Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session. I would now like to turn the conference over to Erik Bylin. Please go ahead.

Welcome to ESS's Third 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 third 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, capital raising, 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, challenges with raising capital, 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. And with that, I will turn the call over to ESS's CEO, Eric Dresselhuys.

Thank you for joining the call today. There are many reasons to feel positive about the future of ESS, a massive emerging market opportunity, a global top tier customer base, a truly differentiated and intellectual property protected technology, and a great team here in Wilsonville building the product with domestic content. However, the ramp of our revenue continues to be slow due to a variety of external factors. This was evidenced in the last quarter as our ability to stay on schedule was compromised specifically by further delays in the timing of customer funding. Let me provide some more detail. As I mentioned last quarter, project approval and funding were held up at one of our long-standing partners impacting our ability to ship and recognize revenue for product that was ready to go. The great news is that the agreement for public and private funding, which totaled AUD65 million, was announced at the very end of September. This funding was in support of a massive state mandate for long duration storage in Queensland, but unfortunately it did not complete in time for us to close out these transactions before the end of Q3. Since we closed Q3, key contracts for our partner are signed, payments are flowing, and we've started to ship the additional units. So we are optimistic we will meet their demand and recognize revenue in the fourth quarter. As we look forward to the end of the year, we are able to provide updated guidance and expect to recognize revenues between $9 million to $11 million for the full year, representing meaningful year-on-year growth. We expect the fourth quarter will include previously planned EW systems and the initial commercial shipments of our EC product. As you'll recall from previous calls, the EC product serves as our next step in building products designed to support large-scale deployments, which is the direction the market is clearly heading. The EC product has more than double the capacity of our Energy Warehouse product but with the same footprint. The EC product was the logical next step as we work towards the delivery of the hundreds of gigawatt hours of long-duration energy storage our customers and the broader utility industry will need in the coming years. Given the newness of the product and the challenges customers are facing with on-site preparedness, we will moderate our ramp and plan to ship six EC systems in Q4 and defer additional units to the new year. This does not reflect any reduction in demand as we already have contracts in place for these product deliveries, simply a more prudent initial ramp of a new product. Although delays are frustrating, they are a reality in our industry and we're working to get better at both forecasting and mitigating these as we ramp the business. Looking at our internal progress, our team has done a great job of building the EC systems for Portland General Electric and have been gaining valuable experience operating them. The first EC unit has been operating since March and we have been cycling against the standard PNNL and ENGIE 19 testing regimes and have been seeing great reliability and availability. That experience allowed our team to incorporate further design for manufacturability improvements into the second unit, which is now in place and in testing, and we expect full hand-off to PGE this quarter. We've never had units operating at more customers than we do today, demonstrating our iron flow performance and supporting a wide variety of customer use cases. From California to Amsterdam and beyond, our technology is proving the value of long-duration energy storage in addressing customer needs. Some of you may have seen our Founding Board Chairman and Retired Utility Executive Mike Niggli's customer site tour which kicked off at Burbank Water and Power. They are being posted on LinkedIn and are highlighting the many ways that our technology is being deployed. So please stay tuned as he continues this journey, talking grid resiliency, bulk shifting, carbon-free electricity, and the decarbonization of critical infrastructure at customer sites around the world. Importantly, Honeywell's initial units have been delivered and are being deployed. I'm pleased to share that this partnership is hitting its stride across multiple vectors. Our joint development agreement to leverage Honeywell's broad technical expertise to further the success of our iron flow technology is in full swing, focused on lowering cost and achieving ever-improving performance. We're actively engaged in go-to market activities, collaborating on joint proposals and are excited to look at technology configurations that are even greater capacity than anything we've conceived to date. Our broad market opportunity continues to grow. I attended three events recently that I think really speak to the growing opportunity for long-duration energy storage and for ESS specifically. First, at the New York Stock Exchange's Technology Day, I led a panel focused on AI and the transformational impact it is having on electricity usage. With data center energy consumption expected to double by 2028 to 540 gigawatt-hours annually, more than the entire State of Texas consumes, data center operators are looking to fuel this consumption growth cleanly and reliably. These operators are recognizing that renewables plus storage is the best, most cost-effective way to meet the need. Long-duration energy storage will be key to fulfilling this use case, and we believe our technology is particularly well suited to the impending demand. I also addressed a panel at the NextGrid Alliance Summit, an annual gathering in Boston hosted by National Grid. It was clear across many utilities, large users, and regulators that we all need to move faster to ensure the reliability of the grid as we increase demands on the grid in the transition to a carbon-free future. Long-duration energy storage was highlighted as critical to making this happen, and it was great to hear about the regulatory mandates now being implemented from New England to the Midwest to create meaningful opportunities for ESS. And importantly, I joined our partners at SMUD in Sacramento for the Energy Thought Summit. Our relationship with SMUD remains on a great path and like most of the other participants, I remain impressed by SMUD's ambitious plan to decarbonize their grid by 2030, while maintaining reliability and affordability for the people of Sacramento. Our project was highlighted repeatedly by Paul Lau, their CEO, along with a variety of board members and senior leaders. I did a fireside chat with Lora Anguay, their Chief Zero Officer. SMUD remains at the forefront of utilities driving towards decarbonization and Lora did a fantastic job addressing both the challenges and the opportunities they face in implementing such an ambitious plan. But they are creating a roadmap for others and we are certainly very lucky to have such a close commercial relationship with them. ESS continues to make progress in the face of challenges. I'm very proud of the team and we are laser focused on scaling our solution and driving the profitability as we demonstrate the value of long-duration energy storage in delivering the reliability needed to ensure the energy transition. And with that, I'll hand it off to Tony.

