Energy Vault Holdings, Inc. Q1 FY2022 Earnings Call

Greetings, and welcome to the Energy Vault's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laurence Alexander. Thank you. You may begin.

Thank you. Good afternoon and welcome to Energy Vault's First Quarter 2022 Earnings Conference Call. As a reminder, Energy Vault earnings release and a replay of this call will be available later today on the Investor Relations page of our website. This call is now being recorded. If you object in any way, please disconnect now. Please note that Energy Vault earnings release, and this call contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only predictions and may differ materially from the actual future events or results due to a variety of factors. We caution everyone to be guided in their analysis of Energy Vault by referring to our 10-Q filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, please note that we will be presenting and discussing certain non-GAAP information. Please refer to the Safe Harbor disclaimer and non-GAAP financial measures presented in our earnings release for more details including a reconciliation to comparable GAAP measures. Joining me on the call today is Robert Piconi, Chairman and Chief Executive Officer, and David Hitchcock, our Interim Chief Financial Officer. At this time, I'd like to turn the call over to Robert Piconi.

Thank you, Laurence. And welcome to everyone dialing in today. What a milestone with our first earnings review as a public company, and here we are already midway through the second quarter. It feels a bit like old times for me personally, given my prior roles in public companies. And I'm happy to be back and supporting our customers, investors, and the great people that are the foundation of our Company here at Energy Vault. I'll begin the discussion today with a review and update on our progress as a company from the founding a bit, but with a more near-term focus over the last three months to six months in particular both strategically and operationally, followed by an update of our successful execution relative to the plans that we first introduced to all public investors in September of last year. I will then turn the call over to David Hitchcock, who will cover our latest financial results in more detail. Well let's go back to where we started as we founded the Company. Our mission remains the same today as it was 4.5 years ago: focus broadly on decarbonization, which to us means we're focused on solving one of the planet's most pressing issues that poses an existential threat to the world we live in. The need for our global society to develop and store cleaner and more renewable forms of energy, thus decarbonizing and securing the health of the planet for future generations. To accelerate the adoption of renewable energy, you need to be able to store it so it can become dispatchable power or we use phrases like Clean Energy on-demand as we did in our early investor presentations. Today, new wind and solar plants are from 50% to 75% cheaper than the cheapest forms of fossil fuel. So what's the problem? The problem is that to store those same electrons that are generated is really hard to do in both an economical and sustainable way. In fact, it costs a minimum of five to ten times the cost of renewable generation power to actually store it. And today there are just very limited solutions that can sustainably solve this problem in a way that makes it competitive with existing fossil fuel plants. As an industry, I would tell you that we are way behind the innovation curve here, and that it is not positive for any of us in this position. The fact that pumped hydroelectric dams make up over 90% of all energy storage today really says it all. And unfortunately, we really can't build them anymore. But on the plus side, there are places like Idealab and people like Bill Gross and Andrea Pedretti, my co-founders in this project, from the very beginning. Bill also being the founder of Idealab, whose passion has been focused on renewable energy since he was a kid. It has resulted in well over 100 companies being created since he founded Idealab. It’s because of technology innovators like Bill and Andrea and like the people who worked tirelessly at Energy Vault to deliver for our customers that I'm optimistic and also excited to see many new storage approaches and technologies coming about. Fortunately, today we have an incredibly supportive industry backdrop with tremendous long-term tailwinds of investments that will be needed urgently to secure the clean energy transition that's already underway. In the last 24 months in particular, we've seen a dramatic shift in global policy at both government and private sector levels. Some of the largest investment managers and public companies globally have announced net carbon-neutral goals over the next five to 15 years. While many countries have committed to carbon neutrality, more broadly over the next 20-30 years. More recently, the war in Ukraine has also illustrated the need for many countries around the world, and really for our planet, including the United States, to more quickly develop increasing energy independence away from fossil fuels. And finally and perhaps most impactful, investors of all sizes, and employees of all organizations, are voting with their checkbooks and their feet and demanding that the companies in which they invest in, and the companies at which they work, improve all facets of the sustainability of their businesses, including the choices these businesses are making for their supply chain partners and the carbon footprint of their infrastructure used to deliver their products and solutions. These factors individually are significant, but taken collectively, demonstrate incredible support for the shift to renewables, and that cannot be ignored. And thus, the creation of our company Energy Vault. We develop and are now deploying turnkey sustainable energy storage solutions designed to address the tremendous gap in the market today for utility scale energy storage that is required for decarbonization to maintain grid resiliency as a more intermittent and unpredictable wind and solar power come online to the grid. An essential component in achieving this economically is the use of sophisticated software, which is why we announced in October last year the creation of our Energy Vault Solutions group, and the addition of former Greensmith Energy leaders, John Zhang and Jerry Zhang. The EBS team is leading the charge and bringing to market in record time our proprietary energy management system and optimization software suite, which is technology and hardware agnostic and leverages sophisticated algorithms to orchestrate and optimize both energy generation and storage resources to help utilities, independent power producers, and large industrial energy users to significantly reduce their levelized cost of energy while maintaining power quality and grid reliability. This is similar to how telecommunications networks evolved. And in similar fashion, our grid infrastructure is going through the same evolution. And as with telecom, software will play the major role in the optimization and distribution of electrons in our future. Our EBX gravity-based energy storage system, which I'll expand on in just a moment, has been designed to utilize eco-friendly materials, including waste materials for beneficial reuse when available for the massive composite bricks. This touches back to our mission of decarbonization. And for us, that means not only cutting-edge technology and economics, but thinking about ourselves and the products that we produce in a more circular economic way. Thanks to the material science partnership with Pemex labs and Swiss lab, our default solution is to use the soil from the local excavation to make over 98% of the composite bricks. Cheaper and more sustainable than concrete. But we don't stop there and neither did Pemex and our team of collaborations and scientists. We can also use coal ash, decommissioned wind blade fiberglass, tailings from the mining process. All things historically destined for landfill at a very high financial and environmental cost. The