ESS Tech: Q4 2022 Estimate And Questions For Management (NYSE:GWH)

Earnings Call. We were very disappointed with the third quarter earnings of ESS Tech (NYSE:GWH). The earnings call had several items of note on revenue:

• The company acknowledged having deployed 10 of its Energy Warehouse units, “…what’s been deployed, which is in total now about 10 units,….”
• The company acknowledged “…We’ve recognized revenue for four of those units.”
• The company offered its projection for the 4Q, “…our hope is to get something in the neighborhood of 20 of those rolling to customers before the end of the year.”
• And in the second quarter earnings call the company laid out its forecast for the year, “And while we still see a path to our original plan of shipping 40 to 50 energy warehouses this year, we would likely be near the low end of the range and possibly below it depending on our ability to resolve these supply chain issues.”

Earnings forecast. With the paucity of information the company has presented, we believe it’s difficult to make any sort of scientific earnings forecast. Nevertheless, here’s something to spur some discussion and cross check on what we learn on the next earnings call.

We still don’t understand the revenue recognition problems. But based on the six unrecognized units in the field as of the last quarter (see above) we hope that revenue might be recognized on an additional 3 of those. And based on the forecast that 20 more units should go out the door in the 4th quarter, we hope that revenue might be recognized on 20% or 4 of those. Based on the most recent $189,000 sale of an Energy Warehouse, these seven units would generate $1.34mm of revenue in the fourth quarter.

This might result in earnings as follows:

Click to enlarge

Of course all the numbers are “hopes” and not science. We’ve held Sales Expense and G&A basically constant, and hope the huge R&D number comes down as more automation has been accomplished, etc. Shares outstanding are unchanged for the quarterly estimate and a “hoped for” 14 cent loss drops out of the bottom of this overly simplistic model.

A much more important hope is the cash balance. The 3Q 10Q detailed cash and short term investments of $166.7mm. If depreciation and capital expenditures hold relatively constant, and if the net income shown above is realized, ending cash for the 4Q should be around $140mm.

Questions. As the foregoing discussion illustrates, we believe there are a number of unanswered questions brought on by the company’s opaque presentations to shareholders.

1. Tell us about Repair and Replacement expense under Warranties. Based on the 3Q sale price of $189,000 for one Energy Warehouse, it appears you’ve replaced or repaired the equivalent of almost two units in the quarter, and 5 units in the 9 months. Are these current period costs or forward-looking accruals?
2. You currently do not report Cost of Goods Sold and state these numbers are buried in Research and Development expense. When do you foresee exiting R&D and reporting with a conventional income statement that shows Cost of Goods Sold? Even if you can’t tell us the COG’s can you show us the improvement towards a positive contribution over the course of the year?
3. What was the “flow issue” referenced on page 51 of the most recent 10Q: “the flow issue that we identified during the second quarter of 2022 in certain battery modules that were manufactured and shipped to date.”
4. How many robots have you deployed in Wilsonville? How many were there at 1/1/2022? How many will be there at 1/1/2023?
5. Can you give us some more granular detail on one of the biggest items on your income statement, Research and Development expense? This was $20.127mm in the most recent quarter and $49.190mm for the nine months per the most recent 10Q. Without giving away any trade secrets what do the buckets look like for automating manufacturing? Battery process chemical improvements? Balance of System R&D such as inverters, switching and software? Other “over the horizon” battery technologies? manufacturing of current systems? Development of Energy Centers vs improvements to Energy Warehouses?
6. Some of your press releases have referred to a second generation of Energy Warehouse, now being shipped. What are the Kw and KWH ratings of this version? Of previous versions? What does the glide path look like for future versions? How do you rank what customers and prospects are asking for between kilowatts, kilowatt hours, and hours of duration?
7. Please tell us about the revenue recognition issues for units that have been shipped, but for which revenue hasn’t been fully recognized. Some press releases have talked about synching and intertie issues. Are these ongoing? Has your intertie capability been made more flexible to accommodate different field conditions? What are the other issues that are slowing down revenue recognition? What contractual changes are being made to speed up revenue recognition?

Please add to this list in the comments below and reorder the list above. Hopefully, the analysts will ask these if the company doesn’t incorporate them into their next earnings call presentation.

What about Grizzly Research? Our previous article dealt with the short seller research report from Grizzly. Thank you, Grizzly, for getting us to drill into the numbers and to make the confirmatory calls and emails you should have made.

On that score, we sent four messages to people involved in ESI AP, the Australian partner that Grizzly asserts is a sham as it is actually a related entity. One response to date, which read in part,

I can confirm that ESS and ESIAP are indeed independent entities with independent shareholder groups.

We’ll leave that respondent’s name confidential since we didn’t warn them they might appear in a Seeking Alpha article.

Also we recommend that readers take in this December 14th article on the first Energy Warehouse arriving in Australia, which would seem to further call into question Grizzly’s negative assertions. Here’s the lead image:

Conclusions. We believe the company’s presentations are too opaque and that this opacity doesn’t protect company secrets. Instead we believe it just leaves shareholders in the fog. We hope management will answer the questions asked here and no doubt others that will be asked in the comments below. Our confidence in Grizzly’s assertions was never high, and is going lower, but we are on notice that the company is not hitting its own projections and will be watching closely. Good luck to GWH longs.