Thanks, Eric. Unless otherwise noted, all numbers we discuss today will be on a non-GAAP basis. You'll find a reconciliation of GAAP to non-GAAP financial measures in our earnings release which is posted on our Investor Relations website. We reported revenue of $359,000 in the third quarter with the associated cost of revenue at $12.7 million. As previously shared, our COGS are subject to an LCNRV adjustment that continues to significantly impact our results especially at lower volumes while we're purchasing materials and producing products for sale in future quarters. This adjustment notwithstanding we continue to make considerable progress towards unit profitability and our continued cost reduction initiatives are benefiting to the point where our NRV adjustment is down about 40%, which we see as an indicator that we're heading toward more normal COGS reporting. In addition, we've already realized unit cost reductions of 28% on our EC production through the third quarter of this year and expect to achieve nearly 50% in total cost reductions on the EC product for the full year 2024. This great progress is a result of the growing expertise of our teams and optimizing the design for manufacturability along with leveraging EW product cost reduction initiatives. Our non-GAAP operating expenses for Q3 came in below our expectations at $9.2 million. Non-GAAP R&D came in at $2.1 million, which again we believe reflects the company's run rate and continued investment in our cost reduction initiatives and product roadmap improvements on reliability, durability, and the efficiency of the EW and EC products. With that we reported Q3 adjusted EBITDA of negative $18.9 million. We were also able to monetize all of our 2023 production tax credits and are currently reviewing bids to monetize our 2024 production tax credits. Based on our ability to monetize these PTCs, we feel very good about realizing the benefits of the PTC both from a P&L and cash and liquidity standpoint as we continue to scale up manufacturing and sales. Turning to cash flow and liquidity, we ended the third quarter with $55.1 million in cash and short-term investments. We remain focused on managing our cash burn rate including driving ongoing efforts to continue optimizing our working capital. While it was a bit delayed, we recently signed our credit agreement with the Export-Import Bank of the United States or EXIM as was seen in our filing on November 5th. With the signing of the first tranche of the $50 million financing package, we became the first energy storage manufacturer to be supported by the Make More in America Initiative of EXIM. These funds are subject to certain conditions detailed in our recent filing, but they have a very favorable interest rate and can be borrowed against past and future battery manufacturing capacity capital expenditures with repayment by the middle of 2031 and interest-only payments through 2026. I would also like to address the going concern disclosure we included in our 10-Q. While we work towards the optimal path to putting this analysis, we are continuing to manage our working capital tightly and are focused on extending our cash runway through securing new capital, continued efficient management on how we are allocating our resources, and lowering our cash consumption. In particular, we are actively evaluating a variety of strategic financing alternatives both non-dilutive and dilutive to choose the best possible means to strengthen our balance sheet to extend our cash runway and enable ESS to operate through 2025 and beyond. With such strong market tailwinds, we continue to see considerable investor interest in long duration energy storage and we are working to raise the necessary capital to fund us through the cash flow breakeven. Finally, as you may have seen in August, we completed a 1-for-15 reverse split of our stock, which has allowed us to regain compliance with the New York Stock Exchange listing requirements and continue our operations as a publicly listed company, while also aiding in our ability to identify and complete our future capital raising needs. And with that, I'll open it up for questions.