system also supports the creation of jobs in the local community as the majority of our EBS systems are designed to be constructed with locally-sourced materials and construction partners, which enables us to reduce supply chain risk and complements our brick composite manufacturing process, which is executed locally at the site as well. Local equals less transportation as well, which equates to fewer GHG overall from the transportation sector. And this is good for everyone. We fully recognize and embrace our responsibility as a company to facilitate the shift to a circular economy while accelerating the clean energy transition for our customers, and believe we have developed a truly unique approach to product design and supply chain management. While we're still far away from where we want to be, we're making great strides in leveraging the material science and innovative structural and civil engineering to help us get there. And I feel good about our progress in that regard. Let's come a little bit more forward. In 2018, we successfully developed a quarter-scale prototype to prove the main technology and economic parameters, and then shifted in 2019 to a commercial-scale demonstration of our first energy storage system that was designed to prove out the main fundamentals of the technology with a full five-megawatt system that was interconnected to the Swiss electrical grid in mid-2020. All core technology elements were proven and tested at commercial scale with 35 metric ton composite blocks, including the gravity-based charging and discharging sequences to and from the grid. We were successful in reaching several key milestones and achieving first-time development. This included first, a third-party validated round-trip efficiency above 75%, which is the first for any mechanical storage system and well above any thermodynamic process for energy storage that exists in the market today. We proved out the software automation and orchestration with machine vision computerized control and applied the innovative material science from CEMEX and their Swiss-based laboratories to minimize the use of concrete and enable the beneficial reuse of locally sourced soil, but also many other waste materials, as I mentioned previously. In doing so, we were able to replace concrete with local soil from that foundation excavation to make up more than 95% of the materials for the first-generation composite bricks. Our collaboration with CEMEX has enabled the use of other waste materials otherwise destined for landfills for this beneficial reuse. These materials include coal ash, fiberglass from decommissioned wind blades, tailings from the mining processes, and even regular concrete debris that carries a heavy cost environmentally and financially while adding incremental greenhouse gases to the atmosphere from their transportation alone. This innovation established a strong circular economic value proposition for our customers that are making the clean energy transition, while solving for large environmental liabilities on their balance sheets for disposal costs. After receiving feedback from customers on their desire to have a more modular system designed to address shorter-duration and higher-power applications in the two-hour to four-hour range as an alternative to lithium-ion while still allowing seamless scalability to longer-duration needs with zero storage degradation, we were excited to introduce the new EBX platform in April 2021, coincident with the investment from Saudi Aramco Energy Ventures. EBX, which leverages the key technology elements demonstrated at scale in Switzerland, is packaged in a new form factor that is modular, enclosed, and scalable. Our EBX solution allows us to deliver a system built for higher power and shorter duration needs, while also addressing longer-duration requirements in the eight-hour to twelve-hour plus range. Due to the more streamlined vertical motion of EBX's proprietary lifting systems, round-trip efficiency improvements are expected to yield performance in the 80% to 85% range, adding significant economic benefits to our customers and the global community overall. As a result of our achievements in value offering, we have been fortunate to attract many of the largest companies as our strategic investors or customers, including Saudi Aramco, BHP, TPC recently announced in India, Enel Green Power, Korea's Inc., Pickering Energy, CEMEX and Atlas Renewable, to name a few of the larger names. We are humbled as an organization and grateful to have the support from these global companies that are market leaders in their respective rights. We would not be here today without their support. Let's move now to our progress in the quarter. Overall, I'm very pleased with what we achieved in the first quarter here. We recognized total revenue of $42.9 million associated with the recognition of revenue from our IP licensing and royalty agreement with Atlas Renewable that we announced in February. We received $20 million of cash from Atlas Renewable during the first quarter in connection with the licensing and royalty agreement. And we received the second scheduled payment of $25 million already in Q2, putting $45 million of the total $50 million 2022 license already in the bank. I cannot say enough about the commitment and partnership we're forming together with Atlas, China Tianying, Chairman Yen, who heads China Tianying, and I'll talk a little bit more about that further on. Given the margin flow-through of the licensing and royalty-based revenue, we generated significant positive adjusted EBITDA of $31.2 million for the first quarter. As you know, we also completed our pipe investment in SPAC transaction in mid-February, resulting in net proceeds of $191 million to our balance sheet, solidifying the funding to execute on our plan and finishing the quarter with approximately $304 million of cash on hand. As previously announced, it is worth noting that two strategic customers, CEMEX Inc. and Outlets Renewable, each invested $50 million into our pipe, concurrent with our go public transaction, positioning us with a very strong balance sheet now, with no long-term debt. I want to take a moment now to expand on some of our key highlights and achievements in the first quarter. We made important progress with our strategic partners, expanded our world-class leadership team, and ushered in new board members along with a strategic advisory board. To provide a little more color on this, in January, we announced the strategic partnership with Korea Zinc and their subsidiaries on metals, which is based in Australia and is a zinc refinery. The Korea Zinc group is the largest producer of non-ferrous metals in the world and also includes wholly-owned subsidiaries, Arc Energy, which recently announced the closure of the acquisition of over nine gigawatts of wind and solar generation projects in Australia. Kathy Danner, the Vice Chairwoman of Arc Energy, also joined Energy Vault's Strategic Advisory Board, which I will detail further in a minute. This partnership supports Korea Zinc's strategy to decarbonize their refining and smelting operations with expected project deployments to occur in the second half of 2022. I want to recognize Korea Zinc for their partnership in such a short period of time since November and December when we were talking about storage, and really setting a pace of leadership in the world of companies that set aggressive targets. They've set ambitious targets of 80% renewable generation to power their operations by 2030, putting the capital behind those targets in the recent acquisitions they announced, for example, of the nine gigawatts of wind and solar. Very, very excited to be working with them, and we look forward to building on this partnership in the coming years. In addition to the IP licensing and royalty agreement I mentioned earlier, we took a significant step forward during the first quarter by breaking ground in China on the previously announced 100-megawatt hour EBX facility with our partners, Atlas Renewable and China Tianying, a recycling and environmental service company. The 100-megawatt hour gravity-based CBX system is being built adjacent to