ESS Tech Inc

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 our batteries are designed to operate using an electrolyte of primarily salt, iron and water, they are non-toxic 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 sustainable and substantially recyclable.

Previous wording

Our batteries provide flexibility to grid operators and energy assurance for commercial and industrial customers. Our technology addresses energy delivery, duration and cycle-life in a single battery platform that compares favorably to lithium-ion batteries, the most widely deployed alternative technology. Using our iron flow battery technology, we are developing several products, each of which is able to provide reliable, safe, long-duration energy storage. Our first energy storage product, the Energy Warehouse, is our “behind-the-meter” solution (referring to solutions that are located on the customer’s premises, behind the service demarcation with the utility) that offers energy storage ranging from six to twelve-hour duration. Our second, larger scale energy storage product, the Energy Center, is currently being designed for “front-of-the-meter” (referring to solutions that are located outside the customer’s premises, typically operated by the utility or by third-party providers who sell energy into the grid, often known as independent power producers) deployments specifically for utility and large commercial and industrial consumers. Our core technology components in the Energy Warehouse and the Energy Center also are under development for integration into third-party systems.

Current wording

Our batteries provide flexibility to grid operators and energy assurance for commercial and industrial customers. Our technology addresses energy delivery, duration and cycle-life in a single battery platform that compares favorably to lithium-ion batteries, the most widely deployed alternative technology. Using our iron flow battery technology, we are developing several products, each of which is able to provide reliable, safe, long-duration energy storage. Our first energy storage product, the Energy Warehouse, is our “behind-the-meter” solution (referring to solutions that are located on the customer’s premises, behind the service demarcation with the utility) that offers energy storage of up to twelve hours. Our second, larger scale energy storage product, the Energy Center, is designed for “front-of-the-meter” (referring to solutions that are located outside the customer’s premises, typically operated by the utility or by third-party providers who sell energy into the grid, often known as independent power producers) deployments specifically for utility and large commercial and industrial consumers. We are developing additional products at larger scale, in addition to productized versions of our core technology components for integration into third-party systems.

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 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.

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 three quarters 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

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.

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 a positive impact on our gross margins in the future.

Previous wording

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

Current wording

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

Previous wording

Other income (expense), net consists primarily of various gains and losses associated with our short-term investments and other income and expense items.

Current wording

Other income, net consists primarily of various gains and losses associated with our short-term investments and other income and expense items.

Previous 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.

Current wording

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

Previous 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.

Current wording

Revenue for the three and nine months ended September 30, 2024 was $0.4 million and $3.4 million compared to $1.5 million and $4.7 million for the three and nine months ended September 30, 2023 as we delivered and recognized revenue for the sale of Energy Warehouses, other related equipment, and extended warranty services.

Previous 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.

Current wording

Cost of revenue for the three and nine months ended September 30, 2024 was $12.7 million and $35.6 million compared to $10.2 million for the three and nine months ended September 30, 2023. 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.

Previous wording

Research and development expenses decreased by $30.8 million or 83% from $37.2 million for the six months ended June 30, 2023 to $6.4 million for the six months ended June 30, 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.

Current wording

Research and development expenses decreased by $29.7 million or 77% from $38.8 million for the nine months ended September 30, 2023 to $9.1 million for the nine months ended September 30, 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. Research and development expenses have remained otherwise consistent year-over-year.

Previous 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.

Current wording

Sales and marketing expenses increased by $0.5 million or 23% from $2.1 million for the three months ended September 30, 2023 to $2.5 million for the three months ended September 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

Sales and marketing expenses increased by $1.2 million or 32% from $3.6 million for the six months ended June 30, 2023 to $4.7 million for the six 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.

Current wording

Sales and marketing expenses increased by $1.6 million or 29% from $5.6 million for the nine months ended September 30, 2023 to $7.3 million for the nine months ended September 30, 2024. The increase is driven by increased

Previous wording

General and administrative expenses increased by $0.3 million or 6% from $5.8 million for the three months ended June 30, 2023 to $6.2 million for the three months ended June 30, 2024. The increase is due to increased IT expenses and stock-based compensation, partially offset by decreased audit and legal expenses and insurance costs.

Current wording

General and administrative expenses increased by $0.3 million or 4% from $5.8 million for the three months ended September 30, 2023 to $6.1 million for the three months ended September 30, 2024. The increase is due to increased IT expenses and stock-based compensation, partially offset by decreased audit and legal expenses and insurance costs.

Previous 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.

Current wording

General and administrative expenses increased by $0.8 million or 5% from $17.0 million for the nine months ended September 30, 2023 to $17.8 million for the nine months ended September 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 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.

Current wording

Interest income, net decreased by $0.3 million or 30% from $1.2 million for the three months ended September 30, 2023 to $0.8 million for the three months ended September 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

Interest income, net decreased by $0.3 million or 11% from $2.6 million for the six months ended June 30, 2023 to $2.3 million for the six 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.

Current wording

Interest income, net decreased by $0.6 million or 17% from $3.7 million for the nine months ended September 30, 2023 to $3.1 million for the nine months ended September 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

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.

