we expect to start raising our shipments in the coming quarters, driven by both Energy Warehouses and initial deliveries of our Energy Centers. Project timing can often be uncertain, and while we have faced some delays, we anticipate significant revenue growth in 2024 compared to 2023, positioning us for broader expansion in 2025 and beyond. We will continue working diligently to keep these projects on schedule. Now, I'll hand over the call to Tony.

Thanks, Eric. Unless otherwise noted, all numbers we discuss today will be on a non-GAAP basis. You'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website. We reported revenue of $348,000 in the second quarter, with the associated cost of revenue reported at $11.7 million. As previously shared, the transition from R&D accounting to inventory accounting results in an LCNRV adjustment that dramatically impacts our current COGS results. This will not be a material contributor to our financials as we reach scale. We continue to make progress toward profitability. However, our COGS results will not fully reflect our cost reduction initiatives benefits, thereby making it difficult to assess our progress through our current financial statements. We're making great progress with incremental cost reduction initiatives through value engineering, supply chain optimization and process improvements for both the Energy Warehouse and Energy Center. As we previously mentioned, during 2023, we lowered the cost to build Energy Warehouses by 60%, and we're targeting another 40% reduction this year. With the improvements we're realizing on the cost reductions in 2024, we still expect to reach non-GAAP gross margin profitability on the Energy Warehouse by the end of this year. Our non-GAAP operating expenses for Q2 were in line with our expectations at $9.1 million. Non-GAAP R&D came in at $1.9 million, which we believe reflects the company's run rate and continued investment in our cost-out initiatives and product roadmap improvements on reliability, durability and the efficiency of the Energy Warehouse and Energy Center. With that, we reported Q2 adjusted EBITDA of negative $18.8 million. Turning to cash flow and liquidity, we ended the second quarter with $74.4 million in cash and short-term investments. We remain focused on managing our cash burn rate, including driving ongoing efforts to optimize working capital. As Eric mentioned, this quarter, we expect to close on the first tranche of up to $50 million financing facility from EXIM, and from this, we intend to add about $10 million of cash to our balance sheet this year, with extended repayment terms and very competitive interest rates. We have invested in another automated line that is planned to come online early next year to produce power modules that should greatly enhance our ability to ramp up in 2025. That capacity expansion comes at a dramatic improvement in cost per megawatt, roughly half the cost we previously expected. And with the EXIM agreement, we expect to fully fund this and future production capacity expansion. We're extremely well positioned to continue to expand our production capacity through this EXIM financing facility, effectively funding all of our production capacity CapEx needs through 2025 and into 2026. This transformative agreement bolsters our liquidity levels, and we expect this should support our business cash needs well into 2025. We continue to opportunistically look to strengthen our balance sheet through dilutive and non-dilutive financing alternatives to provide the necessary capital to give us operational flexibility to respond to market demand. Our EXIM financing is a great example of a non-dilutive solution to bolstering our cash position. Additionally, with such strong market tailwinds, we continue to see considerable investor interest in investing in long-duration energy storage, and we remain very confident in our ability to raise the necessary capital to fund us through to cash flow breakeven. And finally, as you may have seen, we filed a proxy statement with the SEC to execute a reverse split of our stock to address a listing notice from the New York Stock Exchange. Once executed, we expect to be in compliance with the listing requirements and continue our operations as a publicly listed company. The current ratio of shares has yet to be determined, but we expect to complete the split in late August. And with that, I'll open it up for questions.

Your first question comes from Colin Rusch.

This is Lidya on for Colin. First, we noticed on Slide 20 of the investor presentation that the capital required to produce for ESS is around $20 million per gigawatt hour. Could you maybe talk about what scale you would need to achieve that number?

You are referring to the scale required, which is based on a per gigawatt hour calculation regarding the capacity we need to add. Each of our lines is significantly below that figure.

So we can build an increment smaller than a gigawatt. I think Line 2 is about a half, a little bigger than 0.5 gigawatt hour of capacity…

And then maybe for a follow-up, could you speak to the growth in potential customers evaluating your field data and how quickly those customers are moving through your sales funnel?

