Business Overview and History

ESS Tech, Inc. (NYSE: GWH) is a leading manufacturer of long-duration energy storage (LDES) systems for commercial and utility-scale applications. The company's innovative iron flow battery technology is at the forefront of the global shift towards a more sustainable energy landscape. With a strong customer base, robust intellectual property, and a growing market opportunity, ESS is poised to play a pivotal role in the energy transition.

ESS Tech, Inc. was originally incorporated as a Cayman Islands exempted company on July 21, 2020, under the name ACON S2 Acquisition Corp. (STWO). It was initially a publicly traded special purpose acquisition company (SPAC) formed to effect a business combination. On October 8, 2021, STWO completed a business combination with Legacy ESS, a Delaware corporation founded in 2011. Following this merger, STWO changed its name to ESS Tech, Inc., and began trading on the New York Stock Exchange under the ticker symbols GWH and GWH.W for its common stock and warrants, respectively.

The roots of ESS trace back to 2011 when Craig Evans and Dr. Julia Song founded Legacy ESS with the goal of advancing long-duration energy storage technology. Over the years, the company made significant enhancements to iron flow battery technology, improving round-trip efficiency and developing an innovative solution to the hydroxide build-up problem that had plagued previous researchers in this field. This breakthrough came in the form of their proprietary Proton Pump technology, which utilizes hydrogen generated by side reactions on the negative electrode and converts it back into protons in the positive electrolyte, effectively stabilizing the electrolyte's pH levels.

Throughout its development, ESS has faced and overcome various challenges in its efforts to commercialize its long-duration iron flow battery technology. These hurdles included increasing manufacturing capacity, installing and optimizing higher volume manufacturing equipment, packaging the batteries to ensure adequate cycle life, and achieving cost reductions. The company has also had to address quality and performance issues with some of its installed units, requiring adjustments to its power electronics and energy management system interface.

Despite these obstacles, ESS has made significant progress in developing its technology and gaining customer traction. The company has successfully deployed its Energy Warehouse products to customers and is in the early stages of commercializing its larger-scale Energy Center product. ESS has also formed strategic partnerships with key industry players such as Sacramento Municipal Utility District (SMUD) and Honeywell, which have helped to advance its technology and strengthen its go-to-market efforts.

Financial Performance and Outlook

Over the past three years, ESS has experienced significant growth in its financial performance, though it has yet to achieve profitability. In the fiscal year 2023, the company reported revenue of $7.54 million, a substantial increase from the $894,000 generated in 2022. However, the company's net loss for 2023 stood at $77.58 million, a reflection of the ongoing investments in research, development, and commercial scaling. The operating cash flow for 2023 was negative $54.90 million, while free cash flow was negative $60.69 million.

In the latest reported quarter (Q2 2024), ESS generated revenue of $359,000, with a cost of revenue of $12.7 million. The company's non-GAAP operating expenses for the quarter were $9.2 million, reflecting its continued focus on cost optimization and operational efficiency. The net loss for Q2 2024 was $22.49 million. Year-over-year revenue growth in Q2 2024 was negative as the company is still in the early commercialization stage.

For the six months ended June 30, 2024, the company generated total revenue of $3.09 million, a decrease of 4% compared to the same period in the prior year. This revenue was primarily derived from the sale of Energy Warehouse systems and extended warranty services. The net loss for this period was $40.25 million, compared to a net loss of $44.83 million in the same period of the prior year. The decrease in net loss was primarily due to a reduction in research and development expenses, which fell from $37.18 million in the first half of 2023 to $6.38 million in the first half of 2024 as the company transitioned out of the research and development phase and into commercial inventory accounting in the third quarter of 2023.

Despite the revenue ramp-up challenges, ESS remains optimistic about its long-term prospects. The company expects to recognize revenues between $9 million and $11 million for the full year 2024, representing meaningful year-over-year growth. This guidance is based on the company's ability to deliver previously planned Energy Warehouse systems and the initial commercial shipments of its Energy Center product.

