ESS Tech, Inc. — Q3 2023 Form 10-Q
Business context and period. ESS develops long-duration iron-flow energy storage systems for commercial and utility-scale use. This unaudited report covers the three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. On July 1, 2023, ESS concluded it had reached commercial viability and moved from research-and-development accounting to commercial inventory accounting.
Key financial metrics
Amounts in millions, except per-share data.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.545 | $0.192 | $4.744 | $0.878 |
| Gross profit (loss) | $(8.638) | $0.192 | $(5.439) | $0.878 |
| Operating expenses | $9.496 | $27.923 | $61.401 | $74.974 |
| Net loss | $(16.618) | $(31.597) | $(61.448) | $(52.894) |
| Net loss per share | $(0.11) | $(0.21) | $(0.40) | $(0.35) |
| Cash used in operations | Not provided separately | Not provided separately | $(38.751) | $(56.620) |
- Margins and unusual production costs: Q3 gross loss included cost of revenue of $10.183 million against $1.545 million in revenue. ESS recorded $11.4 million of inventory write-downs and losses on noncancellable purchase commitments during the nine-month period; a $654,000 production tax credit reduced cost of revenue.
- Liquidity at September 30: Cash and cash equivalents were $37.2 million, short-term investments $87.3 million, and restricted cash $2.3 million. Current assets were $131.4 million and current liabilities $18.6 million. ESS stated that unrestricted cash and short-term investments were expected to fund operations and obligations for at least 12 months after the filing date, while noting it may seek additional financing.
- Debt and equity: Notes payable were zero after repayment in July 2023. Stockholders’ equity was $116.5 million and accumulated deficit was $680.0 million. In September, Honeywell Ventures invested $27.5 million, receiving 16.5 million common shares and a warrant for up to 10.6 million additional shares. ESS had 173.0 million shares outstanding at September 30.
- Customer advances and commitments: Deferred revenue was $21.3 million, including a $15.0 million nonrefundable Honeywell/UOP equipment prepayment; ESS expected $1.4 million of deferred revenue to be recognized within 12 months and $19.9 million thereafter. ESS also committed to reimburse UOP at least $8.0 million for joint research and development expenses through 2028.
Material changes versus the prior comparable period
- Q3 revenue increased by $1.353 million year over year, attributed to delivery and revenue recognition for a higher volume of Energy Warehouses and related equipment. Nine-month revenue rose by $3.866 million.
- Q3 net loss narrowed by $15.0 million, mainly alongside lower operating expenses and a more favorable warrant revaluation than in Q3 2022. For the nine months, net loss widened by $8.6 million; the prior-year period included a much larger warrant revaluation gain.
- R&D expense fell sharply in Q3 after the accounting transition. ESS said that nine-month cost of revenue plus R&D expense was $48.9 million, broadly comparable with $49.2 million of R&D expense in the 2022 period; the accounting change therefore affects line-item comparisons.
- Cash used in operations decreased year over year, while investing activities provided $16.0 million, primarily from net maturities of short-term investments. Financing activities provided $25.6 million, including net proceeds from an equity-and-warrant issuance.
Outlook, commentary, risks and contingencies
- No quantified revenue, earnings or margin guidance is provided. Management expects revenue and cost of revenue to increase as the business scales and said future profitability depends on higher production and sales volumes, lower manufacturing costs, and successful development and commercialization of Energy Centers and other products.
- Management cited supply constraints, shipping delays and late customer payments during the first three quarters of 2023, with some negative trends potentially continuing through year-end. Inflation, financing conditions and geopolitical events may add cost, delay projects or weaken customer demand.
- ESS remains at an early commercialization stage. It disclosed limited deployments of second-generation products, field quality and performance issues, site-integration challenges, and risks from manufacturing scale-up, supplier availability, delivery delays and warranty obligations. Current production costs significantly exceed selling prices, and further inventory write-downs may be material if cost or selling-price estimates change.
- ESS reported that 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 efforts include additional personnel, formalized controls and outside advisers.
- Other notable matters include Honeywell/UOP related-party investment, patent license, equipment supply and joint-development arrangements; outstanding warrants that could materially dilute shareholders; and three standby letters of credit. ESS reported no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether shipments, installations and customer acceptance convert the reported revenue and deferred-revenue balances into durable sales and cash collections.
- Whether ESS can reduce unit production costs and limit additional inventory, purchase-commitment and warranty charges as commercial production scales.
- Whether the stated liquidity runway remains achievable given operating cash use, planned investment and any need for additional financing.
- The commercial terms, performance and cash implications of the Honeywell/UOP arrangements, including future orders, the $15.0 million prepayment and potential warrant dilution.
- Progress in remediating the material weakness and evidence that financial reporting controls are operating effectively.