ESS Tech, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. ESS develops long-duration iron-flow battery energy storage systems for commercial and utility-scale customers. The company said it remained in the research and development phase; its products had not yet met its criteria for commercial availability.
Financial highlights
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $12.9 million | $5.7 million |
| Sales and marketing expense | $1.5 million | $0.5 million |
| General and administrative expense | $7.8 million | $2.1 million |
| Total operating expenses / operating loss | $22.2 million | $8.3 million |
| Net loss | $5.7 million | $154.9 million |
| Net loss per share, basic and diluted | $0.04 | $2.51 |
| Cash used in operating activities | $19.4 million | $6.5 million |
| Cash used in investing activities | $4.0 million | $0.1 million |
There was no revenue, so gross profit and gross margin were not reported. The smaller net loss year over year chiefly reflects noncash fair-value movements: Q1 2022 included a $15.7 million warrant-liability gain, while Q1 2021 included a $138.1 million derivative-liability loss. Operating loss increased as expenses expanded.
Balance sheet and liquidity
- Cash and cash equivalents were $212.3 million at March 31, 2022, down from $238.9 million at year-end 2021. Cash, cash equivalents, and restricted cash totaled $213.6 million.
- Current assets were $220.8 million and current liabilities were $18.3 million. Total liabilities were $36.0 million; notes payable totaled $3.3 million, of which $1.8 million was current.
- Property and equipment, net, rose to $10.1 million from $4.5 million; the company attributed much of its Q1 capital spending to production automation.
- Management stated that unrestricted cash at March 31 was expected to fund operations for at least 12 months following the filing date. The company nevertheless expected substantial future losses and had an accumulated deficit of $546.3 million.
Changes, outlook, and significant risks
- Operating expenses rose 168% year over year, with higher headcount, development materials and freight, public-company costs, insurance, and professional fees cited as drivers. Stock-based compensation increased to $2.8 million from $0.1 million.
- ESS had begun shipping second-generation Energy Warehouses in Q3 2021 and continued installation, commissioning, and testing. No second-generation products were fully deployed at quarter-end; revenue recognition depended on customer acceptance after system testing or establishing a history of acceptance.
- Management expected research and development, sales and marketing, and general and administrative expenses to increase. Near- and medium-term revenue was expected to come from Energy Warehouses; achieving margin targets and cash generation depended on completing development and manufacturing of Energy Centers and scaling production. No quantified revenue or earnings guidance was provided.
- Supply-chain delays, supplier quality and availability, shipping constraints, inflationary input costs, and COVID-related disruption could delay production, installations, and revenue. The filing said such delays were expected to continue at least through the remainder of 2022. ESS had issued force majeure notices to customers; potential contract termination effects were uncertain.
- Unfulfilled non-cancellable purchase commitments were $23.3 million, up from $10.2 million at year-end 2021; these commitments were not recorded as liabilities. Cancellable commitments were $3.5 million.
- The company disclosed an unremediated material weakness in controls over review and analysis of certain transactions in the financial-statement close process. Management was adding personnel and formalizing controls. Disclosure controls and procedures were deemed ineffective at quarter-end.
- Other key risks include manufacturing scale-up and product performance, customer acceptance and contract cancellations, dependence on suppliers (including a sole supplier for bipolar plates), competition, and the need to control costs and potentially obtain additional capital. No material legal proceedings were reported.
Investor verification points
- Track customer acceptance, deployment, and revenue conversion for shipped Energy Warehouses, and whether any products become fully deployed.
- Monitor manufacturing-line delivery and installation, production yields, product reliability, and the schedule and readiness of Energy Centers.
- Assess whether supply-chain delays, customer force majeure notices, and the $23.3 million non-cancellable commitments affect delivery obligations, cash needs, or contract risk.
- Compare cash use and operating-expense growth with management’s stated liquidity runway; verify the runway as operations scale.
- Follow remediation of the financial-close material weakness and any subsequent control findings.
- Distinguish recurring operating performance from noncash warrant and other fair-value gains or losses when assessing net results.