ESS Tech Inc

Previous wording

The following discussion and analysis of our financial condition and results of operations should be read together with the condensed consolidated financial statements and related notes in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Part II—Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Current wording

The following discussion and analysis of our financial condition and results of operations should be read together with the condensed financial statements and related notes in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2023. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include those identified below and those discussed in the section titled “Part II—Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q.

Previous wording

ESS is a long-duration energy storage company specializing in iron flow battery technology. We design and produce long-duration batteries predominantly using earth-abundant materials that we believe can be cycled over 20,000 times without capacity fade. Because we designed our batteries to operate using an electrolyte of primarily salt, iron and water, they are environmentally sustainable and substantially recyclable.

Current wording

ESS is a long-duration energy storage company specializing in iron flow battery technology. We design and produce long-duration batteries predominantly using earth-abundant materials that we believe can be cycled over 20,000 times without capacity fade. Because our batteries are designed to operate using an electrolyte of primarily salt, iron and water, they are non-toxic and substantially recyclable.

Previous wording

19 - engineering and research and development functions. Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers.

Current wording

20 - engineering and research and development functions. Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers and core component offerings.

Previous wording

We are closely monitoring macroeconomic developments, including global supply chain challenges, foreign currency fluctuations, elevated inflation and interest rates and monetary policy changes, as well as global events, such as the Russia-Ukraine conflict, the conflict in the Middle East, and other areas of geopolitical tension around the world, and how they may adversely impact our and our customers’, contractors’, suppliers’ and partners’ respective businesses. In particular, weak economic conditions or significant uncertainty regarding the stability of financial markets related to stock market volatility, inflation, recession or governmental fiscal, monetary and tax policies, among others, could adversely impact our and our customers’ business, financial condition and operating results. In addition, general and ongoing tightening in the credit market, lower levels of liquidity, increases in rates of default and bankruptcy, and significant volatility in equity and fixed-income markets could all negatively impact our customers, contractors, suppliers and partners. As a result of these macroeconomic forces, during the first quarter of 2024 we have experienced supply constraints, increased shipping delays for certain customer contracts, and delays in timing of payments from some of our customers. We believe some or all of these negative trends may continue during the remainder of 2024.

Current wording

We are closely monitoring macroeconomic developments, including global supply chain challenges, foreign currency fluctuations, elevated inflation and interest rates and monetary policy changes, as well as global events, such as the Russia-Ukraine conflict, the conflict in the Middle East, and other areas of geopolitical tension around the world, and how they may adversely impact our and our customers’, contractors’, suppliers’ and partners’ respective businesses. In particular, weak economic conditions or significant uncertainty regarding the stability of financial markets related to stock market volatility, inflation, recession or governmental fiscal, monetary and tax policies, among others, could adversely impact our and our customers’ business, financial condition and operating results. In addition, general and ongoing tightening in the credit market, lower levels of liquidity, increases in rates of default and bankruptcy, and significant volatility in equity and fixed-income markets could all negatively impact our customers, contractors, suppliers and partners. As a result of these macroeconomic forces, during the first half of 2024 we experienced supply constraints, increased shipping delays for certain customer contracts, and delays in timing of payments from some of our customers. We believe some or all of these negative trends may continue during the remainder of 2024.

Previous wording

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (the “IRA”), which extends the availability of investment tax credits (“ITCs”) and production tax credits and makes significant changes to the tax credit regime that applies to solar and energy storage products. As a result of changes made by the IRA, the ITC for solar generation projects is extended until at least 2033 and has been expanded to include stand-alone battery storage projects. This expansion provides significant certainty on the tax incentives that will be available to stand-alone battery storage projects in the future. We believe the IRA will increase demand for our services due to the extensions and expansions of various tax credits that are critical for our customers’ economic returns, while also providing more certainty in and visibility into the supply chain for materials and components for energy storage systems. We are continuing to evaluate the overall impact and applicability of the IRA as regulations are issued, and the passage of comparable legislation in other jurisdictions, to our results of operations going forward.

