Executive Summary / Key Takeaways

• Strategic Pivot to Energy Base: ESS Tech is undergoing a critical strategic shift, focusing entirely on its new, modular Energy Base product designed for 10+ hour long-duration storage, with a roadmap to 22 hours, to address the escalating demands of utilities and hyperscale data centers.
• Differentiated Iron Flow Technology: The company's proprietary iron flow battery, featuring the "Proton Pump," offers compelling advantages in safety, sustainability, and durability (20,000+ cycles with no degradation), positioning it as a non-lithium alternative in a market increasingly seeking diverse storage solutions.
• Improving Cost Structure & Commercial Traction: Aggressive cost reduction initiatives have led to non-GAAP gross margin breakeven on older products, with the Energy Base projected to be competitive with lithium-ion at $200/kWh fully installed by 2027-2030, supported by a growing pipeline exceeding 1.1 GWh and a first commercial order for 2026 delivery.
• Critical Capital & Liquidity Challenges: Despite recent capital infusions of up to $31 million (including a $25 million SEPA) and an 80% reduction in Q2 2025 cash burn, ESS Tech faces a "going concern" warning, underscoring the urgent need for additional long-term financing to fund its growth and operational runway.
• Competitive Headwinds & Tailwinds: While facing intense competition from established players like Fluence Energy (FLNC) and Tesla (TSLA), ESS benefits from strong domestic manufacturing (98%+ U.S. content) and legislative tailwinds (IRA, PTCs, potential tariffs on foreign competitors) that favor its unique technology.

The Long-Duration Imperative and ESS's Vision

The global energy landscape is undergoing a profound transformation, driven by the dual forces of decarbonization and surging electricity demand. Hyperscale AI data centers alone are projected to double energy consumption to 540 gigawatt-hours annually by 2028, while overall U.S. electricity demand is expected to grow by 35% to 50% between 2024 and 2040. This unprecedented demand, coupled with the intermittency of renewable sources, creates an urgent need for reliable, long-duration energy storage (LDES) solutions that can provide power for 10 hours or more.

ESS Tech, Inc. (GWH), founded in 2011, is positioning itself as a technology leader in this critical LDES market. The company specializes in iron flow battery technology, which it asserts is uniquely suited to meet these evolving grid-scale and commercial/industrial demands. Its strategic pivot towards the Energy Base product represents a focused effort to capitalize on this burgeoning opportunity.

Technological Edge: The Power of Iron Flow

At the heart of ESS Tech's investment thesis is its proprietary iron flow battery platform. This technology differentiates itself significantly from prevalent lithium-ion solutions through several key attributes. The batteries are designed to deliver safe, sustainable, and nonflammable long-duration energy storage, primarily using earth-abundant materials such as iron, salt, and water.

A core technological differentiator is the "Proton Pump," a proprietary solution that eliminates hydroxide build-up, a common challenge in earlier iron flow battery designs. This innovation converts hydrogen generated by side reactions back into protons, stabilizing the electrolyte's pH levels and significantly improving round-trip efficiency. The company's systems are engineered for exceptional durability, designed to cycle over 20,000 times with no capacity degradation, a stark contrast to the typical degradation profiles of other battery chemistries.

The Energy Base, ESS Tech's latest offering, further leverages these advantages. It is a non-containerized, modular system that decouples power delivery from total capacity, enabling durations beyond 8-10 hours simply by building larger electrolyte tanks. Recent technical milestones in June 2025 demonstrated extended durations of 12.2 hours at rated power and 17.8 hours at reduced power. The company's roadmap targets 12-plus hour duration for 2027 projects, with a line-of-sight to 22 hours, directly addressing the critical need for baseload-level energy storage.

This extended duration capability dramatically reduces total installed costs on a capacity basis, giving the Energy Base the potential to compete with or even surpass lithium-ion on a dollar-per-megawatt-hour basis. ESS Tech models project costs against various sizes (5, 10, 50, and 100 megawatts), targeting a fully installed cost of $200/kWh or less by 2027-2030, while aiming for gross margins north of 30% with Production Tax Credits (PTCs). The wide thermal operating range of iron flow batteries also reduces the need for costly fire suppression and HVAC equipment often required for lithium-ion, further enhancing its economic appeal.

Strategic Evolution: From Warehouse to Energy Base

ESS Tech's product journey reflects a continuous evolution to meet market demands. Initially, the Energy Warehouse served as a behind-the-meter solution for validation. This evolved into the Energy Center, a larger, containerized product with more than double the capacity of the Energy Warehouse, designed for utility and large commercial applications. By the end of Q4 2024, aggressive cost-reduction initiatives enabled the Energy Center to achieve non-GAAP gross margin breakeven, nearly a year ahead of schedule. These initiatives included developing ESS's own electrode, reducing its cost by over 35% with a line-of-sight to another 70% reduction, and reformulating the electrolyte, which cut costs by over 50% while increasing energy output by 20%.

