Good morning, ladies and gentlemen, and welcome to the ESS Business Update Call. Our host for today's call is Eric Dresselhuys. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I will now like to turn the call over to your host. Mr. Dresselhuys, you may begin.
Thank you, and good morning, everybody. I'm excited to welcome you to the ESS Conference Call to discuss the partnership we announced today with Honeywell. I will make a brief presentation, and then we will be open for live Q&A with our CFO, Tony Rabie. Before we begin, I would like to call your attention to our safe harbor statement. During this event, we may make forward-looking statements. Please see our press release, SEC filings, and this presentation to be posted on our investor relations site for more information.
I'm absolutely delighted to announce a significant new partnership with Honeywell, one of the preeminent global vendors leading the energy transition, supplying advanced materials, control systems, energy storage systems, and more. We believe this is a category-defining relationship for long-duration storage, bringing together ESS's market-leading iron flow technology with a global powerhouse, delivering solutions throughout the energy value chain.
I think it's appropriate to go back to the beginning of our discussions with Honeywell. When we first talked, they made it clear that they understood the dramatic impact long-duration energy storage would have on the decarbonization of the grid, ensuring reliability and energy security as we move to a more sustainable source of electricity. They saw the need for safe solutions that could easily be sourced and saw iron flow batteries as the best fit for the market needs.
After extensive due diligence and discussions, we crafted an agreement that leverages the great market strength and technical resources of Honeywell, which builds on the market validation we've already received from some of the leading operators in the industry. By combining our advanced technology with Honeywell's global strength, we believe we will create the category leader in long-duration energy storage. Why is long-duration energy storage so important?
As detailed in the McKinsey report at COP26, long-duration energy storage provides a critical link to ensuring reliability and resiliency in the energy system, not met by existing short-duration lithium-ion batteries. Creating a 24-hour, seven-day, 365-day-a-year resilient energy system requires new ways to store and shift energy. As ESS and Honeywell both know, the market opportunity for long-duration energy storage is significant. Forecasts expect a $3 trillion cumulative market opportunity by 2040.
That market is already starting. Over the last year, we've announced significant customer agreements here in the U.S., in Australia, and in Europe. This market is starting to move. By partnering with Honeywell, we expect to expand our reach and accelerate our efforts in establishing iron flow as the leading solution in this large and important category of the energy transition.
I want to take a minute to outline the agreement, as it is quite comprehensive and I think complementary to the work already underway at ESS. I'll give an overview here, and then we'll dive in. First, Honeywell is making a $27.5 million initial strategic equity investment in ESS, all at a premium to our share price at the closing of the deal last Thursday.
Honeywell will then be buying and reselling ESS solutions as a part of their broader offerings to the market, combining our long-duration energy storage solutions with their control software service offerings, delivering comprehensive energy service storage solutions across the full range of their customers globally. We've set an initial target of $300 million over the next six years, with $15 million of that prepaid. We're starting work immediately.
I'm working with the teams and expect that this will open up incremental market opportunities, segments, and use cases for ESS. As a part of the agreement, ESS will take control of Honeywell's IP related to flow batteries. Honeywell has extensive experience across a range of advanced materials and solutions, and this move will allow us to create a single focused set of solutions related to long-duration energy storage.
Finally, Honeywell has extensive capabilities in core material science, controls, power, electronics, and more, spending about $1 billion a year on R&D annually. We have agreed to collaborate on further advancing long-duration energy storage through a joint development agreement, accessing Honeywell's full capabilities to ensure that we are leading the market for years to come. Now let's dig into each of those a little bit more.
Honeywell's initial $27.5 million investment is priced at $1.67 a share, which was a 24% premium to the price at the closing of the deal. Honeywell has an option to purchase an additional $20 million of ESS equity at $1.89 per share, a 41% premium to the closing price. Additionally, Honeywell has made a $15 million purchase prepayment, which is non-dilutive to ESS, against their anticipated purchases.
As we've said, ESS was well-funded before, but with this deal, we have additional resources and a clear runway well into 2025 as we drive to profitability. The genesis of this entire agreement was Honeywell's belief that long-duration energy storage and our iron flow technology's superior position can address the market needs. That's why the global go-to-market aspects of this agreement are so exciting.
Honeywell will purchase and resell ESS technology, combining our solutions with their broader product and solution offerings. As I said, we've targeted $300 million in purchases initially, with $15 million of that to jumpstart the effort. Given Honeywell's reach, we expect this agreement will open incremental markets and customer segments to ESS. The IP arrangement enhances these activities as it creates clear control of both legacy IP and the future development of innovation in flow batteries.
