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

Welcome to ESS Second Quarter of 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 second quarter of fiscal year 2024. The earnings release is available in 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 also 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 in our most recent periodic filings filed with the Securities and Exchange Commission, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, the markets, the economy and the current geopolitical situation. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call today 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 US 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 US GAAP and non-GAAP results are presented within our earnings release. With that, I'll turn the call over to ESS CEO, Eric Dresselhuys.

Welcome, and thanks for joining us today. Momentum continues to build for our business and for the larger long duration energy storage market. In the last quarter, we've seen continued regulatory momentum to grow deployments of eight plus hour duration storage and direct funding announcements to projects that will accelerate adoption and continued deployment of our technology reinforcing our position as a leader in the field. In the second quarter, we have expected to ship more units but a key partner experienced a delay in final approvals and funding. We have built and had anticipated shipping approximately 12 additional EWs last quarter in support of those projects. But unfortunately, they flipped. Based on the current information provided by the partner and the end customer, we now expect to ship and recognize revenue for those units in the third quarter. So stay tuned for further announcements. These delays are frustrating and given our early stage any shift in project timing has a meaningful impact on the results within any given quarter. In any case, we continue to execute on our strategy and expect to ramp revenue in the back half of the year as we lower cost and increase our capacity. I'm thrilled to announce that we are finalizing the details to close a transformative agreement with the Export-Import Bank of the United States, or EXIM for up to $50 million in funding to help ESS continue to maintain our strong balance sheet while expanding our operations. Provided by the Make More in America Initiative, this funding is long term, low interest nondilutive capital to finance expanding manufacturing capacity. We can use it immediately to add to our cash position, borrowing about $10 million this year, including on a look back basis for previously installed capacity and for the addition of…

Thanks, Eric. Unless 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 Web site. We reported revenue of $348,000 in the second quarter with the associated cost of revenue reported at $11.7 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. We're making great progress with incremental cost reduction initiatives through value engineering, supply chain optimization and process improvements for both the Energy Warehouse and Energy Center. As we previously mentioned, during 2023, we lowered the cost to build EW by 60% and we're targeting another 40% reduction this year. With the improvements we're realizing on the 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 Q2 were in line with our expectations at $9.1 million. Non-GAAP R&D came in at $1.9 million, which we believe reflects the company's run rate and continued investment in our cost out initiatives and product road map improvements on reliability, durability and the efficiency of the EW and EC. With that, we reported Q2 adjusted EBITDA of negative $18.8 million. Turning to cash flow and liquidity. We ended the second quarter with $74.4 million in cash and short term investments. We remain focused on managing our cash…

[Operator Instructions] Your first question comes from Colin Rusch.

This is Lidya on for Colin. First, we noticed on Slide 20 of the investor presentation that the capital required to produce for ESS is around $20 million per gigawatt hour. Could you maybe talk about what scale you would need to achieve that number?

You mean the scale to -- that's on a per gigawatt hour basis in terms of the capacity that we need to add. So each of our lines is substantially less than that amount.

So we can build an increment smaller than a gigawatt. I think Line 2 is about a half, a little bigger than 0.5 gigawatt hour of capacity…

And then maybe for a follow-up, could you speak to the growth in potential customers evaluating your field data and how quickly those customers are moving through your sales funnel?

It's a mixed bag, as you would expect. We're seeing two things. We're seeing some of the behind the meter applications where customers have kind of follow-on applications, they tend to move through more quickly. They'll often want to run for a year but sometimes less. And for other customers, we have a multi phased approach where we're going through it kind of in order. So we’d expect, as we said, if you look at SMUD to having deployed the first phase, complete the work on that and start moving on to the second phase, which will be an EC phase product. But the third piece that we found is that a lot of the market activity these days from an RFP, RFI perspective, are all targeting larger projects that will be ‘26 and ‘27 projects. One of the things about our industry that people who follow other companies would certainly be aware is that the lead times for planning are quite long and that can be influenced by interconnect cues and site preparations as well. So we have a lot of folks that are looking at current customers and visiting them, getting feedback on the product as they're making their plans for very large projects that happen in the out years. And that activity has increased quite a bit in part, as I mentioned, due to things like the need for green PPAs from hyperscalers and folks like that.

Your next question comes from Corinne Blanchard.

This is actually Mike [indiscernible] on for Corinne. My question has to do with your revenue target of 3 times to 4 times in 2024. So this is implying $23 million in the second half at midpoint. Could you maybe break that down between Energy Centers and Energy Warehouses?

