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What changed in ESS Tech, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of ESS Tech, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+396 added−436 removedSource: 10-K (2024-03-14) vs 10-K (2023-03-02)

Top changes in ESS Tech, Inc.'s 2023 10-K

396 paragraphs added · 436 removed · 306 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeAs of December 31, 2022, we had a limited number of second-generation products fully deployed for which we recognized revenue and were in the process of installing and commissioning additional second-generation Energy Warehouse units that had shipped. - 5 - Table of Contents Our second, larger scale energy storage product, the Energy Center, is a “front-of-the-meter” solution, meaning that it is designed for use in front of the service demarcation with the utility.
Biggest changeOur second, larger scale energy storage product, the Energy Center, is a “front-of-the-meter” solution, meaning that it is designed for use in front of the service demarcation with the utility. Energy Center solutions are designed specifically for utilities, independent power producers (“IPPs”) and large C&I consumers.
Our batteries and technology can be purchased with an extended ten-year warranty which is backed by investment-grade, ten-year warranty and project insurance policies from Munich Re, a leading provider of reinsurance, primary insurance and insurance-related risk solutions, which stands behind the performance of our energy storage products.
Our batteries and technology can be purchased with an extended ten-year warranty which is backed by investment-grade, warranty and project insurance policies from Munich Re, a leading provider of reinsurance, primary insurance and insurance-related risk solutions, which stands behind the performance of our energy storage products.
Each battery module is made up of one or more cells and each of these cells are made up of a negative electrode and a positive electrode, and these two electrodes are separated by a porous separator.
Each battery module is made up of one or more cells and each of these cells is made up of a negative electrode and a positive electrode, and these two electrodes are separated by a porous separator.
Partnerships • Munich Re : Our batteries and technology can be purchased with a ten-year warranty which is backed by investment-grade, ten-year warranty and project insurance policies from Munich Re, a leading provider of reinsurance, primary insurance and insurance-related risk solutions, which stands behind the performance of our energy storage products.
Partnerships • Munich Re : Our batteries and technology can be purchased with a ten-year warranty which is backed by investment-grade warranty and project insurance policies from Munich Re, a leading provider of reinsurance, primary insurance and insurance-related risk solutions, which stands behind the performance of our energy storage products.
EXIM equips U.S. businesses with the financing tools necessary to compete for global sales when the private sector lenders are unable or unwilling to provide financing. Our energy storage products are qualified by EXIM and can provide financing for qualified overseas buyers.
EXIM equips U.S. businesses with the financing tools necessary to compete for global sales when private sector lenders are unable or unwilling to provide financing. Our energy storage products are qualified by EXIM and can provide financing for qualified overseas buyers.
With each battery deployed, we will further our mission to accelerate the transition to a zero-carbon energy future with increased grid reliability. Our batteries are non-flammable, non-toxic, do not have explosion risk and can operate in temperatures ranging from -5°C to 50°C without requiring heating or cooling systems.
With each battery deployed, we will further our mission to accelerate the transition to a zero-carbon energy future with increased grid reliability. Our batteries are non-flammable, do not have explosion risk and can operate in temperatures ranging from -5°C to 50°C without requiring heating or cooling systems.
States with high Renewable Portfolio Standards, for example, have seen greater deployment of renewables than states with similar renewable resources that lack such requirements. In many states, including Texas, Oklahoma and California, the RPS-driven deployment of intermittent renewables is straining the electric grid and thus driving demand for energy storage.
States with high Renewable Portfolio Standards (“RPS”), for example, have seen greater deployment of renewables than states with similar renewable resources that lack such requirements. In many states, including Texas, Oklahoma and California, the RPS-driven deployment of intermittent renewables is straining the electric grid and thus driving demand for energy storage.
Both policies provide tax and financing advantages for battery storage projects. They lower the capital requirements for renewable energy projects to be developed and open a new source of funding for these projects. State incentives have also driven growth in the deployment of renewable energy and energy storage.
Both policies provide tax and financing advantages for battery storage projects, lower the capital requirements for renewable energy projects to be developed and open a new source of funding for these projects. State incentives have also driven growth in the deployment of renewable energy and energy storage.
New South Wales has also recognized the critical need for energy storage, calling for the procurement of 2 GW of long-duration energy storage in its Electricity Infrastructure Roadmap. All of these governmental programs supporting demand for our products are complex and political in nature, and therefore are subject to repeal, amendment, and interpretation in ways less supportive of our growth.
New South Wales has also recognized the critical need for energy storage, calling for the procurement of 2 gigawatts of long-duration energy storage in its Electricity Infrastructure Roadmap. All of these governmental programs supporting demand for our products are complex and political in nature, and therefore are subject to repeal, amendment, and interpretation in ways less supportive of our growth.
Examples of use cases range from localized energy storage at commercial and industrial sites to grid-scale use cases, such as peaker plant replacement and grid stabilization. Our Technology and Products Our long-duration iron flow batteries are the product of nearly 50 years of scientific advancement. In the 1970’s, researchers first developed the concept of iron flow batteries.
Examples of use cases range from localized energy storage at commercial and industrial sites to grid-scale use cases, such as peaker plant replacement and grid stabilization. Our Technology and Products Our long-duration iron flow batteries are the product of nearly 50 years of scientific advancement. In the 1970s, researchers first developed the concept of iron flow batteries.
This project financing coverage provides warranty continuity insurance in the event of our insolvency, providing long-term assurance of project performance to our customers and their investors and lenders. • OneBeacon Insurance : Through OneBeacon, we offer growing project surety capacity and corporate bonding options to our customers. • Export-Import Bank of the United States : The Export-Import Bank of the United States (“EXIM”) is the official export credit agency of the United States.
This project coverage provides warranty continuity insurance in the event of our insolvency, providing long-term assurance of project performance to our customers and their investors and lenders. • OneBeacon Insurance : Through OneBeacon, we offer project surety capacity and corporate bonding options to our customers. • Export-Import Bank of the United States : The Export-Import Bank of the United States (“EXIM”) is the official export credit agency of the United States.
We believe that we have enforceable intellectual property protection over all critical design elements as well as the key enabling technologies for iron flow batteries. We have developed a significant patent portfolio. We have over 175 patents that are granted or in the pipeline and an undisclosed number of trade secrets and identified patents.
We believe that we have enforceable intellectual property protection over all critical design elements as well as the key enabling technologies for iron flow batteries. We have developed a significant patent portfolio. We have over 250 patents that are granted or in the pipeline and an undisclosed number of trade secrets and identified patents.
Battery storage projects storing energy from renewable energy sources are eligible for investment tax credits that allow project developers to monetize and sell the tax credits they experience from the creation of their projects. Additionally, battery storage is eligible for accelerated depreciation via the federal government’s Modified Accelerated Cost Recovery System.
Battery storage projects storing energy from renewable energy sources are eligible for investment tax credits that allow project developers to monetize and sell the tax credits they receive from the creation of their projects. Additionally, battery storage is eligible for accelerated depreciation via the federal government’s Modified Accelerated Cost Recovery System.
The main competitive factors in the energy storage market include, but - 7 - Table of Contents are not limited to, safety and reliability, duration, performance and uptime, operational flexibility, asset life length and cyclability, ease of integration, operability in extreme temperatures, environmental sustainability, historical track record, and field-proven technology.
The main competitive factors in the energy storage market include, but are not limited to, safety and reliability, duration, performance and uptime, operational flexibility, asset life length and cyclability, ease of integration, operability in extreme temperatures, environmental sustainability, historical track record, and field-proven 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 non-toxic and substantially recyclable. Our batteries provide flexibility to grid operators and energy assurance for commercial and industrial customers.
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. Our batteries provide flexibility to grid operators and energy assurance for commercial and industrial customers.
Without taking into account any possible patent term adjustments or extensions, the earliest these patents will begin to expire is 2028. We continually review our efforts to assess the existence and patentability of new intellectual, proprietary technology. We intend to leverage our iron flow expertise to drive innovation and are pursuing additional technological advancements.
Without taking into account any possible patent term adjustments or extensions, the earliest our current, issued patents will begin to expire is 2028. We continually review our efforts to assess the existence and patentability of new proprietary technology. We intend to leverage our iron flow expertise to drive innovation and are pursuing additional technological advancements.
These customers use our energy storage products to store energy on a utility scale that they can then utilize or sell to their customers when needed. Over time, we expect our front-of-the-meter customer base to expand to include additional types of energy suppliers. Current customers of ours include large utility companies.
These customers use our energy storage products to store energy on a utility scale that they can then utilize or sell to their customers when needed. Over time, we expect our front-of-the-meter customer base to expand to include additional types of energy suppliers.
Our reports, amendments thereto, proxy statements and other information are also made available, free of charge, on our investor relations website at investors.essinc.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC.
Our reports, amendments thereto, proxy statements and other information are also made available, free of charge, on our investor relations website as soon as reasonably practicable after we electronically file or furnish such information with the SEC.
ITEM 1. BUSINESS Unless the context otherwise requires, all references in this section to “ESS,” “we,” “us,” “our,” or the “Company” refer to ESS Tech, Inc. and its subsidiaries. Business Combination On October 8, 2021 (the “Closing Date”), ACON S2 Acquisition Corp.
ITEM 1. BUSINESS Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “ESS,” “we,” “us,” “our,” or the “Company” refer to ESS Tech, Inc. and its subsidiaries. Business Combination On October 8, 2021 (the “Closing Date”), ACON S2 Acquisition Corp.
Continued delays in our supply chain and shipments could further harm our ability to manufacture and commercialize our energy storage products ,” the mechanical elements and control systems of our batteries are comprised of commercially available equipment that can be supplied by multiple manufacturers.
Quality issues or delays in our supply or delivery chain and shipments could harm our ability to manufacture, supply and commercialize our energy storage products ,” the mechanical elements and control systems of our batteries are comprised of commercially available equipment that can be supplied by multiple manufacturers.
Research & Development Since January 1, 2019, we have invested approximately $122 million on improving our technology and bringing our energy storage products to market. Our research and development efforts are conducted in Oregon and supported by our approximately 65 research and development employees.
Research & Development Since January 1, 2019, we have invested approximately $164.6 million on improving our technology and bringing our energy storage products to market. Our research and development efforts are conducted in Oregon and supported by our approximately 44 research and development employees.
The power generated is a factor of the membrane size, while the duration of storage we can offer is a factor of the tank sizes and the addition of electrolytes to the tank. The duration of stored energy can be independently varied from the power.
The power generated is a factor of the membrane size, while the duration of storage we can offer is a factor of the tank sizes and the addition of electrolytes to the tank, which can be accomplished at a relatively low cost. The duration of stored energy can be independently varied from the power.
To our knowledge, we are the first long-duration energy storage company to receive this type of insurance, which provides a warranty backstop for our proprietary flow battery technology, supporting our performance obligations regardless of project size or location and de-risking the technology for our customers.
To our knowledge, we are the first long-duration energy storage company to receive this type of insurance, which provides a warranty backstop for our proprietary flow battery technology, supporting our performance obligations regardless of project size or location and de-risking the technology for our customers. We have also collaborated with Munich Re to develop separate project coverage for our customers.
To our knowledge, we are the first long-duration energy storage company to receive this type of insurance, which provides a warranty backstop for our proprietary flow battery technology, supporting our performance obligations regardless of project size or location and de-risking the technology for our customers.
To our knowledge, we are the first long-duration energy storage company to receive this type of insurance, which provides a warranty backstop for our proprietary flow battery technology, supporting our performance obligations regardless of project size or location and de-risking the technology for our customers. We have also collaborated with Munich Re to develop separate project coverage for our customers.