As part of the IP licensing, Honeywell will receive a warrant to buy $18 million of ESS stock at the price of $2.90 per share. Finally, both companies are committing resources to advanced long-duration energy storage technologies and the superior value proposition of iron flow batteries. Honeywell has a broad portfolio of products, technologies, and development capabilities, and we plan to collaborate to drive continual improvement in our solutions to enhance the value creation we're delivering to the market.
We've only just started these conversations, but we'll target cost reduction and improve performance, and leverage Honeywell's long experience building some of the most durable and reliable industrial solutions to make our products even better. We've included a summary of the financial aspects of the deal. This has immediately put $42.5 million in cash on the ESS balance sheet. As mentioned, this includes the $15 million of non-dilutive capital through the prepayment, and strengthens our resources to fund us well into 2025.
When fully executed, it will add over $80 million in cash in addition to the future purchases Honeywell makes. As Honeywell makes those purchases, they will be granted Performance Warrants at a rate of 5% of their annual purchases, but those warrants will not start until 2026 and will be priced based on the then current price of ESS stock.
As we said at the beginning of the call, we believe this is an industry-defining collaboration that will further advance both the long-duration energy storage market and ESS's leadership position. We're excited to make this announcement, but we're even more excited to get to work. And with that, I'll open it up to questions.
If you would like to ask a question, please press star one on your telephone keypad now, and you will be placed into the queue in the order received. If you want to ask a question and are connected to the webcast video, please mute the webcast to ensure a good audio connection. First question comes from Colin Rusch, from Oppenheimer. Please go ahead, Colin.
Thanks so much, guys, and congratulations. Obviously, this is a watershed moment for the company. You know, could you talk a little bit about how mature your conversations are around supply chain evolution, and how helpful you expect Honeywell to be in helping and, you know, optimizing and kind of growing the supply chain?
Thanks, Colin, and thanks for joining. I'd say that the conversations are really just getting underway. During the process of crafting the agreement, there was a lot of due diligence done into the ESS supply chain and where there could be collaboration. I think one of the things that we found great collaboration and agreement on with Honeywell was the idea that iron flow has a supply chain that should be much more accessible, much less volatile from a pricing and an availability perspective.
So, if you look at what Honeywell has done historically, they've got a great strength around the material science kind of core technology parts, as well as power electronics. And so hopefully we'll be able to tap into those resources to broaden our supply chain.
Excellent. And then with the IP that you're getting from them, can you talk about kind of the key elements of that that you guys are excited about, and how quickly you might be able to integrate some of that IP to improve the solution?
Sure. So, the IP kind of runs a gamut. We're gonna use this joint development agreement to go through, component by component and see what things we'll pull in and how those will get incorporated into our supply chain. Obviously, anything that lowers cost or improves performance is interesting for us.
But I think the broader question for us was that we wanted to make sure that as we go through the joint development agreement, there was no lack of clarity around who would own the upcoming IP. And I think this agreement is structured in a really collaborative way to allow us to go push on any number of angles.
Excellent. Thanks so much, guys.
Thanks.
Our next question comes from Thomas Boyes, from TD Cowen. Please go ahead, Thomas.
Yep. Thanks for taking the questions, and obviously, congratulations on the announcement today. Just two quick ones. First, I wanted to kind of touch on the go-to-market opportunity. Are there specific geographies or regions now that you're gonna have better access to or maybe where you were unable to address as well as you would like previously?
Sure. Well, I'd say that, you know, anytime you bring somebody of Honeywell's strength and stature to the market, that's gonna be goodness for us. We're obviously still a young company with limited resources on the go-to-market. We're we can't be everywhere all at once. And so, I think the Honeywell collaboration will open up any number of markets. I don't think there's a specific geography or a specific customer segment that I'd call out as something we were missing.
But it's certainly true that when you're talking about projects at this scale, there are a lot of people who get a comfort from having somebody like Honeywell involved in the technology and involved in the deal.
That makes sense. And then maybe lastly, just for the $300 million in equipment purchases, is this for Energy Center as well, or is it exclusively for Energy Warehouse? Or maybe just on the first $15 million, I assume that's Energy Warehouse. Just want to understand the composition there.
Yeah. Sure. It's not, it's not limited to either Energy Warehouses, Energy Centers, or even building, taking the core componentry of our technology and building that into alternative configurations as Honeywell sees their market fit evolving. So it's, it's open across the entire portfolio of products.
Got it. Thanks very much.
Our next question comes from Brian Dobson from Chardan Capital Markets. Please go ahead, Brian.