Current wording

On August 16, 2022, President Biden signed into law the Inflation Reduction Act, which extends the availability of investment tax credits (“ITCs”) and production tax credits and makes significant changes to the tax credit regime that applies to solar and energy storage products. As a result of changes made by the IRA, the ITC for solar generation projects is extended until at least 2033 and has been expanded to include stand-alone battery storage projects. This expansion provides significant certainty on the tax incentives that will be available to stand-alone battery storage projects in the future. We believe the IRA will increase demand for our services due to the extensions and expansions of various tax credits that are critical for our customers’ economic returns, while also providing more certainty in and visibility into the supply chain for materials and components for energy storage systems. We are continuing to evaluate the overall impact and applicability of the IRA as regulations are issued, and the passage of comparable legislation in other jurisdictions, to our results of operations going forward.

Previous wording

As discussed in Note 13, Government Grants, to our condensed consolidated financial statements, starting in 2023, there are PTCs that can be claimed on battery components manufactured in the U.S. and sold to U.S. or foreign customers. The tax credits available to manufacturers include a credit for ten percent of the cost incurred to make electrode active materials in addition to credits of $35 per kWh of capacity of battery cells and $10 per kWh of capacity of battery modules. The credits are cumulative, meaning that companies will be able to claim each of the available tax credits based on the battery components produced and sold through 2029, after which the PTC will begin to gradually phase down through 2032. We expect these credits will have positive impact on our gross margins in the future.

Current wording

As discussed in Note 13, Government Grants, to our condensed financial statements, starting in 2023, there are PTCs that can be claimed on battery components manufactured in the U.S. and sold to U.S. or foreign customers. The tax credits available to manufacturers include a credit for ten percent of the cost incurred to make electrode active materials in addition to credits of $35 per kWh of capacity of battery cells and $10 per kWh of capacity of battery modules. The credits are cumulative, meaning that companies will be able to claim each of the available tax credits based on the battery components produced and sold through 2029, after which the PTC will begin to gradually phase down through 2032. We expect these credits will have positive impact on our gross margins in the future.

Previous wording

Following the Transition Date, research and development expenses consist of materials, supplies, personnel-related expenses, allocated facilities costs, consulting services and other direct expenses. Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation. Prior to the Transition Date, research and development expenses also included direct product development material costs, including freight charges, and warranty-related costs. Our research and development costs have decreased following the transition to commercial inventory accounting in the third quarter of 2023; however, we continue to perform research and development activities to further expand our product roadmap.

Current wording

Following the Transition Date, research and development expenses consist of materials, supplies, personnel-related expenses, consulting services and other direct expenses. Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation. Prior to the Transition Date, research and development expenses also included direct product development material costs, including freight charges, and warranty-related costs. Our research and development costs have decreased following the transition to commercial inventory accounting in the third quarter of 2023; however, we continue to perform research and development activities to further expand our product roadmap.

Previous wording

Gain on revaluation of common stock warrant liabilities consists of periodic fair value adjustments related to our common stock warrants.

Current wording

Gain (loss) on revaluation of common stock warrant liabilities consists of periodic fair value adjustments related to our common stock warrants.

Previous wording

In this section, we discuss the results of our operations for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

In this section, we discuss the results of our operations for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023.

Previous wording

Revenue for the three months ended March 31, 2024 was $2.7 million compared to $0.4 million for the three months ended March 31, 2023 as we delivered and recognized revenue for a higher volume of Energy Warehouses and other related equipment delivered in the first quarter of 2024 compared to 2023.

Current wording

Revenue for the three and six months ended June 30, 2024 was $0.3 million and $3.1 million compared to $2.8 million and $3.2 million for the three and six months ended June 30, 2023 as we consistently delivered and recognized revenue for the sale of Energy Warehouses, other related equipment, and extended warranty services in the first half of 2024 and 2023.

Previous wording

Cost of revenue for the three months ended March 31, 2024 was $11.1 million. During the third quarter of 2023 we reached commercial viability and transitioned out of the research and development phase and into commercial inventory accounting. As such, we began recording cost of revenue as of the Transition Date. Cost of revenue for units associated with the revenue recognized prior to the Transition Date is zero as these costs were recognized as research and development expenses in the respective periods incurred. As the production costs for our units significantly exceed their selling price, after the transition to commercial inventory accounting, we began recognizing LCNRV charges. LCNRV write-downs and losses on purchase commitments are recorded as cost of revenue.

