ESS Tech, Inc. (GWH) Q4 2022 Earnings Call Transcript

ESS Tech, Inc. (NYSE:GWH) Q4 2022 Results Conference Call March 1, 2023 5:00 PM ET

Company Participants

Erik Bylin - Investor Relations

Eric Dresselhuys - Chief Executive Officer

Tony Rabb - Chief Financial Officer

Conference Call Participants

Thomas Boyes - Cowen & Co.

Colin Rusch - Oppenheimer

Davis Sunderland - Baird

Joseph Osha - Guggenheim Partners

Chip Moore - EF Hutton

Chris Kapsch - Loop Capital

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Erik Bylin

Welcome to ESS's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Joining me on the call 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 fourth quarter of 2022. This 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 2022 and beyond. The forward-looking statements are subject to known to 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 reports filed with the SEC, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, inflation, 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 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 U.S. 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 U.S. GAAP and non-GAAP results are presented within our earnings release.

With that, I will now turn the call over to ESS's CEO, Eric Dresselhuys.

Eric Dresselhuys

Thank you, Erik and thank you all for joining us for our fourth quarter and full year 2022 earnings call. Today, I will review our financial results, operational progress, recent wins and the impact of the Inflation Reduction Act. I'm joining Tony Rabb who recently joint ESS as fiscal Chief Financial Officer and he's joining us for his first earnings call.

We delivered 14 energy warehouses in Q4 and 20 for the full year. The 14 EWs in Q4 is a record for ESS and we're extremely excited to see this growth. Although it is a bit less than the higher end we had targeted, it reflects our increasing ability to navigate a challenging supply environment and drive an upward trajectory in our production capacity.

We expect to recognize substantially all of the revenues from the 14 EWs we delivered in Q4 later this year. And I'll let Tony cover that.

We finished out the year having made strong progress on our operational initiatives. On the power module front. Our target was to end the year at 750 megawatt hours of annual capacity. And we exceeded that achieving 800 megawatt hours of annual capacity. The team did a great job of getting the fully automated line up and operational and delivering efficiencies across all three lines to help us achieve the additional capacity.

During the fourth quarter, we successfully finalized a number of important designs for manufacturability initiatives that lowered the labor we used to build EGW. With better processes and a second-generation design that is easier to manufacture, we have also been able to dramatically reduce the time required for our final testing process. Another key facet of getting our products out the door more quickly.

All of this is difficult and complicated work. We started the year with aggressive ambitions to take costs and labor out of each unit we build as we aim to dramatically increase capacity. That effort unfortunately coincided with one of the worst supply environments and tightest labor markets the U.S. has ever seen.

ESS persevered and we expanded and strengthened the team. We redesigned a number of assemblies within our EWs to simplify manufacturing. While looking to onboard new vendors that we believe could deliver reliably at lower cost and higher volume.

We brought on new automated manufacturing processes, we built and trained a team from scratch to help customers deploy our products at their sites. Our technology team has increased the energy density of our electrolyte by 25%, improving our cost per kilowatt hour and increasing performance.

Again, this has been hard work, and there have been bumps in the road as we scale a unique patent protected technology in a fast-growing market that demands a new solution. But we've made significant progress in reducing cost, improving quality across the board. To accomplish this through 2022. We had a key leader across engineering, operations, finance, legal and customer success that bring deep experience to the challenge of scaling a company for growth and profitability.

These new leaders are professional operators that are accelerating the progress we're seeing the ESS. As a notable example our customer success team is working collaboratively with customers in the field and is making great progress accelerating the EW commissioning process for Consumers Energy. Despite temperatures as low as six degrees Fahrenheit at the customer site, the team was able to deliver and test the energy, energy warehouse a great sign for the team and our ability to manage the process to implement our technology on a customer site.

Our internal collaboration between our customer success team and our WILSONVILLE operations team has played a critical role in this progress. In a virtuous cycle, our customer success team has provided valuable feedback from the customer sites to our ops team on changes they could implement to packaging and delivery to speed commissioning.

