Energy Vault Holdings, Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, good morning, and welcome to the Energy Vault Q2 FY '22 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the call over to Mr. Laurence Alexander, Chief Marketing Officer. Please go ahead.

Thank you, and good afternoon, and welcome to Energy Vault's Second Quarter 2022 Earnings Conference Call. As a reminder, Energy Vault's 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’s 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’ll 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, our 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.

Great, thank you, Laurence, and welcome everyone to our second quarter 2022 financial results conference call. I want to start my remarks today with an overview of the key highlights from the quarter, including the recently announced project awards that you may have seen come across this morning in our release representing approximately 1 gigawatt hour of new projects. David Hitchcock, our Interim Chief Financial Officer, will then walk you through the financial results in more detail before we open the line for questions. We made strong progress with what we achieved through the second quarter, and we continue to execute on our 2022 regional priority for deployment as we originally planned in the U.S., Australia, and China, which provide us tremendous momentum going into the second half of 2022 while setting ourselves up well for 2023. Let me start in Australia. We're building on our announced strategic partnership with Korea Zinc group. We announced the commencement of site and feasibility planning with Ark Energy, the Australian wholly owned subsidiary of Korea Zinc for multi gigawatt hours of both long and short duration storage projects supporting its sister company Sun Metals Corporation in North Queensland, Australia, given their stated commitments of being powered 80% by renewable energy by 2030. In November 2020, Sun Metals joined the RE100 and plans to become one of the first refineries in the world to produce green zinc. More recently in May 2022, Ark Energy announced a friendly acquisition of Epuron Holdings in Australia, and now has a portfolio of approximately 9 gigawatts of future wind and solar projects to support its strategy to become one of the largest producers of green hydrogen in Australia. Over to China, we previously announced the groundbreaking of Atlas Renewables’ 25 megawatt, 100 megawatt hour gravity based storage solution, and construction continues to proceed as planned. All permitting site activities and initial civil works have progressed well through the summer after some initial delays coming out of the COVID related shutdown in Shanghai. With all 1200 foundation pilings completing this month, the focus now shifts to the foundation, the fixed frame build-up, and the power electronics, which are all underway in parallel with the composite brick production locally. We expect mechanical completion and the beginning of system commissioning in the fourth quarter this year. Energy Vault will directly support on site the 100 megawatt hour project in Q4, and into next year with the power electronic startup, overall system mechanical completion, and final system and software commissioning to full operation. I want to provide a bit more color on the local development activities in China as well. Atlas Jiangsu, in collaboration with the Energy Investment Professional Committee of investment association in China, referred to as EIPC, has also engaged with China's top-5 state-owned enterprise power utilities and energy companies in discussions to support their decarbonization processes by providing Energy Vault resiliency centers based upon our EVx platform. Additionally, multiple 100 megawatt hour projects are under development across China, as well as larger gigawatt hour gravity storage projects and other provinces under the Zero Carbon Park initiative, also sponsored by EIPC. In collaboration with EIPC, and with additional support from the National Center for Sustainable Development and the Bush Global Advisors Group, Atlas Renewables will partner with EIPC’s five regional zero carbon park programs across China. A key objective of this will focus on the value of the EVx technology storage solution to support local grid and regional industrial renewable power needs. Atlas Renewables is supporting the efforts by EIPC to demonstrate Energy Vault’s gravity energy storage technology for inclusion in the new China energy green standard. To better ensure direct local support and more financial flexibility, Energy Vault is establishing a wholly owned foreign subsidiary in China, which is expected to be operational in October 2022 to support Atlas, China Tianying and the China market more broadly. Shifting to the U.S. market. We received a limited notice proceed with Enel Green Power in May 2022, which continues to be on track with the upcoming deployment of the first U.S. based gravity system in Snyder, Texas, which is expected to break ground in the next 60 days. In May, we also announced with DG Fuels the doubling of size and increased scope of our previously announced project and providing the production of green hydrogen to support the biomass waste energy process in the manufacturing of sustainable aviation fuel. Under the terms of the original agreement, Energy Vault agreed to provide 500 megawatt hour for the first three projects starting in Louisiana. This specific project was increased in capacity and now developed to support up to 73 megawatts for 16 hours, reflecting a total of 1.168 gigawatt hours in storage capacity for this first project. DG Fuels plans to follow the Louisiana project with additional projects in British Columbia and Ohio, with an opportunity for total storage capacity of 2.234 gigawatt hours overall, and up approximately 735 million in project revenue over time as previously announced in the quarter. In April, we announced a signing of a Memorandum of Understanding or MOU for gravity based energy storage technology, as well as our energy management service platform with NTPC, India's largest power generation utility, to support their clean energy transition. The MOU is to collaborate and formalize a long-term strategic partnership for the deployment of Energy Vault’s EVx gravity based energy storage technology and its energy management software solutions based on the outcome of a joint feasibility study, which is underway now. This is a tremendous landmark day for Energy Vault and the execution of our software and Energy Vault Solution strategy announced just nine months ago with the addition of John Jung and Akshay Ladwa to the Energy Vault team in November 2021. Today, we are making multiple project award announcements, totaling nearly 1 gigawatt hour, progressing our first Energy Vault Solutions project integrating battery energy storage systems. Our technology-agnostic energy management software platform extends our offering to enable both short and long-term duration storage solutions with diverse underlying storage technologies. EVS now enables our customers to utilize the same software platform across their energy generation and storage platforms, while future-proofing their evolution to longer duration storage as renewable energy continues to grow as a percentage of the power generation mix. We are announcing three project awards today. A 275 megawatt hour project with Wellhead Electric and W Power in Southern California. A 220 megawatt hour project to provide energy and ancillary services to the ERCOT market in Texas and resource adequacy to the CAISO market in California with a leading independent power producer. And finally, a 440 megawatt hour project with a large Western U.S. public utility. All of these awards will be followed shortly with customer announcements. The project with Wellhead Electric is a 275 megawatt hour energy storage project in Orange County in Southern California. Through our EVS team, we will deploy a 68.8 megawatt battery energy storage system at Wellhead’s Energy Reliability Center in Stanton, California, to provide enhanced resources and improved grid reliability to the Southern California Edison territory. The Stanton Energy Storage System will be one of the largest energy storage systems in Southern California. All of these projects were based on our EVS proprietary system design and energy management software for optimal economic dispatching. These contracts reflect the successful execution of our EVS technology-agnostic strategy to provide customers with the most flexible and cost-effective energy storage solutions. I want to call out a special thanks to Akshay Ladwa, our Chief Engineer at EVS, and his team for their innovation and agility and speed in the development of the new platform, coupled with an intense customer focus to support the project awards announced today, as well as Marco Terruzzin and his commercial team in winning the trust of the newly announced customers through a relentless focus and a passion to serve their needs while solving complex problems. With the new market introduction of our EVS platform and services, coupled with the ongoing multi-continent deployments of our gravity storage solutions, we are well-positioned to take advantage of what remains a very healthy and growing market. From an industry perspective, demand trends remain robust for storage technology across durations supported by carbon neutral and reduction targets from corporations in some of the largest countries across the globe. If you look at the second half of 2022 and full-year guidance, we are expecting revenue in a range of $75 million to $100 million, reflecting gravity project starts as well as newly awarded EVS project starts in Q4 this year. We currently expect adjusted EBITDA in a range of minus $10 million to plus $3 million for the year. Looking at 2023 and the Gravity and the EVS projects awarded and underway, as well as early development activity in China referenced earlier, we are expecting the aggregate revenue for 2022 and 2023 in line with our original investment plan, for a total of approximately $680 million across both years. We continue to see many positive regulatory macro trends that will benefit Energy Vault's business trajectory. We are excited about the announcement this past weekend of the approval of the Inflation Reduction Act in the Senate and believe that the inclusion of the standalone storage, ITC, and support for clean energy initiatives will continue to greatly benefit our growth strategy and that of our customers. Our gravity and battery storage solutions are seeing heightened demand due to the economic value we are able to create without ITC or tax subsidies, but this legislation will serve to support and accelerate our growth trajectory. Additionally, we continue to make good progress in building out our global supply chain and other infrastructure capabilities as we execute on our initial projects and continue working to source and qualify critical materials and establish key supplier relationships globally. For our EVx gravity solution over 50% and up to 75% of our solution is sourced locally within the region, eliminating some of the challenges facing many other storage providers in the industry while maximizing the application of the regulatory incentives for local content and job creation. I also want to highlight a key action that the Board implemented, extending lockup agreements for 100% of the executive officers who held equity awards that vested on an accelerated basis upon the closing of Energy Vault’s business combination in IPO in February 2022, impacting equity awards underlying a number of shares that equal approximately 5% of the shares outstanding as of June 30, 2022. This underscores our alignment with our shareholders and the long-term vision and belief we have in our strategy, and the team we are building here at Energy Vault. We are all results-driven management team and laser-focused on creating long-term shareholder value while maintaining a disciplined capital allocation approach to ensure profitable growth. To wrap up, I'm very pleased with the commercial progress we have made across our gravity and the new capabilities we unlock for customers with our new EVS platform. Stay tuned for more exciting announcements to come as we continue to be actively engaged in advanced discussions for multi-gigawatt hours of projects across four continents. I will now turn the call over to David Hitchcock, Energy Vault's Interim Chief Financial Officer, to cover our financial results in more detail. David?