a wind farm and national grid site in Rudong, Jiangsu province, located outside of Shanghai, to augment and balance China's national energy grid to the delivery of renewable energy to the State Grid Corporation of China, the world's largest utility company. I really want to also recognize Chairman Yan from China Tianying for his leadership and crafting this announcement and this organization that we've built now to deliver on what we're going to be doing with not only the first 100 megawatt-hour gravity system, but also with our further deployments that we're planning after that demonstration. Pausing also, it is very important to reiterate that both Atlas and Korea Zinc invested $50 million each into Energy Vault. This $100 million investment coupled with cash received from our go public transaction, along with our series C, which closed in September 2021 for $107 million increase our already strong balance sheet position to provide additional flexibility, making us well-positioned to execute on our growth strategy. The investments by these two entities really demonstrate the value proposition of our technology and we're excited to have them as our partners. Also in February, we announced the appointment of two new board members to the Energy Vault board, Mary Beth Mandanas and Thomas Ertel, who bring strategic expertise in the areas of energy solutions and global corporate governance, respectively. Miss Mandanas currently serves as Chief Executive Officer of Onyx Renewable Partners, a renewable and distributed energy solutions platform serving the commercial, industrial, and municipal sectors in North America. Mr. Ertel currently serves as Chief Accounting Officer at Strada Education Network, and possesses more than 30 years of leadership experience advising audit committees and CEC executives on global corporate governance and financial matters. We're pleased to have both of these accomplished executives on our Board. We were also successful in adding talent and experience to our already strong executive team. This morning, we were excited to announce the addition of Josh McMorrow as the new Chief Legal Officer of Energy Vault. Josh joins our executive leadership team that is now at full strength and focused on executing our global expansion plans to deploy our innovative energy storage technologies. We're proud of our ongoing ability to attract world-class talent at our leadership level across the entirety of our operations. Moving to our Energy Vault Solutions business, or EVS. We made significant progress executing to our plan on the software development for the new energy management platform. As a reminder, we announced in Q4, 2021 the formation of EVS, which is led by energy storage veteran John Jung and Akshay Ladwa, both of whom bring deep experience and expertise in grid-scale energy storage and technology integration. Looking to the balance of 2022, we are well-positioned to begin supporting our customers this year with this proprietary technology. Importantly, our platform will be capable of supporting both energy generation and storage infrastructure integration across any energy storage technology owing to our hardware-agnostic approach and optimizing for a host of revenue-generating grid services. Additionally, earlier last week we announced with DG fuels the doubling the size and increased scope of our previously announced project. Under the terms of the original agreement, we announced that we would provide 1.6 gigawatt hours or 1,600 megawatt hours of energy storage to support DG fuels across three sustainable aviation fuel or SAF projects. For the first project originally slated for 500 megawatt hours in Louisiana. In October 2021, we invested alongside Black & Veatch and Hydrogen Pro, in financing rounds for DG fuels to support its continued development of the first SAF project in Louisiana. The upsized agreement for the SAF project is being developed to support up to 73 megawatts for 16 hours, reflecting a total of 1,168 megawatt hours in storage capacity. DG fuels and their partners are planning to follow the Louisiana project with additional projects in British Columbia and Ohio, as previously announced, with an opportunity for total storage capacity of 2.2 gigawatt hours overall and up to $737 million in potential project revenue over the three projects. We also continue to deepen our relationship with Enel Green Power following our strategic collaboration announcement in June 2021. After the successful completion of phase one, which was the wind blade recycling and feasibility study for the first gravity energy storage system deployment, we signed an MOU to move to the second phase for construction now, of a gravity energy storage system in Snyder, Texas. A two-hour system at 18 megawatts and 36 megawatt hours, with expected breaking ground in September of this year. We're really excited to showcase this technology in Texas with such an important partner like Enel Green Power. I really want to thank Nicola Rossi, the Chief Innovation Officer at Enel Green Power, as well as Salvatore Bernabei, the CEO of Enel Green Power, who have known Energy Vault now for the last 2.5 years and have supported our development and diligence of our technology. Finally, we announced the strategic advisory board in February to support me and my leadership team as we optimize our energy storage solution focus and longer-term strategic evolution. The Advisory Board consists of respected industry leaders from Energy Vault's existing investor and customer base who all bring relevant domain experience, deep knowledge of the evolving technology landscape and each, a proven track record of shareholder value creation. This includes leaders from CEMEX, BHP Ventures, Saudi Aramco Energy Venture, Ark Energy, Pickering Energy, PlusVolta, and Enel Green Power. I'm really looking forward to their guidance as we continue to prioritize our innovation and our focus on our longer-term strategic roadmap. As we look at the balance of the year, here's an overview of what we expect. First, we will continue to make significant progress on the construction of the Atlas Renewable project in Rudong, our first EBX facility in China. Speed and efficiency of local construction will enable us to test and deploy new and innovative cost reduction initiatives while leveraging the local Chinese supply chain for the local builds, but also for the future optimization of our global deployments outside China for selected power electronic components, for example. Second, outside of China, our focus this year will be executing with our strategic investors and customers in two very important and high-growth markets in Australia and the United States. With both our gravity-based storage solutions and our new Energy Vault software solutions, EVX, which provides a seamless software platform to integrate and optimize both energy generation and storage systems to help customers better address the complexity of the network transitions. Third, we will continue to build out our global supply chain and other infrastructure capabilities as we begin to execute on our initial projects, sourcing and qualifying critical materials, for example, and establishing key supplier relationships globally. We're really mindful to diversify our supply chain base to help eliminate as much potential disruption as is being seen in the current operating landscape across many sectors, and the fact that over 50% to 75% of our solution is done locally within the region is already an advantage in this sector. Finally, we continue to hire the best talent to ensure we can deliver on our mission. Our people represent the foundation of this company. And it is this talent and their passion to deliver and execute for our customers with courage, integrity, and above all, humility that drives our culture and makes Energy Vault the place where the best talent in the industry wants to work. Overall, I'm very pleased with what we accomplished over the last quarter and energized as to what the future holds for us at Energy Vault. I will now turn the call over to David Hitchcock, Energy Vault interim Chief Financial Officer to cover our financial results in more detail.