Our first question today comes from Justin Clare with ROTH Capital Partners. Your line is now open.

Hi. Good afternoon.

Hey, Justin. How are you?

Good afternoon.

I'm looking forward to asking about the customer delays you experienced in Q3. It seems ESI was waiting for financing. Were there other customers also facing financing delays? Additionally, you mentioned something about site preparation, so I'm curious if customers are working on permitting or if there are interconnection constraints. Could you provide more details on the reasons for the delay?

Sure. Justin, Eric here, I'll take that. The specific delay that we mentioned in Q3 was limited to one customer and was limited to the projects in Australia. You may have seen there was quite a big public announcement made when their funding was announced, but unfortunately, the timing was insufficient to get it all closed out in the quarter. So that was the source of that delay. As we look more broadly, there had been delays, not so much on the interconnect queue at this point, but certainly, we have experienced and our customers have experienced certain site readiness delays. Sometimes that's due to third-party equipment like inverters or transformers, which is, as you probably know, quite popular these days and can sometimes be back-ordered, in some cases due to construction on-site. So there's no one thing that causes an issue, but we've tried and continue to work to get better at predicting and managing around those delays.

I see. Okay. That's helpful. And then looking into Q4 here, I think you mentioned you expect to ship six of the EC units in Q4, if I heard right. Wondering, do you expect to recognize the full value of those six units in Q4? And then wondering when those units could be operating in the field and when you might have a sense for the performance of those units?

Yeah. I'll take that again. On the performance, we think we have a very good sense of the performance. The two units that we currently have here in Oregon installed for Portland General are the same model and the same vintage as what we're shipping to the first commercial customer outside of the state. So I think we feel good about the performance, but the units will ship. The installation will happen and I think that go-live will probably be in Q2 of '25. So, we won't see those operating in the field till the second quarter based on their schedule for going live. So, I don't think we'll see any field results before that.

I see. Okay.

And we do expect, yeah, we do expect to recognize the revenue on those units this quarter.

Yeah, as soon as they reach the site, that's when we can recognize the revenue.

Okay. Perfect. Then just one more. Wondering on the ramp-up of your second automated line. I think the expectation was in the first half of next year that would be online, but maybe you could just provide an update there. And then I believe that line would enable you to lower your costs. So maybe you could comment on that aspect of it as well.

Yeah, this is Tony. So, our expectation is that that line will still be operational by midyear next year. It's currently being assembled at our vendors. We're going to be doing some testing out at our vendor site by the end of this year, and then it will be shipped out to our site in the first quarter of next year, reassembled, and then we'll start testing here. We feel like we'll have that up and operational by midyear.

Okay. I appreciate it. Thank you.

Thanks.

Our next question comes from Corinne Blanchard with Deutsche Bank. Your line is now open.