I think that the ramp-up on the Energy Centers we've talked about in the past will start in the -- not until the fourth quarter. So it's going to be, I'd say, I don't know, maybe a split of two thirds EW and a third ECs. As we said in our -- in the prepared comments, not just what we've seen but with other people have seen, we get very interested about the timing of one project versus another if there's any slippage or movement in timing because our numbers are comparatively small number of projects, that can make a pretty big difference. So I wouldn't want to hang my hat too hard on exact mixes but that would roughly be the layout.

And then my follow-up has to do with the growth tied to AI and data centers. You mentioned it in your prepared remarks, I was wondering if you could give a little bit more color around what you're hearing from potential customers in that space?

So the step back is really on the broader category of data centers. One of the increasingly loud screams we're hearing from the market, both from end users but also from developers who serve that market is that the data center operators have very ambitious plans for building out in support of what they expect to be massive growth in generative AI. And that's got two problems. One, it's just regular use, but generative AI is, depending on who you talk to, kind of 8 to 10 times more energy consuming than, say, a typical Google search. So people are anticipating that demand. And what's happening is they're going to utilities, not just here in the US but around the world saying, hey, I'd like to build a data center of this size and I need the power of a certain level. And they're getting the answer back from the utilities that say, I'm sorry, I just can't support that, it's just too much energy. So this is becoming kind of an economic limiter for the people in the business of hosting data centers to say where can I go put a data center that can supply the power I need. In some markets like Ireland, as an example, Ireland, they've come out and just told data center people would love to have you, but you're totally responsible for coming up with your own power. So with that as a little bit long winded background what we're finding is that people are looking at saying, can I do this as a microgrid, can I buy my own renewables, pair it with storage and create a 24/7 green energy system and do that without having a heavy reliance, maybe not no reliance, but without any heavier reliance on the grid operator that I normally would thought about doing. It's early days of this but it's a topic at every conference that happens in the energy industry these days. And there have been quite a few big public announcements from Google, Microsoft and AWS, they're trying to procure their own green PPAs to get out of the way to not have the reliance on the utility operators.

Our next question today comes from Justin Clare.

So I wanted to start with the manufacturing here. So the second automated line, I think that's expected to come online next year. I was wondering if you could talk about the ramp there. So you talked about getting to 1 gigawatt hour. When could you achieve that run rate and what does the time line look in terms of the ramp-up of that second line?

So the second line, we anticipate, should be online in the first half or by the end of the first half of next year. And so the way to think about that is that we'll have 1 gigawatt hour approximately of production capacity going forward from that point. So we'll get about half year's worth of that capacity in 2025.

And then just on the manufacturing CapEx, I was wondering when we think about the financing from Export-Import Bank, $10 million this year and then $10 million to $15 million, I think you anticipate next year. Is all of that capital expected to be devoted toward the CapEx spend for that second automated line? And then just wondering how you're thinking about the remaining capital that might be available to you and whether that could be used for a third automated line or what you're contemplating there?

So the large portion of the first $10 million that we're drawing down is associated with Line 1 and the production capacity CapEx that we incurred to put that in place. So that's that look back component that Eric had mentioned. And then Line 2 will be financed with the remaining parts of the credit facility. And as we mentioned, the CapEx that we need to implement these lines is substantially less than Line 1. So we should be able to add multiple lines with this credit facility well beyond Line 2 and into the capacity that we need into 2026.

And then one more just on the margin profile. So it sounds like you're on track to reach non-GAAP profitability for the EW toward the end of this year. Wondering what the impact could be on the profitability for that product as that second automated line ramps up. Like would you produce EWs on that line and would you expect a margin boost at that point in time?

Well, what gets produced on those battery stacks lines, those go into both EWs and ECs. It's the exact same product. So it doesn't matter what the mix of product is that we are shipping. Those production lines, the core components and the battery powertrain that goes into the EC is the exact same product. So as we scale up to produce and sell ECs, that's all going to be happening on Line 1. And then as we run out of capacity on Line 1, we'll start producing on Line 2.

Your next question today comes from Davis Sunderland.

I wanted to ask if you can talk a bit more about the Honeywell partnership, maybe if there's any new traction you can speak to as a distribution channel, maybe if there's any possibility to execute more, I guess, I'll call them individual asset sales rather than your typical kind of framework partnerships you have with, say, SMUD or LEAG or some of the other larger partners? Just anything that's opened up from the Honeywell, and then I have one follow-up.