A 50 kW system, when used for eight hours of storage, can power the equivalent of 20 homes with a total output of 400 kilowatt-hours (“kWh”). Energy Warehouses are deployed in shipping container units, allowing for a fully turnkey system that can be installed easily at nearly any customer’s site.
When seeking just 50 kW, the system can realize eight hours of power; the equivalent of 20 homes with a total output of 500 kWh. Energy Warehouses are deployed in shipping container units, allowing for a fully turnkey system that can be installed easily at nearly any customer’s site.
Front-of-the-meter customers, in contrast, are primarily utilities experiencing high rates of renewable energy penetration and requiring energy storage to help balance the grid, and IPPs who can leverage energy storage to improve the economics of renewable energy projects.
Behind-the-meter customers may include microgrids and small-scale C&I customers. Front-of-the-meter customers, in contrast, are primarily utilities experiencing high rates of renewable energy penetration and requiring energy storage to help balance the grid, and IPPs who can leverage energy storage to improve the economics of renewable energy projects.
We believe there is significant government support available for energy storage technologies, and a variety of newer and emerging companies have announced plans to develop energy storage products using a variety of technologies, including compressed air, thermal energy, and solid-state batteries among others.
New technologies may enter the market that may have additional or superior advantages to our offerings. We believe there is significant government support available for energy storage technologies, and a variety of newer and emerging companies have announced plans to develop energy storage products using a variety of technologies, including compressed air, thermal energy, and solid-state batteries among others.
While supply chain disruptions have impacted the ability of some of our suppliers to deliver certain components of our batteries to us in a timely manner as described in the section entitled “ Part I—Item 1A.
In addition, we use limited high cost materials such as platinum in our manufacturing. While supply chain disruptions have - 6 - Table of Contents impacted the ability of some of our suppliers to deliver certain components of our batteries to us in a timely manner as described in the section entitled “ Part I—Item 1A.
Using our iron flow battery technology, we are developing two products, each of which is able to provide reliable, safe, long-duration energy storage.
This allows for low marginal costs of energy, making our technology attractive for long-duration energy storage. Using our iron flow battery technology, we are developing several products, each of which is able to provide reliable, safe, long-duration energy storage.
Although we are small compared to our competitors, we believe we are well-positioned to compete with them in the market supported by our innovative iron flow battery technology, strategic partnerships and premier leadership team with a proven track record of success. New technologies may enter the market that may have additional or superior advantages to our offerings.
Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do. Although we may be small compared to some of our competitors, we believe we are well-positioned to compete with them in the market supported by our innovative iron flow battery technology, strategic partnerships and premier leadership team with a proven track record of success.
In order to achieve our mission to create a reliable, resilient, and safe renewable energy future, we are committed to investing in our employees and building a respectful and diverse work environment.
As of December 31, 2023, we employed 231 full-time employees, based primarily in our headquarters in Wilsonville, Oregon. In order to achieve our mission to create a reliable, resilient, and safe renewable energy future, we are committed to investing in our employees and building a respectful and diverse work environment.
We also plan to sell products to IPPs. - 6 - Table of Contents We have designed the Energy Warehouse and Energy Center to address the needs of these two distinct markets. The Energy Warehouse is intended for behind-the-meter use owing to its small size and convenient turnkey packaging.
We have designed the Energy Warehouse and Energy Center to address the needs of these two distinct markets. The Energy Warehouse is intended for behind-the-meter use owing to its small size and convenient turnkey packaging. The Energy Center can be used by larger customers in both the behind-the-meter and front-of-the-meter markets.
We provide equal employment opportunities to all persons regardless of race, age, color, gender, sexual orientation, national origin, physical or mental disability, religion, or any other characteristic protected by federal, state, or local law. Our employees are key to our success as a company, and we are committed to attracting, developing and retaining the best talent.
We provide equal employment opportunities to all persons regardless of race, age, color, gender, sexual orientation, national origin, physical or mental - 8 - Table of Contents disability, religion, or any other characteristic protected by federal, state, or local law.
In behind-the-meter applications, customers will use our energy storage products to reduce energy costs, integrate with renewable energy solutions to achieve corporate sustainability goals, and to enhance their energy resiliency. Behind-the-meter customers may include microgrids and small-scale C&I customers.
ESS’ Critical Technology Customers Our current and potential customers include utilities, IPPs and C&I end users. We intend to serve customers in both behind-the-meter and front-of-the-meter markets. In behind-the-meter applications, customers will use our energy storage products to reduce energy costs, integrate with renewable energy solutions to achieve corporate sustainability goals, and to enhance their energy resiliency.
The Energy Center can be used by larger customers in both the behind-the-meter and front-of-the-meter markets. Suppliers Our batteries are made predominantly of earth-abundant, non-toxic materials. These materials are considerably less expensive than rare earth metals that make up other batteries and as a result make up a low percentage of the total costs for our batteries.
Suppliers Our batteries are made predominantly of earth-abundant, environmentally sustainable materials. These materials are considerably less expensive than rare earth metals that make up other batteries and as a result make up a low percentage of the total costs for our batteries. Because these materials are widely available, there are multiple suppliers for each input.
The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
The information on, or that can be accessed through, our website and the aforementioned X account and LinkedIn account is not incorporated by reference into this Annual Report and should not be considered to be part of this Annual Report on Form 10-K unless expressly noted. Further, our references to website URLs are intended to be inactive textual references only.
Our first energy storage product, the Energy Warehouse, is our “behind-the-meter” solution (referring to solutions that are located on the customers’ premise, behind the service demarcation with the utility) that offers energy storage ranging from 50 kilowatt (“kW”) to 90 kW and four to 12-hour duration.
Our first energy storage product, the Energy Warehouse, is our “behind-the-meter” solution (referring to solutions that are located on the customers’ premise, behind the service demarcation with the utility) that offers energy storage of 420 kilowatt hours (“kWh”) for over five hours at a rated power level of 75 kilowatt (“kW”).
The Energy Center’s modular design allows the product to scale to meet IPP and utility-scale applications, including large renewable-plus-storage projects and standalone energy storage projects. The modular design of the Energy Center also allows for it to be flexibly configured to meet varying power and energy capacity needs and deployment in a variety of settings.
The Energy Center’s modular design allows the - 5 - Table of Contents product to scale to meet IPP and utility-scale applications, including large renewable-plus-storage projects and standalone energy storage projects.
For both of our energy storage products, the intellectual property and points of differentiation are contained within the Proton Pump, power module and electrolyte. These components are protected by trade secrets, patents (both granted and in process) and years of research. The remainder of the Energy Warehouse and the Energy Center are intentionally designed to be easily produced.
These components are protected by trade secrets, patents (both granted and in process) and years of research. The remainder of the Energy Warehouse and the Energy Center are intentionally designed to be easily produced. By using standard pumps and equipment and easily fabricated enclosures, our energy storage products can be assembled almost anywhere and produced at an efficient cost.
Climate change will also result in more unpredictable weather events including extreme temperatures, hurricanes and wildfires. Our technology can operate efficiently and effectively in these extreme weather conditions. Our key competitors include different energy storage technologies such as lithium-ion batteries, lithium metal batteries, vanadium or zinc bromine batteries, sodium sulfur batteries, compressed air, hydrogen, fuel cell and pumped-storage hydropower.
Our key competitors include different energy storage technologies such as lithium-ion batteries, lithium metal batteries, vanadium or zinc bromine batteries, sodium sulfur batteries, compressed air, hydrogen, fuel cell and pumped-storage hydropower. Key competitors in the traditional lithium-ion space include Contemporary Amperex Technology Co.
We are also subject to the requirements of the Occupational Safety and Health Act, local wage regulations and rigorous health and safety regulations in the State of Oregon. - 8 - Table of Contents Human Capital Management We pride ourselves on our clean, innovative technology and our employees are dedicated to our strategic mission to deliver reliable, resilient and safe renewable energy storage solutions to communities worldwide.
Human Capital Management We pride ourselves on our clean, innovative technology and our employees are dedicated to our strategic mission to deliver reliable, resilient and safe renewable energy storage solutions to communities worldwide. Approximately half of our employees are involved in product manufacturing in order to refine and grow our operations.
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 second-generation S200 iron flow battery technology, we are developing two products, the Energy Warehouse and the Energy Center, each of which is able to provide reliable, safe, long-duration energy storage.
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.
Key competitors in the traditional lithium-ion space include Contemporary Amperex Technology Co. Limited, Energy Vault, LG Chem, Ltd., Samsung Electronics Co., Ltd., Sungrow Power Supply Co., Ltd., and Tesla, Inc.
Limited, Energy Vault, LG Chem, Ltd., Samsung Electronics Co., Ltd., Sungrow Power Supply Co., Ltd., and Tesla, Inc. Key competitors in the non-lithium-ion space include CellCube, CMBlu Energy AG, Enerox GmbH, Eos Energy Enterprises, Inc., Highview Power PTY Ltd., Hydrostor, Lockheed Martin, Malta Inc., Redflow, Energy Dome, and VoltStorage GmbH.
Bonding and surety capital is provided through OneBeacon Insurance Group (“OneBeacon”) as well as qualification from the U.S. Export-Import Bank, which provides additional product assurance. We believe each of these elements allows us to increase our total addressable market, as potential customers have reduced technology risk, financing risk and importing risk.
This project coverage provides warranty continuity insurance in the event of our insolvency, providing long-term assurance of project performance to our customers and their investors and lenders. Bonding and surety capital is provided through OneBeacon Insurance Group (“OneBeacon”) as well as qualification from the U.S. Export-Import Bank, which provides additional product assurance.
We believe that as we scale up our production, our battery technology will be priced competitively.
We believe each of these elements allows us to increase our total addressable market, as potential customers have reduced technology risk, financing risk and importing risk. We believe that as we scale up our production, our battery technology will be priced competitively.
Since then, all of our first-generation units have been returned to us except for two where the prototype trials continue.
Since then, all of our first-generation units have been returned to us except for one. We commenced shipping our second-generation Energy Warehouses in 2021 and began recognizing revenue for fully deployed Energy Warehouses in 2022.
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As of December 31, 2022, we had a limited number of second-generation products fully deployed for which we recognized revenue. We have shipped and were in the process of installing and commissioning additional second-generation Energy Warehouse at December 31, 2022.
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Using our second-generation S200 iron flow battery technology, we are developing several products, the Energy Warehouse and the Energy Center, each of which is able to provide reliable, safe, long-duration energy storage, and a productized form of the core technology components used therein. As of December 31, 2023, we had a limited number of second-generation products fully deployed.
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We have also collaborated with Munich Re to develop separate project financing coverage for our customers. This project financing coverage provides warranty continuity insurance in the event of our insolvency, providing long-term assurance of project performance to our customers and their investors and lenders.
Added
The modular design of the Energy Center also allows for it to be flexibly configured to meet varying power and energy capacity needs for deployment in a variety of settings. For both of our energy storage products, the intellectual property and points of differentiation are contained within the core technology components, the Proton Pump, power module and electrolyte.
Removed
We can increase the size of the electrolyte tanks at a relatively low cost, and the electrolyte, consisting of iron, potassium or sodium chloride and water, is extremely inexpensive. This allows for very low marginal costs of energy, making our technology attractive for long-duration energy storage.
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Climate change will also result in more unpredictable weather events including extreme temperatures, hurricanes and wildfires. Our technology can operate efficiently and effectively in - 7 - Table of Contents these extreme weather conditions.