Current wording

Cost of revenue for the three and six months ended June 30, 2024 was $11.7 million and $22.9 million. During the third quarter of 2023 we reached commercial viability and transitioned out of the research and development phase and into commercial inventory accounting. As such, we began recording cost of revenue as of the Transition Date. Cost of revenue for units associated with the revenue recognized prior to the Transition Date is zero as these costs were recognized as research and development expenses in the respective periods incurred. As the production costs for our units significantly exceed their selling price, after the transition to commercial inventory accounting, we began recognizing LCNRV charges. LCNRV write-downs and losses on purchase commitments are recorded as cost of revenue.

Previous wording

Research and development expenses decreased by $14.2 million or 80% from $17.7 million for the three months ended March 31, 2023 to $3.5 million for the three months ended March 31, 2024. The decrease resulted from the transition out of research and development accounting in the third quarter of 2023 into commercial inventory accounting as of the Transition Date, offset by increased material expenses and payroll and benefit expense, including stock-based compensation.

Current wording

Research and development expenses decreased by $16.6 million or 85% from $19.5 million for the three months ended June 30, 2023 to $2.8 million for the three months ended June 30, 2024. The decrease resulted primarily from the transition out of research and development accounting in the third quarter of 2023 into commercial inventory accounting as of the Transition Date, as well as decreased material expenses and outside services.

Previous wording

Sales and marketing expenses increased by $0.2 million or 10% from $1.9 million for the three months ended March 31, 2023 to $2.0 million for the three months ended March 31, 2024. The increase is driven by increased personnel-related expenses.

Current wording

Sales and marketing expenses increased by $1.0 million or 56% from $1.7 million for the three months ended June 30, 2023 to $2.7 million for the three months ended June 30, 2024. The increase is driven by increased personnel-related expenses due to expanded headcount as well as increased outside services, advertising and sales consultant expenses.

Previous wording

General and administrative expenses increased by $0.2 million or 5% from $5.3 million for the three months ended March 31, 2023 to $5.5 million for the three months ended March 31, 2024. The increase is due primarily to lower than

Current wording

General and administrative expenses increased by $0.6 million or 5% from $11.1 million for the six months ended June 30, 2023 to $11.7 million for the six months ended June 30, 2024. The increase is due primarily to personnel-related expenses including stock-based compensation and increased professional and outside services costs.

Previous wording

Interest income, net was $1.2 million for the three months ended March 31, 2024 compared to $1.3 million for the three months ended March 31, 2023. The decrease resulted from a decrease in interest income during the three months ended March 31, 2024 driven by interest earned on our short-term investment portfolio offset by a decrease in expense resulting from the repayment of our notes payable during 2023.

Current wording

Interest income, net decreased by $0.3 million or 21% from $1.3 million for the three months ended June 30, 2023 to $1.1 million for the three months ended June 30, 2024. The decrease resulted from a decrease in interest income earned on our short-term investment portfolio offset by a decrease in expense resulting from the repayment of our notes payable during 2023.

Previous wording

There was no gain or loss recorded on common stock warrant liabilities in the three months ended March 31, 2024 as the liability remained constant over that period. A gain of $0.7 million was recorded for the three months ended March 31, 2023. The changes in fair value of warrant liabilities are driven by changes in the market price of our public warrants over the respective periods.

Current wording

The change in fair value of common stock warrant liabilities resulted in a gain of $0.1 million for the three months ended June 30, 2024 and a loss of $0.1 million for the three months ended June 30, 2023. The changes in fair value of warrant liabilities were driven by changes in the market price of our common stock over the respective periods.

Previous wording

Other income (expense), net for the three months ended March 31, 2024 was $55 thousand of expense and $0.7 million of income for the three months ended March 31, 2023. The change is a result of funding received from federal agencies for our research and development activities in 2023 that did not recur in 2024, as well the recognition of unrealized losses rather than unrealized gains reported on trading securities.

Current wording

Other income (expense), net for the six months ended June 30, 2024 was $37 thousand of expense compared to $0.7 million of income for the six months ended June 30, 2023. The change is a result of funding received from federal agencies for our research and development activities in 2023 that did not recur in 2024 as well as from the recognition of year-to-date unrealized losses on trading securities in 2024 rather than unrealized gains in 2023.