Thanks, Rob. Relative to our financial results for the second quarter of 2022, revenue in the quarter was $1 million, reflecting construction support services to support the 100 megawatt hour project in Rudong, China. Second quarter gross profit was $0.4 million, driven by the construction support services revenue, through six months we've reported revenue of $43.9 million driven by the Atlas License Agreement booked in Q1, and gross profit of $43.3 million. Total operating expenses were $22.4 million in Q2, roughly flat with the $22.1 million reported in Q1 of this year. Stock-based compensation was $6.7 million in Q2, down $2.5 million versus Q1 2022. Excluding stock-based compensation, operating expenses were up $2.8 million versus the first quarter. Sales and marketing costs for the second quarter of 2022 were $1.9 million compared to $2.6 million in Q1 of this year. Excluding stock-based compensation, sales and marketing expenses were down $600,000 versus Q1 driven by a decrease in marketing costs related to the IPO. Research and development costs for the second quarter of 2022 were $9.8 million compared to $9.7 million in Q1 of this year. Excluding stock-based compensation, R&D expenses were up $900,000 versus Q1, driven by an increase in EVx testbed activities. G&A for the second quarter increased to $10.7 million, compared to $9.8 million in Q1 of this year. Excluding stock-based compensation, G&A was up $2.5 million versus Q1 driven primarily by cash compensation, professional fees, and personnel and recruiting costs. In total, we ended the quarter with 129 headcount across the company, up 38 heads or 42% versus March 31, as we continue to build out the team to deliver for our customers and execute as a public company. In line with our business plan, we expect that our operating expenses will continue to increase sequentially as we further expand globally and invest in the overall growth of the business. Operating income for the second quarter of 2022 was negative $22 million compared to a positive $20.8 million in Q1 of this year, driven by the lower revenue and margin, as we recorded $42.9 million of licensing revenue in Q1. Through six months, our loss from operations was $1.1 million. Second quarter 2022 adjusted EBITDA was a negative $14.2 million compared to a positive $31.2 million in Q1 of this year. Our earnings release in the 10-Q, which we filed this morning, includes a bridge from net income to adjusted EBITDA. The key non-cash or non-recurring items that we added back are the $6.7 million of stock-based compensation and the $14.6 million gain reflecting the change in the fair value of our warrant liability relating to our public and private warrants. On a year-to-date basis, adjusted EBITDA is a positive $17 million. As of June 30, 2022, we had approximately $299 million in cash and cash equivalents on the balance sheet, leaving us well positioned to continue to progress towards our growth objectives in 2022 and beyond. In Q2, we used $10 million of cash from operations, which was partially offset by the cash exercise of warrants in the quarter. Finally, I'm pleased to report that as of August 2, 2022, we redeemed the 8.9 million of outstanding public warrants as of June 30, 2022. Starting in Q4, we will no longer be marking these instruments. We still have the 5.1 million of private warrants outstanding. I'll now turn the call back over to Rob.