It's a mixed bag, as you would expect. We're seeing two things. We're seeing some of the behind-the-meter applications where customers have follow-on applications; they tend to move through more quickly. They'll often want to run for a year but sometimes less. And for other customers, we have a multi-phased approach where we're going through it kind of in order. So we’d expect, as we said, if you look at SMUD to having deployed the first phase, complete the work on that and start moving on to the second phase, which will be an Energy Center phase product. But the third piece that we found is that a lot of the market activity these days from an RFP, RFI perspective, are all targeting larger projects that will be 2026 and 2027 projects. One of the things about our industry that people who follow other companies would certainly be aware of is that the lead times for planning are quite long and that can be influenced by interconnect queues and site preparations as well. So we have a lot of folks that are looking at current customers and visiting them, getting feedback on the product as they're making their plans for very large projects that happen in the out years. And that activity has increased quite a bit, in part, as I mentioned, due to things like the need for green PPAs from hyperscalers and folks like that.

Your next question comes from Corinne Blanchard.

This is Mike asking on behalf of Corinne. My question is about your revenue target of three to four times in 2024, which suggests $23 million in the second half at the midpoint. Could you provide a breakdown of that amount between Energy Centers and Energy Warehouses?

I think that the ramp-up on the Energy Centers we've talked about in the past will start in the fourth quarter. So it's going to be, I'd say, I don't know, maybe a split of two-thirds Energy Warehouses and a third Energy Centers. As we said in our prepared comments, not just what we've seen, but what others have seen, we get very interested about the timing of one project versus another if there's any slippage or movement in timing because our numbers are comparatively small number of projects, that can make a pretty big difference. So I wouldn't want to hang my hat too hard on exact mixes, but that would roughly be the layout.

And then my follow-up has to do with the growth tied to AI and data centers. You mentioned it in your prepared remarks, I was wondering if you could give a little bit more color around what you're hearing from potential customers in that space?

So the step back is really on the broader category of data centers. One of the increasingly loud screams we're hearing from the market, both from end users but also from developers who serve that market, is that the data center operators have very ambitious plans for building out in support of what they expect to be massive growth in generative AI. And that's got two problems. One, it's just regular use, but generative AI is, depending on who you talk to, kind of eight to ten times more energy consuming than, say, a typical Google search. So people are anticipating that demand. And what's happening is they're going to utilities, not just here in the US but around the world, saying, hey, I'd like to build a data center of this size, and I need the power of a certain level. And they're getting the answer back from the utilities that say, I'm sorry, I just can't support that; it's just too much energy. So this is becoming kind of an economic limiter for the people in the business of hosting data centers to say where can I go put a data center that can supply the power I need. In some markets, like Ireland, they've come out and just told data center operators they would love to have them, but they're totally responsible for coming up with their own power. So with that as a little bit long-winded background, what we're finding is that people are looking at saying, can I do this as a microgrid, can I buy my own renewables, pair it with storage and create a 24/7 green energy system and do that without having a heavy reliance, maybe not no reliance, but without a heavier reliance on the grid operator than I normally would have thought about doing. It's early days of this, but it's a topic at every conference that happens in the energy industry these days. And there have been quite a few big public announcements from Google, Microsoft, and AWS; they're trying to procure their own green PPAs to get out of the way and not have the reliance on the utility operators.

Our next question today comes from Justin Clare.

So I wanted to start with the manufacturing here. So the second automated line, I think that's expected to come online next year. I was wondering if you could talk about the ramp there. So you talked about getting to 1 gigawatt hour. When could you achieve that run rate, and what does the timeline look like in terms of the ramp-up of that second line?

So the second line, we anticipate, should be online in the first half or by the end of the first half of next year. And so the way to think about that is that we'll have about 1 gigawatt hour approximately of production capacity going forward from that point. So we'll get about half a year's worth of that capacity in 2025.

And then just on the manufacturing CapEx, I was wondering when we think about the financing from the Export-Import Bank, $10 million this year and then $10 million to $15 million, I think you anticipate next year. Is all of that capital expected to be devoted toward the CapEx spend for that second automated line? And then just wondering how you're thinking about the remaining capital that might be available to you and whether that could be used for a third automated line or what you're contemplating there?

So the large portion of the first $10 million that we're drawing down is associated with Line 1 and the production capacity CapEx that we incurred to put that in place. So that's that look-back component that Eric had mentioned. And then Line 2 will be financed with the remaining parts of the credit facility. And as we mentioned, the CapEx that we need to implement these lines is substantially less than Line 1. So we should be able to add multiple lines with this credit facility, well beyond Line 2 and into the capacity that we need through 2026.

And then one more just on the margin profile. So it sounds like you're on track to reach non-GAAP profitability for the Energy Warehouse toward the end of this year. Wondering what the impact could be on the profitability for that product as that second automated line ramps up. Like would you produce Energy Warehouses on that line, and would you expect a margin boost at that point in time?

