Q3 2022 Ess Tech Inc Earnings Call
It was delayed.
These units to be quickly completed and tested once we receive the final parts.
While we didn't ship as many units in Q3 as we had hoped we had many others in various stages of completion in the third quarter and we feel we can ship 20 or more AWS in the fourth quarter.
Leave us below our original target for 2022, but importantly, we still feel confident in our ability to get to our exit run rate by the end of the year.
These challenges obscured the progress we are making with our production processes.
As a reminder, we generally speak about production in two categories battery modules, which represent our core intellectual property and balance of plant.
On the battery module side, we now have two semi automated lines running and have our fully automated line slated to be up and running before the end of beer.
As our team works to optimize each of these lines to improve cycle time scalability and cost. We now have line of sight to exit 2022 with the capacity greater than our original target of 750 megawatt hours per year.
On the balance of plant, we continue to make progress with our design for manufacture ability initiatives that speed throughput improved quality and lower labor and its associated costs.
At the end of the third quarter, we have already cut the labor input to energy warehouses by half from the start of the year and expect considerable additional improvements by the end of the year.
We are in the midst of transitioning from batch to scale manufacturing and are optimizing our processes as we grow capacity importantly, I wanted to give a big shout out to the team that is working tirelessly to execute these improvements against the challenging supply backdrop.
I would also like to welcome Vince coming out to the team.
Vince joined US as Chief operating officer in September and brings a wealth of experience leading high growth manufacturing organizations and thrilled to see that many new faces that have joined <unk> in 2022 gel with the existing team to drive our progress.
Certainly an exciting time to be a DSS.
We continued to make significant progress with customers as you likely saw last month, we announced a transformative deal with the Sacramento municipal utility district or smart.
Deal calls for Esf's to supply up to two gigawatt hours of long duration energy storage over the next five years in the form of energy warehouses and energy centers.
Smart is a leader in Decarbonize the electric grid.
California's objective is the heavy carbon free electricity generation by 2045, Smothers targeting 2030, a full 15 years earlier than the rest of the state.
Additionally, as another sign of the significance of this transaction. So smug will team up with local colleges and universities to establish a center of excellence to educate the workforce needed to install and service the burgeoning long duration energy storage market.
We're thrilled this progressive utility has chosen <unk> as their partner as they drive forward, but there is zero carbon plant and is exciting and transformative. This deal is let's put in perspective in terms of the market size.
Spud to provide the electricity to one 5 million homes in this deal will only supply a fraction of their needs.
And smug serves only about 10% of the 15 million homes in California.
In fact, California represents roughly 110th of the storage power needed in the U S, which is estimated to be about 50 gigawatts.
As utilities in jurisdictions around the world progress their decarbonization plans. It will quickly recognize the critical role of long duration energy storage in achieving their goals.
This deal comes on the heels of the announcement of our supply partnership with Australia based energy storage International is the Asia Pacific.
For ESI.
In fact I was in Australia, just last week attending the all energy, Australia conflicts and could not have been more impressed with how the entire market is moving forward to drive de carbonization and accelerate the demand for long duration energy storage.
Si relationship expands our reach into a new and fast growing geographic region. When we expect to offer significant opportunities over the years to come.
When combined with the Smart agreement, we've established a meaningful base of business for us.
And the last time I spoke to you the completion reduction that could just passed the Senate.
Now that it has been signed into law. It is clear that the IRS will have a dramatic impact on deploying technologies like ours, along with many others to decarbonize the domestic energy system.
We can expect our customers to receive a baseline investment tax credit of 30% for a battery project net incentive should increase by another 10% for deploying domestically sourced USS iron flow batteries.
With an additional kicker possible for settling the project and an economic or energy development zone, our customers couldn't receive a total tax credit of 50% or more.
These are benefits our customers can access without any application process for the next decade.
<unk> top of that our customers can also apply for certain available grants and if approved.
That can knock more than two thirds off their total project costs approaching 70% savings.
Additionally, <unk> is expected to receive a production tax credit of about $45 per kilowatt hour that we ship.
Solar plus storage without incentives.
Regarded by many as a better capital investment than other generation options.
Combined the impact of these initiatives produces a dramatic improvements in the ROI of investing in carbon free energy projects.