It's great to see the teams working together to improve the customer experience. I'd also like to share some detail on two very interesting customer wins we recently secured. In the fourth quarter, we signed a deal with Schiphol Airport in Amsterdam, the second largest airport in Mainland Europe.

Triple is driving to be emission free by 2030 and is looking to replace the diesel ground power units that provide electricity to airplanes while they're at the gates with fully electric versions. In this pilot program our EW will charge these electric ground power units with clean, renewable electricity.

Forward thinking airport simple also leads the tulips consortium of European airports, that is working to accelerate the implementation of innovative and sustainable technologies to reduce emissions at airports. I had a chance to visit with the shipping team in mid-February and was impressed with their vision and the critical role they believe. battery storage will play in decarbonizing airports.

We believe this initial installation has the potential to unlock a huge market opportunity across Europe and beyond. We also signed a deal to deliver to EWs to Turlock Irrigation District, quaint project Nexus Turlock Irrigation District will conduct the test installing solar panel canopies over its irrigation comments are first in the United States.

This installation is expected to create the double benefit of producing clean electricity as well as mitigating the evaporation that occurs from irrigation canals to critical needs in California. In fact, the cooling effect of the water can actually increase the solar panels efficiency funded by the state of California. The pilot project is expected to be underway earlier this year, and completed by the end of next year.

This project creates an opportunity for up to 3 gigawatts of our environmentally safe nontoxic batteries to be paired with 13 gigawatts of potential solar that could be installed over California's canals as well. We are proud to have been chosen to be paired with the solar installation and excited about our opportunity from this innovative approach to decarbonizing the grid. Each of these winds elicits a unique and valuable application for long duration energy storage. That represents opportunities for projects that could generate significant additional revenue for ESS.

ESS is certainly fortunate to have such a compelling technology to address a critical and burgeoning market of applications so broad that we could not begin to imagine them all today. And as such ESS shaped its go-to-market strategy to leverage our unique position in the market.

We are focused on customer relationships and applications that once the technology proves itself and the use case have the potential for considerable upside. We are excited about these two programs and look forward to the many that come as we strive to help decarbonize the grid, I would like to quickly revisit the anticipated impact that the Inflation Reduction Act or IRA will have on ESS in our market.

We are still waiting for the IRS to enact the IRA rules, so the full impact likely won't be known until that is done. But we are excited about how discussions around long duration energy storage programs are accelerating with customers. With customer investment tax credits, that could save them up to 50% off our product cost coupled with a production tax credit of about $45 per kilowatt hour for ESS.

The economic viability of any battery storage project has dramatically improved. I'll give one example. Everyone has likely read stories recently about grid congestion issues across the United States and around the world. With incentives for standalone storage in the IRA, we're getting a lot of interest from traditional utilities to use long duration storage as a deferral of grid investments, an application ideally suited for our solutions.

With proprietary technology based on abundant and inexpensive iron, salt and water, we believe ESS remains very well positioned to capitalize on the opportunities to come.

Moving on to our plans for 2023, we aim to continue the progress we're making across manufacturing operations and market penetration. We built substantial capacity during 2022. But we're hindered from achieving our potential like continuing supply challenges largely across the balance of plant. Our focus in the coming year is clear. We are aiming to strengthen our supply base for consistent timely delivery at greater scale, while driving down costs across labor and cost of goods as we drive toward unit profitability.

We also intend to take a responsible approach to growth in the coming year as we balance delivering product with managing operating costs. We find landmark deals in 2022. Firstly, SMUD for 2 gigawatt hours, which has now given us notice to proceed in the first phase of this multiyear project and ESIAP with potential to be even larger. This in addition to the numerous other initial deployment opportunities that have the potential for considerable upside, we entered 2023 completely booked for the year and buoyed by the impact of the IRA.

We expect to sign deals to book out our capacity in 2024 and beyond. Given the ongoing uncertainties we will defer providing guidance at this time, we look to provide further updates in the coming quarters. We plan to ramp deliveries and installations throughout the year, and remain tremendously excited about how the prospects for the business continue to grow. Given the current environment, we believe it is best to refrain from giving specific guidance for the coming quarters or the year.