So well, things are starting to really get some great momentum with Honeywell. We were very fortunate to host Vimal, the CEO of Honeywell, all Honeywell came out just last week to visit us and -- two weeks ago, I want to be accurate, came out to visit us here in Wilsonville and spent a day with us, which -- he's a busy guy, so I think that's a great sign for the importance that he's putting on the relationship in the space, and we had a great series of conversations across both go-to-market and on some of the joint development activities that we've taken on together to do some things, to add new features, functions and performance, but a lot of it has been driven by just getting to scale more and driving cost out of the system. Honeywell certainly has a great appreciation, as we do, for the market environment and the mandate to get down the cost curve as fast as possible. So we're at the stage now where the go-to-market teams have been organized. They've been off actively engaged in the marketplace. And I think the hope would be we'd have announcements to make. We're putting proposals out to people and our hope would be that we'll be able to translate that into live announcements with people here over the coming months.

And then my follow-up is just on raw material costs. And I know there's some one-offs this quarter and probably the rest of this year with LCNRV, the accounting of the higher cost. But just wanted to ask if you guys are suffering from the so-called start-up premium or if suppliers have been able to renegotiate with you guys as you're getting more units out in the field now, or just anything you can speak to on that would be great.

So we're not seeing any negative impacts from our suppliers in terms of raw materials costs. Most of the efforts that we are seeing is we're either negotiating with our vendors for reduced cost or negotiating and qualifying new vendors for the same materials for lower cost. So that tends to be the primary focus of what we tend to be experiencing with respect to raw materials.

Your next question today comes from Thomas Boyes.

Just two quick ones. Do you have a sense on maybe what the financing issues were that caused the delay in EWs this quarter? The reason I asked is we saw something similar in solar complex, where adjustments to the domestic content add or caused some companies to kind of pause for a second reassess, figure out under the new kind of schedule that was put out there, what the ramifications are. Is that something that you're seeing or could you give any commentary there?

We haven't seen that specific case. Although like you, we've been noting a lot of the announcements made by others on project delays either from site delays or other third party equipment delays. We've been fortunate we've avoided those for this quarter. This specific case was the project is specifically dependent on the government grant. So government funding that was expected to happen before the end of the quarter that would have freed everything up and the government just didn't move fast, this government entity just didn't move fast enough to get it done. So we've talked to the party -- both our partner and the folks at the utility and the government funders, everybody assures us that they're moving through and getting it done, and it's just taken longer than they had hoped. But unfortunately, in this case, it was enough of a timing slip that it held us back from shipping the product.

Do you know if that was the PACE program or the newer financing vehicles?

No, this was just a directed investment. So it wasn't under any sort of a broader program or anything that we'd see be more methodical.

And then for my follow-up, just -- it was good to see the project with India Energy, we've talked about some of the traction you've seen in -- for military applications. I'm trying to get a sense of maybe what the size of the resiliency market would be for tribal land, is that maybe a large opportunity, how do you think about addressing that longer term?

I think it's -- I don't know that I can give you a number specifically for tribal lands. But certainly, resiliency as a market resiliency microgrids, we see as a multibillion dollar US market between now and 2030. And it ties back a little bit to the earlier question on data centers, although that is -- certainly, data centers are very unique use case with some very unique requirements. But it ties into this broader theme of people wanting to have not just green energy networks that they're supplying their own electricity, but they're really starting to ship to see this as a resiliency play where you're obviously going green and hopefully trying to drive cost out but you're worried about your ability to access electricity on a regular basis. And so microgrids for military bases or indigenous communities are great examples of where they frankly have, in the past, either had an underserved community where the electricity distribution isn't good enough or where the cost of having a power outage is so severe, it's beyond the cost of electricity, right? There's operational or application impacts to losing electricity. And we like those markets because those markets also tend to have -- put a big premium on both American made products and on safe products, right? They wanted their -- there's a lot of concern about lithium and some of the problems that lithium batteries have had. And so there's kind of a predisposition, if you will, towards buying a US product or buying a product that is non-lithium in design.

Our next question comes from Brian [Hayden].

Maybe we lost Brian.

It would appear we are having technical difficulties with Canaccord’s lines, I do apologize. But that was our final question for today. I see there aren't any further questions in the queue. So that will conclude today's conference call. I want to thank you all for your participation, and that will conclude today's call. You may now disconnect.