Thanks, Rob. I'm pleased to be joining you today, and I look forward to meeting many of our investors and analysts in the near future. I'll review our results for the quarter. But first, I would like to share my initial observations since joining Energy Vault in mid-April. So I'm four weeks in and very happy that I was able to work with and see the team in action as the quarter and 10-Q came together. It is clear to me that we have a solid base of talent on the finance team and a strong foundation of finance systems infrastructure and internal controls. In the near-term, I plan to continue to work with my colleagues across the organization to identify areas where we can further enhance our capabilities as we mature as a public company to provide a best-in-class finance function, focusing on adding required resources to strengthen and solidify the team, and continuing to implement and strengthen key systems and processes to enhance our visibility into the business. Moving on to our financial results for the first quarter of 2022. Revenue in the quarter was $42.9 million, reflecting the license agreement with Atlas Renewable. Licensing revenue is largely recognized upon the transfer of intellectual property to the customer, which we partially completed in the first quarter. There's roughly $7 million for other services that we have deferred until we deliver them in the future. From a cash perspective, we received the first $20 million payment for the IP transfer in Q1, and as Rob mentioned earlier, we have received the second scheduled payment of $25 million this quarter. First-quarter 2022 gross profit was $42.9 million, driven by the Atlas licensing revenue I just discussed. The costs for developing the IP we transferred is included in our historical R&D expense base. Sales and marketing costs for the first quarter of 2022 were $2.6 million compared to $0.1 million in the prior-year period, driven by an increase in marketing costs, including costs for our IPO, along with expanded headcount and an increase in stock-based compensation expenses. Research and development costs for the first quarter of 2022 totaled $9.7 million compared to $1 million in the prior-year period, driven by an increase in personnel-related expenses including stock-based compensation, depreciation, and engineering and development costs. G&A for the first quarter was $9.8 million compared to $1.9 million in the prior-year period. Primary drivers for these increases were due to an increase in personnel, stock-based compensation expenses, legal fees, insurance, consultants, and other expenses. In-line with our business plans, we expect that our operating expenses will continue to increase for the foreseeable future as we further expand globally and invest in the overall growth of the business. Operating income for the first quarter of 2022 was $20.9 million, an improvement from a loss of $3 million in the prior year period. Again, driven by the recognition of the high-margin licensing revenue. I should note that the operating income includes a charge of $9.2 million for non-cash stock-based compensation expense. First-quarter 2022 adjusted EBITDA was $31.2 million compared to a negative $3 million in the prior-year period. Our earnings release and 10-Q which we filed this afternoon, includes a bridge from net income to adjusted EBITDA. The key non-cash or non-recurring items that we added back are the $9.2 million of stock-based compensation, $20.2 million of change in fair value of our warrant liability relating to our public and private warrants, and $20.6 million of transaction costs. As of March 31st, 2022, we had approximately $304 million in cash and cash equivalents, leaving us well-positioned to continue to progress on our growth objectives in 2022 and beyond. The first quarter, which included the closing of the SPAC and the pipe was a very strong start to the year from a financial perspective. That, coupled with the commercial initiatives Rob discussed, and those that we have in progress, give us a good line of sight to delivering on our 2022 top-line plan. Looking forward, we are focused on executing for our strategic partners and customers and delivering on our business plan. I will now turn the call back over to Rob.