Thanks, David. Again, I hope you get a sense from what we discussed earlier in the commercial side of how pleased I am with the progress that the team has made in the first half of this year and making substantial gains and advancing our goals and building out a growth platform with the requisite infrastructure and team to deliver with it. We're very well positioned now through the second half of 2022, driven by the factors we've reviewed above, the most important of which are three. First, strong customer commercial validation from some of the largest customers in the energy sector, focused in the highest growth countries and regional markets for renewables and energy storage. Strategic investors, who are coincident as customers and playing an active role in helping guide and support the company through our Strategic Advisory Board, which held its first session this past month in July 2022. I'll also note that this focus on customers and listening to our customers and investors has served us well as we proved out the technology at scale with the first 5-megawatt system in Switzerland and helped to influence the evolution of that to our new EVx platform announced back in 2021. This has been fundamental in helping to guide our company and maintain our customer focus on the business. Second, a unique and unmatched energy storage portfolio that can serve customer needs across various durations and storage technology mediums, as evidenced by our recent project award announcements. No other energy storage companies are making announcements across both long and short duration projects. Announcing multi-gigawatt hour development of gravity energy storage projects in one of the largest energy storage markets in the world, Australia, and our first three EVx project awards from customers totaling another 1 gigawatt hour is not something that comes without dedication and a relentless focus on execution, while ignoring the noise. And third and finally, the foundation of all we accomplish as a company every day starts with our people, who share a passion for our mission of decarbonization and most importantly, serving customers. With that operator, we're now ready for questions.

Our first question is from Joseph Osha from Guggenheim Partners.

My compliments on all the announcements, I have a couple of questions. First looking at these energy bulk solution wins that you just announced, are they all hardware integration plus software? And if so, I was just wondering if you could give us maybe some rough sense as to what the contracted software revenue might look like for that gigawatt hour of projects you just announced?

Joe, it's great to speak again. We are in New York here, so we're on East Coast time. To your first question, the answer is yes, those projects include hardware integration and software, okay? They'll also include, as you would expect, long-term service agreements in addition to the initial hardware integration and software that gets implemented. Secondly, relative to those three contracts, you can expect something in the range of $350 million or so of revenue across those three specific projects that we referenced today.

Okay. Can you discuss the contracted software revenue, since that's where the significant value lies? Is that something you can address?

We're going to be giving more updates on that software component revenue as we get into the specific customer announcements, Joe, so we'll be able to share more then with you.