Well, what gets produced on those battery stacks lines, those go into both Energy Warehouses and Energy Centers. It's the exact same product. So it doesn't matter what the mix of products we are shipping. Those production lines, the core components and the battery powertrain that goes into the Energy Centers is the exact same product. So as we scale up to produce and sell Energy Centers, that's all going to be happening on Line 1. And then as we run out of capacity on Line 1, we'll start producing on Line 2.

Your next question comes from Davis Sunderland.

I wanted to ask if you can talk a bit more about the Honeywell partnership, maybe if there's any new traction you can speak to as a distribution channel, maybe if there's any possibility to execute more, I guess I'll call them individual asset sales rather than your typical kind of framework partnerships you have with, say, SMUD or LEAG or some of the other larger partners? Just anything that's opened up from the Honeywell partnership, and then I have one follow-up.

So well, things are starting to really get some great momentum with Honeywell. We were very fortunate to host Vimal, the CEO of Honeywell; he came out just two weeks ago to visit us here in Wilsonville and spent a day with us, which he's a busy guy, so I think that's a great sign for the importance that he's putting on the relationship in the space, and we had a great series of conversations across both go-to-market and on some of the joint development activities that we've taken on together to do some things, to add new features, functions and performance, but a lot of it has been driven by just getting to scale more and driving costs out of the system. Honeywell certainly has a great appreciation, as we do, for the market environment and the mandate to get down the cost curve as fast as possible. So we're at the stage now where the go-to-market teams have been organized. They've been off actively engaged in the marketplace. And I think the hope would be we'd have announcements to make. We're putting proposals out to people and our hope would be that we'll be able to translate that into live announcements with people over the coming months.

And then my follow-up is just on raw material costs. And I know there's some one-offs this quarter and probably the rest of this year with LCNRV, the accounting of the higher cost. But just wanted to ask if you guys are suffering from the so-called start-up premium or if suppliers have been able to renegotiate with you guys as you're getting more units out in the field now, or just anything you can speak to on that would be great.

So we're not seeing any negative impacts from our suppliers in terms of raw materials costs. Most of the efforts that we are seeing is we're either negotiating with our vendors for reduced cost or negotiating and qualifying new vendors for the same materials at lower cost. So that tends to be the primary focus of what we tend to be experiencing with respect to raw materials.

Your next question today comes from Thomas Boyes.

Just two quick ones. Do you have a sense on maybe what the financing issues were that caused the delay in Energy Warehouses this quarter? The reason I ask is we saw something similar in the solar complex, where adjustments to the domestic content add or caused some companies to kind of pause for a second reassess, figure out under the new kind of schedule that was put out there, what the ramifications are. Is that something that you're seeing or could you give any commentary there?

We haven't seen that specific case. Although, like you, we've been noting a lot of the announcements made by others on project delays either from site delays or other third-party equipment delays. We've been fortunate; we've avoided those for this quarter. This specific case was the project is specifically dependent on the government grant. So the government funding that was expected to happen before the end of the quarter would have freed everything up, and the government just didn't move fast enough to get it done. So we've talked to both our partner and the folks at the utility and the government funders; everybody assures us that they're moving through and getting it done, and it's just taken longer than they had hoped. But unfortunately, in this case, it was enough of a timing slip that it held us back from shipping the product.

Do you know if that was the PACE program or the newer financing vehicles?

No, this was just a directed investment. So it wasn't under any sort of a broader program or anything that we'd see be more methodical.

It was good to see the project with Indian Energy and the traction you've gained in military applications. I'm trying to understand the potential size of the resiliency market for tribal land; is that a significant opportunity? How do you view this in the long term?

I can't provide a specific number for tribal lands, but the resiliency market, particularly resiliency microgrids, is projected to be worth several billion dollars in the U.S. between now and 2030. This connects to the earlier discussion on data centers, which have their own unique needs. However, there's a broader trend of people looking to not only have green energy networks for their electricity but also ensuring resilience in their energy access. They are increasingly aware of the importance of reliable electricity, beyond just the costs. Microgrids for military bases or indigenous communities demonstrate this; these areas have often faced challenges with electricity distribution or the high costs associated with power outages, which can have serious operational effects. We find these markets attractive since they often value American-made and safe products. Concerns about lithium batteries have led to a preference for U.S. products or non-lithium designs.

Our next question comes from Brian.

Maybe we lost Brian.

It would appear we are having technical difficulties with Canaccord’s lines, I do apologize. But that was our final question for today. I see there aren't any further questions in the queue. So that will conclude today's conference call. I want to thank you all for your participation, and that will conclude today's call. You may now disconnect.