The launch of the non-containerized Energy Base marks a pivotal strategic shift. This modular design allows ESS to focus its resources on manufacturing the core "power block unit" (stacks, electrolyte health management system, electrolyte), where its intellectual property and expertise are concentrated. It can then leverage partners like Honeywell (HON) for commoditized balance-of-system components (tanks, pumps, actuators), optimizing manufacturing strategy and margin profile. This approach simplifies manufacturing and shipment for very large projects, enabling "plug-and-play" on-site deployment.

Commercial momentum for the Energy Base is building, with proposal activity exceeding 1.1 GWh since its launch. The company secured its first commercial order for an 8 MWh Energy Base project with a U.S. strategic partner, anticipated for delivery in 2026. This early traction, including an award for a 50 MWh pilot project with an Arizona public power utility, validates the market's demand for non-lithium, long-duration solutions that perform across wide temperature ranges and offer competitive pricing.

Financial Performance: A Turnaround in Progress

ESS Tech's financial performance reflects a company in a critical transition phase, marked by historical losses but showing signs of operational improvement. For the three months ended June 30, 2025, the company reported GAAP revenue of $2.4 million, a significant increase from $0.3 million in the same period last year, primarily driven by deliveries of Energy Warehouses and Energy Centers to a related party as it phases out these older products. However, total revenue for the six months ended June 30, 2025, was $3.0 million, a slight decrease from $3.1 million in the prior year period. The company's net loss for Q2 2025 improved to $(11.1) million from $(21.9) million in Q2 2024, and for the six months ended June 30, 2025, it was $(29.1) million, an improvement from $(40.3) million in the prior year. This narrowing loss is a direct result of aggressive cost reduction efforts.

Cost of revenue decreased by 37% year-over-year in Q2 2025 to $7.5 million, driven by lower net realizable value adjustments and utilization of previously expensed R&D inventory. Total operating expenses also fell by 45% to $6.4 million in Q2 2025, reflecting a disciplined approach to capital control and rightsizing the business. The company has successfully monetized its Production Tax Credits (PTCs), claiming $1.9 million for 2024 production in Q1 2025 at a favorable $0.92 on the dollar discount rate. The expansion of PTCs to include electrode active materials has increased the claimable amount by over 30% per unit sold, providing a significant tailwind to gross margins. While the company does not anticipate being U.S. GAAP gross margin positive in 2025, it expects to achieve this post-2025, with a path to becoming EBITDA and cash flow positive in the next few years, contingent on the ramp-up of Energy Base production and sales.

Capital & Liquidity: Extending the Runway

Despite operational improvements, ESS Tech faces significant liquidity challenges. The company has incurred operating losses and negative cash flows since inception, and as of June 30, 2025, it had only $0.8 million in unrestricted cash and cash equivalents. This has led to a "going concern" disclosure, indicating substantial doubt about its ability to continue operations for the next 12 months without additional funding.

Management is actively pursuing various capital-raising strategies. In July 2025, ESS secured up to $31 million in new capital, including approximately $0.9 million in short-term loans from directors and management, and a Standby Equity Purchase Agreement (SEPA) for up to $25 million, accessible over 36 months. By July 2025, over $2 million had been raised under the SEPA. Additionally, a Sale and Leaseback Agreement was executed in July 2025 with UOP (Honeywell affiliate), generating $10.5 million ($4 million cash, $6.5 million applied to prepayments) from the sale of a stack assembly line. These measures, combined with an 80% reduction in the operating cash burn rate in June 2025 compared to the Q1 average, are aimed at extending the company's operational runway. The company also has access to a $22.7 million secured loan facility from the Export-Impoort Bank (EXIM) for equipment financing, with no borrowings outstanding as of June 30, 2025, but anticipates potentially drawing on this facility. The termination of the At-The-Market (ATM) offering in July 2025, after raising $0.7 million in Q2, signals a shift in financing strategy towards the SEPA and other avenues.

Competitive Dynamics: Iron Flow vs. The Field

The energy storage market is highly competitive, with ESS Tech vying against a diverse set of players. Key direct competitors include Fluence Energy, Tesla, and Stem Inc. (STEM), all of whom offer solutions for grid-scale and commercial energy storage.

Fluence Energy, a joint venture of Siemens (SIE) and AES (AES), is a leader in grid-scale battery solutions, known for its global presence, advanced integration capabilities, and rapid deployment. FLNC's TTM Gross Profit Margin is 13%, Operating Profit Margin is 0.99%, and Net Profit Margin is 0.84%, demonstrating a more established path to profitability compared to GWH. While FLNC excels in software-driven optimization and project execution speed, GWH differentiates itself with its iron flow technology's inherent safety, sustainability, and long-duration capabilities, which are critical for specific use cases where lithium-ion's limitations become apparent.