The second question is about the revenue target of $75 to $100 million for the remainder of the year. In terms of timing, should we expect the remaining revenue this year to come from EVS and additional monetization of the first China Rudong project? Also, it seems like you're starting a new project; where should we anticipate the rest of that revenue coming from?

Yes, it's going to come from a combination of our gravity projects that we announced, and also some of the starts on, in particular, two of the announced awards on the battery side in Q4. So that’s what you can expect for the rest of the year. There would also be some additional revenue from the initial IP license, and that’ll continue to sort of trickle in for the remaining amounts there.

Okay. And then the last question that target for next year is quite something, although I think your previous reference to the $350 million may have given me some sense there? To what extent are you able to help us understand that build up to that now looks like $580 or so million in revenue for next year, and how much of it might be that $350 you just referred to on the EVS side?

Yes, well, look, so that number essentially reflects, if you look at our first two years, 2022 and 2023 essentially a slight shift from 2022, given the ramp up of the project into ‘23. And with everything we see today, both in terms of announced project awards, some of those have pretty quick CODs into the mid part of next year. And so that gives us a lot of confidence relative to the revenue that we put out there. In addition, we have advanced discussions on other projects that we see fairly near-term closure on in terms of getting the deals done that then would impact as well next year. So that’s what essentially led to that revenue range there.

Okay. But just this one last question. Can you help us understand what contributes to that number for next year?

Sure. We have over $350 million from additional EVS projects and are also working on some gravity projects. There is significant customer activity and discussions happening across our main regions. I recently spent time in China discussing the ongoing developments there. The local government is very supportive in deploying removals, and China has set serious targets for 2030 and 2060. Our local partners are focused on these targets, and based on my previous comments, we see strong opportunities in those markets. This situation represents a substantial revenue ramp-up, and we have a clear view of this in terms of our current awards and ongoing customer discussions. It's important to note that the size of our deals is significant; we're not announcing 50- or 60-megawatt hour deals, but rather projects in the multi-hundred megawatt hour range. In terms of gravity projects, our focus is on large utility-scale and industrial projects rather than smaller deals, which take considerable time to finalize. We experienced this delay this year, and I would have preferred to have some contracts signed a quarter earlier. However, these deals require careful attention to safety and reliability, and our technical teams collaborate closely with customers to ensure they have the right setup for effective operation. As we move into the next quarter, I expect to share more information in November about our progress regarding project awards and bookings that will provide additional clarity for 2023.

Next question is from the line of Stephen Gengaro from Stifel.

So a couple of things for me, and I'm just going to ask one more on the ‘23 revenue guide. And that is, if you look at it right now, can you tell us how much is contracted, how much is in advanced discussions, and how much is expected? Because one of the big questions we get is sort of the revenue ramp in general. And since you kind of reiterated your sort of two-year cumulative revenue guidance, it would be great to get a sense for the visibility there.

Sure. Well, as I referenced, as we announced some of the new EVS projects, you can think about those in the $350 million plus type of range on those. And what's interesting about them, two of the three have mid-2023 CODs, so that, I think that's important relative as we think about recognition, meaning these are projects that are urgently needed by the utilities. A lot of them in California that have urgent needs. So that's on the one side; obviously the battery system side, those deals tend to turn a little more quickly, obviously, because we're not building gigawatt battery factories. We're buying and integrating our software. So those deals tend to turn quickly, and we have, I’d say, in the hundreds of millions of Gravity Energy towards projects that we see. And those obviously come over longer periods of time because it takes a little longer to build out those systems, and they’re larger projects. They are larger projects. So there’s a mix of that. That’s about all I want to say at this point. I think as I mentioned, to Joe’s question, as we get into next quarter, Stephen, we will have better visibility of course on the progress through this quarter, bookings, and new project awards, and be able to shed probably a little more color on your question. I think we felt comfortable saying something about 2023 even though we’re only halfway through this year just by the nature of what we have underway in awards and project awards and what we have in discussion, where we have actually been selected and we are finalizing a contract where we have been shortlisted, getting through a competitive process. So this is our first year, our first deployment year this year, so obviously it’s a little dynamic. But feel good about the mix of our portfolio here and what we are looking at for next year.

Okay, thanks. And when we think about these three projects with sort of battery storage involved, I think it's lithium-ion, is that a customer decision? Is that an application? And how does that sort of fold in with the overall strategy of the company and the margin profile?