David, thank you. And I just want to compliment you on getting up to speed on the business here so quickly. David is somebody that I've known for about 20 years. Our paths crossed together in the telecommunications industry and I was able to convince him to come out of retirement to join us here on our mission. I want to thank you, David, for doing that. I'm pleased with our first quarter of 2022 as we made substantial progress towards achieving our goals. We were very well-positioned through the balance now that we enjoy a number of supportive factors. These include a strong Q1 financial performance as David just reviewed, across our income statement and cash flow, but perhaps more importantly, strong customer commercial validation across some of the largest customers in the most important markets for renewable energy and storage across the globe. We had a growing number of signed LOIs and executed agreements totaling approximately 2,500 megawatt hours or 2.5 gigawatt hours across our gravity energy storage system portfolio alone. These are the signals that give a lot of confidence as we look forward into the business with our deployments this year and in the following years. We also built a strong differentiation and sustainability from the beneficial reuse of waste materials to leveraging a localized supply chain that minimizes greenhouse gases from the transportation sector and supports local job growth. I think this aspect of our sustainability is so important for our customers, it's important for our investors, and our employees. For this reason, I joined the company, as we're thinking not only about what we produce and how we produce it, but we finish with the fact that we're the only energy storage company that has this aspect for the beneficial reuse of waste materials. We've had a great partnership with CEMEX along the way in this development and we continue to build on that partnership across the globe. Finally, I want to thank all of our employees for their hard work and dedication, particularly over the last six to nine months, as we went into the IPO market and the stock market, announced the deal, and had to keep focused on our customers. They never took their eye off delivery for our customers while we navigated both the pre-IPO market to support our transition to a public company, and then as we became public and began to execute as a public company, with their focus, determination, and passion for the decarbonization of our planet, none of this would be possible. I think about our employees in three groups. The first group, and to give an example of how we built this company, was a group that made it through the very difficult COVID period, an uncertain time for all of us, who had to take up to 50% salary cuts. We did not lose one employee through that period, and it's just a testament to their dedication and passion for our mission. Then there’s another group of employees, as we tripled in size over the last 12 to 14 months, who joined us from companies that were much larger, much more predictable, that had revenue, etc. I really want to thank those employees for their faith in us, for joining us, for staying true to their desire to pursue decarbonization with a company that has a growing global footprint. Just as an example, our new hires including David Hitchcock, who had a successful career as both a public and private company CFO, and also a large private equity firm. I want to officially welcome all the new folks, thank all our employees and attribute our success in our ability to navigate the public domain to all of you. With that, Operator, we're now ready for questions.