Previous wording

Since our inception, we have financed our operations primarily through the issuance and sale of equity and debt securities and loan agreements. We have incurred significant losses and have negative cash flows from operations. As of March 31, 2024, we had an accumulated deficit of $714.5 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of our cost of revenue, research and development and other operational activities. As of March 31, 2024, we had unrestricted cash and cash equivalents of $36.3 million and short-term investments of $53.2 million, which are available to fund future operations. We believe that our unrestricted cash and cash equivalents and short-term investments as of March 31, 2024 will enable us to maintain our operations and satisfy our financial obligations for a period of at least 12 months following the filing date of our condensed consolidated financial statements. Beyond 12 months, we may need additional cash resources to the extent our current resources are insufficient to satisfy our cash requirements. Therefore, we may seek additional equity or debt financing. If such financing is not available or if the financing terms are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects.

Current wording

Since our inception, we have financed our operations primarily through the issuance and sale of equity and debt securities and loan agreements. We have incurred significant losses and have negative cash flows from operations. As of June 30, 2024, we had an accumulated deficit of $736.4 million. Management expects to continue to incur additional substantial losses in the foreseeable future as a result of our cost of revenue, research and development and other operational activities. As of June 30, 2024, we had unrestricted cash and cash equivalents of $36.7 million and short-term investments of $37.7 million, which are available to fund future operations. We believe that our unrestricted cash and cash equivalents and short-term investments as of June 30, 2024 will enable us to maintain our operations and satisfy our financial obligations for a period of at least 12 months following the filing date of our condensed financial statements. Beyond 12 months, we may need additional cash resources to the extent our current resources are insufficient to satisfy our cash requirements.

Previous wording

We have a standby letter of credit with First Republic Bank for $75 thousand as security for an operating lease of office and manufacturing space in Wilsonville, Oregon secured by a restricted certificate of deposit account totaling $75 thousand. There were no draws against the letter of credit during the three months ended March 31, 2024 and 2023.

Current wording

We have a standby letter of credit with First Republic Bank for $75 thousand as security for an operating lease of office and manufacturing space in Wilsonville, Oregon secured by a restricted certificate of deposit account totaling $75 thousand. There were no draws against the letter of credit during the three and six months ended June 30, 2024 and 2023.

Previous wording

We have a standby letter of credit with Bank of America for $600 thousand as security for the performance and payment of the Company’s obligations under a customer agreement. The letter of credit is in effect until the date on which the warranty period under the agreement expires, which is anticipated to be more than a year from the balance sheet date. As of March 31, 2024, $600 thousand was pledged as collateral for the letter of credit and recorded as restricted cash, non-current. There were no draws against the letter of credit during the three months ended March 31, 2024 and 2023.

Current wording

We have a standby letter of credit with Bank of America for $600 thousand as security for the performance and payment of the Company’s obligations under a customer agreement. The letter of credit is in effect until the date on which the warranty period under the agreement expires, which is anticipated to be more than a year from the balance sheet date. As of June 30, 2024, $600 thousand was pledged as collateral for the letter of credit and recorded as restricted cash, non-current. There were no draws against the letter of credit during the three and six months ended June 30, 2024 and 2023.

Previous wording

We have a standby letter of credit with Bank of America for $200 thousand in support of our customs and duties due on imported materials. The letter of credit is in effect until May 19, 2024. As of March 31, 2024, $200 thousand was pledged as collateral for the letter of credit and recorded as restricted cash, current. There were no draws against the letter of credit during the three months ended March 31, 2024 and 2023.

Current wording

We have a standby letter of credit with Bank of America for $200 thousand in support of our customs and duties due on imported materials. The letter of credit is in effect until May 19, 2025. As of June 30, 2024, $200 thousand was pledged as collateral for the letter of credit and recorded as restricted cash, current. There were no draws against the letter of credit during the three and six months ended June 30, 2024 and 2023.

Previous wording

Net cash used in operating activities was $18.9 million for the three months ended March 31, 2024, which is comprised of net loss of $18.3 million, noncash interest income of $1.0 million, inventory write-downs and losses on noncancellable purchase commitments of $2.0 million, partially offset by stock-based compensation of $2.9 million and depreciation and amortization expense of $1.2 million. Net changes in operating assets and liabilities used $2.1 million of cash driven by cash collections on accounts receivable and an increase in accrued product warranties, partially offset by decreases in accrued and other current liabilities, deferred revenue, accounts payable, operating lease liabilities, and an increase in prepaid and other current assets.