Yes. Well, yes, these are all customer decisions. So that’s who we work for, and that's what our focus is. And in terms of the applications, they’re pretty diverse. Some of these customers that we have developed relationships over many years now have shared with us what they are trying to solve for. And they've got, Steven, they’ve got both short duration needs, they’ve got some longer duration needs that are going to be coming. They’re looking at hybrid architectures, for example, between long and short duration, and even looking at things like green hydrogen and hybrid systems with batteries and looking at unique ways to solve some of their storage needs and really ensuring that they are going to have the capacity at the right time. So I would say what's interesting and how core this is to your final part of your question, how does this impact in our strategy with what we are announcing around the software side of our business now. It really became clear to us a few years ago as we started to build our first commercial system at scale on the Gravity side. As we were getting feedback from customers that led to, of course, the development and the shift in the form factor to the new EVx platform. They were also sharing with us, what they needed to do to manage both generation. So think about that as wind, solar, as well as in some cases their existing fossil fuel that they're managing into multiple different storage solutions. So when you think about that complexity, it became very clear to us back in 2019 and 2020 that we really need to accelerate the part of our vision around the world software that's going to play in helping our customers evolve and supporting them. And that's what led to some of the priority on us getting the right team in here with the announcement back in November of John Jung and Akshay Ladwa joining the team. My, has that moved quickly, and that was nine months ago. And here we are announcing a gigawatt hour in project awards alone. I don't know any other company that's done that. So that's what I'd say about your question.

And then just one final one, your original, and I know there was sort of co-equity investment in a lot of this, so I think that's changed, but your original guidance had give or take $200 million of capital spending in ‘22 and in ‘23, any updates on that and what the cash use looks like over the next two years?

Yes. I think, David, you want to comment on that?

Sure. First of all, I'll provide a little bit of clarity on the rest of this year. As said in the prepared remarks, we wrapped up the second quarter with roughly $300 million of cash. As we look across the rest of the year and what cash we expect to use as we ramp up these initial projects, we expect to end the year with the cash balance between $260 million and $280 million. Secondly, when you looked at that original plan, there were a lot of CapEx equity-based deals that the team was expecting at that point in time. We really haven’t seen a lot of those as the business has worked through this initial year. There is one project that we’re looking at now that could be in that space. But we need to continue to evaluate that and make sure we understand exactly we want to go there, but there’s no projection in front of us right now, where we’re going to be spending $200 million a year on CapEx for that type of build, as they expected a year ago. Most of the deals we are talking now, the customer wants to own the project and wants to own the system. So our CapEx needs are going to be relatively light across the rest of the year.

Yes. Our business model is generally very light on capital expenditures. To emphasize what David mentioned, our customers prefer to own these projects, which is significant for us. This preference allows us to maintain the $300 million in cash we reported for the quarter, with minimal cash burn of just $4 million. We expect to finish the year with strong cash reserves and, importantly, no debt.

Our next question is from the line of Thomas Boyes from Cowen.

I had a couple. First, given the progress in China, I was just wondering if you could talk about what your expectations are around construction and commissioning have changed at all from when you initially put out your, it was like 12 months or something to build facilities that still a fair expectation?

Yes. For the first time, we are expecting mechanical completion of the first 100 megawatt hour system in Q4. Progress has been good despite the Shanghai lockdown. We currently have over 1200 piles in the ground and will begin the foundations next month, which means we will start to see construction emerging. We are pleased with the progress on the core project and the development activities involving state-owned entities in the utility sector, as well as regulatory groups that are facilitating technology advancement and the adoption of new storage solutions. It's exciting to be involved at this early stage as the storage markets develop and China increases its focus on renewable energy. As I mentioned earlier, we will be more engaged with commissioning activities. We are establishing a wholly-owned foreign entity which will provide us with greater flexibility to support local markets and collaborate with China Tianying and Atlas Renewables, as well as other regional markets where it is advantageous to leverage our presence in China.

Maybe just to kind of build off of that, since construction is going well over there, but it's happening at a time where there is inflationary pressures and for the cost of construction. What learnings have you had at that builds that you think that you could translate as far as controlling costs in the US or Australia?

That is a great question. This has been beneficial for us as we develop and build our first full-scale EVx system there. We are using a completely local supply chain for all the materials and power electronics. We are learning several things. You mentioned the cost aspects, particularly regarding core material costs and power electronics, which have been supported by the local supply chain in China. Additionally, we are implementing some of the latest cost-reduction strategies and new architectures immediately. Our approach includes modifying the infrastructure of the power electronics and our lifting mechanisms, as well as optimizing the foundation and piling activities for constructability. All these elements are being incorporated into this first system, which will offer valuable insights. As we get into commissioning the first EVx system, it’s noteworthy that it is a large-scale project at 25 megawatts with a 4-hour capacity totaling 100 megawatt-hours. These learnings will be relevant for our larger, evolving market in Australia and will also benefit our global EVx deployments, including in the US.

If I could, I'll sneak one more in jump back in the queue. Just could you give some insight into what kind of opportunities that you're seeing over this next call 18-month period as far as it relates to duration? My assumption is that it's still probably mostly in the 2-to-4-hour range, but I was just wondering if that's true or maybe if there's longer duration systems that are kind of in the pipeline for where you have in your guidance set up?

