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☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Delaware			98-1550150
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
26440 SW Parkway Ave., Bldg. 83
Wilsonville, Oregon			97070
(Address of Principal Executive Offices)			(Zip Code)

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common stock, $0.0001 par value per share			GWH			New York Stock Exchange
Warrants, each whole warrant exercisable for one share of common stock at an exercise price of $11.50			GWH.W			New York Stock Exchange

Large accelerated filer			☐			Accelerated filer			☐
Non-accelerated filer			☒			Smaller reporting company			☒
						Emerging growth company			☒

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Part I – Financial Information
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
Part II – Other Information
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			68
Item 3. Defaults Upon Senior Securities			68
Item 4. Mine Safety Disclosures			68
Item 5. Other Information			69
Item 6. Exhibits			70
SIGNATURES			71

•our financial and business performance, including financial projections and business metrics;

•changes in our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects and plans;

•the implementation, market acceptance and success of our technology implementation and business model;

•our ability to scale in a cost-effective manner;

•developments and projections relating to our competitors and industry;

•the impact of health epidemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto;

•our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;

•expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act (“JOBS Act”);

•our future capital requirements and sources and uses of cash;

•our ability to obtain funding for our operations;

•our business, expansion plans and opportunities;

•our relationships with third-parties, including our suppliers;

•issues related to the shipment and installation of our products;

•issues related to customer acceptance of our products;

•the outcome of any known and unknown litigation and regulatory proceedings;

•our ability to successfully deploy the proceeds from the Business Combination (as defined herein); and

•other risks and uncertainties discussed in “Part II. Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021.

			September 30, 2022						December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents			$	42,896					$	238,940
Restricted cash, current			1,167						1,217
Accounts receivable, net			80						451
Accounts receivable, net - related parties			—						66
Short-term investments			123,842						—
Prepaid expenses and other current assets			3,258						4,844
Total current assets			171,243						245,518
Property and equipment, net			15,948						4,501
Operating lease right-of-use assets			3,693						—
Restricted cash, non-current			675						75
Other non-current assets			305						105
Total assets			$	191,864					$	250,199
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	1,091					$	1,572
Accrued and other current liabilities			12,651						6,487
Accrued product warranties			1,148						—
Operating lease liabilities, current			1,383						—
Deferred revenue			3,546						3,663
Notes payable, current			2,306						1,900
Total current liabilities			22,125						13,622
Notes payable, non-current			—						1,869
Operating lease liabilities, non-current			2,904						—
Earnout warrant liabilities			432						1,476
Public warrant liabilities			5,460						18,666
Private warrant liabilities			2,590						8,855
Other non-current liabilities			91						552
Total liabilities			33,602						45,040
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock ($0.0001 par value; 200,000,000 shares authorized, none issued and outstanding as of September 30, 2022 and December 31, 2021)			—						—
Common stock ($0.0001 par value; 2,000,000,000 shares authorized, 152,919,714 and 151,839,058 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively)			16						16
Additional paid-in capital			751,750						745,753
Accumulated deficit			(593,504)						(540,610)
Total stockholders’ equity			158,262						205,159
Total liabilities and stockholders’ equity			$	191,864					$	250,199

See accompanying notes to condensed consolidated financial statements

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Revenue:
Revenue			$	191					$	—					$	595					$	—
Revenue - related parties			1						—						283						—
Total revenue			192						—						878						—
Operating expenses:
Research and development			20,127						7,672						49,190						19,546
Sales and marketing			1,815						1,048						5,217						2,261
General and administrative			5,981						2,316						20,567						7,667
Total operating expenses			27,923						11,036						74,974						29,474
Loss from operations			(27,731)						(11,036)						(74,096)						(29,474)
Other income (expenses), net:
Interest income (expense), net			781						(1,582)						999						(1,693)
Gain (loss) on revaluation of warrant liabilities			(4,351)						(2,949)						19,471						(17,753)
Loss on revaluation of derivative liabilities			—						(36,703)						—						(248,691)
Gain (loss) on revaluation of earnout liabilities			(234)						—						1,044						—
Other income (expense), net			(62)						945						(312)						926
Total other income (expenses), net			(3,866)						(40,289)						21,202						(267,211)
Net loss and comprehensive loss to common stockholders			$	(31,597)					$	(51,325)					$	(52,894)					$	(296,685)
Net loss per share - basic and diluted			$	(0.21)					$	(0.76)					$	(0.35)					$	(4.53)
Weighted-average shares used in per share calculation - basic and diluted			152,861,300						67,670,709						152,427,346						65,520,584