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Energy Center solutions are designed specifically for utilities, independent power producers (“IPPs”) and large C&I consumers. The Energy Center offers a fully customizable configuration range and is installed to meet our customers’ power, energy and duration needs.
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We are also subject to the requirements of the Occupational Safety and Health Act, local wage regulations and rigorous health and safety regulations in the State of Oregon.
Removed
By using standard pumps and equipment and easily fabricated enclosures, our energy storage products can be assembled almost anywhere and produced at an efficient cost. ESS’ Critical Technology Customers Our current and potential customers include utilities, IPPs and C&I end users.
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Our employees are key to our success as a company, and we are committed to attracting, developing and retaining the best talent.
Removed
Our potential customers are interested in several use cases including solar shifting, peak shaving, price arbitrage, utility ancillary services and microgrids. We intend to serve customers in both behind-the-meter and front-of-the-meter markets.
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Accordingly, we are committed to the health, safety and wellness of our team members worldwide. To date, we have not experienced any work stoppages and we consider our relationship with our employees to be good. None of our employees are represented by a labor union or subject to a collective bargaining agreement.
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Because these materials are widely available, there are multiple suppliers for each input. In addition, we use limited high cost materials such as platinum in our manufacturing.
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Available Information Our investor relations website is located at https://investors.essinc.com/, our Company X account is located at https://twitter.com/ESS_info, and our corporate LinkedIn account is located at https://www.linkedin.com/company/energy-storage-systems/.
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We have also collaborated with Munich Re to develop separate project financing coverage for our customers.
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We may use our investor relations website and the aforementioned X account and LinkedIn account to post important information for investors, including news releases, analyst presentations, and supplemental financial information, and as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.
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Key competitors in the non-lithium-ion space include CellCube, CMBlu Energy AG, Enerox GmbH, Eos Energy Enterprises, Inc., Highview Power PTY Ltd., Honeywell UOP, Hydrostor, Lockheed Martin, Malta Inc., Redflow, and VoltStorage GmbH. Many of our competitors have substantially greater financial, marketing, personnel and other resources than we do.
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Accordingly, investors should monitor our investor relations website and the aforementioned X account and LinkedIn account, in addition to following press releases, filings with the Securities and Exchange Commission (the “SEC”) and public conference calls and webcasts.
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Approximately half of our employees are involved in product manufacturing in order to refine and grow our operations. As of December 31, 2022, we employed 271 full-time employees, based primarily in our headquarters in Wilsonville, Oregon.
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Accordingly, we are committed to the health, safety and wellness of our team members worldwide. In response to the COVID-19 pandemic, we implemented changes in our operations that we determined were in the best interest of our team members, our customers and partners, and the communities in which we operate. Available Information Our internet address is essinc.com.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeWe have experienced significant disruptions to key supply chains, shipping times, manufacturing times, and associated costs; • Continued delays in our supply chain or the inability to procure needed raw materials and components could further harm our ability to manufacture and commercialize our energy storage products; • We have experienced and may experience delays in the future, disruptions, or quality control problems in our manufacturing operations; • Our ability to expand depends on our ability to hire, train and retain an adequate number of manufacturing employees, in particular employees with the appropriate level of knowledge, background and skills; • We may not be able to perform under our contracts or to realize the benefits of our agreements with strategic partners; • We have experienced disruptions related to COVID-19, which continue to cause uncertainty; • We may be unable to adequately control the costs associated with our operations and the components necessary to build our energy storage products, and if we are unable to reduce our cost structure and effectively scale our operations in the future, our ability to become profitable may be impaired; • We rely on complex machinery for our operations, and the production of our iron flow batteries involves a significant degree of risk and uncertainty in terms of operational performance and costs; • Our expectations for future operating and financial results and market growth rely in large part upon assumptions and analyses developed by us.
Biggest changeQuality issues or delays in our supply or delivery chain and shipments could harm our ability to manufacture, supply and commercialize our energy storage products; • We have experienced in the past, and may experience in the future, delays, disruptions, or quality control problems in our manufacturing operations; • We may be unable to adequately control the costs associated with our operations and the components necessary to build our energy storage products, and if we are unable to reduce our cost structure and effectively scale our operations in the future, our ability to become profitable may be impaired; • We rely on complex machinery for our operations and the production of our iron flow batteries involves a significant degree of risk and uncertainty in terms of operational performance and costs; • Our future success depends in part on our ability to increase our production capacity, and we may not be able to do so in a cost-effective manner.
In the long term, we intend to supplement certain components from our suppliers by manufacturing them ourselves, which we believe will be more efficient, manufacturable at greater volumes and cost-effective than currently available components.
In the long term, we intend to supplement certain components from our suppliers by manufacturing them ourselves, which we believe will be more efficient and manufacturable at greater volumes and cost-effective than currently available components.
This growth has placed, and any future growth may place, a significant strain on our management, operational, and financial infrastructure. In particular, we will be required to expand, train, and manage our growing employee base and scale and otherwise improve our information technology (“IT”) infrastructure in tandem with that headcount growth.
This growth has placed, and any future growth may place, a significant strain on management, operational, and financial infrastructure. In particular, we will be required to expand, train, and manage our growing employee base and scale and otherwise improve our information technology (“IT”) infrastructure in tandem with that headcount growth.
Our management will also be required to maintain and expand our relationships with customers, suppliers, and other third parties and attract new customers and suppliers, as well as manage multiple geographic locations.
Management will also be required to maintain and expand our relationships with customers, suppliers, and other third parties and attract new customers and suppliers, as well as manage multiple geographic locations.
The loss of one or more members of our senior management team, other key personnel or our failure to attract and retain qualified personnel may adversely affect our business and our ability to achieve our anticipated level of growth.
The loss of one or more members of our senior management team and other key personnel or our failure to attract and retain qualified personnel may adversely affect our business and our ability to achieve our anticipated level of growth.
These differences may include regulatory requirements, including tax laws, trade laws, foreign direct investment review regimes, labor regulations, tariffs, export quotas, customs duties, or other trade restrictions, limited or unfavorable intellectual property protection, international, political or economic conditions, restrictions on the repatriation of earnings, longer sales cycles, warranty expectations, product return policies and cost, performance and compatibility requirements.
These differences may include regulatory requirements, including tax laws, trade laws, foreign direct investment review regimes, labor regulations, tariffs, export quotas, customs duties, or other trade restrictions, limited or unfavorable intellectual property protection, international, political or economic conditions, restrictions on the repatriation of earnings, longer sales cycles, warranty expectations, product return policies and cost, and performance and compatibility requirements.
Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming, could be costly to defend, and may hurt our reputation in the marketplace. A successful product liability claim against us could require us to pay a substantial monetary award.
Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming, costly to defend, and may hurt our reputation in the marketplace. A successful product liability claim against us could require us to pay a substantial monetary award.
Related-party transactions create the possibility of conflicts of interest with regard to our management, including that: • we may enter into contracts between us, on the one hand, and related parties, on the other, that are not as a result of arm’s-length transactions; • our executive officers and directors that hold positions of responsibility with related parties may be aware of certain business opportunities that are appropriate for presentation to us as well as to such other related parties and may present such business opportunities to such other parties; and • our executive officers and directors that hold positions of responsibility with related parties may have significant duties with, and spend significant time serving, other entities and may have conflicts of interest in allocating time.
Related-party transactions create the possibility of conflicts of interest with regard to management, including that: • we may enter into contracts between us, on the one hand, and related parties, on the other, that are not as a result of arm’s-length transactions; • our executive officers and directors that hold positions of responsibility with related parties may be aware of certain business opportunities that are appropriate for presentation to us as well as to such other related parties and may present such business opportunities to such other parties; and • our executive officers and directors that hold positions of responsibility with related parties may have significant duties with, and spend significant time serving, other entities and may have conflicts of interest in allocating time.
It is possible that these laws, regulations, and other obligations may be inconsistent with one another or be interpreted or asserted to be inconsistent with our business or practices. We anticipate needing to dedicate substantial resources to comply with laws, regulations, and other obligations relating to privacy and cybersecurity in order to comply.
It is possible that these laws, regulations, and other obligations may be inconsistent with one another or be interpreted or asserted to be inconsistent with our business or practices. We anticipate needing to dedicate substantial resources in order to comply with laws, regulations, and other obligations relating to privacy and cybersecurity.
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. This expansion provides significant certainty on the tax incentives that will be available to stand-alone battery projects in the future.
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.
Any such report, even if it contains false and misleading statements about our company, may cause our stock price to experience volatility. A sale of a significant portion of our total outstanding shares into the market may cause the market price of our common stock to drop significantly, even if our business is doing well.
Any such report, even if it contains false and misleading statements about the Company, may cause our stock price to experience volatility. A sale of a significant portion of our total outstanding shares into the market may cause the market price of our common stock to drop significantly, even if our business is doing well.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay or prevent a change in control of the Company or changes in management and, therefore, depress the market price of our common stock.
The following discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. - 10 - Table of Contents Risks Related to Our Technology, Products and Manufacturing We face significant barriers in our attempts to produce our energy storage products, our energy storage products are still under development, and we may not be able to successfully develop our energy storage products at commercial scale.
The following discussion should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. - 10 - Table of Contents Risks Related to Our Technology, Products and Manufacturing We face significant barriers in our attempts to produce our energy storage products, certain of our energy storage products are still under development, and we may not be able to successfully develop our energy storage products at commercial scale.
These provisions, among other things: • establish a classified board of directors so that not all members of our board are elected at one time; • permit only the board of directors to establish the number of directors and fill vacancies on the board; • provide that directors may only be removed “for cause” and only with the approval of a majority of the voting power of the issued and outstanding capital stock of the Company entitled to vote in the election of directors; • authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a “poison pill”); • eliminate the ability of our stockholders to call special meetings of stockholders; • prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; • prohibit cumulative voting by stockholders at any election of directors; - 42 - Table of Contents • authorize our board of directors to amend the bylaws; • establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings; and • require a super-majority vote of stockholders to amend some of the provisions described above.
These provisions, among other things: • establish a classified board of directors so that not all members of our board are elected at one time; • permit only the board of directors to establish the number of directors and fill vacancies on the board; - 39 - Table of Contents • provide that directors may only be removed “for cause” and only with the approval of a majority of the voting power of the issued and outstanding capital stock of the Company entitled to vote in the election of directors; • authorize the issuance of “blank check” preferred stock that our board could use to implement a stockholder rights plan (also known as a “poison pill”); • eliminate the ability of our stockholders to call special meetings of stockholders; • prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; • prohibit cumulative voting by stockholders at any election of directors; • authorize our board of directors to amend the bylaws; • establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at annual stockholder meetings; and • require a super-majority vote of stockholders to amend some of the provisions described above.
In conjunction with the Advanced Research Projects Agency-Energy grant we received from the Department of Energy, we granted to the United States a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States inventions related to iron flow technology and made within the scope of the grant.
In conjunction with the Advanced Research Projects Agency-Energy grant we received from the Department of Energy, we granted to the United States a non-exclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States inventions related to iron flow technology made within the scope of the grant.
The method estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.
The estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.
Consequences may include litigation, regulation, fines, increased insurance premiums, mandates to temporarily halt production, workers’ compensation claims, or other actions that impact our company brand, finances, or ability to operate. We may be exposed to delays, limitations and risks related to the environmental permits and other operating permits required to operate our products.
Consequences may include litigation, regulation, fines, increased insurance premiums, mandates to temporarily halt production, workers’ compensation claims, or other actions that impact our brand, finances, or ability to operate. We may be exposed to delays, limitations and risks related to the environmental permits and other operating permits required to operate our products.