Thank you. We will now be conducting a question-and-answer session. Your first question comes from Stephen Gengaro with Stifel, please go ahead.

Hello, gentlemen. Congrats on a good start.

Hey there. Thank you.

Thanks for taking my question. So two things I want to touch on. One is, clearly the royalty payments were a big plus in the quarter. When we started thinking about how the year looks, and we're not asking for specific guidance numbers, but when you start thinking about the revenue recognition on projects and how we think about ’22 and ’23 unfolding and maybe relative to even the management forecast you put out there during the process of I think $150-ish million this year and $530-ish million next year, how is the progress there and how should we think about how the year unfolds from here?

Great, thanks, Steven. Well, to the first comment on the license revenue, that obviously is more of a one-time item. We're very happy to have not only that recognized, but $45 million of the $50 million in the bank. So that cash is obviously going to go to use to support our development for the rest of the year, which is I think is the main focus of your question, which is how does the rest of the year look in terms of revenue and execution. So we have projects that we just talked about above in the commentary here that are going to be in the United States, in Australia. In addition to building out the 100-megawatt-hour project in China. So I'd say from a regional perspective, those regions are going to be our focus. We have a lot of demand in many other places. We announced Stephen and TPC in India and working toward now a collaboration with them to really look at their evolution into renewables over 60 gigawatts. Some of these players we're just not going to be able to get to this year, but for the core ones that I mentioned in these locales, you can expect that we're going to begin with revenue recognition for gravity projects in our third quarter this year and then for the second half. As you're aware, we recognize revenue on a percentage of completion accounting mechanism, so that's under U.S. GAAP. As we build the systems and build them out toward progress milestones that get payments from customers along the way, we're allowed to recognize that revenue. We'll be matching up the cost for spending with our progress and recognizing revenue in line with those projects. We talked about here in the release Enel Green Power in Texas, we fully expect to get started on that. In earnest in the second half, we also mentioned Korea Zinc, BHP in Australia. They're both investors and customers, so that's a big focus for us. And we mentioned the 100-megawatt hour in China in Rudong that will continue now to be built out from the breaking ground in March of the last quarter.

Right now. That's hopeful color Rob, and the other question I just wanted to touch on was at this point when do you think you'll have your first commercial operational facility operating?

So we've always said as we went through the investor discussions that we would be building this year and turning over in 2023. I do think as we got started very quickly in China, that even that China unit from the February announcement to the mid-March breaking ground has moved and is moving very quickly. You may have heard a bit on the way the license payments have come through to us, with most of it on the balance sheet now. The fact that they not only are already breaking ground but announced last week, China Tianying announced the agreement with the local grid operator for the integration into the State Grid. So I would say that if any unit is going to be the first to turn over, I think in China just outside of Shanghai, that would probably be the first unit that we turn over based on how I see them moving, and the tremendous support that we've had from the local company, from Atlas Renewable, and from the local, regional municipal authorities in really expediting a lot of the approvals to have something announced and then breaking ground within six weeks with all permitting and things in place. So I believe pretty strongly that that's probably where we're going to see our first unit that gets turned over.

Great. Well, thank you for the color.

Thank you, Steven.

Your next question comes from Thomas Boyes with Cowen and Company, please go.

Thanks for taking my questions. First one being, just love to get a better understanding of maybe what the CapEx expectations are for the year. I would imagine a good portion of it would be earmarked for the construction of the mobile mass machines, so any insight there would be helpful, and maybe as a follow-up, what are the costs of the manufacturing and how should that trend over time?

Sure. Yes. The primary use of our capital is going to be associated with our brick machines. As you know, so that's really our main CapEx. We originally, Thomas, had budgeted in our very first five-year plan a lot of capital, I think over $300 million over three years to use for a lot of on-balance sheet financing and co-equity investments in order to get the projects built. That's really changed significantly from what our expectations were over a year ago. We have customers that really want to acquire and own these things. So that's not to say that we aren't going to deploy capital strategically with some projects where we feel it's relevant. As we announced with the DG fuels, for example, we did invest a bit in that project. But in general, the bulk of the CapEx is going to be focused on these brick machines. And a little bit also in these initial projects focused on building out to a little higher level our overall EPC and construction management. I think as you're aware, it's a difficult environment for a lot of the companies that are actually very busy in building and constructing, especially with some of the supply chain challenges. So that's put some stress in the system and we want to de-stress that a bit with investing in our own resources. That includes the software team, by the way, that we announced in October bringing that on. I'd say from a CapEx planning perspective, primarily no surprise around these brick machines. You asked roughly how much they are? They're modular type of brick machine construction, so they can for smaller projects make them from anywhere from $2 million to $4 million range. For larger ones, we can build them out or do multiple manufacturing lines and spend more. Now, remember, even if we spend more on a single project, these things are amortized over many, many projects over many, many years.

Excellent, and I appreciate the color. Maybe just switching quickly over the licensing business, what are the expectations for that outside of China? Are there other places that you think that model makes sense for specific markets or geographies?

Yeah. We had budgeted some licensing in our plan. Now, we didn't budget as much so early in our five-year plan. So this agreement and as I think you're aware, we had budgeted volume in China. We always just put together an individual line item in our internal budgets for licensing. But this was a little larger on the earlier front. As far as other locations and regions, there are other regions where this could make sense, and those are things we're exploring. We really like this model, Thomas, because it enables us to work with the right local partners with a design that's existing and proven for them just to go execute and for us to support what they need on road maps and even what they need from a technical support perspective, as required, and then they just go execute for that model to be successful. I would say what we've done in China, despite being unique in the sense of the introduction of a new U.S. disruptive technology concurrent in China. So a U.S. disruptive technology introduced in China first in parallel with other continents. I cannot recall any new U.S. technology starting in China. So that's significant in itself. But the fact that this company has invested over $95 million of $100 million in Energy Vault now demonstrates their commitment. They want to go build a big business to solve a massive problem in China. I think, as you're probably aware, that China is planning to increase greenhouse gases for the next nine years until 2030, and then they're only going to become net carbon-neutral in 2060 and that's a challenge the whole world will suffer. I'd say that in terms of us looking at these opportunities to license, I think it's a great model that starts with having the right partner, where you can move very quickly and it's the right balance between the partner leveraging their network locally and executing and building and us just supporting and having a royalty stream that's ongoing relative to that volume deployment. I think the way we structured China is a great model and we will seek to replicate that in the right locations.