And before I hand it off to Tony, I'd like to address the short seller report that was released in December. I want to set the record straight. The central claims that the report are that our customer ESIAP is a related party of ours, and that its new manufacturing facility that will complete final assembly of our EW systems in the future is not being built.

That is simply not true. Let me be clear, ESS has no ownership interest in ESI zero, and we would direct you to our SEC filings for further proof. As to the new facility, ESI broke ground last year and say preparations are progressing. The balance of the short seller report is mostly a combination of hearsay, misleading statements of facts we have already shared publicly, and various disparaging statements about members of our team.

As the author's clearly stated in the introduction, and I quote, this report and all statements contained herein are the opinions of Grizzly Research LLC, and are not statements of fact. We continue to explore our legal options and will vigorously defend ourselves against the false claims made in the short seller report.

With that, I'll turn it over to Tony to cover our results.

Tony Rabb

Thank you, Eric. I'm very excited to be on the team. Unless otherwise noted. All numbers we talked about today will be on a non-GAAP basis. You will find the reconciliation of GAAP to non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website. Is there a shared we deliver energy warehouses which met all the contractual requirements of our customers, including title passing and risk of loss?

However, four criteria for revenue recognition under GAAP had not been met as the customers did not take full control of the units, which occurs once the units are transferred via the shipping method. As a result, we did not recognize material revenues in the fourth quarter. Revenue will be recognized based upon contractual shipping terms. Unless unique customer specific acceptance terms exist.

We remained under development accounting rules in Q4. So, the material overhead and labor costs we incurred in producing the products we've delivered fall into OpEx, resulting in zero cost of goods sold. Our non-GAAP operating expenses in Q4 were in line with our expectations at $28.2 million.

With that we reported Q4 adjusted EBITDA negative $27.5 million. We ended the fourth quarter with $139.8 million in cash and short-term investments, which was well above our prior expectations and puts us on very solid footing from a cash and liquidity standpoint leading into 2023.

We plan to take a prudent approach to our ongoing ramp this fiscal year, we are balancing our customer commitments with our desire to scale up our operations in what continues to be a challenging supply environment, and our plans to further reduce our cost of goods sold. As we execute our plan in the coming year. We believe, we have ample liquidity to operate the business through the balance of this year and into 2024.

And with that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Thomas Boyes with Cown.

Thomas Boyes

Thanks for taking my question. Obviously, I appreciate you guys aren't giving any guidance '23 at this time. But I was just maybe wondering if you could kind of walk us through what maybe some reasonable non-GAAP gross margin expectations would be for the energy warehouse, just thinking about the margin profile there.

And now that you have both the semi-automated and fully automated lines up and running, you have the initiatives for design for manufacturing starting to kind of reduce costs, just wondering how we should think about that product?

Eric Dresselhuys

So, I'll jump in Eric here to take that because there's a little bit of history involved. We've been very focused, as you noted on driving costs out and so we've made really substantial progress, our unit costs have been more than half in the last year, year and a half. Since I've joined in, I think it's also important to note that when we look at total costs, it kind of comes in four categories.

If you think about the GAAP implications. Of course, there's direct materials, costs, which we're driving out through improved designs, vendor upgrades, and of course better volumes.

We're taking out direct labor costs that comes from improved design for manufacturability, putting in those automation lines. And we've noted that we've made substantial progress and taken out labor content there. And then, of course, as we get up to production, normal production operations, we take out scrap and warranty, which is really positive, and of course, reflects in higher quality.

The last thing and this is where it gets a little bit complicated is that there are indirect and allocated costs, the building the facility, the supporting teams those really self-cures in terms of the margin contribution, as we get to higher and higher volume. So, we're talking about driving to unit profitability on the first three, knowing that the fourth category takes care of itself with volume.

And we're in a great place with the cost would come out, we hadn't set a specific announced a specific target, but I think the way to think about it is we'll cross that line on unit profitability in the next 12 to maybe 18 months on the long side. It's very much the focus of the company watching inflation along the way.