Hey, good evening. Maybe to kind of go back on the question around the delays and what how much is being pushed further into Q4, but can you maybe try to give us a little bit of color in terms of the timing, the delays, and maybe potential revenue we can also expect going into 2025. I know you're not going to give full guidance, but just as much detail or color you can share because revenue guidance was decreased quite a lot, talking about $10 million for this year. Can you go up to $40 million or $50 million next year? Can we expect something higher? I'm just trying to get your thoughts on this.

Yeah. Thanks, Corinne. I'll take it. I think you said it right. We're not giving guidance for the year at this point, but I think you'll see the ramp up, the fourth quarter will get us caught up a little bit on some of the units that we're supposed to have shipped before, and we'll continue to see the ramp up happening in the first half of next year. I think the volume as we see it now is, it is often the case for us, back half loaded. So we'll see a ramp that goes in Q2 and Q3 and then picks up pace as we go Q3 and Q4. Again without giving guidance, the numbers that you talk about are quite within the range of what we would see possible.

Okay. Very helpful. And then, the second question maybe on the balance sheet. And so you, I mean, the cash balance is low, right? Can you talk I'm sorry if I missed it on the prepared remarks, but can you talk about the financing? You had a financing, I think, that you are expected to draw on. Can you just yeah, let us know, like, any update on this?

Yeah. Corinne, how you doing? It's Tony. So we did sign the EXIM loan agreement. So we closed that, and there was a filing, noting that. But based on our cash balances that we have today, we do not need to draw on that immediately. We'll be able to draw on that when we feel like it's necessary to draw on it, it is available to us. But we don't need to draw on it today, so we have sufficient capital today to operate without having to draw on it. But the good news is that it is there and available for us.

Okay. Just maybe if I just can just to follow-up on that one. At which level of cash or like the short-term investment would you feel like you need to draw? Because I think if I add up everything you're at $58 million or something like $57 million I think. Is there like a critical level where you will see okay you need to start drawing the money from that line?

Yeah, I don't anticipate needing to draw on it this quarter. If you look at our cash usage over the last couple of quarters, we feel like we do have sufficient cash without drawing on that to get us well into 2025. And so depending on our cash use needs, at some point in 2025 could be when we may decide we need to utilize that credit facility.

Okay. Thank you.

The next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Thanks. Thanks so much, guys. As you look at the customer activity how many folks are looking at late-stage testing data or looking at site selection where they might use the technology? Just trying to get a sense of what the sales pipeline looks like from a late-stage and earlier stage perspective.

Thanks, Colin. Well, I think it's getting, it's moving along quite briskly. Something we've talked about in the past is that long-duration storage has not historically had a lot of regulatory mandate to compel people to act. So people did it because the value proposition and use case demanded it. We're starting to see changes around that. So specific states, and we've talked about them, but states like New York and Michigan and others have come out with specific targets around long duration, and that has generated a fair amount of activity both in terms of new RFPs, new proposals going out, and proposals that have been issued moving through the process. I think we've seen very good activity. I don't know that I have an exact number to put to it, but it's certainly in the hundreds of millions of dollars of activities now in proposals, in citing, and in some cases going through a regulatory approval process. So we feel very good about that. It's interesting when we look around at markets that have higher renewable penetration that has those tend to be further down the line in terms of the progression of specific projects and detailed designs. But the one thing that's been a wild card, I'd say, in the last three to six months has been the data center requests that are coming into utilities. So it's hard to understate, in the prepared remarks, we made a comment about this presentation that I helped lead a panel on at the NYSE. We hear it when we talk to our utility customers and friends all the time. The amount of load request that's starting to pile into their system is creating a real challenge for people looking to figure out how they're going to meet that demand. Historically, load growth has been at a very low rate of 0.5%, 1% a year, so it's very modest. That's starting to change dramatically, where people are coming back and translating that into requests for very large projects in the hundreds of megawatt range that they're asking for deliveries in the '26 and '27 timeframe. That's a lot faster and a lot more urgent than it's been in the past.

