ESS Tech, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. ESS develops iron-flow batteries for commercial and utility-scale long-duration energy storage. The company said it remained in the research and development phase; its commercialization criteria had not yet been met. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $0.192 | $0 | $0.878 | $0 |
| Operating expenses | $27.923 | $11.036 | $74.974 | $29.474 |
| Operating loss | $(27.731) | $(11.036) | $(74.096) | $(29.474) |
| Net loss | $(31.597) | $(51.325) | $(52.894) | $(296.685) |
| Net loss per share | $(0.21) | $(0.76) | $(0.35) | $(4.53) |
- Q3 revenue comprised $0.186 million of product revenue and $0.006 million of service and other revenue. Nine-month revenue included $0.792 million of product revenue, $0.086 million of service and other revenue, and $0.283 million recognized from related parties.
- Gross margin is not meaningfully reported: while in the R&D phase, ESS expensed production costs in R&D rather than cost of goods sold. The company said production costs for accepted units materially exceeded selling prices.
- R&D expense rose 162% in Q3 and 152% for the nine months year over year; sales and marketing rose 73% and 131%, respectively; general and administrative rose 158% and 168%.
- Net loss improved substantially year over year for the nine months, primarily reflecting noncash fair-value movements in derivative and warrant liabilities in 2021 and a 2022 warrant-liability gain. Q3 net loss also benefited from the absence of the large 2021 derivative revaluation loss. These comparisons do not indicate comparable improvement in operating performance: operating losses increased.
- At September 30, cash and cash equivalents were $42.896 million, short-term investments $123.842 million, and restricted cash $1.842 million. Total current assets were $171.243 million and current liabilities $22.125 million. Equity was $158.262 million; accumulated deficit was $593.504 million.
- For the nine months, operating cash use was $56.620 million. Investing cash use was $134.653 million, mainly reflecting purchases of short-term investments and property and equipment; financing cash use was $4.221 million. Cash, cash equivalents and restricted cash decreased by $195.494 million to $44.738 million.
- Notes payable totaled $2.306 million, all classified current. The company reported a technical default related to changing its primary banking relationship; the bank had not declared an event of default or accelerated the debt. The debt is secured by substantially all company property except intellectual property.
Changes, outlook and material risks
- ESS said it received final customer acceptance for initial second-generation Energy Warehouse units in Q2 and an additional unit in Q3. Revenue recognition depends on customer acceptance or an established history of acceptance, which may take longer for newly developed products.
- Management said available unrestricted cash and short-term investments at September 30 were expected to fund operations for at least 12 months following the financial statements’ filing date. It also expects substantial continuing losses and says commercialization and expansion will require significant cash; additional financing may be needed.
- Management expects R&D, sales and marketing, and general and administrative expenses to rise as the company develops products, expands manufacturing and operates as a public company. It expects scale and cost reductions to be important to future margins and cash generation; achieving margin targets depends in part on completing development and manufacturing of Energy Centers. No specific revenue, earnings or cash-flow guidance was provided.
- The company reported delays and increased costs across its supply chain and manufacturing equipment. It expected these pressures to continue at least through the rest of 2022. The semiautomated production line was delivered in Q2; the automated line was expected to become operational in Q4, subject to delays outside the company’s control.
- COVID-related delays led ESS to issue force majeure notices to customers; contract impacts and possible termination are uncertain. Other major execution risks include scaling production, product performance and quality, customer acceptance, supplier availability, cost reductions, and potential warranty or delivery claims. Warranty accruals were $1.148 million at quarter-end, based on limited field experience.
- ESS reported a $15.503 million non-cancellable purchase commitment at September 30, not recorded on the balance sheet. It also disclosed $20.931 million of cancellable purchase commitments. No material legal proceedings were reported.
- ESS believed the Inflation Reduction Act’s expanded and extended tax credits could support demand, including credits for standalone storage, but said the impact remained under evaluation and depended on further guidance. In August 2022 it entered a strategic partnership with ESI: ESS is obligated to supply 70 Energy Warehouse systems in 2022 and 2023; ESI is expected to build an Australian final-assembly facility for 2024 onward. Future orders beyond the initial commitment are uncertain. No orders had been placed under the separate SBE framework agreement.
- Disclosure controls and procedures were deemed ineffective because of an unremediated material weakness in the operating effectiveness of controls over review and analysis of certain transactions in the financial close. Management described hiring and control-framework improvements as remediation efforts.
Important facts for investors to verify
- Whether manufacturing automation, product performance and customer acceptance progress sufficiently to support commercialization, recognized revenue and the stated scale economics.
- Whether the cash and short-term investment balance can support the operating plan and capital needs, and whether additional financing will be required.
- The status and consequences of the technical debt default, including any lender action or change in classification.
- Whether customer force majeure notices, purchase commitments and the ESI arrangement result in firm orders, timely deliveries and collections.
- Whether the company remediates the material weakness and whether warranty costs, product quality issues or supply-chain delays differ materially from current estimates.