Yes. It’s interesting. We probably can uniquely answer that question, given we're playing across short and longer duration, right? So this is a really interesting question. The market continues to be in the bulk of the market, and you can look at all the market data focused in more of the 2-to-4-hour range. Now while saying that, what I’d say about us and our customer base, remember the strategic investors we have in BHP, for example, the Korea Zinc Group, which includes dark energy and fundamentals, has a stated strategy of being one of the largest green hydrogen producers out of Australia, groups like Saudi Aramco. When you look at these types of investors that are coincident with customers, the industrial players are making this transition and a lot of that’s going to require the production of green hydrogen. That’s going to mean longer duration storage of at least 8 and typically up to 12, I think we announced with DG Fuels, a IFRS 16-hour storage. You need that longer duration because you are driving a process of electrolysis with an electrolyte electrolyzer, where you are splitting water and making green hydrogen. So because of that on the industrial side, you have to have something that's 8 to 12 hours, better not to grade because it's going to get way too expensive, and that's where our gravity really comes in and plays strong. And really, there is just not a lot of scalable and low-cost, long-duration storage technology. There is a lot of development, and there are a lot of new solutions that are in process of getting to a first demonstration unit. We were ahead of the game. I think in this case with our first 5-megawatt system in Switzerland that we, in 2019, went right to market to prove the technology at scale, and that’s what led to all the diligence that we had from some of the largest energy groups in the world that I just mentioned. The diligence on the tech saw it working and working as planned, saw the round trip efficiency we are achieving in Switzerland there and that led to the progression in getting to their needs for longer duration storage. So, a little bit of a mix that given our specific customers said, that we work with on the industrial side, I'll say, and also with players making, for example, sustainable aviation fuel. So those types of projects, while they are longer-term and a little bit further out, I think these are things that are getting developed over multiple years. They're very large in scale. So we are going to see more and more on that longer duration play in our portfolio in the coming years and it's going to be a ramp as we get that industrial segment up and going. And the great news for us is, we have got with our new software platform the ability to help our customers develop and implement shorter duration solutions with the same type of software platform.

Our next question comes from the line of Brian Lee from Goldman Sachs.

I appreciate all the high-level color and kind of thoughts around the market. It's really visionary, kind of what you guys are doing and all the momentum you have here. But I have a couple of sort of more nuts and bolts types questions, just as I think about the model here and all the moving pieces. So maybe first off, on the margins, this battery storage all these project wins quite impressive in terms of scale and timing, but it's not your technology. It's not the gravity storage. And we see players like fluence and others barely maintaining single-digit gross margins on these types of deployments, EVx the software piece of the business. So I guess a simple question is what are you going to make margin-wise on being a battery storage deployment company for that kind of $350 million of revenue opportunity versus what you might make on a similar $350 million where you're selling the EVx systems? That’s my first question. And then I have a couple of follow-ups.

Sure. Let me provide some insight into the battery projects we are pursuing. I wouldn't categorize us alongside Fluence, as the projects we're focused on are complex and tailored to customers with specific constraints, such as limited space. This necessitates more innovative solutions regarding energy density that not all competitors can offer. The projects we've announced involve unique architectural combinations of different technologies, and we plan to share more details on that soon. Additionally, we are enhancing our offerings through software and services. However, it's still early to outline expectations in this area since we are just starting to announce these new projects. We will begin executing these initiatives in Q4 and continue into 2023, and I expect to provide a clearer update following our Q3 results.

Okay, fair enough. I mean, maybe a simple question just since you are benchmarking the initial financial model, ‘22 slippage is feeding into a better ‘23. So the aggregate ‘22, ‘23 revenue is in line with what your prior financial model was targeting. Would you say the same about margins given this mix shift which seems to be playing out as well?

Based on our current observations in the ramp-up of both the gravity sector and the battery portfolio, this mix is likely to affect our historical business plan due to the different types of projects we are undertaking. We're seeing some positive developments, particularly in our ability to license technology, especially related to gravity in various parts of the world. We had anticipated engaging in some of this earlier, and we were fortunate to secure a significant early deal with Atlas in China that was larger than expected, which will positively influence our overall margin profile. As we develop gravity further and navigate supply chain challenges along with the demand from EPC companies, I’ll share some insights on early margins. EPC companies are extremely busy, especially when launching new projects, specifically gravity-related projects. They are integrating systems that haven’t been built previously. Earlier this year, we saw many EPC companies incorporate large contingencies for unknowns, especially regarding labor, which has shifted a bit. As a result, our strategy is to be more involved in the innovation of constructability. Moving forward, we will factor this new mix into our margin profile for the remainder of this year and into next. While I provided some adjusted EBITDA guidance, we haven’t yet offered specific guidance on unit economics. I expect our gross margins to be slightly lower as we adjust to this new mix for 2023, but we will gain more insights in the coming quarter as we begin executing projects. This is crucial because we will start recognizing revenue from these projects, putting us in a better position with each passing quarter. This is part of our transformation as a new company deploying planned solutions in our first deployment year, along with the extended timelines for gravity projects, which can take 9 to 12 months or longer for larger systems, particularly those exceeding 500 megawatt hours. While this may not provide all the clarity you seek, I wanted to indicate that we will need to update our strategies across licensing, gravity, and our EVx integration platform, which won't be limited to batteries. We aim to provide more detailed updates after Q3.