But a good piece of news for us is, since our product doesn't really have a lot of high volatility, commodities in it. We don't have lithium, or nickel or cobalt, or any of the things that are subjected to wild commodity price swings, we have a very clear line of sight to get into that unit profitability.

Thomas Boyes

No, I appreciate the color and then maybe just for my follow-up, because you talked about some of the challenges around just the manufacturing of the EWs, you know, heading into the end of the year, I believe the original target in the high-end was closer to 20 units. But what type of supply chain issues or logistical challenges were there I know kind of semiconductor supply chain challenges have been a perennial issue? I was just wondering if there were specific shortages that you can highlight that you think will ultimately resolve themselves maybe the next 12 months?

Eric Dresselhuys

Yeah, sure that well, most of the challenges have been on the balance system. So, it's not the core stack. Battery stack part of it, it isn't the balance of system, and it is the things that have been problematic and really skipped around. So, chips, as we've talked about in the past, are an issue. Anything with power electronics has got supply chain challenges, we've had some smaller challenges with things like pumps that I think are mostly resolved.

Part of what we've tried to do, and I think we felt much better at the end of the quarter and going into this quarter is that as we move through an upgraded to more reliable, more scalable vendors, we hope that we've laid in enough visibility to take care of those problems going forward, we didn't see anything that we felt was a systemic problem or was going to be an ongoing drag. It's just the kind of the chipping away of individual components that seemed to have issues and then and then resolve themselves.

Operator

Your next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch

This is Andre on for Colin, with the completion of the automated line installation, can you give a sense of what the yields are looking like so far, and the rate of improvement that goes I think?

Eric Dresselhuys

I think too early to put a specific number to it because we just commissioned the line. So, we're ramping up its production. Through this quarter, we still have our semi-automated lines, which are carrying most of the load in the near-term, but it was certainly sufficient quality that the team officially commissioned the line and signed off from our vendor partner who was helping us set it up. So, we feel very good about the password to Tom.

Colin Rusch

Thanks. And just as a follow-up, could you give us a sense of timelines for OpEx spending?

Tony Rabb

Hi, this is Tony. So, at this point, I think we haven't provided any guidance in terms of what that might look like going forward. But if you take a look at where we were in the fourth quarter. We feel like that's a fairly adequate level of spending. And so, the change between third and fourth quarter, there was too much of a change there. So, we're looking at maintain.

Colin Rusch

Thank you, so much.

Operator

Your next question comes from the line of Davis Sunderland with Baird. Your line is now open.

Davis Sunderland

Thanks for taking my question. I wanted to ask about any challenges you may have had with validating the technology to customers. And then stemming from that if a few of these bigger deals like small in the Amsterdam airports have kind of been proof points, or if you've seen an uptick in demand following those?

Eric Dresselhuys

Sure. Well, I'll pick that. So, we talked about the biggest challenges that we've had in the field that we've been working through is how our product interfaces with the kind of the grid or third-party system, but there's a lot of complexity that we've had to work through over the course of the year to demonstrate not just the core performance of our products, but really how it interacts with other people's products.

So that's been a chunkier process than we had expected. But I think we've moved through it pretty well. And some of the more recent units in particular that we've shipped here in the states to folks in commercial applications, or some of the units that have shipped down even as far away as Australia have performed quite well. And the time to commissioning, as I alluded to, in my prepared remarks, has really started to shorten. So that's we think, fantastic.

The interest has picked quite a bit. I think it's a combination of some of the announcements and people seeing the different use cases, for long duration storage and where it comes into play. I don't frankly think a lot of people think of something like the Schiphol Airport and said, that was an obvious application that I expected for long duration storage.

When they understand what the application requirements are, and how our technology is really uniquely well suited because of its safety, reliability to be in an airport environment, the response we get as well, that's obvious. I didn't know that. No, you said it makes perfect sense.

That the last thing I'd say is that there has been a big uptick in interest relative to the Inflation Reduction Act. But as I mentioned earlier, it would be great to get the final rules, in terms of the IRS is administration out the door, because we have had some people, we're getting into conversations and planning projects, but they're hesitant to go to full commitment until they know what those IRS rules are.

