ESS Tech, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. ESS develops iron-flow batteries for commercial and utility-scale long-duration energy storage, including Energy Warehouse and developing Energy Center products.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $2.738 million | $0.372 million |
| Cost of revenue | $11.126 million | Not recorded |
| Gross profit (loss) | $(8.388) million | $0.372 million |
| Operating expenses | $11.106 million | $24.871 million |
| Operating loss | $(19.494) million | $(24.499) million |
| Net loss | $(18.310) million | $(21.901) million |
| Basic and diluted loss per share | $(0.10) | $(0.14) |
| Net cash used in operating activities | $(18.910) million | $(18.510) million |
Revenue was predominantly product sales: $2.632 million, with $0.018 million of service revenue and $0.088 million of other revenue. Related-party revenue was $0.524 million, compared with $0.001 million in Q1 2023.
At March 31, 2024, cash and cash equivalents were $36.332 million and short-term investments were $53.220 million, totaling $89.552 million available for operations. Restricted cash was an additional $1.852 million. Current assets were $98.246 million and current liabilities were $19.887 million. Total liabilities were $35.814 million; the balance sheet presents no notes-payable balance. Accumulated deficit was $714.467 million.
Investing activities provided $34.692 million, primarily reflecting net maturities of short-term investments; capital expenditures were $0.953 million. Financing activities used $0.081 million. The company said its unrestricted cash and short-term investments at quarter-end were expected to fund operations and obligations for at least 12 months following the financial statements’ filing date, but additional financing may be needed thereafter.
Changes, outlook, and risks
- Revenue increased by $2.366 million year over year, reflecting delivery and revenue recognition on a higher volume of Energy Warehouses and related equipment.
- Cost of revenue began being recorded after ESS moved from research-and-development accounting to commercial inventory accounting on July 1, 2023. Management said production costs for units significantly exceed their selling prices; inventory write-downs and losses on noncancellable purchase commitments are included in cost of revenue. The periods are therefore not directly comparable on cost of revenue and gross margin.
- Research and development expense fell 80% to $3.546 million, mainly due to the accounting transition, partly offset by higher materials and personnel costs. Sales and marketing rose 10% to $2.034 million; general and administrative rose 5% to $5.526 million.
- Management expects revenue and cost of revenue to increase as production and deliveries scale. It sees future revenue coming from Energy Centers, second-generation Energy Warehouses, and productized core components. It expects manufacturing and sales ramp-up, cost-reduction initiatives, and development work to increase some costs. The filing provides no specific revenue, margin, or earnings guidance.
- Management cited Q1 supply constraints, customer-contract shipping delays, and delayed customer payments, and said some negative effects could persist or worsen during 2024. Other risks include scaling manufacturing, reducing unit costs, product performance and warranty exposure, customer acceptance, supplier dependence, and access to future capital.
- Warranty accruals increased to $3.322 million from $2.129 million at year-end; Q1 warranty accruals issued were $2.583 million and repairs and replacements were $1.083 million. Inventory was carried at $3.161 million after a $9.304 million net realizable value adjustment.
- ESS recognized $0.230 million of U.S. production tax credits as a reduction of cost of revenue. A $1.1 million related receivable was included in prepaid expenses and other current assets.
- Honeywell-related arrangements include a $14.4 million non-refundable equipment prepayment recorded as non-current deferred revenue and a minimum $8.0 million reimbursement commitment for UOP research and development through 2028. These obligations and related-party relationships warrant monitoring.
- ESS disclosed an NYSE notice dated March 6, 2024 for failure to meet the $1.00 minimum average share-price standard. The notice was not a delisting; ESS had six months to regain compliance and said it was monitoring options, including a possible reverse stock split.
- No material legal proceedings were reported. Management concluded disclosure controls were effective as of March 31, 2024; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether deliveries, customer acceptance, and cash collections improve enough to support revenue growth and reduce operating cash burn.
- Whether manufacturing yields, unit costs, and product performance improve; assess how inventory valuation charges and warranty costs may develop.
- Whether available liquidity remains adequate against the stated 12-month runway, expected spending, and potential need for additional capital.
- Whether the NYSE share-price deficiency is cured within the applicable period and whether any contemplated action would affect existing shareholders.
- Potential dilution: 29.151 million warrants were outstanding at quarter-end, in addition to equity awards; verify exercise terms and future share-count changes.
- Progress and commercial substance of Honeywell/UOP arrangements, including equipment purchases, deferred revenue recognition, development commitments, and related-party revenue.