Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to our host, Erik Bylin. Please go ahead.

Welcome to ESS' Fourth Quarter and Fiscal Year 2023 Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhuys, CEO; and Tony Rabb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fiscal year 2023. The earnings release is available on the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects, partnerships, financial performance, and strategy for 2024 and beyond. The forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call. In particular, those described in our Risk Factors set forth in more detail on our most recent periodic reports filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, inflation, the markets, the economy and the current geopolitical situation. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain items that are not indicative of our core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented within our earnings release. With that, I will turn the call over to ESS' CEO, Eric Dresselhuys.

Welcome, and thanks for joining the call. ESS continues to make substantial progress on our strategy, building a world-class, scalable company that is well-positioned to serve the immense long-duration energy storage market in front of us. Although we had numerous accomplishments and grew the business to record levels in 2023, due to unforeseen customer delays, we ultimately came up short of our revenue goal for the year. In spite of this shortfall, I expect the milestones achieved in the course of the year bode well for our future. Our market opportunity and customer engagement remain robust. Energy providers are increasingly recognizing that there is a vast hole in their plans to get to carbon neutral that only long-duration storage can fill. And I believe utilities are increasingly recognizing the limited options they have to supplement their renewable portfolio with a commercially viable LEAG’S solution. Thanks to the decision ESS made more than a decade ago to hone in on our iron flow technology, we have a seat at the table with many of the largest, most forward-thinking utilities today. As you have seen from our announcements, we delivered numerous systems to these partners in 2023, including SMUD, Army Corps of Engineers, Burbank Water and Power, and more. We see extraordinary opportunity for ESS in the near term and well into the future. And thanks to the great work of the team here, even with the intentionally measured pace we are developing the business, I believe we can make the case that we are ahead of other LEAG’S companies as we look across the landscape today. Indeed, we are poised to ramp our shipments and revenue late in 2024 and into 2025 while maintaining a sizable financial cushion which should bolster our market position. The road to building a company in…

Thanks, Eric. Well, as otherwise noted, all numbers we discuss today will be on a non-GAAP basis. You'll find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our investor relations website. In the fourth quarter, we delivered eight energy warehouses across a number of customers. However, there were certain delays that caused revenue we expected to come in during Q4 to get pushed out to the first quarter. This was across two customers, Honeywell and ESI, and amounted to approximately $2 million in revenue. As a result, our revenue fell short of expectations, coming in at $2.8 million for the fourth quarter and $7.5 million for the full year. In spite of these disappointing top line results, I'd like to reiterate what Eric said about the significant headway we've made in the last year in scaling the business, rewinding our revenue recognition process, reducing costs, and improving manufacturing efficiency. The team has worked tirelessly to position ESS for continued growth in the coming year, and we remain confident in our ability to execute successfully on our long-term strategy. As a reminder, beginning in Q3, we transitioned out of development accounting and into commercial inventory accounting. So we are now reporting our cost of revenue separately from our operating expenses and beginning to report inventory on our balance sheet. Our cost of revenue was $10.3 million in the fourth quarter. In addition, as we detailed last quarter, as part of the transition from R&D accounting to inventory accounting and the associated LCNRV adjustment, there are a fair number of items included in COGS that dramatically impact our current COGS results that would not be material contributors as we reach scale. Due to this, our COGS results will not fully reflect our cost…

[Operator instructions] Our first question is from Thomas Boyes with TD Cowen. Your line is now open.

Perfect. Thanks for taking my questions. Maybe first I wanted to just touch on the project delays. With customers, is this primarily an interconnection issue or are there supply chain impacts? I mean, we've heard from a lot of project developers that are being stymied by transformer availability. Some of those lead times are over two years at this point. So, just wondering if you could kind of talk through maybe the nature of some of those delays or at the market at large what you're seeing?

Sure, Thomas. Eric here. I'll take that. It's a great question. And it's, I think, as you point out, something that's happening across the industry. It's a combination of impacts. There's no one thing. In some cases, it's inverters and transformers and delays, other delays related to site readiness. So, we'll have a project plan with a customer and they'll say, I'm ready for the products to arrive on a certain date. And then they'll call at the 11th hour and say, well, wait a minute, the civil works aren't done yet and the pads aren't in place. So, sometimes it's things as simple as that. In some cases, it's delays in getting contracting done or other kind of operational things in terms of the logistics of the planning. So far, we haven't had any short-term problems with interconnect. But as the projects are getting bigger, we're paying a lot of attention to that because we've seen what other folks have gone through.

