ESS Tech, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. ESS develops iron-flow batteries for long-duration commercial and utility-scale energy storage. The company said it remained in the research and development phase; its products had not yet met its criteria for commercialization.
Financial results and liquidity
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 period |
|---|---|---|---|
| Revenue | $686,000 | $686,000 | $0 |
| Operating expenses | $24.862 million | $47.051 million | $10.154 million / $18.438 million |
| Loss from operations | $24.176 million | $46.365 million | $10.154 million / $18.438 million |
| Net loss | $15.588 million | $21.297 million | $90.442 million / $245.360 million |
| Net loss per share | $0.10 | $0.14 | $1.35 / $3.81 |
Revenue comprised $606,000 of product revenue and $80,000 of service revenue; $282,000 was from related parties. The first units shipped in 2021 received final customer acceptance in Q2 2022. ESS reported no cost of goods sold for those units because production costs were recorded as research and development expense; it said production costs significantly exceeded selling prices. Gross margin is therefore not a useful indicator of commercial economics in this period.
Operating expenses rose year over year, primarily with increased materials and freight, headcount, warranty-related costs, sales and marketing activity, and public-company costs. The lower net loss versus 2021 mainly reflects the absence of the prior-year derivative-liability revaluation loss and gains from revaluing warrant and earnout liabilities in 2022; these fair-value changes are non-cash and can make net results volatile.
At June 30, 2022, cash and cash equivalents were $112.708 million, short-term investments were $79.456 million, and total assets were $216.124 million. Current assets were $199.374 million against current liabilities of $22.014 million. Stockholders’ equity was $186.854 million, with an accumulated deficit of $561.907 million. ESS reported $34.533 million of cash used in operating activities in the first half, $88.062 million used in investing activities, and $3.687 million used in financing activities. Investing outflows included $79.599 million of short-term investment purchases and $8.463 million of property and equipment purchases. Management said available unrestricted cash at June 30 would fund operations for at least 12 months following the filing date.
Notes payable totaled $2.828 million and were classified as current. ESS disclosed a technical default because it had ended its primary banking relationship with the lender; the lender had not declared an event of default or accelerated the debt. The notes bear variable interest. Lease liabilities were also recorded, following adoption of the lease accounting standard in 2022.
Changes, outlook and key risks
- ESS began recognizing revenue after obtaining customer acceptance for initial Energy Warehouse units. However, it remained pre-commercial under its stated criteria, and revenue was minimal relative to operating costs.
- Management expected operating expenses to increase versus 2021 as research, development, manufacturing, supply-chain and public-company activities expanded. 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. No quantified revenue, margin or earnings guidance was provided.
- ESS described manufacturing scale-up, product performance, customer acceptance, supply-chain availability and cost, and successful cost reductions as significant uncertainties. It reported supply delays and cost increases, including impacts associated with COVID-19 disruptions, and said delays had affected production-line equipment.
- The filing identified a flow issue in certain battery modules manufactured and shipped to date and said certain Gen II module components were expected to be replaced over the following 12 months. Warranty estimates were based on limited early-stage field data; actual repair or replacement costs could differ materially.
- Noncancellable purchase commitments were $14.945 million at June 30, 2022; cancellable commitments were $13.638 million. Neither amount was recorded as a liability. The company reported no material legal proceedings and no off-balance-sheet arrangements.
- Disclosure controls and procedures were assessed as not effective because of an unremediated material weakness in review and analysis of certain transactions in the financial-statement close process. Management described additional staffing and control-framework work as remediation initiatives.
Important facts for investors to verify
- Whether customer acceptance, field performance and commercialization criteria are achieved, and whether reported product economics improve as costs move from R&D to cost of sales.
- Whether manufacturing automation and supply-chain constraints are resolved on schedule and whether delivery, installation or customer acceptance delays affect contracts or revenue.
- Whether the reported cash runway remains adequate given operating cash use, planned investment, purchase commitments and expected expense growth.
- Whether the technical default on the bank notes is resolved, and whether the lender takes any action that changes repayment obligations.
- Whether warranty claims, the disclosed module flow issue and planned component replacements result in costs above current reserves.
- Whether management remediates the material weakness and improves the effectiveness of internal controls.