Absolutely. I appreciate the insight a lot. I'll hop back in queue.

Thanks, Thomas.

Next question comes from Joseph Osha with Guggenheim Partners. Please go ahead.

Hi, guys. And I'm sorry if this question is duplicative. I got booted off and I had to get back on. You had in the past been willing to share aggregate megawatt backlog or commitment numbers. Is that something that you're able to do today or did you perhaps share that when I was off the call?

Yes. We actually threw some of the talking points here. We had shared that, so that same number Joe, that you remember from before in our investment reviews back in Q4, we pointed to that number as well, which is about 2.5 gigawatt hours between LOIs, MOUs in agreements. And that's significant in the sense of there are things we sign where we've been selected as the technology and the company and we work forward to get to a notice to proceed, that then generates a final announcement. Something similar to what we discussed on this call already for example, pointing to the Enel Green Power projects where we actually named the location and the sizing of it. So yes, that would be the number I think that would be the reference points right now in terms of the things we've executed in different stages of agreements that we're going to be building to, as things progress to notice to proceed and we go forward here for the rest of the year and into next year.

Okay. Thank you. That's helpful. And I assume assigning a duration to that is a little difficult so we should probably think of it in gigawatt-hour terms.

Yes, I think that's in megawatt-hour or gigawatt-hour terms for now. When we get to the specific projects where the customer allows us to, we may be explicit with the power. So for example, what have we said already? China, it's 25-megawatt, 100 megawatt hours, so that's a four-hour system. We disclosed the Enel Green Power, both power and duration, 18 megawatts, 36 megawatt hours, an interesting two-hour system for gravity, right, for the largest global IPP in the world. These are significant and it also demonstrates why our strategy for EBX was the right one. It was market-driven based on what our customers tell us, and that's why we adapted and went to the EBX architecture. So we could participate in this higher end of shorter-duration and have something that's flexible, modular, customizable because our customers were asking for it.

That makes sense. Thank you. I also wanted to ask, as you talked about turning units over, and I did hear from your discussion that this would be in China. What sort of tests in terms of performance or customer acceptance do you base in? And are there any concerns you have or hurdles we might want to think about once you turned a project over, in terms of being able to recognize revenue?

Yes. The first question is about what we need to measure when transitioning something. Generally, we have a specific number of operational days after commissioning that enables us to receive the final payment from the customer. Our contracts usually depend on power availability, meaning we must maintain a certain percentage of power generation and discharge. Another key performance metric is efficiency, specifically round-trip efficiency. Regarding concerns, the reason we secured significant capital through a Series B with SoftBank was to develop a commercial-scale system. This involved not just building it but also connecting it to a live grid instead of local diesel generators or similar infrastructure. The investments, testing, and optimization contributed to refining our overall solution, which directly influenced the development of EVX. We have successfully implemented this technology at scale before. Gravity is a fundamental principle that we've relied on for centuries. Our core technology utilizes motors and power electronics from well-established companies like GE, Nitec, Siemens, and AVB, all experienced in producing equipment for pump hydroelectric dams and other systems. There are risks associated with technology, including the sophisticated software we’ve integrated, but we've also validated that aspect. We are constructing a substantial infrastructure. While there may be some delays in commissioning the first systems, it’s a matter of timing rather than uncertainty. Importantly, we have successfully integrated these components into a new system called the EV1 tower, which is currently in Switzerland and will be taken down in the next few quarters. Overall, we are confident in both the technical feasibility and our capability to efficiently transition these systems.

Alright, thank you very much.

Great. Thanks, Joe.

Next question comes from Brian Lee with Goldman Sachs. Please go ahead.

Hey guys. Good afternoon. Thanks for taking the questions. I hopped on a little bit late.

Hey, how's it going?

I might have missed this, but can you actually quantify your top-line guidance for ’22? I know the last time you published a forecast, I think it was for a $148 million of revenue in 2022, and then post that, you announced the $50 million licensing agreement with Atlas, which sounds encouraging as you're receiving those funds. If my math is right, I guess it implies something in the roughly $200 million top-line range for recognized revenue in 2022. You made a comment during the prepared remarks that you feel pretty comfortable about the guidance. Is that the right number to be thinking about in the models here, reconfirming the $200 million or so on top line for 2022?

Yeah. This is David. I don't think we reconfirm that 200 number. I think given the good start in the first quarter and the projects that Rob laid out as we went through all of our commercial progress that we're focused on and we've got good line-of-sight on delivering roughly $148 million for the year.