			Redeemable Convertible Preferred Stock															Common Stock												Common Stock Warrants						Additional Paid-In Capital						Accumulated Deficit						Total Stockholders’ Equity (Deficit)
			Shares						Amount									Shares						Amount
Balance as of December 31, 2020			—						$	—								58,919,345						$	6					$	153					$	35,446					$	(63,493)					$	(27,888)
Issuance of Legacy ESS redeemable convertible preferred stock			—						—									5,746,003						1						—						29,515						—						29,516
Issuance of common stock upon exercise of options			—						—									2,379,260						—						—						518						—						518
Issuance of common stock upon exercise of warrants			—						—									60,418						—						—						356						—						356
Stock-based compensation expense			—						—									—						—						—						129						—						129
Net loss			—						—									—						—						—						—						(154,918)						(154,918)
Balance as of March 31, 2021			—						$	—								67,105,026						$	7					$	153					$	65,964					$	(218,411)					$	(152,287)
Issuance of common stock upon exercise of options			—						—									49,484						—						—						136						—						136
Issuance of common stock upon exercise of warrants			—						—									2,722						—						—						13						—						13
Stock-based compensation expense			—						—									—						—						—						231						—						231
Net loss			—						—									—						—						—						—						(90,442)						(90,442)
Balance as of June 30, 2021			—						$	—								67,157,232						$	7					$	153					$	66,344					$	(308,853)					$	(242,349)
Issuance of common stock upon exercise of options			—						—									54,172						—						—						10						—						10
Issuance of common stock upon exercise of warrants			—						—									3,335,074						—						(153)						25,969						—						25,816
Stock-based compensation expense			—						—									—						—						—						260						—						260
Net loss			—						—									—						—						—						—						(51,325)						(51,325)
Balance as of September 30, 2021			—						$	—								70,546,478						$	7					$	—					$	92,583					$	(360,178)					$	(267,588)
Balance as of December 31, 2021			—						$	—								151,839,058						$	16					$	—					$	745,753					$	(540,610)					$	205,159
Issuance of common stock upon exercise of options			—						—									138,617						—						—						47						—						47
Issuance of common stock upon release of restricted stock units			—						—									873,070						—						—						—						—						—
Cancellation of shares used to settle payroll tax withholding			—						—									(244,202)						—						—						(2,808)						—						(2,808)
Warrants exercised			—						—									20						—						—						—						—						—
Stock-based compensation expense			—						—									—						—						—						2,760						—						2,760
Net loss			—						—									—						—						—						—						(5,709)						(5,709)
Balance as of March 31, 2022			—						$	—								152,606,563						$	16					$	—					$	745,752					$	(546,319)					$	199,449
Issuance of common stock upon exercise of options			—						—									167,478						—						—						48						—						48
Issuance of common stock upon release of restricted stock units			—						—									41,607						—						—						—						—						—
Stock-based compensation expense			—						—									—						—						—						2,945						—						2,945
Net loss			—						—									—						—						—						—						(15,588)						(15,588)
Balance as of June 30, 2022			—						$	—								152,815,648						$	16					$	—					$	748,745					$	(561,907)					$	186,854
Issuance of common stock upon exercise of options			—						—									35,101						—						—						7						—						7
Issuance of common stock upon release of restricted stock units			—						—									68,965						—						—						—						—						—
Stock-based compensation expense			—						—									—						—						—						2,998						—						2,998
Net loss			—						—									—						—						—						—						(31,597)						(31,597)
Balance as of September 30, 2022			—						$	—								152,919,714						$	16					$	—					$	751,750					$	(593,504)					$	158,262

See accompanying notes to condensed consolidated financial statements

			Nine Months Ended September 30,
			2022						2021
Cash flows from operating activities:
Net loss			$	(52,894)					$	(296,685)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			828						404
Non-cash lease expense			841						—
Stock-based compensation expense			8,703						620
Gain on extinguishment of debt			—						(948)
Loss on investments			189						—
Change in fair value of warrant liabilities			(19,471)						17,753
Change in fair value of derivative liabilities			—						248,691
Change in earnout liabilities			(1,044)						—
Other non-cash income and expenses, net			(410)						1,495
Changes in operating assets and liabilities:
Accounts receivable			437						—
Prepaid expenses and other assets			1,497						(5,713)
Accounts payable			(1,604)						2,441
Accrued and other current liabilities			5,525						2,195
Accrued product warranties			1,148						—
Deferred revenue			(117)						—
Other non-current liabilities			(248)						1,404
Net cash used in operating activities			(56,620)						(28,343)
Cash flows from investing activities:
Purchases of property and equipment			(11,186)						(288)
Purchases and maturities of short-term investments, net			(123,467)						—
Net cash used in investing activities			(134,653)						(288)
Cash flows from financing activities:
Borrowing on notes payable, net of debt issuance costs			—						20,000
Payments on notes payable			(1,500)						(584)
Proceeds from stock options exercised			102						664
Repurchase of shares from employees for income tax withholding purposes			(2,808)						—
Proceeds from sale of Legacy ESS Series C-2 redeemable convertible preferred stock, net of issuance costs			—						11,461
Other, net			(15)						7
Net cash (used in) provided by financing activities			(4,221)						31,548
Net change in cash, cash equivalents and restricted cash			(195,494)						2,917
Cash, cash equivalents and restricted cash, beginning of period			240,232						6,394
Cash, cash equivalents and restricted cash, end of period			$	44,738					$	9,311