Yeah, thanks very much. Congratulations, this is an exciting partnership. I suppose as you, as you look out beyond the near-term objectives of partnering with a company like Honeywell, what do you think the long-term positives could be from sharing processes and also having them amplify your product reach?
Sure. Thanks for the question. I really think, it's about scale. We've talked on previous calls about the need for, the business, our business to scale, for long-duration energy storage as a category to scale.
And, I think having somebody of Honeywell's stature, the scale at which they operate, involved in the product, can help across a range of things, both supply chain, as was previously referenced, but, deployment operations, can scale much more quickly as well. They- you just instantly drop into this global machine, that has operations really in every corner of the earth.
Yeah, that's, that's very exciting. In terms of the, the resale agreement, is there any exclusivity that's afforded to Honeywell, or are you able to, you know, continue to sell your products to whomever you please?
Yeah. We are able to sell to anybody. There's no exclusivity or preemptive rights in the agreement of any kind.
All right, great. Very exciting. Congratulations again.
Thanks.
Our next question comes from George Gianarikas, from Canaccord Genuity. Please go ahead, George.
Hey, good morning, everyone. Thanks for taking my question, and congratulations. I'm just curious as to whether you could talk about the deal that you lined up. I think it's $300 million. You also have opportunities in a deal with SMUD and opportunities in deals in Australia and also in the Amsterdam airport. So I'm curious as to whether you could talk about the manufacturing capacity required to fulfill this pipeline and whether you feel comfortable with what you have in place. Thank you.
Yeah. Thanks, George. It's a great question. We feel like we are in very good shape to meet all of our manufacturing capacity requirements through 2024. And as we've talked, we're continually looking at adding capacity to meet the growth of the company. I think with the Honeywell relationship now in place, we'll have an opportunity to collaborate with them on our planning and forecasting, and we'll, you know, make adjustments as necessary to make sure that we're meeting those needs.
But we feel like we're in good shape for what we are gonna have our requirements in the near term. And we'll continue to, you know, use this, hopefully, increased visibility to add more capacity in the future.
Thanks. This is a follow-up. I'm curious as to whether you can share any details on how the deal originated. Did you approach Honeywell? Did they approach you? What kind of dance was there before you made this announcement? Thank you.
Yeah, sure. Well, what I would say is that Honeywell approached us. This has been a conversation that's been ongoing for some time. As you might imagine, it is a process in and of itself and that it grows over time.
Honeywell was very diligent about their planning and diligence on the company, so it's been a conversation that's been going on with some intensity since February of this year. Including IP diligence, technical diligence, manufacturing diligence, and so that felt great for us to go through that process and to get the validation ultimately on the deal.
Great. Thank you.
Our next question comes from Ben Kallo from Baird. Please go ahead, Ben.
Hey, Eric, congratulations. Maybe just follow up to George's a little more diligent. Could you just talk about, you know, what level, where at Honeywell the, you know, you did the deal, what level of management?
Sure. So from our perspective, really a broad swatch of companies, of folks across the company were involved. This was kind of a deep technical diligence. They came in and did audits around the manufacturing process, quality processes, testing processes, of course, talked to customers, really a full gamut of diligence.
The deal was, from their perspective, run through their PMT organization, which is the division of Honeywell that is responsible for these products. And I think, not disclosing too much to say that ultimately the CEO of Honeywell signed off on the deal.
Does it change the cadence of any of the other announcements you made, or are we thinking this will be separate? Do you need to wait to, you know, have some of this supply chain and technical work, collaboration finished before you deploy others as well?
No, I don't think this slows our business down at all. I, our hope is to jump in with Honeywell and c- and start the work, immediately. Given the lead times of our industry, both from a sales and go-to-market perspective, but also in kind of a product and innovation perspective, you know, there's, there's no time to waste. You want to jump right in and get to work.
Thank you, guys. Congrats.
Thanks, Ben.
Our next question comes from Corinne Blanchard from Deutsche Bank. Please go ahead, Corinne.
Hi, good morning, guys. Congratulations. I think it's a great announcement. Most of my questions have been answered actually, but maybe on pricing or, and maybe I missed it, but is there anything preferential pricing or so that Honeywell would get or if they get some of the product or, or, or no?
No, there's no preferential pricing other than just to ensure, you know, kind of fair market pricing on the purchases. There is a performance warrant that they will earn for their purchases up to the $300 million, the first $300 million, that as we say in the presentation will be calculated at the end of it, of each year. So they're they're incented to make those purchases and to earn the performance warrant, but that's really the only the only specific thing.
All right. Thank you.
Our next question comes from Chris Kapsch from Loop Capital Markets. Please go ahead, Chris.