Coupled with the increasing prices for storage that we're seeing in the market today.
We believe this can provide a considerable accelerant to our growth and profitability objectives.
Combination of incentives represented unprecedented catalyst to our market both customers and suppliers we.
We are excited to capitalize on the opportunity it presents.
With all of this excitement in our business and the market, it's bittersweet to announce that the mere most car will be leaving Etfs.
There has been a significant contributor to the early development of the company and we thank him for his many efforts.
We're very excited to announce that Tony Rob has agreed to join as our new CFO and look forward to everyone getting to know Tony over the coming weeks and months.
We have included details in the press release, but I'll quickly say that Tony brings extensive experience across a range of industries and we are delighted to have him join the leadership team.
And with that I'll hand, it off to a mirror to discuss the financials.
Thank you Eric.
I will review the financials, let me say that it's been my unique pleasure to serve as the CFO of <unk>.
At four years.
I am proud of how much the company has accomplished and know that the best is yet to come.
As I transition into other opportunities I'm proud of the team we've built and have confidence that my successor, Tony Rob will continue and accelerate on the momentum we felt.
Now I will review our financials.
Unless otherwise noted all numbers, we talk about today will be on a non-GAAP basis.
You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website.
As Eric shared yes that continues to gain momentum with our manufacturing initiatives as well as with customers.
I am pleased to share that we've also made good progress on advancing the revenue recognition process.
Near the end of Q2, we shipped a unit to developer tariffs all energy and we were able to commission gain acceptance and recognized revenue on this unit and less than three months.
This resulted in revenue of $189000 for the third quarter.
As we've shared we've been very purposeful in our process and achieving revenue recognition as we balanced legacy customer contracts initial field experience deploying our F 200 battery module and ramping up our customer success organization.
This accelerated revenue recognition timing reflects progress that we've made across each of these fronts and we are committed to honing our process further and working with our customers to further speed up the process.
As a reminder, we remained under development accounting rules and Q3, so the material overhead and labor costs to be incurred in producing the products. We ship fall into opex, resulting in zero cost of goods sold our non-GAAP operating expenses for Q3 were in line with our expectations at $24 5 million.
With that we reported Q3, adjusted EBITDA of negative $24 million.
We ended the third quarter with $166 7 million in cash and short term investments.
In the third quarter cash used by operations was $22 1 million.
We continue to make great progress in our cost reduction efforts.
We have many new people on the team both on the floor and in our leadership ranks and they continue to make outstanding progress not only improving our current manufacturing operation, but also setting the stage to scale manufacturing as we move beyond our two semi automated lines to our first fully automated manufacturing line.
As Eric mentioned, we believe the team innovation and focus on optimizing processes should result in assets exiting 2022 with the capacity greater than our initial goal of 750 megawatt hours.
Given our current plan and the assumption that we will remain under development accounting for the rest of the year. We continue to expect our non-GAAP operating expenses for the year to come in at around $100 million as.
As we execute our plan in the coming year.
We currently have ample liquidity to run the business and expect to end the year with cash cash equivalents and short term investments in excess of $120 million.
And with that we can open up the line for questions.
At this time I commend everyone in order to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks, So much guys could you talk about the number of customers you have that are testing are qualifying the product at this point.
Sure Collin good to hear from you.
<unk>.
About a half a dozen men at this point.
Okay, and then in terms of operating data.
The assistance that you've got out in the field can you talk a little bit about how systems are performing relative to expectations.
Any surprises that youre seeing now that you've had them out until some of them are.
Well.
It's still a relatively limited data set so I don't know that we have learned anything terribly conclusive we have learned a lot about.
The system deliveries shipments.
Hardening the product so it goes to the transport process, but at this point I don't know that we have any broad.
Our conclusion was around system performance.
Over any extended period of time.
Okay.
Its helpful and reasonable and then just with the couple of lines up and running can you speak to the yields that you're getting off of those lines.
How thats tracking relative to expectations.
Yes, it's a little a little ahead of expectations.
You mentioned on the call.
We're tracking.
<unk>.
For slightly better total capacity availability at the end of the year than we have anticipated and that really comes from a better yield off of the lines that we had done what we had anticipated so we feel.
We feel great about that.
It's certainly been more keys.