In countries where we have not applied for patent protection or where effective intellectual property protection is not available to the same extent as in the United States, we may be at greater risk that our proprietary rights will be misappropriated, infringed, or otherwise violated. Government actions may also undermine our intellectual property rights.
In countries where we have not applied for patent protection or where effective intellectual property protection is not available to the same extent as in the United States, we may be at greater risk that our proprietary rights will be misappropriated, infringed, or otherwise violated or may be unprotectable. Government actions may also undermine our intellectual property rights.
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of customer service, or adequately address competitive challenges. We have experienced significant growth in customer contracts in recent periods and intend to continue to expand our business significantly within existing and new markets.
If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of customer service, or adequately address competitive challenges. We have experienced growth in customer contracts in recent periods and intend to continue to expand our business significantly within existing and new markets.
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 believe the IRA will increase demand for our products and 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.
In addition, if any of our partners suffer from capacity constraints, deployment delays, work stoppages or any other reduction in output, we may be unable to meet our delivery schedule, which could result in lost revenue and deployment delays that could harm our business and customer relationships.
In addition, if any of our partners suffer from capacity constraints, deployment delays, work stoppages or any other reduction in output, we may be unable to meet our delivery schedule, which could result in lost revenue, damages, and deployment delays that could harm our business and customer relationships.
Such recalls, whether caused by systems or components engineered or manufactured by us or our suppliers, would involve significant expense and diversion of management’s attention and other resources, which could adversely affect our brand image in our target market and our business, financial condition and results of operations.
Such recalls, whether caused by systems or components engineered or manufactured by us or our suppliers, would involve significant expense, damages and diversion of management’s attention and other resources, which could adversely affect our brand image in our target market and our business, financial condition and results of operations.
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.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “IRA”), which extends the availability of investment tax credits (“ITCs”) and production tax credits (“PTCs”) and makes significant changes to the tax credit regime that applies to solar and energy storage products.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, financial condition and results of operations.
In addition, patents issued to us may be infringed or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, financial condition and results of operations.
The following is a summary of the principal risks we face: • We face significant barriers in our attempts to produce our energy storage products, our energy storage products are still under development, and we may not be able to successfully develop our energy storage products at commercial scale.
The following is a summary of the principal risks we face: • We face significant barriers in our attempts to produce our energy storage products, certain of our energy storage products are still under development, and we may not be able to successfully develop our energy storage products at commercial scale.
We believe that, compared to lithium-ion batteries, our energy storage solutions offer significant benefits, including using widely available, low-cost materials with no rare mineral components, being substantially recyclable at end-of-life, having an approximately 25-year product design life, and having a wide thermal operating range that eliminates the need for fire suppression and heating (except where otherwise required by applicable law), ventilation and air conditioning equipment, which would otherwise be required for use with lithium-ion batteries.
We believe that, compared to lithium-ion batteries, our energy storage solutions offer significant benefits, including using widely available, low-cost materials with no rare mineral components, being substantially recyclable at end-of-life, having an approximately 25-year product design life, and having a wide thermal operating range that reduces the need for fire suppression and heating (except where otherwise required by applicable law), ventilation and air conditioning equipment, which would otherwise be required for use with lithium-ion batteries.
In the future, we may, voluntarily or involuntarily, initiate a recall if any of our Energy Warehouses, Energy Centers, iron flow batteries, Proton Pump or components prove to be defective or noncompliant with applicable safety standards.
In the future, we may, voluntarily or involuntarily, initiate a recall if any of our Energy Warehouses, Energy Centers, iron flow batteries, Proton Pump or other components prove to be defective or noncompliant with applicable safety standards.
If we are required to pay significantly higher premiums for insurance, are not able to maintain insurance coverage at affordable rates or must pay amounts in excess of claims covered by our insurance, then we could experience higher costs that could adversely affect our financial condition and results of operations. - 35 - Table of Contents We are subject to certain restrictions and obligations on our business as a result of grants and/or loans received under certain governmental programs and we may be subject to similar or other restrictions to the extent we utilize governmental grants in the future.
If we are required to pay significantly higher premiums for insurance, are not able to maintain insurance coverage at affordable rates or must pay amounts in excess of claims covered by our insurance, then we could experience higher costs that could adversely affect our financial condition and results of operations. - 32 - Table of Contents We are subject to certain restrictions and obligations on our business as a result of grants and/or loans received under certain governmental programs and we may be subject to similar or other restrictions to the extent we utilize governmental grants in the future.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our common stock that are held by non-affiliates exceeds $700,000,000 as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of our common stock that are held by non-affiliates exceeds $700,000,000 as of June 30 of that fiscal year, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1.0 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025.
Additionally, our ability to attract qualified personnel, including senior management and key technical personnel, is critical to the execution of our growth strategy. Competition in the labor market, including for qualified senior management personnel and highly skilled individuals with technical expertise, is extremely intense.
Additionally, our ability to attract qualified personnel, including senior management and key technical personnel, is critical to the execution of our growth strategy. Competition in the labor market, including for qualified senior management personnel and highly skilled individuals with technical expertise, is intense.
We have identified material weaknesses in our internal control over financial reporting, and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements.
We have identified material weaknesses in our internal control over financial reporting in the past, and may identify additional material weaknesses in the future that may cause us to fail to meet our reporting obligations or result in material misstatements of our financial statements.
In recent periods, we have seen an increase in costs for a wide range of materials and components and such increases may continue, particularly if the high rates of inflation seen in 2022 persist.
In recent periods, we have seen an increase in costs for a wide range of materials and components and such increases may continue, particularly if the high rates of inflation seen in 2022 and 2023 persist.
We have entered into contracts and other agreements to sell our products in a number of different geographic markets, including the United States, Europe (European Union (EU) and non-EU), and Australia.
We have entered into contracts and other agreements to sell our products in a number of different geographic markets, including the United States, Europe (European Union (“EU”) and non-EU), and Australia.
Any allegation or violation of U.S. federal and state and non-U.S. laws, regulations and policies regarding anti-bribery and anti-corruption could result in substantial fines, sanctions, civil and/or criminal penalties, whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, damages, adverse media coverage, investigations, loss of export privileges, suspension or debarment from government contracts, or other - 34 - Table of Contents curtailment of operations in the United States or other applicable jurisdictions.
Any allegation or violation of U.S. federal and state and non-U.S. laws, regulations and policies regarding anti-bribery and anti-corruption could result in substantial fines, sanctions, civil and/or criminal penalties, whistleblower complaints, sanctions, settlements, prosecution, enforcement actions, damages, adverse media coverage, investigations, loss of export privileges, suspension or debarment from government contracts, or other - 31 - Table of Contents curtailment of operations in the United States or other applicable jurisdictions.
In addition, we have the ability to redeem the outstanding Public Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that the closing price of the our common stock equals or exceeds $10.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to proper notice of such redemption and provided that certain other conditions are met, including that holders will be able to exercise their warrants prior to redemption for a number of shares of common stock determined based on the redemption date and the fair market value of our common stock.
In addition, we have the ability to redeem the outstanding Public Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption - 38 - Table of Contents provided that the closing price of our common stock equals or exceeds $10.00 per share (as adjusted for adjustments to the number of shares issuable upon exercise or the exercise price of a warrant) for any 20 trading days within a 30 trading-day period ending on the third trading day prior to proper notice of such redemption and provided that certain other conditions are met, including that holders will be able to exercise their warrants prior to redemption for a number of shares of common stock determined based on the redemption date and the fair market value of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of the Company or changes in our board of directors that our stockholders might consider favorable.
As discussed further elsewhere in this Annual Report on Form 10-K, any future sales and related future cash flows may not be realized in full or at all.
As discussed elsewhere in this Annual Report on Form 10-K, any future sales and related future cash flows may not be realized in full or at all.
If Munich Re terminates or significantly alters its relationship with us in a manner that is adverse to our company, our business would be materially adversely affected.
If Munich Re terminates or significantly alters its relationship with us in a manner that is adverse to the Company, our business would be materially adversely affected.
Our international sales are expected to be denominated in U.S. dollars. As a result, we will not have significant direct exposure to currency valuation exchange rate fluctuations. However, because our products are sold internationally, our products may be at a price disadvantage as compared with other non-U.S. suppliers if the U.S. dollar appreciates relative to other major foreign currencies.
Our international sales are typically denominated in U.S. dollars. As a result, we will not have significant direct exposure to currency valuation exchange rate fluctuations. However, because our products are sold internationally, our products may be at a price disadvantage as compared with other non-U.S. suppliers if the U.S. dollar appreciates relative to other major foreign currencies.
If we experience delivery or installation delays under our customer contracts, we could experience order cancellations and lose business as well as face lawsuits seeking liquidated damages.
If we experience delivery or installation delays under our customer contracts, we could experience order cancellations and lose business as well as face lawsuits seeking damages.
Our intellectual property may be stolen or infringed upon. In the event of such theft or infringement, we may be required to initiate lawsuits to protect our significant investment in our intellectual property.
Our intellectual property may be stolen or infringed. In the event of such theft or infringement, we may be required to initiate lawsuits to protect our significant investment in our intellectual property.
Our operations in such jurisdictions, particularly as a company based in the United States, create risks relating to conforming our products to regulatory and safety requirements and charging and other electric infrastructures; organizing local operating entities; establishing, staffing and managing foreign business locations; attracting local customers; navigating foreign government taxes, regulations and permit requirements; enforceability of our contractual rights; trade restrictions, foreign direct investment review regimes, customs regulations, tariffs and price or exchange controls; and preferences in - 30 - Table of Contents foreign nations for domestically manufactured products.
Our operations in such jurisdictions, particularly as a company based in the United States, create risks relating to conforming our products to regulatory and safety requirements and charging and other electric infrastructures; organizing local operating entities; establishing, staffing and managing foreign business locations; attracting local customers; navigating foreign government taxes, regulations and permit requirements; enforceability of our contractual rights; trade restrictions, foreign direct investment review regimes, customs regulations, tariffs and price or exchange controls; and preferences in foreign nations for domestically manufactured products.
We cannot provide any assurances that we would be able to successfully establish or operate an additional manufacturing facility in a timely or profitable manner, or at all, or within any expected budget for such a project. The construction of any such facility would require significant capital expenditures and result in significantly increased fixed costs.
We cannot provide any assurances that we would be able to successfully establish or operate an additional manufacturing facility in a timely or profitable manner, or at all, or within any expected budget for such a project. The construction of any such facility would require significant capital expenditure and result in significantly increased fixed costs.
This may be a long process and will depend on the safety, reliability, efficiency and quality of our energy storage products, as well as the support and service that we offer. It will also depend on factors outside of our control, such as general market conditions, that could impact customer buying decisions.
This may be a long process and will depend on the safety, reliability, efficiency and quality of our energy storage products, as well as the support and service that we offer. It will also depend on factors outside of our control, such as general market conditions and site capacity, that could impact customer buying decisions.
This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalty and our business may be harmed.
This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address and comply with these regulations and any subsequent changes, we may be subject to penalties and our business may be harmed.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful. - 32 - Table of Contents Our customers may be required to obtain environmental, health and safety or other certifications in order to install our products.
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful. - 29 - Table of Contents Our customers may be required to obtain environmental, health and safety or other certifications in order to install our products.
Any failure or perceived failure by us or our service providers to prevent information security breaches or other incidents or system disruptions, or any compromise of security that results in or is perceived or reported to result in unauthorized access to, or loss, theft, alteration, release or transfer of, our information, or any personal information, confidential - 28 - Table of Contents information, or other data could result in loss or theft of proprietary or sensitive data and intellectual property, could harm our reputation and competitive position and could expose us to legal claims, regulatory investigations and proceedings, and fines, penalties, and other liability.