Davis Sunderland

And actually, your second bit on the IRA there took away a big part of what I was going to ask for a follow up, but any visibility you have into when you are going to realize those benefits, if it's direct pay, or how you incorporate those benefits into future contracts or any read I guess, on when we might know more?

Eric Dresselhuys

So, I'll tell you what we know, which is that the announcements that have come out public announcements that are available, have indicated there will be further indication here at the end of March. I don't know that that will be final rulings. And it may be different across the two parts. So just to reiterate, there are two parts of the IRA that were really the most impactful to us.

There are a number of other benefits as well. But the two most important ones are the investment tax credit that our customers will qualify for. And then the production tax credit that we will qualify for.

On the production tax credit, we feel those rules are pretty straightforward. And we have such a high domestic content requirement. And we've been doing this for years now, as we ramp up. So, we don't feel there's any risk on that we're accruing right now for any units that ship we are keeping track of how many units we built and how many units we've shipped on the assumption that we will get, get our production tax credit for those units and that we will have direct pay available to us because the law has been pretty clear on that.

What's been a little bit more complex are some of the rules around things like the domestic content or economic development don't add errors to the IPC. So, you may recall that the base load of the IPC is about 30%. And now does include standalone batteries, as well as batteries when they're deployed with solar or wind.

That that 30% number goes to 40%, and then up to 50% or more based on qualifying for the domestic content editor, or for the economic and energy redevelopment zones. And those are the rules that people are most curious because they're new. So there really isn't as much kind of history to go point to. So, I think once those rules are clarified, that will help give people the comfort to move forward.

Davis Sunderland

Thank you.

Operator

Your next question comes from the line of Joseph Osha with Guggenheim. Your line is now open.

Joseph Osha

Thank you, guys. Thanks for taking my question. The first step, Eric, you talked about capacity and exiting the year at $800 a megawatt hours. I'm curious that the previous plan had been to continue expanding that number, might we assume from the tone of your comments that you're going to slow that pace of manufacturing expansion?

Eric Dresselhuys

Yeah, I think at least as it relates to stack manufacturing, we've done a really good job with the three lines and now have plenty of capacity for a bit of time. So, I think, we'll focus on ensuring that we've got capacity to build out more systems. In addition to that, and then keep a track of how the backlog is booking up. There is a lead time for automation equipment that you have to be sensitive to.

So, you can't, if you order new automation equipment, it doesn't show up the next day. So, you're really planning on where the pucks going to be 12 months into the future. And so that's the one caveat I put to your comment.

Joseph Osha

That’s helpful. Thank you. The second question, just to drill down on your comment about the 14 units, so those are going to be recognized in Q1 as revenue is that correct?

Tony Rabb

Yeah, hey, this is Tony. So those are going to be recognized in 2023. So, these units, as company's been working aggressively to get those units out at the end of the year. We met contractual terms, legal terms to transfer, title and risk of loss to the customer at the end of the year. They are under various different types of contractual terms, the exact timing of when that that revenue will be recognized will occur in the year.

However, basically, for us to recognize revenue and those units, the control of those units must pass fully to the customer. And that either occurs when the customer picks it up from our dock all the way to once it gets on the ship, or truck or train, all the way to the point where it could be arriving at the port for that customer. So, there's various titles, that impact when that revenue will be recognized, and it will be in 2020.

Joseph Osha

And can you remind me who those units were headed for?

Tony Rabb

I think what we disclosed so far is that there's a unit that were going to ESI and to Schiphol Airport. And I believe all that's been prepped so far.

Joseph Osha

And some of them in the Q4 units were the CMS unit, which was also announced as part of the delivery?

Eric Dresselhuys

Correct.

Joseph Osha

Okay. And then the last question for me before I jump back in queue, if you look at the rate of cash burn here, obviously spent some, you've been building some stuff, and it sounds like that's slowing down that you burn about $100 million since the December quarter of last year, that's probably not sustainable, given what it sounds like I'm hearing about this year. So, can we assume that you're going to take some steps to attenuate that rate of cash burn?

