STWO ACON S2 Acquisition Corporation

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.

Date: November 22, 2021

Exhibit 99.1

ESS TECH SUBSIDIARY, INC. (formerly known as ESS Tech, Inc.).

Unaudited Condensed Financial Statements as of and for the Three and Nine Months Ended September 30, 2021 and 2020

ESS TECH SUBSIDARY, INC.

See accompanying notes to unaudited, interim financial statements

- 3 -

See accompanying notes to unaudited, interim financial statements

- 4 -

See accompanying notes to unaudited, interim financial statements

- 5 -

See accompanying notes to unaudited, interim financial statements

- 6 -

ESS TECH SUBSIDIARY, INC.

Basis of presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Accordingly, these unaudited condensed financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2020. The condensed balance sheet as of December 31, 2020, included herein was derived from the audited financial statements of the Company as of that date.

The unaudited condensed financial statements, in the opinion of management, reflect all adjustments necessary to present fairly the Company’s financial position as of September 30, 2021, and the Company’s results of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ deficit activities for the three and nine months ended September 30, 2021, and 2020, and the cash flows for the nine months ended September 30, 2021, and 2020. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021, any interim period or for any other future year.

Emerging Growth Company

Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is keeping its election to be able to defer the adoption of a new or revised standard at the time private companies are required to adopt the new or revised standard.

This may make comparison of the Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Liquidity and Going concern

In connection with preparing financial statements for each interim and annual reporting period, the Company evaluates whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date on which the financial statements are issued in accordance with FASB Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

The Company’s financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

As of September 30, 2021, the Company had approximately $8,019 thousand in cash and cash equivalents. As also reflected in the condensed financial statements, the Company had an accumulated deficit on September 30, 2021, and December 31, 2020, and had net losses and net cash used in operating activities for the reporting periods then ended. These factors, coupled with the available cash on hand as of September 30, 2021, and compared to management’s operating plan, raised substantial doubt about the Company’s ability to continue as a going concern.

- 8 -

However, as discussed in Note 10 Subsequent Events, the Company effected the close of the Merger with STWO on October 8, 2021, which contributed approximately $246,000 thousand, from the transaction. The Company has capitalized $3,471 thousand of transaction costs as of September 30, 2021. The Company believes that the net proceeds from the Merger plus its cash and cash equivalent balance at September 30, 2021 provide it with sufficient resources to continue as a going concern for at least the next 12 months from the date the condensed financial statements are issued.

Segment information

The Company has determined that its Chief Executive Officer (“CEO”) is its chief operating decision maker (“CODM”). The CEO reviews financial information presented for purposes of assessing performance and making decisions on how to allocate resources. The Company has determined that it operates in a single reportable segment.

All the Company’s operations and long-lived assets were attributable to operations in the United States as of September 30, 2021 and December 31, 2020.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting periods. Such estimates relate to, among others, the useful lives and assessment of recoverability of property and equipment, deferred tax assets valuation, determination of the fair value of the Company’s Bridge Loan, common and preferred stock, warrant liabilities, Series C-2 Redeemable Convertible Preferred Stock Issuance Right, as well as other accruals. These estimates are based on historical trends, market pricing, current events and other relevant assumptions and data points. Actual results could differ from those estimates and such differences may be material to the financial statements.

Significant Risks and Uncertainties

The Company is subject to those risks common in the technology industry and also those risks common to early-stage companies including, but not limited to, the possibility of not being able to successfully develop or market its products, technological obsolescence, competition, dependence on key personnel and key external alliances, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed.

COVID-19 presents material uncertainty and risk with respect to the Company, its performance, and its financial results and could adversely affect the Company’s financial position and results.

