ESS Tech: The Honeywell Honeymoon Was Brief (NYSE:GWH)

Background

ESS Tech Inc. (NYSE:GWH) went public via a SPAC merger in late 2021. The company’s shareholders include Bill Gates’ Breakthrough Energy Ventures and Softbank. Now, as mentioned above, these stalwarts are joined by Honeywell (HON) which has invested $27.5 million to purchase 16.5 million common shares on September 25, 2023.

The main product offering is a grid-scale battery made from iron and salt water, which are much easier chemicals to obtain and are more environmentally friendly than competing lithium-based technologies. Despite hundreds of millions of dollars spent to date, revenues are still in the single-digit millions each quarter. In their third-quarter earnings call, management projected a record result for the 4Q. This article takes a look at that projection.

Potential Delisting

Lately GWH has been trading below $1 which is the trigger for delisting from the New York Stock Exchange.

…on the New York Stock Exchange (NYSE), if a security’s price closed below $1.00 for 30 consecutive trading days, that exchange would initiate the delisting process.

Absent a rise in the stock price, the cure for this is a reverse stock split. An example would be a 1 for 5 splits, where holders of 5 shares get 1 share; percentage ownership hasn’t changed but the price is quintupled. Reverse splits rarely perform well post-split, so this may be only a temporary fix.

Compare this $1 de-listing trigger, and the recent $0.95 trading price, to the $1.39 closing price on the night before the announcement of the Honeywell deal on September 25, 2023. And compare those prices to the $1.67 Honeywell spent for common shares and the various tranches of warrants they received struck at $1.45, $1.89, and $2.90, all as described in the deal 8K. Clearly Honeywell has a much more aggressive outlook for the stock than its current trading level.

What about Honeywell? While pre-SPAC merger shareholders Breakthrough Energy and Softbank have some credibility and name recognition, they don’t have the Fortune 100 chops that diversified utility Honeywell has. Their numbers speak to some serious industrial heft: $128 Billion market cap, $36.6Billion in revenue, $8.26 Billion in EBITDA, and $5.66 Billion in net income.

There’s a good SA piece on their complicated restructuring. Had this restructuring taken place prior to this deal I could easily see Honeywell management saying, “Let’s digest these changes and think about this investment in ESS for a while.” Fortunately for us, the timing was right.

Behind the Meter vs. In Front of the Meter. Behind the Meter refers to installations on a customer’s premises, behind the meter that records their utility purchases. Front of the Meter usually refers to installations at utility of generator sites.

ESS hasn’t emphasized the difficulty and time lag they face in pursuing Front of the Meter applications. One only needs to look at the interconnection queues at regional operators:

PJM, the largest electric grid operator in the United States. This regional transmission organization (RTO) that coordinates the wholesale electricity system in the Mid-Atlantic region has an unprecedented 258 GW of projects waiting in its interconnection queue to be studied and connected to the grid. That’s 1.4 times the amount of currently installed capacity in PJM, and 98 percent of these projects (by nameplate capacity) are carbon-free resources.

And the waiting time is large, as this article indicates:

PJM won’t even begin to process requests submitted after October 2021 until 2026 at the earliest.

So even if ESS has a better mousetrap (and I think it may) it could take 5 years before an interconnection to the grid was allowed for a front of the meter application.

Enter Honeywell with operations in 100 countries and an enormous installed customer base:

With solutions and services used in more than 10 million buildings worldwide, Building Automation will continue to strengthen Honeywell’s position in attractive end markets like hospitals, airports, education, and data centers.

And this may be the key to ESS winning a number of behind the meter installations. The Honeywell service and sales guys know the maintenance folk, the bill paying folk, and the decision makers in 10,000,000 buildings. I bet they know where there are energy problems that could be solved with an Energy Warehouse or two.

What about the company’s projection for the 4Q which should be reported soon? While the company has been gun shy about providing projections, CFO Tony Rabb had this to say on the 3Q earnings call:

We recognized $1.5 million in revenue in the third quarter and we still believe we can deliver on $9 million in revenue for the full-year

And to divine what that means for the 4th quarter one needs to subtract the first three quarters of revenue, available on the SEC’s server here. Rabb’s $9mm for the year minus 4.7mm for the first three quarters equals $4.3 million in revenue for the quarter. The company’s 3Q 2022 10Q spelled out the sale of their Energy Warehouse offering for $189,000. This results in a projection that revenue will be realized on about 23 EW’s in the quarter. And this in turn is more than half the 40 odd units the company has installed over the prior two years, as I detailed in this SA article.

I’m skeptical but prepared to be pleasantly surprised. Even more important than the number of units is what types of installations they have secured? Are these behind the meter installations driven by the new Honeywell relationship? Management may balk at disclosing whether these were Honeywell relationships, but they should and probably have to since Honeywell has advanced funds towards their first sales.

Conclusion

I believe the company still struggles with transparency on items that their prospects, suppliers, competitors, customers know, but about which they are for some reason reluctant to inform shareholders. High on that list:

• the status of previously announced units. The company tardily disclosed that the six units sold to SDG&E for their Cameron Corners microgrid were removed. That disclosure followed satellite images published here on SA months before the announcement. Given that this was the company’s largest installation one might think timely disclosure was in order.
• the status and pricing of the LEAG deal for a 500MW battery in Germany.
• a roll out on the upcoming larger Energy Center offering. This will be the company’s bread and butter and should plunge the cost per Kwh by at least half, making this technology even more affordable than competing lithium technologies. The company did inform shareholders the ECs will begin shipping in the second half of this year.

I’m very enthusiastic about Honeywell’s involvement which could be a huge differentiator that none of the non-lithium vendors has. I do think the technology works and assume that Honeywell’s due diligence and investment are proof of that. I hope the company will be more transparent on items that won’t prejudice it in the competitive market.

With the stock under $1 and an earnings call upon us, I am a buyer of the stock. Good luck to longs.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.