Any failure or perceived failure by us or our service providers to prevent information security breaches or other incidents or system disruptions, or any compromise of security that results in or is perceived or reported to result in unauthorized access to, or loss, theft, alteration, release or transfer of, our information, or any personal information, confidential information, or other data could result in loss or theft of proprietary or sensitive data and intellectual property, could harm our reputation and competitive position and could expose us to legal claims, regulatory investigations and proceedings, and fines, penalties, and other liability.
Some of the development challenges that could prevent the introduction of our iron flow batteries include difficulties with (i) increasing manufacturing capacity to produce the volume of cells needed for our energy storage products, (ii) installing and optimizing higher volume manufacturing equipment, (iii) packaging our batteries to ensure adequate cycle life, (iv) cost reduction, (v) qualifying new vendors, (vi) expanding supply chain capacity, (vii) the completion of rigorous and challenging battery safety testing required by our customers or partners, including but not limited to, performance, life and abuse testing and (viii) the development of the final manufacturing processes and specifications.
Some of the challenges that could prevent the successful scaling of our iron flow batteries include difficulties with (i) increasing manufacturing capacity to produce the volume of cells needed for our energy storage products, (ii) installing and optimizing higher volume manufacturing equipment, (iii) packaging our batteries to ensure adequate cycle life, (iv) cost reduction, (v) qualifying new vendors and subcomponents, (vi) expanding supply chain capacity, (vii) the completion of rigorous and challenging battery safety testing required by our customers or partners, including but not limited to, performance, life and abuse testing and (viii) the development of the final manufacturing processes and specifications.
Further, if the demand for our products decreases or if we do not produce the expected output after any such new facility is operational, we may not be able to spread a significant amount of our fixed - 15 - Table of Contents costs over the production volume, thereby increasing our per product fixed cost, which would have a negative impact on our business, financial condition and results of operations.
Further, if the demand for our products decreases or if we do not produce the expected output after any such new facility is operational, we may not be able to spread a significant amount of our fixed costs over the production volume, thereby increasing our per product fixed cost, which would have a negative impact on our business, financial condition and results of operations.
Our inability to predict the extent of customer adoption of our proprietary technologies in the already-established traditional energy storage market makes it difficult to evaluate our future prospects. As of December 31, 2022, we have limited second-generation products fully deployed.
Our inability to predict the extent of customer adoption of our proprietary technologies in the already-established traditional energy storage market makes it difficult to evaluate our future prospects. As of December 31, 2023, we have limited second-generation products fully deployed.
The cost of components and raw materials, for example, have been increasing and could continue to increase in the future, offsetting any successes in reducing our manufacturing costs. Any such increases could slow our growth and cause our financial results and operational metrics to suffer.
The cost of components and raw materials, for example, has been increasing and could continue to increase in the future, offsetting any successes in reducing our manufacturing costs. Any such increases could slow our growth and cause our financial results and operational metrics to suffer.
Our ability to plan, construct and equip additional manufacturing facilities is subject to significant risks and uncertainties, including but not limited to the following: • The expansion or construction of any manufacturing facilities will be subject to the risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control, which may include delays in government approvals, burdensome permitting conditions, and delays in the delivery or installation of manufacturing equipment and subsystems that we manufacture or obtain from suppliers, similar to or more severe than what we have experienced recently. • In order for us to expand internationally, we anticipate entering into strategic partnerships, joint venture and licensing agreements that allow us to add manufacturing capability outside of the United States.
Our ability to plan, construct and equip additional manufacturing facilities is subject to significant risks and uncertainties, including but not limited to the following: • The expansion or construction of any manufacturing facilities will be subject to the risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control, which may include delays in government approvals, burdensome permitting conditions, and delays in the delivery or installation of manufacturing equipment and subsystems that we manufacture or obtain from suppliers, similar to or more severe than what we have experienced recently. - 14 - Table of Contents • In order for us to expand internationally, we anticipate entering into strategic partnerships, joint ventures and licensing agreements that allow us to add manufacturing capability outside of the United States.
These laws, regulations, and other obligations, - 33 - Table of Contents and changes in their interpretation, could require us to modify our operations and practices, restrict our activities, and increase our costs. Further, these laws, regulations, and other obligations are complex and compliance with them can be difficult.
These laws, regulations, and other obligations, - 30 - Table of Contents and changes in their interpretation, could require us to modify our operations and practices, restrict our activities, and increase our costs. Further, these laws, regulations, and other obligations are complex and compliance with them can be difficult.
In addition, although we believe our iron flow battery technology is field tested and ready for sale, there are no assurances that our proprietary technologies, such as our Proton Pump, will operate as expected and with consistency.
In addition, although we believe our iron flow battery technology is field tested and ready for sale, there are no assurances that our proprietary technologies, such as our Proton Pump, will operate as expected and with consistency over time.
As a result, these assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial unanticipated expense to repair or replace defective products in the future or to compensate customers for defective products.
As a result, these assumptions could prove to be materially different from the actual performance of our systems, causing us to incur substantial unanticipated expenses to repair or replace defective products in the future or to compensate customers for defective products.
If the demand for our iron flow batteries, Energy Centers and Energy Warehouses or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, resulting in a greater than expected per unit fixed cost, which would have a negative impact on our financial condition and our results of operations.
If the demand for our iron flow batteries or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, resulting in a greater than expected per unit fixed cost, which would have a negative impact on our financial condition and our results of operations.
If a license is not available at all or not available on reasonable terms, then we may be required to develop or license a non-violating alternative, either of which could require significant effort and expense.
If a license is not available at all or not available on reasonable terms, then we may be required to develop or license a non-infringing alternative, either of which could require significant effort and expense.
If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products, and we may never achieve profitability. - 19 - Table of Contents Our future growth and success depend on our ability to sell effectively to large customers.
If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products, and we may never achieve profitability. Our future growth and success depend on our ability to sell effectively to large customers.
However, SBE is under no obligation to place any firm orders with us at any price point, and any - 16 - Table of Contents future orders may be subject to future pricing or other commercial or technical negotiations, which we may not be able to satisfy, resulting in a diminished potential value of this relationship to us.
However, SBE is under no obligation to place any firm orders with us at any price point, and any future orders may be subject to future pricing or other commercial or technical negotiations, which we may not be able to satisfy, resulting in a diminished potential value of this relationship to us.
If any development project or construction is not completed, is delayed or is subject to cost overruns, we could become obligated to make delay or termination payments or become obligated for other damages under contracts, experience diminished returns or write off all or a portion of our capitalized costs in the project.
If any development project or construction is not completed, is delayed or is subject to cost - 21 - Table of Contents overruns, we could become obligated to make delay or termination payments or become obligated for other damages under contracts, experience diminished returns or write off all or a portion of our capitalized costs in the project.
In addition to intentional security breaches, the integrity and confidentiality of company and customer data and our intellectual property may be compromised as a result of human error, product defects, or technological failures. Different geographic markets may have different regulations regarding data protection, raising potential compliance risks.
In addition to intentional security breaches, the integrity and confidentiality of company and customer data and our intellectual property may be compromised as a result of human error, product defects, or technological failures. Different geographic - 25 - Table of Contents markets may have different regulations regarding data protection, raising potential compliance risks.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance, investor sentiment generally or about the renewable energy sector specifically and our ability to incur additional debt in compliance with agreements governing our then-outstanding debt.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance, the price of our common stock, investor sentiment generally or about the renewable energy sector specifically and our ability to incur additional debt in compliance with agreements governing our then-outstanding debt.
Under these performance guarantees, we bear the risk of electricity production or other performance shortfalls, even if they result - 27 - Table of Contents from failures in components from third-party manufacturers. These risks are exacerbated in the event such manufacturers cease operations or fail to honor their warranties.
Under these performance guarantees, we bear the risk of electricity production or other performance shortfalls, even if they result from failures in components from third-party manufacturers. These risks are exacerbated in the event such manufacturers cease operations or fail to honor their warranties.
This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
This may make comparison of our financial statements with another public company which is neither an emerging growth company - 34 - Table of Contents nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Further, we have not yet produced iron flow batteries, Energy Warehouses or Energy Centers at volume and our expected cost advantage for the production of these products at scale, compared to conventional lithium-ion cells, will require us to achieve rates of throughput, use of electricity and consumables, yield, and rates of automation demonstrated for mature battery, battery material, and manufacturing processes, that we have not yet achieved.
Further, we have not yet produced iron flow batteries at volume and our expected cost advantage for the production of these products at scale, compared to conventional lithium-ion cells, will require us to achieve rates of throughput, use of electricity and consumables, yield, and rates of automation demonstrated for mature battery, battery material, and manufacturing processes, that we have not yet achieved.
We have applied for patents in multiple jurisdictions, including the United States, Europe, and Australia, and under the Patent Cooperation Treaty, some of which have been issued.
We have applied for patents in multiple jurisdictions, including the United States, Europe, Australia, Japan and China, and under the Patent Cooperation Treaty, some of which have been issued.
Many of our current and potential competitors are large entities at a more advanced stage in development and commercialization than we are and in some cases have substantially greater financial, marketing, personnel and other resources, to increase their market share.
Many of our current and potential competitors are large entities at a more advanced stage in development and commercialization than we are and, in some cases, have - 19 - Table of Contents substantially greater financial, marketing, personnel and other resources, to increase their market share.
In future periods, management will regularly evaluate its estimates such as for service agreements, loss accruals, warranty, performance guarantees, liquidated damages and inventory valuation allowances. Changes in those estimates and judgments could significantly affect our financial condition and results of operations. We will also adopt changes required by the Financial Accounting Standards Board and the SEC.
Management regularly evaluates its estimates such as for service agreements, loss accruals, warranty, performance guarantees, liquidated damages and inventory valuation allowances. Changes in those estimates and judgments could significantly affect our financial condition and results of operations. We will also adopt changes required by the Financial Accounting Standards Board and the SEC.
These maintenance items are typically scheduled on a quarterly basis but may vary depending on how the customer uses the product. We currently rely on our customers that do not have service agreements with us or that perform maintenance that is not covered by such agreements to follow our product operations and maintenance manuals.
These maintenance items are typically - 15 - Table of Contents scheduled on a quarterly basis but may vary depending on how the customer uses the product. We currently rely on our customers that do not have service agreements with us or that perform maintenance that is not covered by such agreements to follow our product operations and maintenance manuals.
If we are unable to generate sufficient funds from operations or raise additional capital, our successful operation and growth could be impeded. Risks Related to Our Common Stock and Warrants The price of our common stock may be volatile.
If we are unable to generate sufficient funds from operations or raise additional capital, our successful operation and growth could be impeded. Risks Related to Our Common Stock and Warrants - 36 - Table of Contents The price of our common stock may be volatile.
Notwithstanding this, it is possible that a conflict of interest could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Regulatory, Environmental and Legal Issues We may face regulatory challenges to or limitations on our ability to sell our Energy Centers and Energy Warehouses directly in certain markets.
Notwithstanding this, it is possible that a conflict of interest could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Regulatory, Environmental and Legal Issues We may face regulatory challenges to or limitations on our ability to sell our products directly in certain markets.
Additionally, certain of our existing customer contracts were entered into based on projections regarding cost reductions that assume continued advances in our manufacturing and services processes that we may be unable to realize.
Additionally, certain of our existing customer contracts were entered into - 13 - Table of Contents based on projections regarding cost reductions that assume continued advances in our manufacturing and services processes that we may be unable to realize.