Concentration of Supply Chain Risk

The Company uses various raw materials and components that are critical to the future manufacturing of its energy storage solutions. Suppliers must undergo a qualification process, which typically requires four to twelve months to complete. The Company does not know whether it will be able to maintain long-term supply relationships with its critical suppliers, or secure new long-term supply relationships on terms that will allow it to achieve its objectives, if at all. A supplier’s failure to develop and supply components in a timely manner or to supply components that meet the Company’s quality, quantity, cost requirements or technical specifications, or the Company’s inability to source these components from alternative providers on a timely basis or on terms acceptable to the Company could each harm the Company’s ability to manufacture its energy storage solutions at the time when its products are commercially ready. In addition, to the extent the processes that the Company’s suppliers use to manufacture components are proprietary, the Company may be unable to obtain comparable components from alternative suppliers, all of which could harm the Company’s business prospects, results of operations and financial condition.

- 9 -

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and restricted cash. The Company’s cash and cash equivalents include cash in bank accounts and a money market account. The Company’s restricted cash includes a certificate of deposit and performance and payment bond. Deposits held with banks may exceed the amount of insurance provided on such deposits.

Significant Accounting Policies

There have been no material changes in the significant accounting policies described in our Audited Financial Statements as of and for the year ended December 31, 2020.

Accounting Standards Pending Adoption

There have been no material changes in the accounting standards pending adoption described in the Company’s audited financial statements for the year ended December 31, 2020.

Customer deposits are classified as other non-current liabilities. The Company is in the research and development phase. Its product is still being developed and does not yet meet standard specifications. As such and while the Company has entered into contracts with customers for shipment of pilot units, no revenue was recognized for the three and nine months ended September 30, 2021, and 2020 and revenue recognition will be deferred until the Company’s product meets such specifications and control of the goods has been transferred to the customer.

The following table is a rollforward of customer deposits balances for the nine months ended September 30, 2021 and twelve months ended December 31, 2020 (in thousands):

- 10 -

There were no common stock options, warrants or preferred stock that were dilutive for the three and nine months ended September 30, 2021 and 2020. Due to net losses for the three and nine months ended September 30, 2021 and 2020, basic and diluted net loss per common share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. The following outstanding balances of common share equivalent securities have been excluded from the calculation of diluted weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented:

- 11 -

Term Loan for Equipment

In September 2019, the Company financed a scanner purchase for $79 thousand. The loan term was 24 months, and the interest rate was 6.9%. In March 2020, the Company financed a machine tool purchase for $50 thousand. The loan term was 36 months, and the interest rate was 8.1%. Both loans’ principal and interest are payable on a monthly basis. In July 2021, the Company fully paid off both loans’ balances. The term loans’ balances as of September 30, 2021 and December 31, 2020 were $0 and $67 thousand, respectively.

Payroll Protection Program Loan

On April 19, 2020, the Company entered into an unsecured promissory note under the Payroll Protection Program (“the PPP Loan”) with a bank under the PPP administered by the United States Small Business Administration (“SBA”). The principal amount of the PPP Loan was $936 thousand. The PPP Loan bore interest of 1.0% per annum and was disbursed to the Company on April 20, 2020. The PPP Loan had a maturity date of April 20, 2022. Under the terms of the PPP, the Company could apply for, and be granted, forgiveness for all or a portion of the PPP Loan. Such forgiveness would be determined based on the use of the loan proceeds for eligible purposes within the first twenty-four weeks from the loan date. If at least 60% of the loan proceeds was used for payroll costs, then the entire loan would be forgiven. The remaining 40% of the loan proceed could be used for mortgage interest, rent, utility costs and the maintenance of employee and compensation levels. In July 2021, the Company applied for and received forgiveness on the $936 thousand PPP Loan plus $12 thousand in accrued interest. The gain on extinguishment of debt of $948 thousand is recorded within other income (expense), net in the Company’s Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2021.

Notes Payable

In 2018, the Company entered into a $1,000 thousand note payable with a bank that is secured by all property of the Company, except for its intellectual property. The original maturity date of the note was July 1, 2021 but was modified and extended to January 1, 2022 under a Deferral Agreement (“Deferral Agreement”) entered into in April 2020.