Got it. That's helpful. And maybe as my follow-up, I just wanted to maybe understand how you're thinking about 45x credits. Is this something that you would think about self-consuming or the plan to take advantage of the transferability of the credit? We've been hearing about ranges of 10% to 5% discounts on the dollar, depending on the size of the credits that one would be able to transfer. Just wondering if you have any thoughts?

Hey, Thomas. Yes, this is Tony. Yes, so we've elected to go with direct pay on the production tax credits. We've already realized some in 2023 and the expectation with our volume ramping up this year would be substantially bigger impact. And based on some conversations we've had with folks, we do believe that there will be a market for us to be able to finance those production tax credits. And so we're evaluating those options and alternatives now.

Our next question is from George Gianarikas with Canaccord. Your line is now open.

Hi, everyone. Thank you for taking my questions. I just want to make sure I heard correctly. Did you say that you expect a tripling or quadrupling of revenue in calendar '24?

Yes, George, Eric here. That's kind of a range that we expect to see as we've shared because of some of these lumps in the timing, we're being a little cautious on being too specific about it, but it's certainly going to be substantial growth in the year.

Got it and I think you also said that you expect that to kind of ramp in the back half of the year. Which specific projects do you expect to push the revenue higher in the back half? You can share that. Thank you.

Yes, I think about it from our standpoint, the two biggest drivers to it are where we are on our cost out curve. As we shared, we made really great progress on driving costs out of the product in 23 and have a very ambitious plan to continue that into here in 24. So the EW on the existing EW products, that hitting that trigger to hitting the lower cost points is frankly more important than any one customer or another customer in driving our ambitions for volume. And then the second thing is starting to shift the ECs. So as we've shared, we've got the initial project with Portland General Electric that's going to pace and we feel great about that. And the current plan is for TECO and SMUD to receive their first EC units in the second half of the year. So it's really the combination of those two things that drives that inflection point in the second half.

And maybe as a follow up, I'm just curious on pricing. Given the pretty much a collapse that we've seen in lithium prices and lithium ion bell prices, are you seeing a kind of a stable pricing environment from your perspective or has that pricing umbrella impacted you? Thank you.

Sure. So far, I think it's been pretty stable on our side, but we're certainly watching what's happening in the lithium market and monitoring the impact that that will have. We have a very ambitious cost out plan that extends through this year and beyond. And we know that we've got a great long term cost entitlement, but certainly competitive prices falling continues to drive the imperative to stay on schedule.

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

Thanks so much, guys. With these adjustments on the design, can you talk a little bit about how different the supply chain is and what does the supply chain looks like in terms of single source components and your ability to kind of navigate to a complete set with the existing suppliers?

Sure. I'll take a crack at that and Tony can add in if need be. We certainly have transformed a lot of our supply chain to try to take out some of the risk and variability that we've seen in the past. And we've talked about that on these calls a number of times. So that equates to a lot more domestication and also equates to a lot of our transformation has been to higher volume manufacturers who have by definition, in most cases, multiple facilities. So what we've been trying to do is drive lower prices with more reliable suppliers who have built in redundancy into their products. And then separately, we've been looking to find places to have alternative sources of supply for key components wherever that's practical. Now, as we get to higher and higher volumes, the idea of diversification in the supplier base gets a little easier to execute than it is for us today. But we think we can get a lot of that diversification and kind of surety of supply by working with larger vendors who have multiple facilities in the first place.

That's actually super helpful. And then in terms of debt providers and underwriting standards along with potential insurance providers for some of these products, can you talk about the maturity of those processes to really look at performance of the assets in the field and how comfortable those underwriters are getting with the technology and how these assets are performing at this point?

Yes, sure. So I'd answer it in two parts really. We've had a lot of engagement with people who do underwriting at the project level and that's both for independent power producers but also kind of more traditional legacy producers. And we've broken that out into two parts. There's one kind of just a general product breakdown where I think we're very mature and certainly the agreement we have with Munich RE and all of the diligence we've been sharing with people for years gives a lot of comfort on that front. As we get more and more operating cycles in the field, that helps drive the bankability study in terms of performance, the number of cycles that we get. And I look at that, I think it's getting increasingly comfortable for people but there's almost no limit to it. The more product you get in the field, the more different operating environments that you demonstrate and the more cycles you put on the unit, the better that gets. And so it's just kind of part of our everyday work.

