ESS Tech: Q4 2022 Estimates and Management Questions (NYSE:GWH)

Incoming call. We were very disappointed with SS Tech’s third quarter earnings (NYSE: GWH). The earnings call had several notes on earnings:

• The company admitted that it has deployed 10 of its energy storage units, “… what is deployed, which In total, it is now about 10 units … “
• “… we have recognized revenue for four of these units,” the company said.
• The company provided its forecast for 4Q, “… our hope is to get something out of the 20 people who are rolling out to their customers before the end of the year.”
• And in second quarter earnings, the company released its forecast for the year, saying, “And while we’re looking at 40 to 50 energy storage units this year toward our original plan, we’ll probably be closer to the low end of the range.” And maybe below it, depending on our ability to address these supply chain issues.

Income forecast. Due to the lack of information provided by the company, we believe it is difficult to make any kind of scientific earnings forecast. Anyway, here’s something to encourage some discussion and test what we learn on the next earnings call.

We still haven’t figured out the revenue recognition problems. But with the six unknown units in the field (see above) in the last quarter, we expect earnings to be recognized on those additional 3. And based on the forecast that 20 more units should be out the door in the 4th quarter, we expect revenue to be 20% or higher in the 4th quarter. Based on Energy Warehouse’s most recent sales of $189,000, these seven units would generate 1.34mm of revenue for the fourth quarter.

This can result in income as follows:

Click to expand

Of course, all numbers are “hopes”, not science. We basically keep cost of sales and G&A, and hopefully the huge R&D number will come down as a lot of automation is done and more. Best-in-class shares were unchanged for the quarter, with a loss of 14 cents a share. This is a very simple model.

The most important prospect is financial balance. 3Q 10Q list cash and short-term investments of $166.7mm. If depreciation and capital expenditures remain relatively constant and the net income shown above is realized, ending 4Q cash flow should be around $140MM.

Questions. As the discussion above shows, we believe there are many unanswered questions in the company’s vague presentation to shareholders.

1. Tell us about repair and replacement costs under warranty. Based on 3Q sales price of $189,000 for one energy storage unit, it appears that they replaced or obsoleted about two units per quarter and 5 units in 9 months. Are these current costs or expected future increases?
2. They don’t currently report cost of goods sold and say these numbers are buried in research and development costs. When do you anticipate reporting R&D exits and cost of goods sold on the ordinary income statement? Even if you can’t tell us the COG, can you show us the improvement in positive contribution during the year?
3. What was the “flow issue” referred to on page 51 in the flow issue of certain battery modules manufactured and shipped to date in the second quarter of 2022?
4. How many robots have you deployed in Wilsonville? How many were there on 1/1/2022? How many will there be on 1/1/2023?
5. Can you give us some more specifics on one of the biggest items on your income statement, research and development expenses? This is $20.127mm in the most recent quarter and $49.190mm for the 9 months in the most recent 10Q. Without giving away trade secrets, what would it look like to automate the production of buckets? Battery Process Chemical Modifications? System R&D scale such as inverters, switches and software? Other “over the horizon” battery technologies? Manufacturing current systems? Development of energy centers with improvements in energy storage?
6. Some of your press releases mentioned the second generation of energy storage that is now being shipped. What are the Kw and KWH ratings of this version? Previous versions? What will the slide path look like for future versions? How do customers and prospects rank demand between kilowatts, kilowatt hours, and hours?
7. Please tell us about revenue recognition issues where units are shipped, but revenue is not fully recognized. Some press releases have discussed synchronization and interpolation issues. Are these ongoing? Has your centering ability been made more flexible to handle different field conditions? What are the other factors that delay revenue recognition? What contractual changes are being made to accelerate revenue recognition?

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

What about grizzly research? Our previous article discussed Grizzly’s short seller research report. Thanks, Grizzly, for letting us crunch the numbers and making the confirmation calls and emails you should have done.

At that point, Grizzly said we sent four messages to the people involved in the Australian partner in the ESI AP because it was actually a related party. One response to date reads in part,

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

We will withhold the name of that respondent as we did not warn them that they might appear in the Alpha Search article.

We also recommend that readers pick up the first Energy Storage Australia on arrival in this December 14 article, which seems to further question Grizzly’s negative comments. Here is the lead image:

Conclusions. We believe that the Company’s approaches are not transparent and that this transparency does not protect the Company’s confidentiality. Instead, we believe it will leave shareholders in the dark. We hope management will answer the questions asked here and others in the comments below. Our confidence in Grizzly’s credentials wasn’t high, and it’s going down, but we’re knowing the company isn’t hitting its own projections and will be watching closely. Good luck miss GWH.