In Q4 2024, ESS plans to ship 6 Energy Center systems and defer additional units to the new year, due to the newness of the product and customer challenges with on-site preparedness. This does not reflect a reduction in demand, as the company already has contracts in place for these product deliveries. ESS expects the first Energy Center units to be operating and tested in Q2 2025.

While the company is not providing full-year 2025 guidance, it has indicated that the revenue ramp is often back-half loaded, with a pickup in Q2 and Q3, and stronger growth in Q3 and Q4.

Liquidity and Financial Position

To support its growth initiatives, ESS recently signed a $50 million financing agreement with the Export-Import Bank of the United States (EXIM) under the Make More in America Initiative. This funding will enable the company to expand its domestic manufacturing capacity and achieve cost efficiencies, further strengthening its competitive position.

As of June 30, 2024, ESS had $36.74 million in cash and cash equivalents and $37.70 million in short-term investments, providing a total of $74.44 million in available liquidity. The company believes this liquidity will enable it to maintain operations and satisfy financial obligations for at least the next 12 months.

The company's debt-to-equity ratio as of June 30, 2024, was 0.0423, indicating a relatively low level of debt. ESS also has access to several standby letters of credit, including a $75,000 facility with First Republic Bank and two facilities with Bank of America totaling $800,000.

The current ratio of 2.14 and quick ratio of 1.92 as of June 30, 2024, suggest that ESS has a strong short-term liquidity position and is well-equipped to meet its short-term obligations.

Product Segments and Market Presence

ESS operates in two main product segments: Energy Warehouses and Energy Centers.

Energy Warehouses are the company's behind-the-meter energy storage solution, located on the customer's premises. These products offer energy storage ranging from six to twelve-hour duration. As of June 30, 2024, ESS had limited deployment of its Energy Warehouse products, and there may be significant yield, cost, performance, and manufacturing process challenges to be solved as the company ramps up commercial production and use.

Energy Centers are the company's larger-scale energy storage product, designed for front-of-the-meter deployments. These are typically located outside the customer's premises and operated by utilities or independent power producers. The Energy Center products are still in the early stages of design and production.

ESS sells primarily to customers in the United States, Europe, and Australia, positioning itself to capitalize on the growing global demand for long-duration energy storage solutions.

Competitive Landscape and Risks

The energy storage market is highly competitive, with ESS facing competition from established players in the lithium-ion battery space, as well as other emerging technologies such as zinc-bromine and vanadium flow batteries. The company's ability to differentiate its iron flow battery technology and demonstrate its superior performance, safety, and cost-effectiveness will be crucial in gaining market share.

One of the key risks facing ESS is the potential impact of macroeconomic factors, such as supply chain disruptions, inflation, and interest rate changes, on its operations and profitability. The company's reliance on third-party suppliers for critical components and materials could also pose challenges, particularly in the current volatile economic environment.

Furthermore, the successful commercialization and large-scale deployment of ESS's products will depend on its ability to address customer concerns, meet performance specifications, and manage its operations efficiently. Delays in product development, quality issues, or inability to scale production could adversely affect the company's growth trajectory.

Industry Trends and Market Opportunity

The long-duration energy storage market is expected to grow at a compound annual growth rate (CAGR) of over 30% from 2023 to 2030. This growth is primarily driven by increasing renewable energy deployment and the need for grid flexibility and reliability. ESS's iron flow battery technology is well-positioned to benefit from this market expansion, offering a sustainable and cost-effective solution for long-duration energy storage needs.

Conclusion

ESS Tech, Inc. is at the forefront of the energy transition, leveraging its innovative iron flow battery technology to address the growing demand for long-duration energy storage solutions. With a strong customer base, strategic partnerships, and a robust intellectual property portfolio, the company is well-positioned to capitalize on the global shift towards renewable energy.

While the company has faced challenges in its revenue ramp-up, the recent financing agreement with EXIM and the introduction of its Energy Center product indicate that ESS is taking proactive steps to strengthen its market position and operational capabilities. As the energy storage market continues to evolve, ESS's ability to overcome macroeconomic headwinds, execute on its growth strategy, and successfully commercialize its products will be crucial in determining its long-term success in this rapidly expanding industry.