In March 2020, the Company amended the note payable and borrowed an additional $4,000 thousand. The additional $4,000 thousand borrowing changed the present value of cash flows by more than 10% and, as such, was treated as a debt extinguishment. The Company recognized a $62 thousand loss on extinguishment of debt for the year ended December 31, 2020. The Company’s note payable was recorded at fair value as part of the extinguishment. The $4,000 thousand note payable’s original maturity date was January 1, 2023 but was modified and extended to July 1, 2023 under the Deferral Agreement.

The Company accounted for the Deferral Agreement, extending the maturity of the notes payable, as a debt modification based on an analysis of cash flows before and after the debt modification.

The notes payable bear interest at 0.50% below the bank’s prime rate as of September 30, 2021 and December 31, 2020 (2.75% interest rate on September 30, 2021 and December 31, 2020). The Company makes monthly interest and principal payments on the notes payable based on the schedule defined in the agreement.

In conjunction with the notes payable, the Company issued 68,000 shares of Series B redeemable convertible preferred stock warrants and 70,000 shares of Series C redeemable convertible preferred stock warrants in July 2018 and March 2020, respectively. The Series B redeemable convertible preferred stock warrants and Series C redeemable convertible preferred stock warrants have exercise prices of $1.42 per share and $1.84 per share, respectively, and expire 10 years after issuance. The fair values of the Series B redeemable convertible preferred stock warrants and Series C redeemable convertible preferred stock warrants were $55 thousand and $44 thousand, respectively, at the time of issuance. The fair value of the Series B redeemable convertible preferred stock warrants was initially

- 12 -

recorded as a reduction of the value of the notes payable and was amortized over the term of the loan as interest expense using the effective interest method. Unamortized Series B redeemable convertible preferred stock warrants were treated as a component of loss on extinguishment of debt. The Series C redeemable convertible preferred stock warrants were issued in conjunction with the additional $4,000 thousand borrowing and were a component of the loss on extinguishment of debt. There was no interest expense recognized related to the amortization of warrants issued in conjunction with the notes payable for the three months ended September 30, 2021 and 2020. Interest expense of $0 and $4 thousand were recognized related to the amortization of warrants issued in conjunction with the notes payable for the nine months ended September 30, 2021 and 2020, respectively.

The audit opinion as of and for the year ended December 31, 2020 financial statements contained a going concern explanatory paragraph. Under the notes payable loan agreement, a going concern opinion with respect to the Company’s audited financial statements is a material adverse change resulting in an event of default. In accordance with a subjective acceleration clause, the Lender had an option to elect to accelerate $4,067 thousand of the Company’s existing indebtedness as of December 31, 2020 to be immediately due and payable. As of December 31, 2020, the event of default would have also accelerated the $943 thousand in principal and interest due on the PPP Loan because of the cross-default provisions. The Company had classified the notes payable and PPP loan as current liabilities as of December 31, 2020 due to the considerations discussed above and the assessment that the material adverse change clause under the notes payable and PPP Loan agreements was not within the Company’s control.

As discussed in Note 1, the Merger alleviated the risk related to going concern, as well as that related to the subjective acceleration clause. As a result, $2,253 thousand of the Company’s notes payable have been reclassified from current to noncurrent liabilities as of September 30, 2021.

Bridge Loan

In July 2021, the Company entered into a six-month $20,000 thousand bridge loan (the “Bridge Loan”), maturing on the earlier of January 12, 2021 or consummation of the SPAC merger, which ultimately closed on October 8, 2021, see Note 10. The Bridge Loan bore interest of 8%, of which 2.25% was payable monthly and 6.75% paid-in-kind (“PIK”) interest was due upon maturity. At maturity, a final payment of $1,250 thousand was due in addition to all outstanding principal and accrued interest. The Bridge Loan was paid off pursuant to the terms of the SPAC merger.    