Hey, good morning. Thank you for taking my questions. So, just one on the partnership. When you described the deal, you understandably incorporated an emphasis on long-duration storage in the context of this deal. I'm just curious if the investment reflects from Honeywell's standpoint, you know, more an endorsement in the long duration subcategory of energy storage, or is it really an endorsement of your technology, or I guess, both?
And then along those lines, what other energy storage offerings does Honeywell have as part of their portfolio in this business unit of Honeywell? Do they have short-duration energy storage offerings as well as this addition of long duration?
Sure. Thanks, Chris. So, yes, Honeywell does have offerings in the short-duration lithium-ion space, as well as a variety of products around their control systems and software, power electronics that are used, you know, quite broadly across the industry. But I think if you go back to the underlying importance of the deal, as Honeywell, who of course is involved across so many different industries, from power grids to large industrial customers and beyond, they very clearly saw that there's a differentiated need for long-duration storage.
As the market's evolving, we're gonna need something that goes beyond the capacity and the capabilities of short-duration storage. And so I think they came to us when the conversation started, kind of, I'll say, pre-sold on this market opportunity and the need for long-duration storage.
As they went off and looked, and you'd have to, of course, ask Honeywell for their view, but as they looked across the long-duration space, they had a number of key criteria that they thought were important, something that had the ability to be safe, globally sourceable, and ultimately could drive to a great cost entitlement. And so we had a real kind of meeting of the minds of the appropriateness of iron flow technology and being the best suited solution to meet all of those needs. And so that was really the genesis.
That was the starting point of the conversation, more than it was something that we came to through the conversation. And it was a great starting point for what ultimately led to the collaboration.
Yeah. Makes sense. Thank you for that. And then just as a follow-up, just curious if the, you know, the sort of the use of funds, I mean, you alluded to this, I guess. Was it, is it mostly about shoring up the balance sheet, you know, and then therefore serving as a runway to bridge the gap to profitability and free capital generation? Or is there some, gonna be an opportunity for you to accelerate some part of your strategy that you may not have, you know, where you may have otherwise been constrained in the meantime? Thank you.
Yeah, thanks, Chris. I think the short answer is both. This puts additional resources on our balance sheet, as I said, well into 2025. We'll expect to finish Q3 at something approximately $120 million in cash on the balance sheet. It certainly helps give us the runway we need to go drive that path to profitability that we've talked about on previous calls. I do think that the joint development agreement has the opportunity to accelerate improvements across all of the things that we're working on already.
We're working on ways to constantly improve the performance of the technology, the durability of the technology, and drive costs out of the system. Our hope is that the JDA really gives us access to Honeywell's great depth of knowledge and experience across the industry to help accelerate all of those activities.
Thank you.
As a reminder, if you would like to ask a question, please press star one on your phone now. We do have a question from Fred Whitridge from Archipelago Corporation. Please go ahead, Fred.
Hi, thanks for taking the call and congratulations on a great collaboration. I have two questions. First question is, you had suggested that we would have contract documents on the LEAG deal this third quarter, and you've only got a few days left in the quarter. My question is, given the extensive involvement of ABB and Siemens previously at LEAG, will Honeywell be involved in the LEAG deal? And is that gonna cause any delay, given these long-term existing relationships LEAG has had with their existing grid batteries?
Thanks for the question. I'd say the short answer is there's been no discussion at this point of Honeywell's involvement in the LEAG deal. As you noted, we're continuing to work through getting the agreements in place.
Whether we'll hit the final days of the quarter or it'll slip into the early part of next quarter, I'm not sure at this point, but at this stage, there's been no formal discussions between LEAG and us about Honeywell's involvement in the project. As one of the previous questions came up, there's no exclusivity to us in this deal, so we're free from an ESS perspective to collaborate with other parties as our customers require.
All right. Thank you for that. A second question is, some posts on social media and some satellite photos have shown that all six Energy Warehouses have been removed from San Diego Gas & Electric Cameron Corners. And I'm wondering whether that's just a replacement and upgrade, and those units will be going back, or whether there's some deeper flaw in that installation, which was your largest installation to date.
Thanks. As we've said previously on the calls, we're limited by what we can say about the project to what our customer, in this case, San Diego, but any customer wants to say publicly. I was on a call with them last week, but at this point, I can't make any further comment on the status of Cameron Corners.
At this time, there are no further questions. I'd like to turn the call back over to Eric for closing remarks.
I'd like to thank you all for joining the call on such short notice. We're excited about the collaboration with Honeywell and what this can do to help accelerate ESS's move into the market, and we look forward to talking to you again on our Q3 call. Have a great day.
This concludes today's conference call. Thank you for attending.