Current wording

Net cash used in operating activities was $34.1 million for the six months ended June 30, 2024, which is comprised of net loss of $40.3 million and noncash interest income of $1.6 million, partially offset by stock-based compensation of $5.9 million, inventory write-downs and losses on noncancellable purchase commitments of $1.5 million, and depreciation and amortization expense of $2.5 million. Net changes in operating assets and liabilities used $2.8 million of cash driven by decreases in inventory, accrued and other current liabilities, deferred revenue, operating lease liabilities, and an increase in prepaid and other current assets, partially offset by cash collections on accounts receivable, an increase in accounts payable, and an increase in accrued product warranties.

Previous wording

Net cash used in operating activities was $18.5 million for the three months ended March 31, 2023, which is comprised of net loss of $21.9 million, noncash interest income of $0.8 million, and noncash changes in the fair value of common stock warrant liabilities of $0.7 million, partially offset by stock-based compensation of $2.1 million and depreciation expense of $1.1 million. Net changes in operating assets and liabilities provided $1.5 million of cash driven by cash collections on accounts receivable, a decrease in prepaid expenses and other current assets and an increase in accrued product warranties, partially offset by decreases in accrued and other current liabilities, accounts payable, operating lease liabilities, and deferred revenue.

Current wording

Net cash used in operating activities was $37.5 million for the six months ended June 30, 2023, which is comprised of net loss of $44.8 million, noncash interest income of $1.5 million, and noncash changes in the fair value of common stock warrant liabilities of $0.6 million, partially offset by stock-based compensation of $4.8 million and depreciation expense of $2.1 million. Net changes in operating assets and liabilities provided $1.9 million of cash driven by cash collections on accounts receivable, a decrease in prepaid expenses and other current assets and an increase in accrued product warranties, partially offset by decreases in accrued and other current liabilities, deferred revenue, accounts payable and operating lease liabilities.

Previous wording

Net cash provided by investing activities was $34.7 million for the three months ended March 31, 2024, which relates to maturities of short-term investments partially offset by purchases of property and equipment.

Current wording

Net cash provided by investing activities was $50.2 million for the six months ended June 30, 2024, which relates to maturities of short-term investments partially offset by purchases of property and equipment.

Previous wording

Net cash used in investing activities was $72.1 million for the three months ended March 31, 2023, which relates to maturities of short-term investments partially offset by purchases of property and equipment. Purchases of property and equipment primarily relate to our investment in automating production.

Current wording

Net cash provided by in investing activities was $33.9 million for the six months ended June 30, 2023, which relates to maturities of short-term investments partially offset by purchases of property and equipment.

Previous wording

Net cash used in financing activities was $0.1 million for the three months ended March 31, 2024, which consisted of repurchases for shares from employees for income tax withholding purposes.

Current wording

Net cash provided by financing activities was $0.1 million for the six months ended June 30, 2024, which consisted of proceeds from our ESPP and stock options exercised offset by repurchases for shares from employees for income tax withholding purposes.

Previous wording

Net cash used in financing activities was $0.3 million for the three months ended March 31, 2023, which is comprised of principal payments on notes payable, partially offset by proceeds from stock options exercised.

Current wording

Net cash used in financing activities was $0.4 million for the six months ended June 30, 2023, which is comprised of principal payments on notes payable, partially offset by proceeds from our ESPP and stock options exercised.

Previous wording

24 - accounts. The letters of credit related to a customer contract and to support customs and duties due on imported materials are secured by a total of $800 thousand pledged as collateral. There were no draws against the letters of credit during the three months ended March 31, 2024 and 2023. Additionally, we are committed to non-cancellable purchase commitments of $0.7 million as of March 31, 2024 and to reimburse UOP a minimum of $8.0 million for research and development expenses incurred through December 31, 2028 under the JDA (as defined herein).

Current wording

Our contractual obligations and other commitments as of June 30, 2024 consist of lease commitments and three standby letters of credit. The letters of credit serve as security for certain operating leases for office and manufacturing space, for our performance and payment obligations under a customer agreement, and in support of our customs and duties due on imported materials. The letter of credit related to operating leases is fully secured by restricted certificate of deposit accounts. The letters of credit related to a customer contract and to support customs and duties due on imported materials are secured by a total of $800 thousand pledged as collateral. There were no draws against the letters of credit during the three and six months ended June 30, 2024 and 2023. Additionally, we are committed to non-cancellable purchase commitments of $1.4 million as of June 30, 2024 and to reimburse UOP a minimum of $8.0 million for research and development expenses incurred through December 31, 2028 under the JDA (as defined herein).