I appreciate the directionality. I know there’s more things to kind of get ironed out here before you reveal the specifics. So that’s helpful though. Maybe last one, just again, kind of logistically, and I’ll get back in the queue. Can you talk about for these large project awards you’re announcing today, the three battery storage, who the battery suppliers are? I mean, the COD in mid ‘23 is great, because it means real line of sight to these projects moving forward, but have you secured the supply? What’s sort of your situation on the ground in terms of lithium-ion battery suppliers pricing those contracts out, getting the delivery schedule?

Sure. Look, we aren’t going to provide specific names of the battery players; just know that we’re working with some of the most well-known players in the world there. We’ve also done a lot of development work on our own there; I mean, China’s a presence for us, as you can imagine for the last few years of what we’re announcing the last year, obviously, as a result of us spending significant time in the region. So I would say that we are looking there to leverage the market as best we can, as well as do some development between some players that are doing some unique things I think on the battery technology and how that integrates with some of the things we’re doing in software. For everything we are going to be doing, Brian, I hope you get a sense, we’re never going to be me too. We look at everything as how do we innovate and do something to provide value to customers that they aren’t potentially finding in the market. And that innovation isn’t just there because we want to say, we’re doing something cool. That is all about unit economics. That is all about unit economics. If you are going to differentiate and do something others can’t, there is a premium you can extract, I think, for that, or you are doing something more cost-effectively in the marketplace to really focus on that and driving that economic weight both for our customers and for us, quite frankly.

Our next question comes from the line of Noel Parks from Tuohy Brothers.

So thinking about some of the comments you are making about implementing technology improvements as you go, for example, the projects in China. I just wondered, could you maybe just talk a bit about what's maybe in motion technology-wise, whether you're talking about implantation, construction, or even all the way back to further progress on the material side? So just to give an idea of what's kind of being updated as you are just getting more attention as you go along with implementation and then design for the next rapid projects.

Yes, it’s a great question. So let me start with gravity. If you look at our gravity solution and think about the buckets of where our cost is, it starts with sort of the fixed frame and the foundation. So if you just think about you’re building a house, right? That’s what we’re building as a structure. So that starts with that foundational element, where I think I mentioned this before, but we are working with some of the leading research players in civil engineering. So for example, from Caltech, we have the Chair of their seismic and civil engineering group, Dr. Jose Andrade to join the company a year ago and is dedicated with us because of the nature of what we are doing as we build these structures and build them across different geological profiles. So that’s a chunk of the cost that we really look to get at and innovate, and that includes looking at alternative materials. That fixed rate component in particular, there are a lot of different ways you can structure a building. You can use steel, you can use prefabricated concrete, and there are also a lot of ways you can get at that constructability cost, which as I mentioned to one of the earlier questions from one of the analysts, this aspect of the time to construct and how you optimize to shrink that timeframe, how do you automate to minimize that labor component, while that labor component is much lower cost in places like China and other places like the U.S., it's very, very high, especially in this market. Especially in this market. So if we can innovate and provide a way to automate the building of these fixed frames, for example, in components, in prefabricated sections, using automated trolley that can leverage the infrastructure of the system itself. There’s a lot of things that we’re looking at there to address that bucket of cost. And of course, with the first system in China, we’re going to be looking at how these things play out in ways to optimize it because we’re going to be learning on these first builds. There’s a second piece around the power electronics; that’s the other chunk of cost, and that’s all the motors, inverters, variable frequency drive. In our case, in the gravity side, we have these lifting systems, these vertical lifting systems. So think vertical freight elevators, right? The large ones that are lifting essentially 25 metric ton blocks, which are the composite blocks. So that’s another area that we look at innovation in there, that gets down to hardware elimination, meaning coming up with architectures where we eliminate gearboxes or the active front end or the variable frequency drives in favor of mechanical systems that work differently, for example, in the process of how we’re lifting objects. So I think there’s a hardware meaning think about that as CapEx, right? For customers. So trying to reduce and get at that CapEx equation to take hardware cost and coming out, there’s obviously a volume component of that. So as we look at multi-megawatt motors and try to look at innovation in that space, that’s an area that we’d like to honestly see more innovation and therefore lower cost and more efficiency. We’re using motors that are going to be anywhere from 96% to 98% plus in terms of efficiency there for a portion of the architecture. So I think, we’re balancing innovation there to take material costs out, as well as to improve round trip efficiency. And that improves economics, right? Because what does that mean? That means for every unit that you store, we’re able to return more of that unit without loss back to the grid. So a higher round trip efficiency means there’s less loss in that process. So I hire round trip efficiency means there’s less loss in that process. So I think having those learnings translates directly into how we cost our gravity systems differently. The third has to do with these mobile masses that get built. Those are these composite – these 25 metric ton composite blocks. There are thousands of them per system. So you can imagine as we eliminate the use of concrete. So this is part of our focus on sustainability, but as well as cost, we aren’t using concrete in the production of those composite blocks; we’re using as a default solution soil. So that’s available locally. Additionally, we can use waste materials and where we can do that. We’re going to try to do things like coal ash, tailings from the mining process. And as we announced with Enel Green Power, looking at the integration of wind blade-decommissioned wind blades, and that fiberglass that otherwise have to be burned or buried. So we look at trying to recycle that. So those are the areas around cost that we try to get in gravity. Then what I’d say about EVS is I mentioned this to the last question, also that, I think Brian had, but also that Stephen touched on, we’re looking at trying to innovate to do things between the battery suppliers and our software in a way in helping customers solve some of their complex problems that can help us take cost out to the overall solution and provide something very value-added to customers. That includes by the way looking at different hybrid architectures to uniquely provide, for example, backup systems with multiple technologies. We’ll be sharing more about that in the future here as we execute.