The Company elected the fair value option to account for the Bridge Loan, which contained multiple embedded derivatives. The Company recorded the Bridge Loan at fair value of $20,000 thousand at issuance. Interest expense of $1,432 thousand was recognized and accrued related to the paid in-kind interest and final payment on the Bridge Loan for the three and nine months ended September 30, 2021. The Company remeasured the fair value of the Bridge Loan on September 30, 2021.

The Company, from time to time, is made a party to various claims, legal actions, and complaints arising in the ordinary course of business. The Company is not aware of any legal proceedings or other claims, legal actions, or complaints through the date of issuance of these financial statements.

On November 1, 2017, the Company executed a standby letter of credit with First Republic Bank totaling $725 thousand for security of its operating lease of office and manufacturing space in Wilsonville, Oregon. The letter of credit is fully secured by restricted certificate of deposit accounts. The Company can draw $200 thousand on the 95^th day following each of

- 13 -

the twelfth, twenty-fourth and thirty-sixth full calendar month following the commencement date of the lease (November 1, 2017), and an additional $50 thousand on the 95^th day following the forty-eighth full calendar month following November 1, 2017. The letter of credit shall not be reduced below $75 thousand. As of September 30, 2021, and December 31, 2020, the standby letter of credit balance was $125 thousand and $325 thousand, respectively. The Company drew $200 thousand in the three and nine months ended September 30, 2021. There were no draws against the letter of credit during the three and nine months ended September 30, 2020.

The Company purchases materials from several suppliers and has entered into agreements with various contract manufacturers, which include cancelable and noncancelable purchase commitments.

As of September 30, 2021, and December 31, 2020, total unfulfilled noncancelable purchase commitments were $13,392 thousand and $3,410 thousand, respectively. In addition, total unfulfilled cancellable purchase commitments amounted to $3,774 thousand and $787 thousand as of September 30, 2021 and December 31, 2020, respectively. These purchase commitments were not recorded in the condensed financial statements.

On May 7, 2021, the Company amended and restated its Certificate of Incorporation (the “Fifth Restatement”). The Fifth Restatement supersedes and replaces all previous Certificates of Incorporation.

Under the Fifth Restatement, the Company is authorized to issue 79,000,000 shares of common stock with $0.0001 par value. The holders of common stock are entitled to one vote for each share held.

Under the Fifth Restatement, the number of shares of preferred stock authorized for issuance remained the same at 62,072,064 with $0.0001 par value.

The Company’s Redeemable Convertible Preferred Stock as of September 30, 2021 consisted of the following (in thousands, except share data):

Sale of Series C-2 Redeemable Convertible Preferred Stock

In March 2021, the Company issued 3,900,988 shares of Series C-2 redeemable convertible preferred stock for $2.95 per share, totaling $11,500 thousand. The Company incurred $39 thousand in costs associated with the issuance. In connection with the sale of the Series C-2 redeemable convertible preferred stock, the Company issued warrants to purchase 585,145 shares of Series C-2 redeemable convertible preferred stock and extinguished a portion of the C-2 Purchase Right for 3,900,988 shares. The warrants are exercisable at a price of $0.0001 per share. The extinguishment of a portion of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right reduced the Company’s derivative liabilities and increased the amount attributable to the issuance by $23,152 thousand. Total transaction value of $34,613 thousand was allocated to the Series C-2 redeemable convertible preferred stock and warrants in the amounts of $29,516 thousand and $5,097 thousand, respectively.