We face and are likely to continue to face challenges identifying, hiring, and retaining qualified personnel in all areas of our business, and we can provide no - 22 - Table of Contents assurance that we will find suitable successors as transitions occur.
We face and are likely to continue to face challenges identifying, hiring, and retaining qualified personnel in all areas of our business, and we can provide no assurance that we will find suitable successors as transitions occur.
In addition, we may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the United States.
In addition, we may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the United - 28 - Table of Contents States.
This could lead to our receiving lower prices or our struggling to compete for international customers. Consequently, currency fluctuations, in particular, a renewed strengthening of the U.S. dollar, could adversely affect the competitiveness of our products in international markets.
This could lead to our having to lower prices or our struggling to compete for international customers. Consequently, currency fluctuations, in particular, a strengthening of the U.S. dollar, could adversely affect the competitiveness of our products in international markets.
For example, beginning in January 2022, the Tax Cuts and Jobs Act eliminates the right to deduct research and development expenditures for tax purposes in the period the expenses were incurred and instead requires all U.S. and foreign research and development expenditures to be amortized over five and fifteen tax years, respectively, and as a result, we recognized a deferred tax asset for the future tax benefit of the amortization deductions of the capitalized research and development expenditures.
For example, beginning in January 2022, the Tax Cuts and Jobs Act of 2017 eliminated the right to deduct research and development expenditures for tax purposes in the period such expenses were incurred and instead requires all U.S. and foreign research and development expenditures to be amortized over five and fifteen tax years, respectively, and as a result, we recognized a deferred tax asset for the future tax benefit of the amortization deductions of these capitalized research and development expenditures.
Our relationship with SBE, an affiliate of SoftBank Group Corp., is subject to various risks which could adversely affect our business and future prospects. There are no assurances that we will be able to commercialize iron flow batteries from our joint development relationship with SBE.
Our relationship with related parties, SBE, an affiliate of SoftBank Group Corp., and Honeywell, is subject to various risks which could adversely affect our business and future prospects. There are no assurances that we will be able to commercialize iron flow batteries from our joint development relationship with such parties.
Any such issuances of additional common stock or equity-linked securities may cause stockholders to experience significant dilution of their ownership interests and could adversely affect prevailing market prices of our common stock.
Any such issuances of additional common stock or equity-linked - 37 - Table of Contents securities may cause stockholders to experience significant dilution of their ownership interests and could adversely affect prevailing market prices of our common stock.
While our engineering team has worked closely with the CSA Group, Intertek, UL and Technischer Überwachungsverein certification agencies to obtain certifications of our flow battery products against all applicable safety standards, there is no guarantee that such certifications shall continue to be obtained.
While our engineering team has worked closely with the CSA Group, Intertek, UL and Technischer Überwachungsverein certification agencies to obtain certifications of our flow battery products under all applicable safety standards, there is no guarantee that such certifications will continue to be obtained.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES Our corporate headquarters is located in Wilsonville, Oregon. The approximately 200,000 square foot facility contains both our corporate and administrative functions as well as our automated and semi-automated battery manufacturing lines. Currently, this facility has the capacity to manufacture approximately 800 MWh of batteries annually.
Biggest changeITEM 2. PROPERTIES Our corporate headquarters is located in Wilsonville, Oregon. The approximately 200,000 square foot facility contains both our corporate, engineering, and administrative functions as well as our automated and semi-automated battery manufacturing lines. During 2023, the facility had the capacity to manufacture approximately 800 MWh of batteries annually.
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Over time, we plan to increase efficiency at the Wilsonville facility to scale manufacturing capacity up to 2,000 MWh. We also envision opening additional manufacturing facilities globally.
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We are currently in the process of procuring a new automated battery manufacturing line sized at 600 MWh and plan to retire our original semi-automated line (112 MWh), thus bringing our total battery manufacturing capacity to 1.288 GWh annually. - 42 - Table of Contents Over time, we plan to increase efficiency at the Wilsonville facility to scale manufacturing capacity up to 2,000 MWh.
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We also envision opening additional manufacturing facilities globally.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeIn the future, we may become involved in legal proceedings that arise in the ordinary course of business, the outcome of which, if determined adversely to us, could individually or in the aggregate have a material adverse effect on our business, financial condition and results of operations. - 44 - Table of Contents ITEM 4.
Biggest changeIn the future, we may become involved in legal proceedings that arise in the ordinary course of business, the outcome of which, if determined adversely to us, could individually or in the aggregate have a material adverse effect on our business, financial condition and results of operations. ITEM 4.
MINE SAFETY DISCLOSURES Not applicable. - 45 - Table of Contents PART II
MINE SAFETY DISCLOSURES Not applicable. - 43 - Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeIssuer Purchases of Equity Securities During the year ended December 31, 2022, we did not purchase any of our equity securities that are registered under Section 12(b) of the Exchange Act. ITEM 6. [RESERVED]
Biggest changeIssuer Purchases of Equity Securities During the year ended December 31, 2023, we did not purchase any of our equity securities that are registered under Section 12(b) of the Exchange Act (other than shares that were repurchased pursuant to net settlement to satisfy tax withholding obligations of plan participants upon the vesting of restricted stock unit awards).
The actual number of stockholders of our c ommon stock is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares of common stock are held in street name by banks, brokers and other nominees. Dividend Policy We have not paid any cash dividends on the common stock to date.
The actual number of stockholders of our common stock is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares of common stock are held in street name by banks, brokers and other nominees. Dividend Policy We have not paid any cash dividends on the common stock to date.
As of February 24, 2023, there were 59 holders of record of our common stock and 4 holders of record of our Public Warrants.
As of March 8, 2024, there were 59 holders of record of our common stock and one holder of record of our Public Warrants.
Added
Securities Authorized for Issuance Under Equity Compensation Plans See “ Part III—Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .” Recent Sales of Unregistered Securities The Company had no sales of unregistered equity securities during the period covered by this Annual Report on Form 10-K that were not previously reported in a Current Report on Form 8-K or Quarterly Report on Form 10-Q. ITEM 6. [RESERVED]

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOther (expenses) income, net Other (expenses) income, net consists primarily of various gains and losses associated with our short-term investments and other income and expense items. - 48 - Table of Contents Results of Operations Comparison of Year Ended December 31, 2022 to Year Ended December 31, 2021 The following table sets forth ESS’ operating results for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 $ Change % Change Revenue $ 894 $ — $ 894 N/M Operating expenses: Research and development 71,979 30,275 41,704 138% Sales and marketing 6,938 3,041 3,897 128 General and administrative 27,469 27,286 183 1 Total operating expenses 106,386 60,602 45,784 76 Loss from operations (105,492) (60,602) (45,784) 74 Other income (expenses), net: Interest income (expense), net 2,187 (1,886) 4,073 N/M Gain (loss) on revaluation of warrant liabilities 24,475 (37,584) 62,059 N/M Loss on revaluation of derivative liabilities — (223,165) 223,165 N/M Gain (loss) on revaluation of earnout liabilities 1,313 (154,806) 156,119 N/M Other (expenses) income, net (452) 926 (1,378) N/M Total other income (expenses), net 27,523 (416,515) 444,038 (106.6) Net loss and comprehensive loss to common stockholders $ (77,969) $ (477,117) $ 398,254 (83.7)% __________________ N/M = Not meaningful Revenue Revenue for the year ended December 31, 2022 was $894 thousand compared to zero for the year ended December 31, 2021.
Biggest changeResults of Operations In this section, we discuss the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. - 47 - Table of Contents Comparison of Year Ended December 31, 2023 to Year Ended December 31, 2022 The following table sets forth ESS’ operating results for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 $ Change % Change Revenue $ 7,540 $ 894 $ 6,646 743% Cost of revenue 20,495 — 20,495 100 Gross profit (loss) (12,955) 894 (13,849) NM Operating expenses: Research and development 42,632 71,979 (29,347) (41) Sales and marketing 7,744 6,938 806 12 General and administrative 22,574 27,469 (4,895) (18) Total operating expenses 72,950 106,386 (33,436) (31) Loss from operations (85,905) (105,492) 19,587 (19) Other income (expenses), net: Interest income, net 5,262 2,187 3,075 141 Gain on revaluation of common stock warrant liabilities 2,292 25,788 (23,496) (91) Other income (expense), net 773 (452) 1,225 N/M Total other income, net 8,327 27,523 (19,196) N/M Net loss and comprehensive loss to common stockholders $ (77,578) $ (77,969) $ 391 (0.5)% __________________ N/M = Not meaningful Revenue Revenue for the year ended December 31, 2023 was $7.5 million compared to $0.9 million for the year ended December 31, 2022.
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. This expansion provides significant certainty on the tax incentives that will be available to stand-alone battery projects in the future.
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 expect to continue to take advantage of the benefits of the extended transition period for as long as we remain an emerging growth company, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.
We expect to continue to take advantage of the benefits of the extended transition period for as long as we remain an emerging growth company, although we may decide to early adopt new or revised accounting standards to the extent permitted by such standards.
See Note 10, Borrowings to our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K. As of December 31, 2022, we had a standby letter of credit with First Republic Bank totaling $725 thousand as security for an operating lease of office and manufacturing space in Wilsonville, Oregon.
See Note 10, Borrowings to our consolidated financial statements for the year ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K. As of December 31, 2022, we had a standby letter of credit with First Republic Bank totaling $725 thousand as security for an operating lease of office and manufacturing space in Wilsonville, Oregon.
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 two products, each of which is able to provide reliable, safe, long-duration energy storage.
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.
We believe that our unrestricted cash and cash equivalents and short-term investments as of December 31, 2022 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 this Annual Report on Form 10-K.
We believe that our unrestricted cash and cash equivalents and short-term investments as of December 31, 2023 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 this Annual Report on Form 10-K.
Inflation Reduction Act of 2022 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.
Inflation Reduction Act of 2022 On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which extends the availability of investment tax credits and production tax credits and makes significant changes to the tax credit regime that applies to solar and energy storage products.
Our team has significantly enhanced the technology, improved the round-trip efficiency and developed an innovative and patented solution to the hydroxide build-up problem that plagued previous researchers developing iron flow batteries. Our proprietary solution to eliminate the hydroxide formation is known as the Proton Pump, and it works by utilizing hydrogen generated by side reactions on the negative electrode.
Our team has significantly enhanced the technology, improved the round-trip efficiency and developed an innovative solution to the hydroxide build-up problem that plagued previous researchers developing iron flow batteries. Our proprietary solution to eliminate the hydroxide formation is known as the Proton Pump, which works by utilizing hydrogen generated by side reactions on the negative electrode.
Because we designed our batteries to operate using an electrolyte of primarily salt, iron and water, they are non-toxic and substantially recyclable. Our long-duration iron flow batteries are the product of nearly 50 years of scientific advancement. Our founders, Craig Evans and Dr. Julia Song, began advancing this technology in 2011 and formed Legacy ESS.
Because we designed our batteries to operate using an electrolyte of primarily salt, iron and water, they are environmentally sustainable and substantially recyclable. Our long-duration iron flow batteries are the product of nearly 50 years of scientific advancement. Our founders, Craig Evans and Dr. Julia Song, began advancing this technology in 2011 and formed Legacy ESS.
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.
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 - 44 - Table of Contents for utility and large commercial and industrial consumers.
Net changes in operating assets and liabilities provided $8,457 thousand of cash driven by increases in accounts payable, accrued and other current liabilities, accrued product warranties, and deferred revenue, partially offset by increases in accounts receivable, prepaid expenses and other assets, and a decrease in operating lease liabilities.
