Company Overview
ESS Tech, Inc. (NYSE:GWH) is a leading manufacturer of long-duration energy storage (LDES) systems, playing a critical role in the global transition to renewable energy. Founded in 2011 and headquartered in Wilsonville, Oregon, the company has emerged as a trailblazer in the development and deployment of its innovative iron flow battery technology.
History and Development
ESS's history is marked by a relentless pursuit of innovation and a steadfast commitment to sustainability. The company was originally incorporated as a Cayman Islands exempted company on July 21, 2020, as a publicly traded special purpose acquisition company under the name ACON S2 Acquisition Corp. (STWO). On October 8, 2021, ESS consummated a business combination pursuant to a merger agreement with Legacy ESS, a Delaware corporation, wherein Legacy ESS merged with and into STWO, with Legacy ESS surviving as a wholly owned subsidiary of STWO. On the closing date, STWO changed its name from ACON S2 Acquisition Corp. to ESS Tech, Inc.
Prior to the business combination in October 2021, ESS was in the research and development phase, facing significant challenges in completing the development of its various energy storage products and in producing its energy storage products in commercial volumes. The company had limited deployment of its energy storage products and encountered various quality and performance issues with units that had been installed, requiring repair or replacement.
Technology and Products
Today, ESS's iron flow batteries provide a unique, non-toxic, and substantially recyclable solution that can be cycled over 20,000 times without capacity fade. This durability and longevity make ESS's technology a compelling alternative to lithium-ion batteries, particularly for applications requiring long-duration energy storage.
The company's flagship products, the Energy Warehouse and Energy Center, serve commercial and utility-scale customers, respectively. These systems offer flexible energy capacity, ranging from six to twelve hours, and are designed to address the growing demand for reliable, safe, and sustainable energy storage solutions. In 2023, ESS further expanded its product lineup by introducing its larger-scale Energy Center, which doubles the capacity of the Energy Warehouse while maintaining the same footprint.
The Energy Warehouse is ESS's behind-the-meter energy storage solution, designed for commercial and industrial customers. As of June 30, 2024, ESS had limited deployment of its Energy Warehouse products, and there may still be significant challenges in scaling up manufacturing capacity and production to meet customer demand.
The Energy Center is ESS's larger scale, front-of-the-meter energy storage product, designed specifically for utility and large commercial/industrial consumers. The Energy Center product is still in the early stages of design and production. ESS's core technology components in both the Energy Warehouse and Energy Center are also under development for integration into third-party systems.
It's worth noting that certain aspects of ESS's technology, such as the Proton Pump used to eliminate hydroxide buildup, have not yet been fully field tested at commercial scale. This introduces uncertainty around the long-term performance and reliability of its energy storage products.
Financials
ESS's financial performance has been marked by consistent year-over-year growth, with revenue increasing from $0.9 million in 2022 to $7.5 million in 2023. However, the company's net income has remained in the red, with net losses of $77.6 million in 2023 and $78.0 million in 2022. This is largely due to the company's ongoing investments in research and development, as well as the scaling of its manufacturing operations to meet the growing demand for its products.
For the most recent fiscal year, ESS reported revenue of $7.54 million, a net loss of $77.58 million, operating cash flow (OCF) of -$54.90 million, and free cash flow (FCF) of -$60.69 million.
In the most recent quarter, ESS reported revenue of $359,000, a net loss of $22.49 million, OCF of -$17.61 million, and FCF of -$19.87 million. The year-over-year revenue growth was -87.3%. The decrease in revenue was primarily due to a delay in customer funding for projects, which pushed out planned deliveries into the fourth quarter. The net loss and negative cash flows were driven by the low revenue and high cost of revenue as the company continues to scale production.
ESS sells its products globally, with installations in the United States, Europe, and Australia. However, as a small cap company, the majority of its revenue is currently generated in the US market.
For the full year 2024, ESS expects to recognize revenues between $9 million to $11 million, representing meaningful year-on-year growth. In Q4 2024, ESS expects to recognize revenue from previously planned Energy Warehouse systems and the initial commercial shipments of their new Energy Center product. The company plans to ship 6 Energy Center systems in Q4 2024 and defer additional units to the new year, due to the newness of the product and challenges customers are facing with on-site preparedness.