Tesla, a dominant force in electric vehicles, also offers energy solutions like Powerwall and Megapack. TSLA's TTM Gross Profit Margin is 18%, Operating Profit Margin is 7%, and Net Profit Margin is 7%, reflecting robust financial health and diversified operations. Tesla's strengths lie in its massive scale, brand recognition, and vertical integration. GWH's non-flammable, earth-ababundant material approach offers a compelling alternative for safety-conscious or environmentally stringent applications, potentially providing a lower levelized cost of storage (LCOS) over the long term, despite TSLA's higher power density and round-trip efficiency.

Stem Inc. specializes in AI-driven energy storage and management software for commercial and industrial clients. STEM's TTM Gross Profit Margin is -8%, Operating Profit Margin is -581%, and Net Profit Margin is -591%, indicating it is also in a growth phase with negative profitability, similar to GWH's current state. STEM's strength is in digital optimization and data analytics, whereas GWH's focus is on robust, long-term physical storage. GWH's hardware-centric, durable solution can appeal to clients prioritizing physical longevity and material sustainability, contrasting with STEM's software-heavy approach.

GWH's competitive advantages, or "moats," are deeply rooted in its iron flow technology:

• Safety and Sustainability: The nonflammable nature and use of earth-abundant, recyclable materials provide a strong environmental and safety profile, appealing to utilities and data centers seeking reliable, low-risk solutions. This can translate into higher customer loyalty and potentially superior margins in specific segments.
• Long-Duration Capability: The ability to deliver 10+ hours, with a roadmap to 22 hours, directly addresses a market segment where lithium-ion is less effective or cost-prohibitive, particularly for baseload power and grid stability. This allows GWH to target niche but rapidly growing opportunities.
• Domestic Manufacturing: With over 98% American-made inputs, ESS benefits from "Make More in America" initiatives and legislative tailwinds like the Inflation Reduction Act's Section 45X Production Tax Credits. This mitigates tariff risks and enhances competitiveness against foreign-sourced alternatives, potentially improving pricing power and market share.

However, GWH faces vulnerabilities. Its smaller scale compared to industry giants like Tesla and Fluence Energy can lead to higher operational costs and potential supply chain dependencies. The company's current negative profitability and cash flow, as evidenced by its TTM Gross Profit Margin of -629.55% and Net Profit Margin of -1217.22%, underscore the challenge of scaling efficiently against rivals with more mature operational models and stronger balance sheets.

Outlook & Risks: A Path Forward, Fraught with Challenges

ESS Tech's outlook for the remainder of 2025 is characterized by a cautious ramp-up, with revenue expected to be moderate in the first half and potentially scale in the back half, contingent on successful Energy Base sales and capital raising. The company is not providing specific revenue guidance for H2 2025, but management anticipates revenue growth to be driven by Energy Base deliveries starting in 2026 and beyond. The path to becoming EBITDA and cash flow positive is projected for post-2025, assuming continued cost reductions and increased sales volumes.

The company's strategic pivot to the Energy Base and its focus on cost discipline are critical to this future. Management aims to maintain a controlled approach to costs, leveraging the significant reductions already achieved in electrode and electrolyte manufacturing. The appointment of a new COO, Jigish Trivedi, with 30 years of experience in scaling global operations, and an interim CFO, Kate Suhadolnik, signals a commitment to operational excellence during this transition.

However, significant risks remain. The "going concern" disclosure highlights the paramount need for additional long-term financing. While recent capital infusions provide a temporary runway, the company's ability to secure substantial, non-dilutive funding on acceptable terms is crucial. Delays in customer funding and site readiness, as experienced in 2024, could continue to impact revenue recognition and cash flow. Macroeconomic headwinds, including inflation, interest rate fluctuations, and geopolitical tensions, could further exacerbate these challenges by affecting customer purchasing decisions and increasing operational costs.

Furthermore, ESS Tech received a notice in March 2025 for failing to meet NYSE's Minimum Market Capitalization Standard and stockholders' equity requirements, necessitating a plan to regain compliance within an 18-month cure period. Failure to do so could lead to delisting, severely impacting liquidity and access to capital. The market acceptance of iron flow batteries, while gaining traction, is still emerging, and competition from established lithium-ion technologies and other LDES alternatives remains intense.

Conclusion

ESS Tech, Inc. stands at a pivotal juncture, embodying a high-risk, high-reward investment proposition. The company's core investment thesis hinges on its differentiated iron flow battery technology, which offers a compelling solution for the rapidly expanding long-duration energy storage market. The strategic pivot to the Energy Base, with its modular design, extended duration capabilities, and competitive cost profile, positions ESS to address critical industry needs, particularly from utilities and data centers.

While operational improvements, including significant cost reductions and a disciplined approach to cash management, are encouraging, the company's immediate future is heavily reliant on its ability to secure substantial long-term capital. The "going concern" warning underscores this urgency. Investors must weigh the immense market opportunity and ESS's technological leadership against the execution risks and the ongoing challenge of financing its ambitious growth trajectory in a highly competitive landscape.