Net changes in operating assets and liabilities provided $8.5 million of cash driven by increases in accounts payable, accrued and other current liabilities, accrued product warranties, and deferred revenue, partially offset by increases in accounts receivable, prepaid expenses and other assets, and a decrease in operating lease liabilities.
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 four to 12-hour duration.
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.
Other income (expenses), net Interest income (expense), net Interest expense consists primarily of interest on our notes payable. Interest income consists primarily of earned income on our cash equivalents, restricted cash, and short-term investments. These amounts will vary based on our cash, cash equivalents, restricted cash and short-term investment balances, and on market rates.
Other income (expenses), net Interest income, net Interest income, net consists primarily of earned income on our cash equivalents, restricted cash, and short-term investments. These amounts will vary based on our cash, cash equivalents, restricted cash and short-term investment balances, and on market rates. Interest income is partially offset by interest expense on our notes payable.
As of December 31, 2022, the letter of credit was secured by a restricted certificate of deposit account totaling $75 thousand. There were no draws against the letter of credit during the years ended December 31, 2022 and 2021.
As of December 31, 2023, the letter of credit was reduced to $75 thousand. As of December 31, 2023, the letter of credit was secured by a restricted certificate of deposit account totaling $75 thousand. There were no draws against the letter of credit during the years ended December 31, 2023 and 2022.
Recently Issued Accounting Standards - 53 - Table of Contents See Note 2, Significant Accounting Policies to our consolidated financial statements for the year ended December 31, 2022 included elsewhere in this Annual Report on Form 10-K.
Recently Issued Accounting Standards See Note 2, Significant Accounting Policies to our consolidated financial statements for the year ended December 31, 2023 included elsewhere in this Annual Report on Form 10-K.
Net cash used in investing activities was $117,884 thousand for the year ended December 31, 2022, which related to purchases of short-term investments and, to a lesser extent, purchases of property and equipment. Purchases of property and equipment primarily relate to our investment in automating production.
Net cash used in investing activities was $117.9 million thousand for the year ended December 31, 2022, which related to purchases of short-term investments and purchases of property and equipment, primarily for our investment in automating production.
Liquidity and Capital Resources 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 December 31, 2022, we had an accumulated deficit of $618,579 thousand.
Liquidity and Capital Resources 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 December 31, 2023, we had an accumulated deficit of $696.2 million.
We expect our general and administrative expenses to increase as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
We expect some of our general and administrative expenses to increase as we expand our operations and manufacturing capacity to support the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
The following accounting policies represent those that management believes are particularly important to the consolidated financial statements and that require the use of estimates, assumptions, and judgments to determine matters that are inherently uncertain.
GAAP requires that management apply accounting policies and make estimates and assumptions that affect amounts reported in the statements. The following accounting policies represent those that management believes are particularly important to the consolidated financial statements and that require the use of estimates, assumptions, and judgments to determine matters that are inherently uncertain.
Our ability to successfully manage this growth will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations. - 51 - Table of Contents Contractual Obligations and Commitments Our contractual obligations and other commitments as of December 31, 2022 consist of operating lease commitments and notes payable.
Our ability to successfully manage this growth will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations. Contractual Obligations and Commitments Our contractual obligations and other commitments as of December 31, 2023 consist of lease commitments and three standby letters of credit.
On September 1, 2022, we executed a standby letter of credit with CitiBank, N.A. 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.
On September 1, 2022, we executed a standby letter of credit with CitiBank, N.A. for $600 thousand as security for the performance and payment of the Company’s obligations under a customer agreement.
The following table summarizes cash flows from operating, investing and financing activities for the periods presented: Years Ended December 31, ($ in thousands) 2022 2021 Net cash used in operating activities $ (81,620) $ (51,849) Net cash used in investing activities (117,884) (2,767) Net cash (used in) provided by financing activities (4,073) 288,454 Cash flows from operating activities: Our cash flows used in operating activities to date have been primarily comprised of costs related to research and development, manufacturing of our energy storage products, building awareness of our products’ capabilities and other general and administrative activities.
The following table summarizes cash flows from operating, investing and financing activities for the periods presented (in thousands): Years Ended December 31, 2023 2022 Net cash used in operating activities $ (54,896) $ (81,620) Net cash provided by (used in) investing activities 15,071 (117,884) Net cash provided by (used in) financing activities 25,653 (4,073) Cash flows from operating activities: 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.
The changes in fair value of earnout liabilities was driven by changes in the market price of our common stock over the same period. Other (expenses) income, net Other income was $926 thousand for the year ended December 31, 2021 compared to other expense of $452 thousand for the year ended December 31, 2022.
The changes in fair value of common stock warrant liabilities was driven by changes in the market price of our common stock over the respective period. Other income (expense), net Other income (expense), net for the year ended December 31, 2023 was $773 thousand of income and $452 thousand of expense for the year ended December 31, 2022.
To a lesser extent, general and administrative expenses include depreciation and other allocated costs, such as facility-related expenses, and supplies.
Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation. To a lesser extent, general and administrative expenses include depreciation and other allocated costs, such as facility-related expenses, and supplies.
The decrease in interest expense resulted primarily from a decrease in borrowings for 2022 compared to 2021. The increase in interest income was driven by interest earned on our short-term investment portfolio.
The change resulted from a decrease in interest expense resulting primarily from a decrease in outstanding notes payable for 2023 compared to 2022 and an increase in interest income driven by interest earned on our short-term investment portfolio during 2023.
Net cash used in operating activities was $81,620 thousand for the year ended December 31, 2022, which is comprised of net loss of $77,969 thousand and noncash changes in the fair value of warrant liabilities of $24,475 thousand and earnout liabilities of $1,313 thousand, partially offset by stock-based compensation of $11,889 thousand.
Net cash used in operating activities was $81.6 million for the year ended December 31, 2022, which is comprised of net loss of $78.0 million and noncash changes in the fair value of warrant liabilities of $25.8 million, partially offset by stock-based compensation of $11.9 million.
We review our warranty accrual at least quarterly and adjust our estimates as needed to ensure our accruals are adequate to meet expected future warranty obligations. Adjustments to warranty accruals are recorded to research and development expenses while the Company is in the research and development phase.
We review our warranty accrual at least quarterly and adjust our estimates as needed to ensure our accruals are adequate to meet expected future warranty obligations.
As of December 31, 2022, $600 thousand was pledged - 50 - Table of Contents 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 year ended December 31, 2022.
The letter of credit is in effect until March 9, 2024. As of December 31, 2023, $200 thousand was pledged as collateral for the letter of credit and - 49 - Table of Contents recorded as restricted cash, current. There were no draws against the letter of credit during the year ended December 31, 2023.
We accrue an estimate of warranty costs at the time of recording the revenue for a unit. Warranty accruals include management’s best estimate of the projected costs to repair or replace any items under warranty, which is based on various factors including actual claim data to date.
Warranty accruals include management’s best estimate of the projected costs to repair or replace any items under warranty, which is based on various factors including actual claim data to date. Initial warranty data is limited at the early stage in the commercialization of our products.
Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers. Our near-term and medium-term revenue is expected to be generated from our Energy Centers and second-generation Energy Warehouses.
We also anticipate some higher general and administrative expenses related to operating as a public company. Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers. Our near-term and medium-term revenue is expected to be generated from our Energy Centers, second-generation Energy Warehouses, and core technology component productization.
Additionally, we are committed to non-cancellable purchase commitments of $21,540 thousand as of December 31, 2022. Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our financial statements.
Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our financial statements. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S.
Operating expenses Research and development expenses Costs related to research and development consist of direct product development material costs, including freight charges, and product development personnel-related expenses, warranty-related costs, depreciation charges, overhead related costs, consulting services and other direct expenses. Personnel-related expenses consist of salaries, benefits and stock-based compensation.
Personnel-related expenses consist of salaries, bonuses, benefits and stock-based compensation. Prior to the Transition Date, research and development expenses - 46 - Table of Contents also included direct product development material costs, including freight charges, and warranty-related costs.
The standard warranty is accounted for as an assurance-type warranty, which provides customers with assurance that the product complies with agreed-upon specifications and does not represent a separate performance obligation. The ISP warranty is considered a distinct service and is accounted for as a performance obligation where a portion of the transaction price is allocated to that performance obligation.
Product Warranties - 51 - Table of Contents We generally provide a standard warranty for a period of one year and an optional extended warranty. The standard warranty is accounted for as an assurance-type warranty, which provides customers with assurance that the product complies with agreed-upon specifications and does not represent a separate performance obligation.
Management expects to continue to incur additional substantial losses in the foreseeable future as a result of our research and development and other operational activities. As of December 31, 2022, we had unrestricted cash and cash equivalents of $34,767 thousand, which is available to fund future operations, and short-term investments of $105,047 thousand.
Management expects to continue to incur additional substantial losses in the foreseeable future as we scale our operations to achieve positive unit economics. As of December 31, 2023, we had unrestricted cash and cash equivalents of $20.2 million, which is available to fund future operations, and short-term investments of $87.9 million.
We commenced shipping our second-generation Energy Warehouses in the third quarter of 2021 and we received final customer acceptance for the initial unit shipped during the second quarter of 2 022. We delivered and recognized revenue on an additional three units during the second half of 2022.
We commenced shipping of our second-generation Energy Warehouses in the third quarter of 2021 and we received final customer acceptance for the initial units shipped and began recognizing revenue in 2022. Revenue increased as we ramped up production and commercialization of our products following acceptance of the initial units in 2022.
Net changes in operating assets and liabilities provided $2,087 thousand of cash driven by an increase in accounts payable and accrued and other current liabilities, partially offset by an increase in prepaid expenses and other assets.
Net changes in operating assets and liabilities used $1.6 million of cash driven by cash collections on accounts receivable, an increase in prepaid expenses and other current assets, accrued product warranties and deferred revenue, partially offset by inventory purchases and decreases in accrued and other current liabilities, accounts payable and operating lease liabilities.
General and administrative expenses General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, legal, and other administrative functions, as well as expenses for outside professional services and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation.
We expect that our sales and marketing expenses will increase over time as we continue to hire additional personnel to scale our business. General and administrative expenses General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, legal, and other administrative functions, as well as expenses for outside professional services and insurance costs.
We believe our unique technology provides a compelling value proposition and an opportunity for favorable margins and unit economics in the energy storage industry in the future. COVID-19 The COVID-19 pandemic has disrupted supply chains and affected production and sales across a range of industries, and continues to impact the United States and other countries throughout the world.
We believe our unique technology provides a compelling value proposition and an opportunity for favorable margins and unit economics in the energy storage industry in the future.
General and administrative expenses General and administrative expenses increased by $183 thousand, or 1%, from $27,286 thousand for the year ended December 31, 2021 to $27,469 thousand for the year ended December 31, 2022.
General and administrative expenses General and administrative expenses decreased by $4.9 million, or 18%, from $27.5 million for the year ended December 31, 2022 to $22.6 million for the year ended December 31, 2023.
In March 2020, we borrowed $4,000 thousand through a note payable with Silicon Valley Bank that is secured by significantly all of our property, except for intellectual property. The $4,000 thousand note payable’s original maturity date was January 1, 2023; however, the maturity date was modified and extended to January 1, 2024.
In March 2020, we borrowed $4.0 million through a note payable with Silicon Valley Bank (“SVB”) that was secured by significantly all of our property, except for intellectual property. The note bore interest at 0.50% below the bank’s prime rate.
Net cash used in financing activities was $4,073 thousand for the year ended December 31, 2022, which is comprised of repurchases of shares from employees for income tax withholding purposes of $2,808 thousand and payments on notes payable of $1,900 thousand.