Tony Rabb

Look, I think, if you think about that cash burn, a lot of that is ramp up of manufacturing yields, rework, scrap, and material use that earlier units, and warranty costs associated with those. And as the company ramped up the business, and our objectives this year are going to be to focus on reducing the cost of the unit and continuing to improve yields and reducing our scrap rates. So obviously, a big push for us will be to be a lot more efficient with how we manufacture, which is a big point of our big usage of our cat.

Joseph Osha

Okay. Thank you.

Operator

Next question is from the line of Chip Moore with EF Hutton. Your line is now open.

Chip Moore

I want to follow-up maybe on that, that last one, just question, you talked about driving towards unit profitability, I think over the next 12 to 18 months. Maybe just expand on key initiatives there? Is it sort of the blocking and tackling that some of the things you just talked about? Or anything else we should take into account?

Eric Dresselhuys

I think it's really a lot of blocking and tackling. It's some of it is I think comes from volume. And some of it comes from the design improvements. So, it's that the balance, which is the blocking and tackling balance is to implement the upgraded designs would make it more manufacturable improves quality. And then as we hit those and implement each of those changes, the profitability story of each unit gets better, which narrows bet loss gap, and we kind of cross over, you know, somewhere outside of 12 months from now.

And so, but it's not a cliff. It ramps down over time as you approach the crossover point. And I should point out, doesn't end there, then we just keep driving and driving to keep taking costs out as we ramp up volume and that's what builds the margin story of the company.

Chip Moore

And maybe one on higher incentives, you did a good job talking about the dynamics there, I think. I guess specifically, I thought I'd read that the DOE was going to do some funding for some demonstration projects in the space. I think it was like a 50% cost share. Is that an area you think you'd be active in or is that not as relevant for you guys?

Tony Rabb

Yeah, well, the way I think we would, we would be active in that we've looked at some of those funding buckets. Our approach would be to partner with an end user to apply for the money together. So, in our view, since we're not, we don't want to be in kind of an owner operator developer, I wouldn't probably go and apply for a grant to do a project, there's an ESS owned ESS operated project.

But when I wouldn't do is get together with a municipal, commercial customer and developer and look at a project that would qualify for grant funding, where our technology would be involved in incorporated into the project.

Chip Moore

Back to, I think he mentioned, sort of lead times on automation equipment, nothing overnight. When would you have to make a decision, let's say, we get some more clarity on some of the IRs stuff and demand really takes off, that sort of like a six-month decision or any way to handicap that?

Eric Dresselhuys

I mean, it's at least a six, probably closer to a nine-month decision. And I haven't, I won't profess, I haven't looked into all of the potential mechanisms for acceleration and expedition of those kinds of things. The good news is that a lot of the way that the industry works, a lot of the project planning tend to be nine to 12 months out into the future anyway. So, we do get really pretty good visibility into the shipment plans and the customer deployment plans.

And so, I think that it won't be a constraint to us in terms of building the capacity to fill it out based on the time, the planning time horizons of the industry.

Operator

Your next question comes from the line of Chris Kapsch with Loop Capital. Your line is now open.

Chris Kapsch

Good afternoon. Mostly follow-up to some of the discussion items here. Just curious on the on the comments around cash burn and just, as you look to, as you call their thing, crossover to break even. I'm assuming you're factoring in production tax credits, that will anyway to quantify how much you've been spared, that will diminish the cash burn? And curious if you know yet, will you be getting those for thought I was in you manufacture to date or is it, so including inventories, or to have to be capacity that's shift or recognized on a GAAP basis? Any color on that?

Tony Rabb

So, what well, I can tell you what we know. But you've hit Chris, a great point on why everybody is so anxious to get the details of the IRS rules out, because the details matter. And they probably matter more at the IRS to do most places. So, what we what we expect, what we believe is that the production tax credit for us is about $45 a kilowatt hour and unit rated capacity.