- 14 -

Amendment to Series C-2 Redeemable Convertible Preferred Stock Purchase Right and Related Warrants

On May 7, 2021, the Company amended its Series C-2 Preferred Stock Purchase Agreement and Amendment to Series C Preferred Stock Purchase Agreement. Under the terms of the amended agreement, the number of shares of C-2 Convertible Redeemable Preferred Stock required to be issued by the Company and purchased by investors under the C-2 Redeemable Convertible Preferred Stock Purchase Right were adjusted, and the Company issued Series C-2 warrants. The Series C-2 warrants are exercisable at a price of $.0001 per share upon a successful SPAC merger with STWO. The investors may purchase shares subject to the C-2 Redeemable Convertible Preferred Stock Purchase Right at any time and must purchase the shares upon the Company’s achievement of specific milestones. The number of shares subject to and potential proceeds from the C-2 Redeemable Convertible Preferred Stock Purchase Agreement and related C-2 Warrants are as follows, before and after the amendment:

The Series C-2 Redeemable Convertible Purchase Right must be exercised prior to the SPAC merger, or it will be eliminated in the event of the successful SPAC merger. If the SPAC merger is unsuccessful, then the remaining rights of the two investors under the Series C-2 Redeemable Convertible Purchase Right from the Series C Preferred Stock Purchase Agreement dated August 28, 2019 will be restored, as shown in the tables above. The combined value of the Series C-2 Redeemable Convertible Preferred Stock Purchase Right and related Series C-2 warrants are included within derivative liabilities on the Company’s condensed balance sheets. The C-2 warrants and Purchase Rights were exercised in conjunction with the SPAC merger which closed in October 2021, see Note 10.

- 15 -

The outstanding warrants include Series C redeemable convertible preferred stock warrants and Series B redeemable convertible preferred stock warrants issued in conjunction with the Company’s long-term debt discussed within Note 4. The table of warrants outstanding above, does not include the 14,365,207 Series C-2 warrants contingently issued as per the Amendment to Series C-2 Redeemable Convertible Preferred Stock Purchase Right, which are only exercisable upon completion of the SPAC merger and adjust to a quantity of zero if a SPAC merger is not completed.

The Company’s Series B redeemable convertible preferred stock warrants and Series C redeemable convertible preferred stock warrants were liability classified awards.

The Company’s Series B redeemable convertible preferred stock warrants were issued at exercise prices ranging from $0.001 per share to $1.42 per share. 68,000 shares of Series B redeemable convertible preferred stock warrants have a ten-year exercise period and the remaining 1,290,777 shares of redeemable convertible preferred stock warrants do not expire until a significant transaction has occurred, as defined by the Warrant Purchase Agreement. The warrants were fully vested at the issuance date.

The Company’s Series C-1 and C-2 redeemable convertible preferred stock warrants, reflected in the table below, were issued with prices ranging from $0.0001 to $1.84 per share, a life of 10 years and were fully vested at issuance.

The common stock warrants, all issued at a price of $0.001 per share, were recorded at fair value within equity. The common stock warrants were fully vested at issuance and do not expire until a significant transaction has occurred, as defined by the Warrant Purchase Agreement.

The table below shows the warrant activities during the nine months ended September 30, 2021:

The table below shows the valuation assumptions for the warrants immediately prior to the exercises as of and for the nine months ended September 30, 2021:

- 16 -

The warrants were valued using the following assumptions as of December 31, 2020:

In accordance with Accounting Standards Codification (ASC) 718, the fair value of each option grant has been estimated as of the date of grant using the Black-Scholes Merton option-pricing model based on the following weighted average assumptions:

The compensation expense is allocated on a departmental basis, based on the classification of the award holder. The following table presents the amount of stock-based compensation related to stock-based awards to employees on the Company’s Statements of Operations and Other Comprehensive Loss (in thousands):

For the three and nine months ended September 30, 2021 and 2020, there were no transfers between levels in the fair value hierarchy. The carrying amounts of the Company’s notes payable and accounts payable approximate their fair values due to their short maturities.

- 18 -

Level 1 Assets:

The Company invests in money market funds that have maturities of 90 days or less. The money market funds are classified as cash equivalents and are recorded at their carrying value, which approximates fair value.

Level 2 Assets:

The Company invests in a certificate of deposit with a maturity of one year from purchase date. The certificate of deposit is classified as restricted cash and recorded at its carrying value, which approximates fair value.