Ensuring that we have the supply chain to keep the lines is the limiting factor at this point.
Thanks, so much guys.
Thank you.
Your next question comes from the line of Thomas <unk> with Cowen <unk> Company. Your line is now open.
Great. Thanks for the.
Taking the questions first one for me, maybe just to piggyback off of Collins is just around the labor cost reductions with the lines I mean, it's great to see the 50% and are recognized as of this quarter I believe the long term target was closer to 80% is that still a fair target is it better just because of the better yields.
And maybe kind of over what timeframe do you think that we would kind of see the balance of those improvements with the automated line up and running.
Yes, I mean look we're in the process of commissioning our automated line now so I think <unk>.
Actually I think that those those targets still hold I think once we get the mine up and running.
And finalize some of the processes around that we'd be able to better speak to if that number would need to be updated or not I think.
The summary is there some significant cost out opportunity that remains with.
What's driving labor out and we're right in the middle right in the heart of determining exactly what that is.
Got it that's helpful and then.
Again, if you could just.
And then give some color around the uptick in demand that youre seeing following the passage of a 2022.
Im wondering if thats still a lot of the increase for systems that would be kind of in that two four hour range, you're already seeing kind of more pronounced shift to longer generation generation six plus.
Our systems.
Yes, I'll take it I think it comes through we are seeing more.
Longer duration request certainly.
Some of the more advanced markets, whether it's California, or Australia, where I was last week any of the markets that are further developed arm b.
On the renewable penetration curve are all starting to ask for longer six 810 hour duration storage and I think that would have happened irrespective of IRA whats happened now is that.
People are doing the math and figuring what the impact on the.
IRI.
Return on their ROI on their projects would be and if there was something that was maybe on the margin before.
Kind of easily goes into the money after the.
The IRA incentives the itc's kick in and so I think that's really been an accelerant to the amount of it to the inquiries and frankly, the scale and the size of the projects.
Perfect and then if I could sneak one more and I'll hop back in the queue I just saw that you. After the close it filed a shelf offering. So just wondering if you could give some color on that would be helpful.
Sure well as you know we've just come on the one year anniversary of the listing. So it is time to move through that next generation of.
What I would consider kind of good corporate housekeeping.
We filed the S. Three with the shelf there are no immediate plans to take.
<unk> taken on any specific fund raising activities around that but we wanted to ensure that we're in the right position to act if and when.
At the time comes.
Perfect. Thanks, a lot.
Thank you.
Your next question comes from the line of Juan Joseph Osha with Guggenheim Partners. Your line is now open.
<unk>.
Q1, Joseph Osha that makes me sound so important.
Hello.
A couple of questions first just to go back to.
Some of those.
Parts that your products are waiting for final parts I'm wondering how.
How many.
Warehouse units you may have just sitting there waiting to ship and then on a related note. Obviously you've recognized one for revenue, but can you update us on how many units you currently have in the field that youre still working to achieve revenue recognition.
Yes, so in terms of the.
The units we have here, we've got seven or eight units that are effectively complete leading final acceptance and about another 20 units that are on the floor kind of in various stages of completion waiting for those overdue parts. So certainly relative to what's been deployed which is.
In total now about about 10 units.
It's a pretty substantial step up.
Okay.
Ken can you remind me of how many you recognize revenue for it at this point.
Hi, Joe we recognize revenue for four of those units. So it would be the initial Softbank unit two applied medical units and then the tariffs all unit that we ship.
The <unk> project, because that's a micro grid.
That is still in process of being commissioned.
Okay, Okay and then.
Of that call it seven or eight that are kind of sitting there on the loading dock is it your hope to maybe have those.
On on trucks are boats by by the end of the year.
Yes, correct.
Don't know what the final exact number will be but our hope is to get.
Something in the neighborhood of 20 of those rolling to customers before the end of the year.
Okay great.
My last question. It's nice that you you just recognized revenue on one unit because now we know what the ASP I can figure that out and I'm wondering.
Whether this $192000 price tag is perhaps how we should.
Representative of pricing that we're going to see going forward.
Hi.
<unk> to say some of these early units that we're shipping or against contracts that were signed in some cases, a year or two ago.
No.
I think the market has moved considerably both because of things like.