Okay. Inclusive of the licensing. Okay. That's fair. And then maybe two more specific questions just as we try to calibrate the model. One is, you mentioned Enel and Korea Zinc and Atlas. I know DG Fuels, you also mentioned them, but can you give us an update as to the progress with that large customer and whether or not you're anticipating to see shipments in revenue recognition from them this year? And then secondly, on Atlas, outside of the $50 million licensing revenue you'll see, can you give us a sense of the range of revenue you'll see on the 100-megawatt hour deployment? Given that's the first one, it sounds like that's going to be fully online and could be in 2022 when it's all said and done. Thank you.

Thanks, Brian. Rob here. I'll address these points. Firstly, regarding DG fuels, we recently announced an expansion of our first contract, which has more than doubled in size. The timeline for this project will depend on DG fuels finalizing the details, as we have a larger expansion and much work to prepare before we receive the notice to proceed. We have not included any of that revenue in this year’s projections. As David mentioned, our public guidance remains at $148 million. If we announce something additional later, it does not exceed the $148 million; it is part of our annual total, which has not changed. We are optimistic about our current projects. Additionally, in relation to Korea Zinc and their subsidiaries, ARC Energy and Sun Metals BHP in Australia, they are both investors and partners in storage. We have commenced work on the 100-megawatt hour project in China and will provide guidance regarding its timeline at our next call. The project is already underway, and we are assisting with various developments as they begin the piling activities. It’s remarkable; we announced on February 1st the $50 million pipe investment and the licensing and royalty agreement, and they were in the ground within six weeks. China is consistently impressive in its speed and efficiency with infrastructure projects, and I’ve seen this firsthand across three industries over the past 30 years. To your question about how this fits into our plan, it’s already in progress. I expect it will be part of our strategy, and we will provide updates next time on its impact in the second half of this year.

Alright, thanks a lot. We appreciate it.

Yes.

Next question comes from Noel Parks with Chewy Brothers. Please go ahead.

Hi. Good afternoon.

Noel, how are you?

Really good thanks. I wonder if you would talk a little bit about total cost of ownership and of course with some of the geopolitical events we've had on top of a big upsurge that has been in lithium pricing. I know originally you talked about the differential between your total cost of ownership versus a lithium storage solution. I wonder, have you done any updated calculations or do you have a feel for what that delta might look like now at current prices?

What I can say about that is that it really varies. There’s a duration aspect of storage and the amount of power that needs to be delivered. For instance, in the two projects we discussed, Enel has an 18-megawatt system with 36 megawatt hours, which is a two-hour system with a specific cost profile based on delivering that power over that time. Then in China, there's a system that has 25 megawatts over four hours, which translates to 100 megawatt hours, leading to a different cost profile. So, there will be a range of costs depending on the power specifications and duration. Now, concerning your question about total cost of ownership, we think of it as the levelized cost of energy or storage that fits into the levelized cost of energy. Typically, there’s a capital expenditure component. You mentioned Lithium, which we also share a CapEx investment for building the system. Then, Lithium has something we call augmentation CapEx. As their battery cells degrade over time, similar to mobile phones or laptops, those cells need replacement, particularly as they are cycled more frequently. The next component is the operating expense. This is critical since it affects customers' profit and loss reports yearly, and they pay close attention to this. For Lithium-ion, those facilities may require air conditioning, especially in hotter regions, leading to higher operational costs compared to us. Our infrastructure can function effectively without specialized heating or cooling. We don't experience the same degradation, so apart from standard maintenance like replacing motors and power electronics parts, we don’t need to replace entire battery cells. As we don’t degrade, that significantly benefits us regarding augmentation CapEx and operating expenses. Additionally, for end-of-life considerations, I believe technology will advance in recycling more of what constitutes Lithium-ion batteries, though we aren't there yet, which presents some liabilities on our balance sheet. Our infrastructure can be established to last a long time, and we estimate a technical life of over 30 years. Just like pumped hydroelectric dams that have operated for nearly a century, many being 40 to 50 years old, we expect our setup to have a similarly long lifespan. Does this provide a clearer comparison?

It does, it's interesting because just beyond the raw materials costs going into lithium storage, especially the operating and augmentation costs are helpful so thanks.

Yes. Okay.

I would now like to turn the floor over to Rob Piconi for closing remarks.

Great. Thank you, Operator. And I want to thank everybody that took some time to listen in with us today. Hopefully, you got a sense from us, we're really excited about the start that we have today. But more importantly, we're excited about the market validation and the commercial and customer progress that you don't see in last quarter and you may not see in the next quarter. But these announcements that we've made with the largest companies in their respective countries for power and TPC for example, the largest power provider in India, with the likes of large industrial giants like Korea, Zinc, like BHP. With groups that are distributing and building out renewables and signing long-term agreements with utilities like Enel Green Power, the largest global IPP in the world. It's very significant and gives us a lot of confidence as we continue to build those relationships, that some of them are quite new. Both Korea, Zinc, and Atlas are a bit new, but just seeing tremendous focus from them and in particular in China, as you heard, the speed that we're moving there is really unprecedented from anywhere else in the world. So fairly I want to thank you all for listening in and again, thank our employees for supporting our development and who continue to support our development up to this point. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.