Level 3 Liabilities:

Bridge Loan

The Company accounts for the Bridge Loan under the fair value option election wherein the Bridge Loan is initially measured at its issue-date fair value and then subsequently re-measured at estimated fair value on a recurring basis at each reporting date. As a result of applying the fair value option, direct costs and fees related to the Bridge Loan were expensed as incurred.

The fair value of the Bridge Loan is based on significant inputs including, estimated time to maturity, which causes them to be classified as a Level 3 measurement within the fair value hierarchy. The valuation uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Bridge Loan was paid off on October 8, 2021 as part of the SPAC merger. See Note 10 for further details.

Warrants

Freestanding warrants to purchase Redeemable Convertible Preferred Stock are accounted for as liability awards and recorded at fair value on their issuance date and adjusted to fair value at each reporting date, with the change in fair value being recorded as a component of other income (expense). The warrants are accounted for as liabilities as the underlying shares of Preferred Stock are contingently redeemable upon occurrence of a change in control, which is outside the control of the Company.    

The Company measures its warrant liabilities using Level 3 unobservable inputs within the Black-Scholes Merton option-pricing model. The Company uses various key assumptions, such as the fair value of Series B redeemable convertible preferred stock warrants and Series C redeemable convertible preferred stock warrants, the volatility of peer companies’ stock prices, the risk-free interest rate based on the U.S. Treasury yield, and the expected term (based on remaining term to a significant event for Series B redeemable convertible preferred stock warrants and remaining contractual term for Series C redeemable convertible preferred stock warrants). The Company measures the fair value of the redeemable convertible Preferred Stock warrants at each reporting date, with subsequent gains and losses from remeasurement of Level 3 financial liabilities recorded through other expense, net in the Statements of Operations and Comprehensive Loss.

All the warrants were exercised during the nine months ended September 30, 2021.

Future Rights to Purchase Series C-2 Redeemable Convertible Preferred Stock

The Company’s Series C Redeemable Convertible Preferred Stock financing agreement provides additional committed funding through the purchase of shares of Series C-2 Redeemable Convertible Preferred Stock based on the completion of certain operational milestones at a predetermined price of $2.95 per share as of September 30, 2021, from certain Series C-1 Investors (“Series C-2 Redeemable Convertible Preferred Stock Issuance Right”). See discussion within Note 6 related to the Amendment to the C-2 Redeemable Convertible Preferred Stock Purchase Right and related issuance of Series C-2 warrants during the nine months ended September 30, 2021.    

- 19 -

The value of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right is determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.

The Company utilized a probability weighting of successful completion of the SPAC merger versus probability of the Company staying private in establishing the quantity of purchase rights to value and the fair value of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right. The fair value of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right was determined using a discounted cash flow model, which takes into account the estimated value of Series C-2 stock, estimated time to purchase, probability of purchase and the risk-free interest rate based on the U.S. treasury yield. The Company measures the fair value of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right at each reporting date, with subsequent gains and losses from remeasurement of Level 3 financial liabilities recorded through other expense, net in the Statements of Operations and Comprehensive Loss. The Company includes the valuation of the related Series C-2 warrants that are only exercisable upon completion of a SPAC merger with the valuation of the Series C-2 Convertible Preferred Stock Issuance Right.

- 20 -

The following table sets forth a summary of changes in the fair value of the Company’s level 3 liabilities at fair value on a recurring basis (in thousands):

The Company did not record a tax provision for the three and nine months ended September 30, 2021 and 2020, respectively, due to the losses and valuation allowance against substantially all of the Company’s net deferred tax assets. The Company provides for a valuation allowance when it is more likely than not that some portion of, or all of the Company’s deferred tax assets will not be realized. Due to the Company’s history of losses, the Company determined that it is not more likely than not to realize its deferred tax assets.

The Company has evaluated subsequent events through November 22, 2021, the date the condensed financial statements were available to be issued.

