ESS Tech, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. ESS develops long-duration iron-flow battery systems for commercial and utility-scale energy storage. The company said it expected to transition from research and development accounting to commercial inventory accounting in Q3 2023.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.827 million | $0.686 million | $3.199 million | $0.686 million |
| Operating expenses | $27.034 million | $24.862 million | $51.905 million | $47.051 million |
| Loss from operations | $(24.207) million | $(24.176) million | $(48.706) million | $(46.365) million |
| Net loss | $(22.929) million | $(15.588) million | $(44.830) million | $(21.297) million |
| Net loss per share | $(0.15) | $(0.10) | $(0.29) | $(0.14) |
| Operating cash used | Not stated by quarter | $(37.532) million | $(34.533) million |
- Q2 revenue rose 312% year over year, primarily from Energy Warehouse deliveries. Six-month revenue rose 366%.
- Product costs associated with recognized revenue were recorded in research and development expense, so reported cost of goods sold was zero. ESS said production costs for those units significantly exceeded their selling prices; consequently, reported gross margin does not reflect underlying unit economics.
- At June 30, cash and cash equivalents were $30.287 million, short-term investments $69.216 million, and restricted cash $2.317 million. Total assets were $127.756 million; total liabilities $30.456 million; stockholders’ equity $97.300 million. Accumulated deficit was $663.409 million.
- Current assets were $105.417 million and current liabilities $22.705 million. Notes payable were $1.127 million at quarter-end. The company repaid the debt on July 7, 2023, for $1.0 million including principal, interest, and a final payment.
- Warranty accruals increased to $5.103 million from $1.643 million at year-end 2022. Six-month warranty accruals for warranties issued were $5.178 million.
Changes, outlook, and notable matters
- Net loss increased by 47% in Q2 and 110% for the first half versus 2022. Operating loss was nearly unchanged in Q2, but increased 5% for the first half. Higher research and development spending was a principal contributor.
- 2022 net income comparisons benefited substantially from warrant revaluation gains: $8.596 million in Q2 2022 and $25.101 million for the first half, compared with a $0.115 million loss in Q2 2023 and a $0.573 million gain for the first half of 2023.
- Management said cash and short-term investments at June 30 were expected to fund operations and obligations for at least 12 months following the financial-statement filing date. It also said additional financing may be sought; unavailable or costly financing could require reduced investment or scaled-back operations.
- On transition to commercial inventory accounting, ESS expected to capitalize inventoriable costs and recognize cost of goods sold, along with lower-of-cost-or-net-realizable-value inventory charges and losses on noncancellable purchase commitments. These charges may reduce future reported gross margins. Noncancellable purchase commitments were $0.869 million at June 30.
- The company reported first-half supply constraints, shipping delays for some customer contracts, and delays in some customer payments; it expected some or all of these pressures could continue in the second half of 2023. It also cited inflation, supplier quality and availability, manufacturing scale-up, and customer acceptance as risks.
- ESS said the Inflation Reduction Act’s expanded tax credits for standalone storage could support demand, while noting its impact and applicability remained under evaluation.
- Disclosure controls and procedures were deemed ineffective because of an unremediated material weakness in controls over review and analysis of certain transactions in the financial-statement close process. Remediation includes hiring and strengthening review controls.
- The filing reports limited deployment and field testing of second-generation products, product quality and performance issues, and potentially significant warranty obligations. It also identifies dependence on suppliers, manufacturing scale-up, customer and partner order conversion, and cost reductions as material business risks.
Investor verification priorities
- Track whether the Q3 2023 transition to commercial inventory accounting occurred, and quantify inventory write-downs, purchase-commitment losses, cost of goods sold, and gross margins.
- Verify cash burn, liquidity, and any financing activity against management’s stated minimum 12-month funding expectation.
- Monitor product performance, customer acceptance, warranty claims, and the adequacy of the $5.103 million warranty accrual.
- Assess whether manufacturing scale-up and supplier or shipping constraints affect delivery schedules, revenue recognition, and unit costs.
- Follow remediation of the material weakness and whether disclosure controls are subsequently judged effective.
- Confirm that the July 7 debt repayment settled the note and assess the effect of ongoing contractual commitments and restricted cash on available liquidity.