Flow battery player ESS Inc has ‘strong confidence’ in 2022 performance despite ‘unanticipated challenges’ in Q1

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Iron electrolyte flow battery company ESS Inc continues to await recognition of revenues, but has “strong confidence” in its trajectory towards profitability.

ESS Inc is the only provider of flow battery technology based on all-iron electrolyte, a non-toxic liquid that allows for the same ability to scale up the energy capacity of storage units as flow batteries using vanadium.

The US company has developed its proprietary technology and ships units to customers globally, recently opening its first offices in Europe. However, as it openly said before its shares listed publicly, and highlighted by its full-year 2021 results, the cost of commercialisation remains high and there remains work to do before it can go into profit.

CEO Eric Dresselhuys said in an earnings call to explain its Q1 financial results this week that to achieve that, ESS Inc is committed to lowering its costs and significantly ramping up manufacturing capacity.

ESS Inc also believes that the market drivers for energy storage are growing strong in many regions of the world as the transition to renewable energy accelerates and its technology is set to benefit, Dresselhuys said.

At the end of 2021, due to the revaluation of warrants pertaining to the company’s merger with a special purpose acquisition company (SPAC) that gave it a New York Stock Exchange (NYSE) listing, the company reported US$477 million losses for the year.

With the listing out of the way, there were no such accounting movements in Q1 2022, and ESS Inc said it holds more than US$235 million total assets with just over US$212 million in cash and cash equivalents.

Its biggest expense for the quarter was US$12.9 million spent on research and development (R&D).

CEO comments outline trajectory and progress made

Shipments of ESS Inc’s Energy Warehouse large-scale battery storage units were successfully made during the quarter for customer San Diego Gas & Electric (SDG&E), one of California’s three main investor-owned utility (IOU) groups.

These were for the Cameron Corners zero emissions microgrid project, which will utilise 3MWh of Energy Warehouse units to create six-hours duration of energy storage to enable critical facilities in the city of Cameron Corners to maintain power supply in the event of the public safety power shutoffs (PSPS) that California’s IOUs have enacted to prevent electricity infrastructure causing or exacerbating wildfires, as well as grid outages or other emergencies.

Two units of a total six have been shipped, Dresselhuys said, for the “truly exciting utility grade project”. Elsewhere in ESS Inc’s home state of Oregon, another 3MWh system is going to be delivered for utility company Portland General Electric (PGE) to test and trial.

ESS Inc will ship between 40 and 50 Energy Warehouses during 2022, the CEO said, while manufacturing has become semi-automated and is on track to be fully automated before the end of the year.

“A strong capacity ramp coupled with significant cost reductions will be instrumental in our efforts to accelerate our path to profitability,” Dresselhuys said.

Supply chain challenges have faced the energy storage industry in the past few months – in fact supply chain challenges have faced pretty much every industry in the past few months – and ESS Inc was no different. However, despite a “less than optimal” start to the year regarding its electronics supply chain, ESS Inc’s CEO claimed it now has a “strong handle” on securing components and delivering production on schedule this year.

However, one supply chain issue facing most of the energy storage industry that ESS Inc isn’t exposed to is the rising cost of lithium and other lithium battery materials like cobalt and nickel. Dresselhuys claimed that with abundant ingredients of iron, salt and water in the company’s battery iron electrolyte, ESS Inc is on track to have “the most viable lithium alternative grid storage system available” to the market.

And that addressable market is poised to accelerate the already rapid growth it has seen in the past few years, the CEO claimed, and in just the past year the market dynamics for the long-duration storage ESS Inc provides (typically between 4-12 hours) have changed in its favour, he said.

Dresselhuys picked out Europe, particularly Germany, as a key market where renewable energy ambitions are high but unlikely to be achieved without massive amounts of energy storage. He also referred to recent comments by Tesla CEO Elon Musk that the world will need 300TWh of storage to transition all energy use across transport, electricity and heating and cooling to low carbon sources.

“We think he’s right,” Dresselhuys said.

That said, the ability to recognise revenues remained just out of reach for ESS Inc in Q1 once again. This was due to a number of “unanticipated challenges” that delayed revenues being recognised for units already shipped.

Chief financial officer Amir Moftakhar would not be drawn into giving details on what those challenges were, though admitted that they included “technical hurdles” and to some extent referred to what had been written into legacy contracts.

Though the CFO said the company views progress on resolving those challenges as proceeding well, a note of caution was sounded on its ability to recognise revenues of around US$10 million that the 40 to 50 Energy Warehouse units ESS Inc expects to ship would generate in time to be recorded before the end of this year.

Moftakhar did say that ESS Inc expects to end this year holding in excess of US$120 million in cash and cash equivalents, with non-GAAP operating expenses expected to come in at about US$100 million. In other words, the flow battery company has “more than ample liquidity” to run the business.

On the production lines, the CFO said ESS Inc will end the year with 750MWh annual production capacity from those by-then fully automated lines.

Conference call transcript by Seeking Alpha.

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