On October 8, 2021, the Company completed the Merger and received approximately $246,000 thousand in net proceeds. Upon the Merger closing, each share of the Company’s common stock, par value $0.0001 per share (“ESS Common Stock”) was converted into the right to receive shares of New ESS common stock at an exchange ratio of approximately 1.47 (the “Per Share Consideration”) as calculated pursuant to the Merger Agreement. The aggregate consideration paid to ESS stockholders in connection with the Merger (excluding any potential Earnout Stock), was 99,562,793 shares of New ESS Common Stock.

- 21 -

The Merger occurred based on the following events contemplated by the Merger Agreement:

Other events that took place in connection with the Merger are summarized below:

- 22 -

Exhibit 99.2

The U.S. Department of Energy has identified long duration battery storage as one of the key elements toward helping the United States achieve a net-zero carbon electricity system. Guidehouse Inc. expects the global total addressable market for energy storage to reach approximately $56.0 billion by 2027 in comparison to $8.0 billion in 2020.

The key driver for battery installations will be increased reliance on renewable energy resources. As renewable penetration increases, the intermittency of these resources can put strain on the grid if the operator is unable to fully match supply with demand. This strain can lead to an inability to supply power when it is needed and increased costs to consumers.

Energy storage can help reduce this strain. However, beyond a threshold level of renewable penetration, short duration (less than four hour) batteries are insufficient to ensure grid reliability. In order to maintain system stability and achieve mandated decarbonization goals, longer duration energy storage options must be deployed. Iron flow batteries are among a small list of available technologies that can meet this requirement and stand to grow rapidly in order to ensure grid reliability.

Our long duration iron flow batteries are the product of nearly fifty years of scientific advancement. Our founders, Craig Evans and Dr. Julia Song, began advancing this technology in 2011 and formed ESS. 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. The Proton Pump converts the hydrogen back into protons in the positive electrolyte. This process eliminates the hydroxide and stabilizes the electrolytes’ pH levels. The Proton Pump allows the electrolyte to be used for over 20,000 cycles without any capacity fade.

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 four to 12-hour duration. 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 premise, typically 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.

The Business Combination

On October 8, 2021, ESS consummated the previously announced merger pursuant to the Merger Agreement dated May 6, 2021 (the “Business Combination”). As a result, ESS merged with Merger Sub, with 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 under the Merger Agreement will be used to fund our corporate 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. The cash raised from the Business Combination will also be used to fund investments in personnel and research and development as well as provide liquidity for the funding of our ongoing operating expenses.

The Business Combination was accounted for as a reverse recapitalization. ESS was deemed the accounting predecessor and the combined entity is the successor SEC registrant, meaning that its financial statements for previous periods will be disclosed in the registrant’s future periodic reports filed with the SEC. Under this method of accounting, STWO was treated as the acquired company for financial statement reporting purposes. The most significant change in the successor’s future reported financial position and results are expected to be an estimated net increase in cash (as compared to its balance sheet at September 30, 2021) of $246.0 million, which includes $250.0 million in gross proceeds from the private investment in public equity (“PIPE Financing”), net of additional offering costs. See Legacy ESS’ unaudited pro forma condensed combined financial information as of and for the nine months ended September 30, 2021 and the year ended December 31, 2020 as set forth in Exhibit 99.3 to the Form 8-K/A and incorporated herein by reference.

As a result of the Business Combination, ESS became the successor to an SEC-registered and publicly traded company, which will require us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. 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.

Key Factors and Trends Affecting our Business

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, in the section entitled “Risk Factors” beginning on page 33 of the Proxy Statement, and in the section entitled “Risk Factors” Beginning on page 5 of the Form S-1.

We believe we have the opportunity to establish high margin unit economics when operating at scale. Our future performance will depend on our ability to deliver on these economies of scale with lower product costs to enable profitable growth. We believe our business model is positioned for scalability due to the ability to leverage the same product platform across our customer base, reduced labor, raw materials and other costs from manufacturing. Further, the manufacturing model is a capital light model and does not require significant capital expenditures when compared to alternative technologies. Significant improvements in manufacturing scale are expected to decrease the core bill of materials. However, in the near term, we expect our 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 public company readiness. Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers.