Super helpful. And then I appreciate the headwinds around volumes on the cost side, but you've talked about Honeywell in the past supporting the supply chain. Just curious if you can give us an update in terms of those efforts and when we might start to see some of the impact of some of that sale purchasing, some of the design activity you guys have been going through and the cadence of that cost out as you begin to ramp incremental volumes?

Sure. The projects are kicking off. It depends on the nature of the product. Some of the supply chain improvements can happen, I think, a little bit faster. I think we'll see benefits starting at the end of this year, first part of next year. The things that are more engineering and kind of value engineering driven tend to have a little bit longer kind of incubation and implementation time. So I don't think we'll see some of those benefits start to kick in until the middle part of '25 and accelerate as we get in towards '26. Thank you for the questions.

Our next question comes from Ben Kallo with Baird. Go ahead.

Thank you for taking my question. Regarding your customers financing projects, do you believe that facilitating their financing will be an ongoing necessity? Also, how long do you anticipate it will take to incorporate tax equity into a project? Is this something that could be achieved within a year, or will it take a longer time due to the new technology involved?

Yeah. Great question, Ben. I think there is no one answer to that. The experience that we had in the third quarter was, I think, unique in that it was a non-US customer, a relatively new party, and they were in negotiation with the government. The good news is that they are the owner of the utilities. So that one, I think, was a very unique deal. Obviously, the creditworthiness of the government entity is quite high, but it was more of a timing and paperwork decision. Most of our customers tend to be large, very well-established entities, and particularly people like the municipalities that we deal with are funding this out of their normal capital budgets. So there is no delay at all. As we get into some of the projects that are independent, that can change. I think we see that as a bigger part of our business in the late part of '25 and going into '26, it's all the reasons you mentioned. There’s going to be bankability work and studies, tax equity offtake agreements and things, and those definitely take longer. So we're trying to build that into our planning and not comment on that for near-term deals.

Thank you. You mentioned something, Eric, in the prepared remarks about Honeywell and early discussions around, I'm going to paraphrase it like making a larger battery size than you've even done now. Could you tell me what you mean by that and or tell us what you mean by that?

Sure. As I mentioned in the previous question, one of the dynamics we're seeing in the market now, I think in no small part driven by just total load growth across the energy system is we would have very typically been having conversations in the single-digit to mid-tens of megawatt size projects before. One of the questions that come up now are people looking at much larger projects, 100 megawatt, 200 megawatt plus projects. We've been in discussions. One of the things we think Honeywell is really well suited at is building very large scale plants. So we've been in some discussions about how do we optimize cost and performance at larger scale. It's very exciting. One of the things that we've said for years about our technology is it's definitely benefited by being larger and it's benefited by longer durations. So as the market trends to larger projects and longer durations, that's a great trend for us.

I was just clarifying because I thought there might be a difference in configuration, but you're indicating that project size is increasing and they're assisting you with those larger projects.

Yeah. So, yeah, that's really the configuration. The core technology that we're proving now and demonstrating working now in the field of these projects is the same core technology that we can do at 1 megawatt or 10 megawatts or a 100 megawatts. But there are changes to what people would call the balance of system or balance of plant and how you configure that to be most cost-effective and achieve the highest performance out of it.

Thank you. My last one just on additional capital. It sounded like you mentioned several different avenues from dilutive to non-dilutive. But how could you characterize how far along down the road you guys are in being able to secure capital? Is that something that we should expect in the next two, three months or is there still a lot of unknown around it?

Well, I don't think we have any timing to announce, but I think that we've been, as we've said for the last number of quarters, we've been evaluating options and looking at what's available. I think we'll pick the pace up on that. We have picked up the pace on that. We'll continue to do it. But at this point, no prediction of when that would close.

All right. Thanks, guys. You have a good night.

You too.

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