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

Hey, good afternoon. Could you talk, two days ago there was a filing saying that the stock price basically doesn't go further much up. I think there is maybe a risk of it being delisted or going on the OTC. So just trying to get a little bit of color and what could be the different scenario happening from that filing?

Sure, and thanks for the question. Yes, we've received a notice from the NYSE which we've responded to. It's got a relatively long kind of observation and cure period to it of about six months. So there's no immediate action that's required. So we're monitoring that. We have a number of options to address it if it doesn't kind of cure on its own. But we certainly don't have any intention of being delisted or trading down to alternative platforms.

Okay, thank you. And maybe the second question, and sorry if I missed it earlier in the Q&A, but can you give a little bit more color as well about the 40% cost reduction, maybe the timing and how you're thinking of implementing it?

Yes. Hey, Corinne, this is Tony. The 40% cost reductions that we're expecting to achieve this year are similar to what we saw last year in terms of the various projects that we have associated with cost reduction initiatives. So again, there's going to be some more design-related initiatives and generation changes that will simplify the EWs as well as remove some of the material that's in there. And we also expect to continue to reduce the cost of our electrolyte. So there's a number of projects that are all going to be realized throughout the year, as there are multiple of these projects, in addition to some supply chain-related projects where we're continuing to evaluate alternative vendors who can provide us better or cheaper materials. And so as we realize those throughout the year, that's how we're going to be able to take the cost of the product down by 40% by the end of the year.

Our next question is from Brian Dobson with Chardan Capital Markets. Your line is now open.

Yes, thanks very much. So you had mentioned earlier in the call that your 4Q delivery misses were mostly from client disruptions. Would it be safe to assume that we should view those deliveries as delayed rather than missed entirely?

Absolutely. In fact, both of those have already subsequently been delivered, and we expect to recognize them in Q1.

Yes, very good. I think that that's an important point. And just shifting gears a little bit to your agreement with Honeywell, have you seen any -- I know it's early, but have you seen any early synergies from having access to that company's sales channels, or have you received any early feedback from your new partner?

Sure. No, I think there's been really positive feedback, and a couple of things kind of have popped up. Certainly, Honeywell has a vast experience, technically, on products similar to ours across a range of industries. And so, the interactions with our technical teams have had on a joint development project basis and evaluating things to do together is the first thing. From a channels perspective, they have great access to tons of channels across the space. I'd say two things have kind of come up. One, of course, very large customers sometimes have a strong preference to dealing with very large suppliers. And so, Honeywell has a lot of great relationships with very large customers, and that's opening up some doors. But then also things like, you know, I think military bases and government contracts, there's a lot of connections into those. So, I think you're absolutely right. It's early days, and they're a big ship. So we're working hard across the teams on both the commercial and the technical side to kind of get specific things locked in and ramped up. But we feel really good about the progress we've made so far.

We have a follow-up from Thomas Boyce with TD Cohen. Your line is now open.

Yes, thanks again. Just one more. You know, it was great to see the improvements on the system commissioning times. I was wondering if you could kind of rank order the actions that kind of led to those improvements, you know, changing to the contracts, kind of the overwhelming component there, or is a lot of it the team that you had put in place to assist with commissioning?

Yes, Thomas, this is Tony. A lot of it has to do with how we're out in the field as we're, you know, getting set up to do the startup and the commissioning. So it's productivity on our field service engineers' part. And part of it is productivity from just implementing more units throughout the year. Part of it is that we've changed some of the procedures that we follow as we are out in the field and starting up and commissioning the units. And then it's also because of the simplification and the work we've done to improve the reliability and durability of the units as they're put out there. So it's a number of things, but a lot of it is a testament to the learnings that our customer success team has been able to realize throughout the year from the early units that were installed to the units later in the year. And more specifically, with something like SMUD, where there's multiple units out at a site and you're able to get quite a bit of productivity when you're working through multiple units at one time. And so as we see that type of increase going forward, we would anticipate that we'd be able to continue to make progress on those types of field initiatives. And that will significantly reduce our cost and allow us to be a lot more productive with our field service engineers as we scale up the business.

I'll now pass the call back to the management team for any closing remarks.

Well, we'd like to thank everybody for joining the call today and for your interest in ESS. We are now almost a quarter into 2024 and really excited about how the business continues to progress. Our really great progress around the key initiatives around driving costs out and keeping us on our path to profitability. We look forward to talking to everybody again in just a few weeks as we talk about Q1 results.

That concludes today's conference call. Thank you all for your participation. You may now disconnect your line.