As you mentioned, I'm trying to envision projects that are currently under construction as well as those at various planning stages, including specifications and scaling to determine their requirements. Regarding lead time, there must be a critical point beyond which we won't be adding any innovations for a certain period before the project begins. Can you clarify how this timing works when you're integrating advancements into a project?

That's a great question, and it involves balancing several factors. As we sign contracts, we need to adhere to deadlines and customer constraints while still meeting our targets. For our projects in the US, we need to get started, which may require us to be cautious with materials to ensure that the technology works well in the initial deployments. This could lead to higher costs since we may not have fully tested some of our new innovations and cost-saving measures yet. We’re enthusiastic about our progress in China, where we will be implementing and testing on a large commercial scale. In Switzerland, we have a test bed for our EVx systems, where we're examining various new cost-reduction strategies. There's a necessary balance in how we move forward based on the resources at our disposal, while also keeping a roadmap for progress. We structured the company to allow for substantial equity investments, originally planning over $350 million for projects across three years, anticipating greater involvement with our balance sheet. However, the situation has evolved, and we now require minimal capital expenditures, with one project currently under consideration for our balance sheet, details of which we'll share soon. The implementation of our cost-reduction roadmap and the decisions we make must align with our execution plans for customers. Regarding timing, we're genuinely hoping to secure some project awards two to three months earlier than we initially expected, ideally before June 30. However, the contracting process has taken longer than anticipated. We're ready to discuss these project awards now, which we couldn't do last quarter due to the ongoing contracting negotiations. Our management team has extensive experience in this sector, and we understand what it takes to finalize agreements with our customers. We're addressing complex issues for them, which requires significant engagement from our technical teams. Ultimately, the value of our innovative solutions drives customers to choose us, enabling us to navigate the contracting process successfully.

So it's still very much a very dynamic process and it's not as if there is an off-the-shelf installation, you can outline to somebody and do a contracting you're done. It sounds like you said a lot of involvement from the technical team just to even get to the contract?

Yes, it's not unexpected. To clarify, we always start with a standard approach and then move into specifics, which is part of our value proposition. For the gravity systems, we have a modular approach to get things built. So for gravity, it requires significant site work because we're constructing a building. This involves considerable upfront effort. It's more modular in nature. As we utilize our EVS software to tackle various challenges and incorporate new technologies, there is more creativity and complexity involved. That’s where we add value, and it’s why we are selected for these larger projects.

Ladies and gentlemen, at this time, we have reached the end of the question-and-answer session. And now, I would like to turn the conference over to Mr. Robert Piconi for closing comments.

Okay, great. Well, look, I want to thank everybody for joining our call today. We are really excited with what we have discussed today across the gravity front and the progress we are making in our focused three regions that we outlined at the beginning of the year, and that's the U.S., China, and Australia. We have a lot of activity going on globally. We're very measured and focused as a company to ensure that we focus on these first deployments of our EVx platform as well as the new deployments now with our EVS team that these first ones are very successful. And while I know the numbers are large as we have discussed some pretty large ramp here of revenues, we look into 2023, it does reflect a very focused effort on specific regions and specific customers. If you got a sense of the size of the deals we mentioned, I think that's a real benefit, meaning we aren't doing 30 deals or even 20 deals or even 15 deals. We are focused on large projects with large customers that have a lot of credibility and are making choices, as you heard today for our technology. So I think that's definitely a benefit. It's a strength. It allows us, I think, both a commercial and operational team to keep focused on few but important things. I think less is more in that regard, and that's going to help us drive success as we scale and ramp up and learn by the way. So these are going to be first deployments that brings with it some level of execution risk. At the same time, if you look at the management team around the table, and I always want to end on this note with the people and the team we have assembled, I really believe we have one of the most experienced, dedicated, motivated, and passionate teams focused on decarbonization but really, really focused on listening to our customers. And that's why you get the nature of being able to announce project awards of this size and with these type of customers and we have a lot in the hopper here, and look forward to share more here as we get back together next quarter. So thank you everyone, and enjoy the rest of your day.

Thank you, sir. The conference of Energy Vault has now concluded. Thank you for your participation. You may now disconnect your lines. 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.