So, it's a little bit of a derivative of each of our battery cells. And important to point out, the production tax credit, in our case, applies to the battery cell. So, the actual energy storage unit balance, a plant in this case doesn't matter. And that's $45 a kilowatt hour. And what we know for sure is that it's something that is shipped to a customer, it has to be shipped to a third-party.

And that clock started on one of this year. So, the funny thing that we've that we build our ship, even if we built it before, but if we ship it, and that transaction takes place, after the first of the year should count towards the production tax credit, I don't believe there will be any direct lines to GAAP accounting rules. I think that's a very different category. But I think you won't have to prove that you sold it to a third-party.

Eric Dresselhuys

[indiscernible] that we have factored into our cash burn some benefit of that. So, anything that we could realize this year would be a net positive for us.

Chris Kapsch

So, upside to the cadence that you it's sort of communicated in terms of the cash burn sounds like, okay, that's the great thing. If I had that, right, and the other follow-up I had was on the benefits from the IRA with respect to the commercial momentum behind this market’s development. And just curious, I know, you're, I understand you're not really comfortable or in a position to provide guidance, given all the dynamics.

But can you just talk about the nature of the engagement with customers and how that's manifested in either discussions or backlog or funnel anyway that quantify that or characterize that sort of market development, if you will, from a engagement with potential customers?

Eric Dresselhuys

Sour So, the way I guess I would describe it is and I would certainly hope that everybody would appreciate that nothing about providing guidance at this point in any way, shape, or form is a diminishment of our enthusiasm, excitement about how the market is growing, because it really has been a fantastic ramp up in the interest across the board.

And I should add, because I don't think we said anything. In the prepared remarks, you may have seen that Australia has announced an IRA like incentive program, and there has been progress made in the last, 35, 40 days in Europe, to have a similar incentive program.

I think it'll look different in the details. But directionally is the same in Europe. So, there is a ton of tailwinds coming in to build market momentum around that. We haven't dimensionalized a total pipeline kind of impact. Because it frankly, those in the numbers kind of get crazy big and I'm more for $0.02 focused on the things that are more progressed through the sales process.

What I can tell you for sure is that with IRs, and the investment tax credit, you're now opening up new use cases that before people might not have thought to be cost effective. And the one that I mentioned earlier, I think is really worth calling out.

We were at a conference last week where or two weeks ago, excuse me, we're where CAISO, the operator of the California grid hosted a panel on using batteries, as a deferral for TMD investment. And utilities are now looking at energy storage, which could go into their rate base at a very favorable set of terms because of the investment tax credit, as a deferral towards TMD investments on their side. Those were conversations that we just weren't having a year ago, before, before the IRA came onto the scene.

So, it's not maybe orders of magnitude of growth, but it's multiples of growth in terms of the interest in the use cases. And we just have to keep moving through the process to continue to move those to the sales funnel and ultimately move them to deal.

Chris Kapsch

You mentioned the revenue recognition in calendar '23 for what's going to shift. Is that a prelude to emerging from development accounting, or am I to completing two different considerations? Thanks.

Tony Rabb

Well, sort of yeah, they are. Obviously, as you recognize revenue over time, it doesn't make sense to remain in R&D accounting, but they're two different criteria to transition. So, they're not linked together but our expectation from an R&D accounting transition is that we will be transitioning this year. And there's more work for us to do to determine the appropriate timing, but we're still expecting to transition this year.

Chris Kapsch

Right. And that's what I was really good at. And then when that happens, would there be sort of a pro forma reset to as if this happened, let's just say it happens in I don't know the fall. Whether it be a pro forma reset as for the recast the entire calendar year on a post development accounting basis? Thank you.

Tony Rabb

Yeah, I think that's a determination that we still need to work through in terms of what actually is reflected depending on the timing of when we transition. But at a minimum that will be out of perspective.

Operator

[Operator Instructions] There are no further questions at this time. Mr. Dresselhuys, I pass the call back over to you.

Eric Dresselhuys

Thank you. And thank you all for joining us for the call. We couldn't be more excited about the progress we're making in the business. And we look forward to giving you further updates on our subsequent calls.

Operator

This concludes today's conference call. You may now disconnect.