Depletion reduction act with just the general market pricing so.
It also depends of course, a little bit on what the scope of our.
Our.
Deliverables are under a contract it's just a standalone unit or if there are other services and.
Components, along with that so.
It's not it's not.
A mile walk, but it would probably be to the lower side of what we would expect going forward.
It's a little lower Scott Thank you.
Clarifies thing okay. Thanks, very much I'll jump back in queue.
Thanks, Joe.
Again, I would like to inform the call. If you would like to ask a question. Please press star one on your number count on that.
Our next question comes from the line of Chip Moore pattern.
Your line is open.
Hey, good evening, thanks for taking the question.
Curious nice to see that acceleration in revenue recognition for the unit in Pennsylvania.
And you just touched on.
Any macro micro grid situation, maybe that takes a little longer can you just kind of walk us through what might be unique to different types of projects in terms of.
Being able to.
So all of that type of timeframe for strategic Rev. Rec.
Is that unique.
Pennsylvania already or should we think about future projects.
Following that type of timeframe.
Yes, Hi, this is Amir I'll take that question. So I think we're certainly broadly working on the acceleration of revenue recognition.
For all projects I would say there will be some.
More straightforward single unit projects, where we're delivering.
A small number of AWS with no larger project component behind the EW, It's really just.
Delivering those to the customers.
With.
Our newer contract terms I think those will accelerate the way that the most recent unit that I think to the extent that their legacy customer contracts and or there is a larger micro grid project component I think those need a little bit more time and care just to get them up and running and commissioned.
And a little bit more purposeful cycle. So.
Certainly over time, I think what Youll see is.
Our contract terms have changed those will get more favorable to the revenue recognition process and just as we build a history of delivering in shipping to these customers that will all continue to accelerate whether it's a single unit or a project that will just take some time to work through.
Got it understood.
And maybe as my follow up.
You did a great job outlining pretty compelling.
Economics there.
Some of those benefits.
Any way to sort of handicap or think about.
Any potential for delays as customers contemplate.
Some of those.
Savings into their decision making.
Or how are you thinking about that.
Yes, Thanks Chip Eric here.
We haven't had anybody call us and say please don't ship the product.
Because I'm waiting for IRA.
So I don't think that any delays.
Or shifts in our shipping schedule are expected as a result of.
The order I know the detailed IRS rules are being worked right now we'd expect that those will be published before the end of the calendar year and the tax impacts on both the ITC and the PTC will be in effect for the full length of.
Calendar year, 2003, and tax year 'twenty three must be in this case more specifically.
If anything I think we're seeing people feel urgency now to say am I going to be able to get products because the anticipation is that there will be.
The surge in demand and there.
There will be a near term scramble for capacity product capacity for projects that need to deploy in the 'twenty three in 2004 timeframe.
Perfect good to hear alright, thanks very much.
Thank you.
Your next question is a follow up from the line of Thomas <unk> with Cowen and company. Your line is open.
Okay.
I appreciate it yes, I just had one more I just wonder if you could give some insight into what youre seeing as it relates to interconnection queues and is there anything that might give you confidence that maybe seeing that congestion and it might be relaxed at all or is it still take it is going to be tight for the foreseeable future.
I think it really depends some projects I suspect if you talk if you did a survey of people across the spectrum of <unk>.
Project developers they would tell you that the expected to continue to be tight.
In the near term for US we're fortunate in two regards the first is a lot of our projects get deployed downstream distribution networks, where the interconnect Q is not nearly the burden that it is for large transmission projects in the second advantage that we have is for some of the larger projects that were involved in the <unk>.
Hartner the developer partner has taken care of we're already managing that interconnect Q. So we're not reading out that whole project.
Yes, the way that the developer is we're coming in at the construction fees. After the interconnect Q has been determined.
Great that was very helpful. Thanks.
Thank you for your question Sir.
There are no further questions at this time, so I would like to turn.
The call back over to the presenters.
Thank you and thank you all for joining the call today, we're very excited about the continued progress in the market excited that we're building at an accelerating rate and look forward to finishing the year strongly as we head into 2023, which we believe will be very important year of growth for ESI. So thank you for your support and we'll look.
Forward to talking to you soon.
This concludes today's conference you may now disconnect.