Current wording

The change in fair value of common stock warrant liabilities resulted in a gain of $0.3 million for the three months ended September 30, 2024 and a loss of $0.3 million for the three months ended September 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

The change in fair value of common stock warrant liabilities resulted in a gain of $0.1 million for the six months ended June 30, 2024 and a gain of $0.6 million for the six 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.

Current wording

The change in fair value of common stock warrant liabilities resulted in a gain of $0.5 million for the nine months ended September 30, 2024 and a gain of $0.9 million for the nine months ended September 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 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.

Current wording

Other income, net increased by $22 thousand or 129% from $17 thousand for the three months ended September 30, 2023 to $39 thousand for the three months ended September 30, 2024. The increase in income is a result of recognition of quarter-to-date unrealized gains on trading securities in 2024 rather than unrealized losses in 2023.

Previous wording

Other income (expense), net decreased by $45 thousand or 71% from $63 thousand of income for the three months ended June 30, 2023 to $18 thousand for the three months ended June 30, 2024. The decrease in income is a result of funding received from federal agencies for our research and development activities in 2023 that did not recur in 2024, offset by the recognition of quarter-to-date unrealized gains on trading securities in 2024 rather than unrealized losses in 2023.

Current wording

Other income, net decreased by $0.7 million or 100% from $0.7 million for the nine months ended September 30, 2023 to $2 thousand of income for the nine months ended September 30, 2024. The decrease is a result of funding received from federal agencies for our research and development activities in 2023 that did not recur in 2024, offset by the recognition of year-to-date unrealized losses on trading securities in 2023 rather than unrealized gains in 2024.

Previous wording

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 losses since inception and have negative cash flows from operations. We anticipate that losses will continue in the near term. During the nine months ended September 30, 2024, we incurred net losses of $62.7 million and used $51.7 million of cash in operating activities. As of September 30, 2024, we had unrestricted cash and cash equivalents of $12.8 million and short-term investments of $42.3 million, or total liquid assets of $55.1 million. We will need additional debt or equity financing in order to meet our near-term operating cash flow requirements, and accordingly there is substantial doubt as to our ability to continue as a going concern for 12 months from the issuance of the condensed financial statements included in this Quarterly Report on Form 10-Q. 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.

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 and six months ended June 30, 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 nine months ended September 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 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.

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 September 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 nine months ended September 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, 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.

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 September 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 nine months ended September 30, 2024 and 2023.

Previous wording

On September 21, 2023, we entered into a Common Stock and Warrant Purchase Agreement with Honeywell Ventures pursuant to which, Honeywell Ventures invested $27.5 million in the Company and the Company issued 16,491,754 shares of common stock and the Investment Warrant exercisable for up to 10,631,633 shares of Common Stock.

Current wording

On September 21, 2023, we entered into a Common Stock and Warrant Purchase Agreement with Honeywell Ventures pursuant to which, Honeywell Ventures invested $27.5 million in the Company and the Company issued 1,099,450 shares of common stock and the Investment Warrant exercisable for up to 708,775 shares of Common Stock.

Previous wording

Cash flows used in operating activities to date have primarily consisted of costs related to research and development of our energy storage systems, building awareness of our products’ capabilities and other general and administrative activities. Beginning in the third quarter of 2023, following the transition to commercial inventory accounting, cash flows used in operating activities also consisted of inventory purchases and cost of revenue.

Current wording

Cash flows used in operating activities to date have primarily consisted inventory purchases and cost of revenue, costs related to research and development of our energy storage systems, building awareness of our products’ capabilities and other general and administrative activities.

Previous 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.

Current wording

Net cash used in operating activities was $51.7 million for the nine months ended September 30, 2024, which is comprised of net loss of $62.7 million and noncash interest income of $2.1 million, partially offset by stock-based compensation of $8.5 million, inventory write-downs and losses on noncancellable purchase commitments of $5.2 million, and depreciation and amortization expense of $3.3 million. Net changes in operating assets and liabilities used $4.8 million of cash driven by decreases accrued and other current liabilities, deferred revenue, operating lease liabilities, and an increase in inventory, 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 $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.

Current wording

Net cash used in operating activities was $38.8 million for the nine months ended September 30, 2023, which is comprised of net loss of $61.4 million, noncash interest income of $2.4 million, and noncash changes in the fair value of common stock warrant liabilities of $0.9 million, partially offset by inventory write-downs and losses on noncancellable purchase commitments of $11.4 million, stock-based compensation of $7.7 million and depreciation expense of $3.2 million. Net changes in operating assets and liabilities provided $2.9 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 $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.

Current wording

Net cash provided by investing activities was $43.9 million for the nine months ended September 30, 2024, which relates to maturities of short-term investments partially offset by purchases of property and equipment.

Previous 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.

Current wording

Net cash provided by investing activities was $16.0 million for the nine months ended September 30, 2023, which relates to maturities of short-term investments partially offset by purchases of property and equipment.

Previous 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.

Current wording

Net cash provided by financing activities was $49 thousand for the nine months ended September 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

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).

Current wording

Our contractual obligations and other commitments as of September 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 nine months ended September 30, 2024 and 2023. Additionally, we are committed to non-cancellable purchase commitments of $0.8 million as of September 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).