ESS Tech, Inc. annual report, FY2023

ESS Tech, Inc. — FY2023 Form 10-K

Reporting period: Year ended December 31, 2023; comparison is with FY2022. This is an annual filing, not a standalone fourth-quarter report. ESS develops and manufactures iron-flow batteries for long-duration energy storage. Its second-generation products had only limited full deployment by year-end, and its Energy Center was still under development.

Financial performance and position

Metric	FY2023	FY2022
Revenue	$7.54 million	$0.89 million
Cost of revenue	$20.50 million	None reported
Gross profit (loss)	$(12.96) million	$0.89 million
Operating expenses	$72.95 million	$106.39 million
Operating loss	$(85.91) million	$(105.49) million
Net loss	$(77.58) million	$(77.97) million
Net loss per share, diluted	$(0.48)	$(0.51)
Net cash used in operations	$54.90 million	$81.62 million

• FY2023 gross margin was approximately negative 172%, calculated from reported revenue and gross loss. Product revenue was $5.10 million, service revenue $0.18 million, and other revenue $2.25 million; other revenue included engineering services and work on contracts later terminated.
• Cash and cash equivalents were $20.2 million and short-term investments $87.9 million at year-end, totaling $108.1 million in unrestricted cash and investments. Restricted cash was additional. Management stated these resources were expected to fund operations and obligations for at least 12 months from the filing date; additional capital may be needed thereafter.
• Operating cash use improved year over year. Investing activities provided $15.1 million, mainly from investment maturities; financing activities provided $25.7 million, including proceeds from the Honeywell transaction. Capital expenditures were $5.8 million.
• ESS had no notes payable at year-end after repaying its remaining bank debt in July 2023. Current assets were $118.1 million and current liabilities $19.8 million; current assets included $87.9 million of short-term investments.
• Accumulated deficit was $696.2 million. Year-end inventory was $3.4 million net of an $11.3 million lower-of-cost-or-net-realizable-value adjustment.

Material changes versus FY2022

• Revenue increased by $6.6 million as ESS ramped commercialization and recognized revenue on accepted systems and services.
• Beginning July 1, 2023, ESS concluded it had reached commercial viability and moved from research-and-development accounting to commercial inventory accounting. Inventory costs were capitalized subject to valuation adjustments, and cost of revenue began including production, warranty, fulfillment, and commitment-loss costs. Thus, reported gross profit comparisons with 2022 are not directly comparable: 2022 product costs were generally expensed as research and development rather than cost of revenue.
• Research and development expense declined 41% to $42.6 million, primarily reflecting that accounting transition. General and administrative expense declined 18% to $22.6 million; sales and marketing expense rose 12% to $7.7 million.
• Operating cash use fell by $26.7 million. ESS raised $27.5 million from Honeywell Ventures, issuing 16.5 million common shares and warrants; it also issued warrants associated with intellectual-property licensing and a $15 million equipment prepayment from Honeywell affiliate UOP.
• Common shares outstanding were 174.2 million at year-end. Outstanding warrants totaled 29.2 million, creating potential dilution.

Outlook, risks, and unusual items

• Management expects revenue growth from Energy Centers, second-generation Energy Warehouses, and productized core technology components, but provided no quantified revenue or earnings guidance. It expects indirect cost of goods and operating expenses to rise as manufacturing and sales scale, alongside spending on cost-reduction initiatives.
• ESS says profitability depends on completing Energy Center development, scaling production, reducing manufacturing and warranty costs, and converting its pipeline into delivered and accepted customer projects. Management disclosed that production costs significantly exceed selling prices at current volumes.
• Key execution risks include limited field deployments, reported quality and performance issues, site-integration challenges, supplier and shipping delays, manufacturing ramp risks, and uncertainty around customer acceptance, project awards, and cancellations. Many customer pipeline or framework arrangements are not firm purchase commitments.
• Macroeconomic and geopolitical conditions, inflation, interest rates, trade restrictions, and supply-chain disruptions may delay customer decisions or payments and increase material and freight costs. ESS said some adverse trends could continue in 2024.
• ESS believes U.S. Inflation Reduction Act production tax credits may support future gross margins. It recognized $0.8 million of such credits in 2023 as a reduction of cost of revenue; future benefit depends on qualifying production and sales.
• Commitments included $0.6 million of unfulfilled noncancellable purchase commitments and a minimum $8.0 million reimbursement of UOP research-and-development expenses through 2028. Deferred revenue was $20.8 million, including UOP’s $15.0 million non-refundable equipment prepayment; $18.2 million of deferred revenue was expected to be recognized after the next 12 months.
• Warranty accruals ended the year at $2.1 million; estimates remain uncertain given limited operating history. Warranty adjustments reduced existing accruals by $1.5 million in 2023.
• The financial statements received an unqualified KPMG audit opinion. Management stated disclosure controls and internal control over financial reporting were effective at year-end after remediating a previously identified material weakness. The cover page indicates correction of an error in the financial statements, but the provided filing text does not clearly identify the correction or its effect. EY declined re-election; the filing reports no accounting disagreements.
• No material legal proceedings were reported. ESS does not anticipate cash dividends in the foreseeable future.

Important facts for investors to verify

• Whether production yields, product quality, customer acceptance, and Energy Center development progress support the expected ramp and eventual positive unit economics.
• How much of reported and pipeline revenue converts to binding orders, deliveries, customer acceptance, and cash collections—and whether customer advances adequately fund fulfillment.
• Whether unrestricted cash and investments remain sufficient relative to operating cash burn, capital needs, and the filing’s stated 12-month liquidity horizon.
• Whether inventory valuation charges, warranty costs, and manufacturing costs continue to rise or require additional reserves.
• The conditions, economics, and potential dilution associated with Honeywell-related agreements and the 29.2 million outstanding warrants, as well as future financing needs.
• The nature and financial impact of the correction-of-error checkbox on the cover page, which are not clear from the provided filing text.