ESS Tech, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. ESS develops long-duration iron-flow battery energy storage systems and states that it remains in the research and development phase.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $0.372 million | $0; product and service sales began to be recognized after initial shipments in 2022 |
| Operating expenses | $24.871 million | $22.188 million, up 12.1% |
| Operating loss | $24.499 million | $22.188 million |
| Net loss | $21.901 million; $0.14 per share | $5.709 million; $0.04 per share |
| Operating cash flow | $(18.510) million | $(19.374) million |
| Capital expenditures | $2.610 million | $4.041 million |
| Cash and cash equivalents | $87.811 million at March 31 | $34.767 million at December 31, 2022 |
| Short-term investments | $31.196 million | $105.047 million at December 31, 2022 |
| Total liabilities | $30.215 million | $36.579 million at December 31, 2022 |
The $72.058 million of cash provided by investing activities largely reflected net maturities of short-term investments, not cash generated by operations. Cash, cash equivalents and restricted cash totaled $89.900 million at quarter-end. Management stated that unrestricted cash and short-term investments should fund operations and obligations for at least 12 months following the financial statements’ issuance, while noting the company may seek additional financing.
No meaningful gross margin is presented. ESS reported no cost of goods sold for the revenue recognized in the quarter because related production costs had been expensed as research and development in the periods incurred; management said production costs for those units significantly exceeded their selling price. ESS had not yet met its commercialization criteria.
Material changes and significant items
- Net loss increased by $16.192 million year over year. Operating expenses rose $2.683 million: research and development increased 37.5% to $17.732 million, sales and marketing rose 23.4% to $1.852 million, and general and administrative expense fell 32.1% to $5.287 million.
- Other income was $2.598 million, versus $16.479 million in Q1 2022. The prior-year result included a much larger $16.504 million warrant-liability revaluation gain; the Q1 2023 gain was $0.688 million. Q1 2023 also included $1.252 million of net interest income.
- Accrued product warranties increased from $1.643 million at year-end to $2.874 million, including $1.504 million of warranty accruals and $0.273 million of repairs and replacements during the quarter. Management cautioned that limited field history makes warranty estimates uncertain.
- Non-cancellable purchase commitments were $17.497 million at March 31, down from $21.540 million at December 31, 2022; cancellable commitments were $5.275 million. These commitments were not recorded as liabilities.
- ESS reported $1.522 million of notes payable, classified as current. The notes were in default because cash balances held at SVB were below required levels; First Citizens assumed the debt after SVB’s closure. The bank had not declared an event of default or accelerated repayment. Management said cash on hand would cover the obligation if accelerated.
- The filing reports disclosure controls and procedures were not effective because of an unremediated material weakness in review and analysis of certain transactions in the financial-statement close process. Remediation includes additional personnel and formalized controls.
Outlook, commentary and risks
- No specific revenue, earnings, production or cash-flow guidance is provided. Management expects research and development and manufacturing activity to ramp up, with indirect costs and operating expenses expected to rise versus 2022.
- Management says future margins and cash generation depend on scaling production, reducing costs, and developing Energy Centers and second-generation Energy Warehouses. The Energy Center remains under development; the new automated production line had not started commercial operations.
- ESS reported supply constraints, shipping delays on some customer contracts and delayed customer payments during the quarter, and said some or all of these pressures could continue during 2023. Inflation, supply availability, manufacturing quality and customer acceptance are material uncertainties.
- The company is early in commercialization, has limited deployment of second-generation systems, and has experienced field quality, performance, grid-compatibility and site-integration issues. Delays, cancellations, warranty costs or failure to meet contract specifications could adversely affect results.
- ESS cited the Inflation Reduction Act’s expanded tax credits for stand-alone storage as a potential demand benefit, but said the overall impact and implementing rules remained under evaluation.
- ESS reported no material legal proceedings. It stated it had access to its cash, cash equivalents and short-term investments after the March 2023 banking disruption.
Most important facts for investors to verify
- Whether cash burn, financing needs and the stated minimum 12-month liquidity horizon remain consistent with subsequent results and funding plans.
- The status of the SVB/First Citizens loan covenant default, any bank declaration or acceleration, and the reconciliation of the filing’s $1.522 million notes-payable carrying amount with the MD&A’s $1.333 million outstanding principal figure.
- Whether manufacturing automation, product performance, customer acceptance, delivery schedules and cost reductions progress sufficiently to achieve commercialization and positive unit economics.
- Whether field issues and warranty claims develop differently from current estimates, given the limited operating history and $2.874 million warranty liability.
- Progress in remediating the material weakness in financial-reporting controls and whether the controls become effective.