GWH - ESS Tech: Anemic Q4 Results Merit Only A Hold

Summary

• ESS Tech presented results on March 1, 2023.
• Net loss of -0.16 per share was slightly worse than my guesstimate of -0.16. But cash and equivalents of $141mm were more than my hoped for $140mm.
• New wins and shipments in the current quarter look positive vs. terrible 4Q results.

As the map above signals, developments in Australia are key to combating short seller research on ESS Tech ( GWH ) from Grizzly and Bonitas . I believe there's very positive news debunking some assertions in those reports, which follows.

But first, what about those 4Q results?

My December 17, 2022 article advanced a guesstimate, as opposed to an estimate, for the 4Q just reported. Here's my guess and the actual:

*cash + restricted cash + short term investments

Estimates are from my article, cited above. Actuals are from the 4Q press release cited above.

I'm delighted with the cash level and astounded revenue wasn't recognized on more Energy Warehouses. It's too early to do an estimate for Q1 but the many shipment announcements look like better results could be in the offing.

What is the company saying and what are the analysts asking?

Despite having dialed in and pressed the *1 to ask questions, I was never called. Such is the fate of Seeking Alpha authors on these calls. Analysts tried 99 ways to get some projection on backlog, margins, even percentage improvements. But I think a management in a class action suit over allegations made by the short sellers cited above is clearly not ready to give guidance.

I would have drilled in on two questions from my article:

• Can you give us broad buckets on the largest item on your P&L, the $22.8mm of R&D expense shown in the 4Q? How much is non-recurring related to setting up the automated lines? How much is related to "Balance of System" which you mentioned on the call was an ongoing problem? Once the BOS issues are solved for the current generation of Energy Warehouses, aren't these also non-recurring?
• Please tell us about the enormous Repair and Replacement expense recorded under Warranties in your last 10Q's. Taking the recent revenue of $189,000 for an Energy Warehouse, it looks like more expense is being recorded for replacement than recent shipments. Are these period costs or forward looking accruals?

Presumably management could and would shed light on numbers like these that they've already published.

And what about Australia?

A main allegation of the Grizzly short seller report is that the Australian partner-- ESI Asia-- is not a third party, and that there is no construction on their site in Queensland, Australia. On the earnings call, management stated they have no ownership in ESI Asia and that ground has been broken.

And indeed ESI Asia announced a ground breaking on July 6, 2022 under the banner, " Construction starts on Australia's first, large scale iron flow battery hub ." Unfortunately for ESS Technology and ESI Asia, this ground breaking was not on Lot2 of the Moonaboola Industrial Estate, the proposed battery plant site, as this correspondence from the current owner establishes, and the following drone flights illustrate. ESI doesn't yet own Lot2 and it remains forested and undisturbed.

Here's the response I got when I reached out to the current property owner, the Fraser Coast Regional Council:

And they included a plot map:

While this may seem like splitting hairs, it's not. Combatting a short seller requires source documents like the above and a careful parsing of the timeline. What ESI Asia and the Fraser Council have done is broken ground and done an enormous amount of work on the site access to Lot2. ESI Asia apparently has that parcel under contract but has not yet closed or begun any actual construction work. I believe ESS Tech management could make things a lot clearer by telling us when ESI Asia intends to close on their contract for Lot2 and begin construction. The pleasant folk at Fraser have given me the link to the Right to Information Act, which is the equivalent of our Freedom of Information Act, so I should soon have some answers to these simple questions.

And what about those drones?

Here's an aerial photo of the muddy site from the Grizzly report that they used to try to illustrate no site work was being done:

And here's a very recent crowd sourced drone flight of the same site:

Many, many thanks to johndkopta , Jerry_Slo, Randall A. Dass , and kscopes who answered the siren call for more drone flights and sent money via PayPal to Bobby, the drone operator who became famous on Seeking Alpha in my last article. We have enough money in hand for an additional flight once there is activity on Lot2 -- the treed area to the left, or south, of the substation at the far end of the drone pic above. Ground has indeed been broken and an impressive amount of site prep work in a flood prone area needed to access the site has been done. But the site of the battery plant is as yet not sold and is undisturbed.

In the "What's next" category, I've looked at Google and Sentinel2 sat images of 26440 SW Parkway Ave, Wilsonville, OR 97070. Clever sat guys (not me!) have automated regular inspections to count ships at wharves, cars in a lot, or I suppose 40' shipping containers in Wilsonville. Might be an interesting way to gauge activity. But I'd want to get a Wilsonville resident to tell us where the company stages empty and full containers as well.

Conclusions

While the net loss and cash balance just reported for the 4Q were close to my hopes, I am still at a hold on the stock. I took the company at their word from the last call that as many as 20 units might ship in the quarter. But only 11 shipped and no revenue was realized on those units. If management remains what I find to be very opaque, if R&D expense doesn’t attenuate, or if Lot2 remains unbuilt for a considerable period, I will move to a sell.

The company needs to get out of "onesy" and "twosy" sales. They need to establish that their much trumpeted Australian partner will shortly be capable of some of the revenue forecasts that have been attributed to them.

I'm very encouraged that the Australian partner, ESI Asia, has got a unit on test with the Queensland University of Technology. We should receive regular updates from them on how that unit is performing.

I believe the technology works and QUT, and other recent installations, should give us those testimonials . The world needs a non-lithium grid scale battery. And here's a company that seems like it can do it with more than 50% of its market cap in cash and equivalents.

Be patient, ESS Tech longs. And good luck.

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