Net cash used in financing activities was $4.1 million for the year ended December 31, 2022 and consisted of repurchases of shares from employees for income tax withholding purposes of $2.8 million and payments on notes payable of $1.9 million, partially offset by proceeds from contributions to our ESPP of $492 thousand. - 50 - Table of Contents Further commercialization, development, and expansion of our business will require a significant amount of cash for expenditures.
Cash flows from investing activities: Our cash flows from investing activities have been comprised primarily of purchases and sales of short-term investments and purchases of property and equipment.
Cash flows from investing activities: Our cash flows from investing activities have been comprised primarily of purchases and sales of short-term investments and purchases of property and equipment. Net cash provided by investing activities was $15.1 million for the year ended December 31, 2023, which related to maturities of short-term investments partially offset by purchases of property and equipment.
Operating expenses Research and development expenses Research and development expenses increased by $41,704 thousand, or 138%, from $30,275 thousand for the year ended December 31, 2021 to $71,979 thousand for the year ended December 31, 2022.
Operating expenses Research and development expenses Research and development expenses decreased by $29.3 million, or 41%, from $72.0 million for the year ended December 31, 2022 to $42.6 million for the year ended December 31, 2023.
Compared to 2022, we expect our indirect cost of goods and operating expenses to increase as we ramp up our research and development and manufacturing activities including with respect to our supply chain, parts and launch of our second-generation Energy Warehouses as well as higher general and administrative expenses related to operating as a public company.
Compared to 2023, we expect our indirect cost of goods and operating expenses to increase as we ramp up our manufacturing and sales activities. We further expect an increase in expenses related to the implementation of cost reduction projects and initiatives in our supply chain, manufacturing engineering and research and development functions.
Sales and marketing expenses Sales and marketing expenses increased by $3,897 thousand, or 128%, from $3,041 thousand for the year ended December 31, 2021 to $6,938 thousand for the year ended December 31, 2022. The increase is primarily due to costs incurred for marketing related activities to build awareness of our products’ capabilities and increased personnel-related expenses.
Sales and marketing expenses Sales and marketing expenses increased by $0.8 million, or 12%, from $6.9 million for the year ended December 31, 2022 to $7.7 million for the year ended December 31, 2023. The increase is driven by an increase in personnel-related expenses due to expanded sales headcount and an increase in external marketing costs.
Gain (loss) on revaluation of warrant liabilities Gain (loss) on revaluation of warrant liabilities resulted in a loss of $37,584 thousand for the year ended December 31, 2021 compared to a gain of $24,475 thousand for the year ended December 31, 2022.
Gain on revaluation of common stock warrant liabilities The change in fair value of common stock warrant liabilities resulted in a gain of $2.3 million for the year ended December 31, 2023 and a gain of $25.8 million for the year ended December 31, 2022.
To a lesser extent , sales and marketing expenses also include professional services costs, travel costs, and trade show sponsorships. We expect that our sales and marketing expenses will increase over time as we continue to hire additional personnel to scale our business.
Sales and marketing expenses Sales and marketing expenses consist primarily of salaries, bonuses, benefits and stock-based compensation for marketing and sales personnel and related support teams. To a lesser extent, sales and marketing expenses also include professional services costs, travel costs, and trade show sponsorships.
These increases were almost entirely offset by a reduction in fees and expenses related to the Business Combination incurred in 2021. - 49 - Table of Contents Other (expense) income, net Interest income (expense), net Interest income (expense), net increased by $4,073 thousand from $1,886 thousand of interest expense for the year ended December 31, 2021 to $2,187 thousand of interest income for the year ended December 31, 2022.
Other (expense) income, net Interest income, net Interest income, net increased by $3.1 million from $2.2 million of interest income, net for the year ended December 31, 2022 to $5.3 million of interest income, net for the year ended December 31, 2023.
Net cash used in operating activities was $51,849 thousand for the year ended December 31, 2021, which is comprised of net loss of $477,117 thousand, offset by noncash changes in derivative liabilities of $223,165 thousand, earnout liabilities of $154,806 thousand, warrant liabilities of $37,584 thousand, and stock-based compensation of $7,922 thousand.
Net cash used in operating activities was $54.9 million for the year ended December 31, 2023, which is comprised of net loss of $77.6 million, adjusted for noncash interest income of $3.6 million and changes in the fair value of warrant liabilities of $2.3 million, partially offset by inventory write-downs and losses on noncancellable purchase commitments of $11.9 million, stock-based compensation of $10.6 million, and depreciation expense of $6.5 million.
We also have a standby letter of credit that serves as security for certain operating leases for office and manufacturing space. The letter of credit is fully secured by restricted certificate of deposit accounts. There was no draw against the letter of credit during the year ended December 31, 2022.
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.
Cost of goods sold for these units is zero as related costs have been accounted for as part of research and development expenses in the respect ive periods incurred; however, the production costs for these units significantly exceeded their selling price. This accounting treatment will continue until we meet the criteria for commercialization.
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.
Net cash used in investing activities was $2,767 thousand for the year ended December 31, 2021, which relates to purchases of property and equipment. Cash flows from financing activities: Through December 31, 2022, we have raised capital from the Business Combination and financed our operations through the issuance of debt and equity securities and loan agreements.
Cash flows from financing activities: Cash flows from financing activities to date have consisted of the Business Combination, the Honeywell agreements, and the issuance of debt and equity securities and loan agreements.
As we transition from the research and development phase and into a full commercial phase, all inventoriable costs will be capitalized, net of any lower of cost or net realizable value charges. As of December 31, 2022, the criteria for commercialization has not yet been met.
As a result of the transition, all inventoriable costs incurred are capitalized, net of any lower of cost or net realizable value (“LCNRV”) charges, which are recognized as cost of revenue.
Gain (loss) on revaluation of earnout liabilities The gain (loss) on revaluation of earnout liabilities consists of periodic fair value adjustments related to the Earnout Warrants issued in conjunction with the Business Combination.
Gain on revaluation of common stock warrant liabilities Gain on revaluation of common stock warrant liabilities consists of periodic fair value adjustments related to our common stock warrants. Other income (expense), net Other income (expense), net consists primarily of various gains and losses associated with our short-term investments and other income and expense items.
Removed
The Business Combination On October 8, 2021, ESS consummated the Business Combination.
Added
Our core technology components in the Energy Warehouse and the Energy Center also are under development for integration into third-party systems. Recent Developments Transition to Commercial Inventory Accounting We have historically been in the research and development phase for accounting purposes.
Removed
As a result, Legacy ESS merged with Merger Sub, with Legacy ESS surviving as a wholly owned subsidiary of STWO, which changed its name to “ESS Tech, Inc.” The increase in cash resulting from the Business Combination is being used to fund our growth strategy related to the commercial sale of our second-generation energy storage solution and the scaling of our manufacturing operations to meet customer demand.
Added
On a quarterly basis we had evaluated a combination of evidence including production quality metrics, field functionality to date, revenue trends, and existing contracts with customers. Based on the evaluation performed during the third quarter of 2023, we transitioned out of the research and development phase and into commercial inventory accounting as of July 1, 2023 (the “Transition Date”).
Removed
The cash raised from the Business Combination is also being used to fund investments in personnel and research and development as well as provide liquidity for the funding of our ongoing operating expenses. - 46 - Table of Contents The Business Combination was accounted for as a reverse recapitalization.
Added
Further, unfulfilled noncancellable purchase commitments are recognized as expense for estimated losses in cost of revenue and warranty and fulfillment costs are recorded as a component of cost of revenue rather than research and development expense beginning on the Transition Date.
Removed
Legacy ESS was deemed the accounting predecessor and the combined entity is the successor SEC registrant, meaning that Legacy ESS’ financial statements for previous periods will be disclosed in our future periodic reports filed with the SEC.
Added
Honeywell Agreements On September 21, 2023, we entered into a Common Stock and Warrant Purchase Agreement (the “Purchase Agreement”) with Honeywell ACS Ventures LLC (“Honeywell Ventures”), an affiliate of Honeywell, which became a related party as a result.
Removed
Under this method of accounting, STWO was treated as the acquired company for financial statement reporting purposes As a result of the Business Combination, Legacy ESS became the successor to an SEC-registered and publicly traded company, which has required, and may further require, us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.
Added
Pursuant to the Purchase Agreement, Honeywell invested $27.5 million in the Company and we issued 16,491,754 shares of common stock and a warrant to issue up to 10,631,633 shares of common stock (the “Investment Warrant”) to Honeywell Ventures.
Removed
We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.
Added
Pursuant to the Purchase Agreement and also as further consideration for the licensing by UOP, an affiliate of Honeywell, of certain intellectual property to us, we issued a warrant to issue up to 6,269,955 shares of common stock (the “IP Warrant”) to UOP.
Removed
There have already been multiple waves of the COVID-19 pandemic and COVID-19 cases continue to surge in certain areas of the world, including in certain countries that were initially successful at containing the virus.
Added
On September 21, 2023, the Company and UOP also entered into a Master Supply Agreement (the “Supply Agreement”), pursuant to which UOP may purchase equipment supplied by the Company.
Removed
For example, the Chinese government has previously pursued and may reinstate a ‘zero COVID’ or other policy, imposing lock downs that have adversely affected and may continue to adversely affect supply chains. The evolution of the pandemic and the ultimate extent of its economic impact are still unknown.
Added
Pursuant to the Supply Agreement, the Company agreed to issue additional warrants to purchase common stock to UOP, consisting of (i) an initial performance warrant to issue up to 775,760 shares of common stock, issued on September 21, 2023 in exchange for a prepayment of equipment by UOP in the amount of $15 million, and (ii) additional performance warrants (not to exceed an aggregate value of $15 million based on target purchase amounts of up to $300 million by 2030) to be issued on an annual basis for the five-year period beginning in 2026, based on UOP’s purchase of additional equipment after execution of the Supply Agreement (the “Performance Warrants”).
Removed
Due to the number of variables involved, the significance and the duration of the pandemic’s financial impact are difficult to determine. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, and the impact on our customers, employees and vendors.
Added
Impact of Macroeconomic Developments 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.
Removed
The ultimate outcome of these matters is uncertain and, accordingly, the impact on our financial condition or results of operations is also uncertain. We have issued several force majeure notices to customers as a result of delays caused by COVID-19 and future COVID-19 delays could further impact such agreements.
Added
In particular, weak economic conditions or significant uncertainty regarding the stability of financial markets related to stock market - 45 - Table of Contents 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.
Removed
Components of Results of Operations As the Business Combination is accounted for as a reverse recapitalization, the operating results included in this discussion reflect the historical operating results of Legacy ESS prior to the Business Combination and the combined results of ESS - 47 - Table of Contents following the closing of the Business Combination.
Added
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.
Removed
The assets and liabilities of the Company are stated at their historical cost. Revenue We earn revenue from the sale of our energy storage products and from service contracts. Revenue recognition is deferred until written customer acceptance has been received, after site acceptance testing, or until we have established a history of successfully obtaining customer acceptance.
Added
Potentially as a result of these macroeconomic forces, during the 2023 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 in 2024.
Removed
In the near term, as our products are newly developed, this is likely to be a longer process than when our products are more mature and we have an established history of customer acceptance.
Added
To the extent that challenging macroeconomic conditions persist, we may experience an extension and worsening of these effects as well as additional adverse effects on our business, financial condition, or results of operations in future periods.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise reported under this Item. - 54 - Table of Contents
Biggest changeITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise reported under this Item. - 52 - Table of Contents

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