Ladies and gentlemen, thank you for standing by. [Operator Instructions]. I would now like to turn the conference over to Erik Bylin. Please go ahead.

Welcome to ESS' First Quarter and Fiscal Year 2024 Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhuys, CEO; and Tony Rabb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the first quarter of fiscal year 2024. 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. Today, I'll cover a recent deal, some customer activities, our progress with the Energy Center and our second automation line. Then Tony will cover financials. As we did last year, we have created a video highlighting some of our operations that includes a look at our Energy Center. You can find it at our Investor Relations website. As you saw in today's release, we just announced a new relationship with Sapele Power, a leading Nigerian energy generation company with over a terawatt of power generation capacity. The initial deployment phase will begin with 8 megawatt hours of storage to improve the efficiency of Sapele's existing assets by providing ancillary services. Supported by the Export-Import Bank of the U.S. or EXM, this installation will be a great opportunity to offset backup generators and improve grid resiliency. With future phases including 50 megawatts of battery storage to support green baseload power, this deal exhibits the global market need for long-duration energy storage to help power producers maximize the reliability of their electricity supply. Our customer success team is busy across many installations, and we're getting great feedback about our team's engagement with customers at their sites. We've made tremendous progress on this front. Between building up the team, formulating the best processes, and technology, and learning to nimbly adjust to the varied operating environments in which our technology operates. We have established a healthy feedback loop from our customer success team to our engineering and operations teams that is producing design enhancements that lead to simpler, faster installation and commissioning as well as ongoing maintenance. Our team is working closely with our customers to ensure our batteries are prepared to perform as soon as the projects achieve readiness. At Schiphol Airport in Amsterdam, our initial…

Thanks, Eric. Unless otherwise noted, all numbers we discuss today will be on a non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website. We reported revenue of $2.7 million in the first quarter with the associated cost of revenue reported at $11.1 million. As previously shared, the transition from R&D accounting to inventory accounting results in an LCNRV adjustment that dramatically impacts our current COGS results. This will not be a material contributor to our financials as we reach scale. We continue to make progress towards profitability. However, our COGS results will not fully reflect our cost reduction initiatives benefits, thereby making it difficult to assess our progress through our current financial statements. As we layer on to our COGS reduction results from 2023, we are making great progress with incremental cost reduction initiatives through value engineering, supply chain optimizations and process improvements for both the Energy Warehouse and Energy Center. With the improvements we are realizing on those additional cost reductions in 2024, we still expect to reach non-GAAP gross margin profitability on the Energy Warehouse by the end of this year. Our non-GAAP operating expenses for Q1 were in line with our expectations at $9 million. Non-GAAP R&D came in at $2.9 million which we believe reflects the company's run rate and continued investment in our cost out initiatives and product roadmap improvements on reliability, durability and efficiency of the Energy Warehouse and Energy Center. With that, we reported Q1 adjusted EBITDA of negative $15.4 million another significant year-over-year improvement and indicative of our trajectory towards profitability. I'd like to take a moment to recap some important progress we've made on cost reduction. As we mentioned last call, during 2023, we…

[Operator Instructions]. Our first question comes from the line of Colin Rusch.

Could you talk a little bit about where you're seeing the real manufacturing efficiency? It seems like you guys are making some pretty healthy progress there. I'd love to understand what specifically is moving forward in an incremental way?

Yes, sure, Colin. Eric here, I'll take that and let Tony chime in if he's got anything to add. The biggest piece for us is in stack manufacturing and getting the fully automated line up and running, getting the whole supply chain that feeds that running smoothly is the single biggest cost item in the product. And so, getting that done is by far the biggest thing. The second thing on the systems side really, I'd say falls into two categories. We're starting as we're ramping up shipments, we're going to use a lot more electrolytes. So, getting the cost down and the manufacturing, the mixing process on the electrolyte down has a big impact. And then on the system side, the balance of system side, it's a little bit like the process of going through building a car or any other large device, getting the flows through the factory, so that it's really taking out all the waste and movement and motion through the factory is the biggest thing. I think there it's probably more plumbing and electronics than anything else.

Yes. Hey Colin, just to add on, this is Tony. On line the second line, we've also factored in a number of design improvements that we've learned from the first line. So, while the first line is extremely efficient and has pretty high throughput, the second line has factored in some design improvements to it that allow us to get much higher throughput through the equipment than the original fully automated production line. So big pickup on stacked manufacturing capacity.

And now that you've got a number of units in the field and a significantly higher volume of data around performance, can you talk a little bit about what sort of debt financing your customers are looking at or comfort level incremental diligence that lenders are doing around the technology that may support incremental sales opportunities?

Yes. I think we're going to start to see that ramp up. It hasn't been a big part of the story today, but in the New York Times article that came out today that we were fortunate enough to be mentioned in and then there was another article in I think Energy Storage News that was talking about this very topic. Lenders in general are starting to look at energy storage as kind of a big growth space. So most of our customers to date have been large industrial customers or municipal customers, and they haven't relied on third-party financing as much. The IPP market and the developer market for both standalone batteries and renewables is we think going to be a big part of the business going forward and thinkability and having that data for performance is going to, I think be a big boost to building confidence. I would be remiss if I didn't also call out that for years now, we've had this relationship with Munich Re from a product warranty perspective. And I think the combination of performance data plus feeling really high confidence in the product guarantee are the two things that really help open up that market.

[Operator Instructions]. Our next question comes from the line of Corinne Blanchard with Deutsche Bank.

Good evening, guys. Just maybe if you can talk about so you got a new contract with in a different region in Africa, I believe. So just if you can talk about, maybe, if you have a region of focus or if you have any, geographic that you would prefer to focus maybe in the next 12 months to 36 months?

Yes, sure, Corinne. Thanks for the question. I think the vast majority of our business is still going to remain in our core markets of the U.S., Australia and Europe. And we've talked about those projects. The new project we announced, we're excited about it. For us, it looks a little bit like a U.S. project because we're building and selling the product here in the U.S. to a third-party that's developed that will deploy it in Africa. But what we are seeing happen is kind of opportunistically anybody that's moving towards those same use cases that we have in the U.S., in Europe and in Australia around green baseload power, those people are quite, I think, in an accelerating basis saying, we need long duration storage to make the idea of a resilient 24-hour system work. And the times article today highlighted that as well. So, any place where you're seeing the transition to Green Base Low Power, we're going to have opportunities. But we think the biggest opportunities, the majority of our business will remain in the U.S., Australia and Europe.

[Operator Instructions]. There are no further questions at this time. Mr. Dresselhuys, I turn the call back over to you.

Well, I thank everybody for listening in to the call. We're excited and we remind you to visit our Investor Relations site where you can see a presentation and a short video about our operations and we look forward to talking to you all next quarter.

This concludes today's conference call. You may dial disconnect.