While ESS is not providing specific guidance for 2025, they mentioned the potential for revenue ramps in the range of $40 million to $50 million as a possibility. Overall, ESS's revenue ramp continues to be slower than expected due to external factors like customer funding delays. However, they are optimistic about the market opportunity and are focused on scaling their solution and driving profitability as they demonstrate the value of their long-duration energy storage technology.
Liquidity
Despite these financial challenges, ESS has maintained a strong liquidity position, ending 2023 with $108.1 million in cash, cash equivalents, and short-term investments. This robust balance sheet has allowed the company to continue investing in its future, including the expansion of its manufacturing capabilities and the development of new product innovations.
As of June 30, 2024, ESS had $36.74 million in cash and cash equivalents and $55.1 million in total cash and short-term investments. The company's debt-to-equity ratio stands at 0.033, indicating a low level of debt relative to equity. ESS's current ratio of 2.14 and quick ratio of 1.92 suggest a strong ability to meet short-term obligations.
ESS recently signed a $50 million credit facility with the Export-Import Bank of the United States, which provides additional liquidity and supports the company's growth plans.
Recent Performance
In the third quarter of 2024, ESS reported revenue of $359,000, a slight increase from the $348,000 generated in the second quarter. The company's non-GAAP operating expenses for the quarter came in at $9.2 million, lower than expected, as the team continued to make progress on its cost reduction initiatives. ESS ended the third quarter with $55.1 million in cash and short-term investments, positioning the company to carry on operations well into 2025.
One of the key highlights of the quarter was the signing of a credit agreement with the Export-Import Bank of the United States (EXIM) for a $50 million financing package. This landmark deal makes ESS the first energy storage manufacturer to be supported by EXIM's Make More in America Initiative, enabling the company to expand its domestic manufacturing capacity and drive further cost efficiencies.
Strategic Partnerships
ESS has also made significant strides in building strategic partnerships that are critical to its growth. In 2023, the company entered into a Joint Development Agreement with Honeywell, leveraging the industrial conglomerate's technical expertise to further enhance the performance and cost-effectiveness of ESS's iron flow technology. Additionally, the company's long-standing relationship with Sacramento Municipal Utility District (SMUD) continues to bear fruit, with ESS's products playing a key role in SMUD's ambitious plan to decarbonize its grid by 2030.
Market Position and Future Outlook
Despite the challenges faced in 2023, which included delays in customer funding and the ramp-up of its new Energy Center product, ESS remains well-positioned to capitalize on the growing global demand for long-duration energy storage solutions. The company's innovative technology, strong customer relationships, and strategic partnerships position it as a leader in a market that is poised for significant growth in the years ahead.
The long-duration energy storage market is expected to grow at a compound annual growth rate (CAGR) of over 30% from 2022 to 2030, driven by increasing renewable energy deployment and grid modernization initiatives globally. ESS's iron flow battery technology addresses a key need in the market for safe, sustainable, and long-duration energy storage solutions.
Looking to the future, ESS is actively evaluating a variety of financing alternatives, both non-dilutive and dilutive, to strengthen its balance sheet and enable the company to operate through 2025 and beyond. With the expected ramp-up of its Energy Center product and continued cost reduction initiatives, the company is confident in its ability to achieve profitability and drive long-term shareholder value.
However, ESS continues to face challenges in its supply chain, including delays and cost increases for key components and materials, which have impacted its ability to ramp up production and delivery. The company's ability to achieve targeted cost reductions and scale production to drive improved profitability remains a key challenge.
Conclusion
In conclusion, ESS Tech, Inc. is a pioneering force in the long-duration energy storage market, offering a differentiated and scalable technology that is poised to play a critical role in the global transition to renewable energy. Despite the challenges faced in 2023 and 2024, the company's robust liquidity position, strategic partnerships, and unwavering commitment to innovation position it for continued growth and success in the years to come. While ESS is still in the early stages of commercializing its long-duration energy storage technology and faces various manufacturing, supply chain, and technological hurdles, the potential market opportunity and the company's unique technology offer promising prospects for future growth and profitability.