Our revenue is expected to be generated from our second generation Energy Warehouses and we expect to begin generating revenues from Energy Centers in 2022. We believe our unique technology provides a compelling value proposition for favorable margins and unit economics in the energy storage industry.

COVID-19

The rapid global spread of the COVID-19 coronavirus since December 2019 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. While COVID-19 cases have declined in many parts of the United States, some states are seeing increases in the infection rates as they began to allow businesses to reopen. COVID-19 cases have also continued to surge in certain countries outside the United States, and certain countries that were initially successful at containing the virus have experienced renewed outbreaks in recent months. The evolution of the disease, the extent of its economic impact and the results of steps taken and yet to be taken by governments and financial institutions are still unknown. The significance and the duration of the pandemic’s financial impact are indeterminable. 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. The ultimate outcome of these matters is uncertain and, accordingly, the impact on our financial condition or results of operations is also uncertain.

To support the health and well-being of our employees, customers, partners and communities, in March 2020, we temporarily suspended operations at our Wilsonville, Oregon manufacturing facility, and also required all of our non-essential employees to work remotely. This represented approximately 20% of our workforce. While we resumed operations in the manufacturing facility within several weeks, we instituted a split schedule shift, staggered workdays, and significant limitations on various areas of our physical building. Currently, we continue to evaluate our ability to operate in light of recent resurgences of COVID-19, including the emergence of new variant strains of COVID-19, which have and may in the future necessitate renewed government restrictions, and the advisability of continuing operations, based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders. We have issued several force majeure notices to customers as a result of delays caused by COVID-19 and the impact of COVID-19 on such agreements, or the applicable agreements’ termination provisions, is uncertain and could result in the termination of such agreements.

Components of Results of Operations

Revenue

We expect to earn revenue from the sale of our energy storage products and from service contracts. We have not recognized any revenue to date. Although second generation Energy Warehouses were shipped during the third quarter of 2021, full revenue recognition criteria for those shipments had not been met as of September 30, 2021.

Operating expenses

Research and development expenses

Costs related to research and development consist of direct product development material costs and product development personnel related expenses and to a lesser extent, depreciation charges, overhead related costs, consulting services and other direct expenses. Personnel related expenses consist of salaries, benefits and stock-based compensation. We expect our research and development costs to increase for the foreseeable future as we continue to invest in research and development activities to achieve our product roadmap.

Sales and marketing expenses

Sales and marketing expenses consist primarily of salaries, benefits and stock-based compensation for marketing and sales personnel and related support teams. To a lesser extent sales and marketing expenses also includes professional services 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.

General and administrative expenses

General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, and other administrative functions, as well as expenses for outside professional services. Personnel related expenses consist of salaries, benefits, and stock-based compensation. To a lesser extent, general and administrative expense includes depreciation, insurance costs, and other allocated costs, such as facility-related expenses, and supplies. We expect our general and administrative expenses to increase for the foreseeable future 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.

Interest expense, net

Interest expense consists primarily of interest on our notes payable. Interest income consists primarily of earned income on our cash equivalents and restricted cash. These amounts will vary based on our cash, cash equivalents and restricted cash balances, and with market rates.

Loss on revaluation of warrant liabilities

The loss on revaluation of warrant liabilities consists of periodic fair value adjustments related to our Series B and C warrants outstanding.

Loss on revaluation of derivative liabilities

The loss on revaluation of derivative liability consists of periodic fair value adjustments associated with our derivative liability for the Series C-2 Convertible Preferred Stock issuance right liability and contingently issuable warrants.

Other income (expense)

Other income and expense consist of various other income and expense items but primarily consists of gain or loss on extinguishment of debt and issuance costs allocated to the Series C-2 Convertible Preferred Stock issuance right.