			Nine Months Ended September 30,
			2022						2021
Supplemental disclosures of cash flow information:
Cash paid for operating leases included in cash used in operating activities			$	1,213					$	—
Non-cash investing and financing transactions:
Purchase of property and equipment included in accounts payable and accrued and other current liabilities			1,718						343
Right-of-use operating lease assets obtained in exchange for lease obligations			4,534						—
Right-of-use finance lease assets obtained in exchange for lease obligations			123						—
Extinguishment of derivative liabilities upon sale of Legacy ESS Series C-2 redeemable convertible preferred stock, net of amount allocated to warrants			—						18,055
Extinguishment of warrant liabilities upon exercise of Legacy ESS Series B, Series C-1 and Series C-2 redeemable convertible preferred stock warrants			—						26,178
Payroll Protection Program loan forgiven			—						948
Cash and cash equivalents			$	42,896					$	8,019
Restricted cash, current			1,167						1,217
Restricted cash, non-current			675						75
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows			$	44,738					$	9,311

ESS TECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business—ESS Tech, Inc. (“ESS” or the “Company”) is a long-duration energy storage company specializing in iron flow battery technology. ESS develops long-duration iron flow batteries for commercial and utility-scale energy storage applications requiring four or more hours of flexible energy capacity. The Company’s products are designed for a 25-year operating life without performance degradation and with minimal annual operational and maintenance requirements. The Company continues to be in the research and development phase.

The Company was originally incorporated as a Cayman Islands exempted company on July 21, 2020 as a publicly traded special purpose acquisition company under the name ACON S2 Acquisition Corp. (“STWO”) for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination involving STWO and one or more businesses. On October 8, 2021 (the “Closing Date”), the Company consummated the merger agreement (the “Merger Agreement”) dated May 6, 2021, by and among STWO, SCharge Merger Sub, Inc., a Delaware corporation and wholly owned direct subsidiary of STWO (“Merger Sub”), and ESS Tech, Inc., a Delaware corporation (“Legacy ESS”) following the approval at a special meeting of the stockholders of STWO held on October 5, 2021.

Pursuant to the terms of the Merger Agreement, STWO deregistered by way of continuation under the Cayman Islands Companies Act (2021 Revision) and registered as a corporation in the State of Delaware under Part XII of the Delaware General Corporation Law (the “Domestication”), and a business combination between STWO and Legacy ESS was effected through the merger of Merger Sub with and into Legacy ESS, with Legacy ESS surviving as a wholly owned subsidiary of STWO (together with the other transactions described in the Merger Agreement, the “Business Combination”). On the Closing Date, STWO changed its name from “ACON S2 Acquisition Corp” to “ESS Tech, Inc.”, and its shares of common stock and warrants for shares of common stock commenced trading on the New York Stock Exchange under the new ticker symbols “GWH” and “GWH.W”, respectively.

Basis of Presentation—The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary and have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Pursuant to the Merger Agreement, the merger between Merger Sub and Legacy ESS was accounted for as a reverse recapitalization in accordance with U.S. GAAP (the “Reverse Recapitalization”). Under this method of accounting, STWO was treated as the “acquired” company and Legacy ESS was treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Legacy ESS issuing stock for the net assets of STWO, accompanied by a recapitalization. The net assets of STWO were stated at historical cost, with no goodwill or other intangible assets recorded. Legacy ESS was determined to be the accounting acquirer based on the following predominant factors:

•Legacy ESS’s existing stockholders had the greatest voting interest in the Company;

•Legacy ESS’s directors represented all of the new board of directors of the Company;

•Legacy ESS’s senior management continued as the senior management of the Company; and,

•Legacy ESS had the larger employee base.

The assets, liabilities and results of operations prior to the Reverse Recapitalization are those of Legacy ESS. The shares and corresponding capital amounts and losses per share, prior to the Reverse Recapitalization, have been retroactively restated based on shares reflecting the exchange ratio of approximately 1.47 (the “Per Share Consideration”) established in the Business Combination.

Condensed Consolidated Financial Statements—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary in order to make the condensed consolidated financial statements not misleading. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related

notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 4, 2022.

Reclassifications—Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no effect on the reported results of operations.

2.SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates—The preparation of the condensed consolidated 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 commitments and contingencies as of the date of the condensed consolidated 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 investments, earnout warrant liabilities and private warrants, product warranty liabilities, 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 condensed consolidated financial statements.

Net Loss Per Share—The Company follows the two-class method when computing net income (loss) per common share when shares are issued that meet the definition of participating securities. Under this method, net earnings are reduced by the amount of dividends declared in the current period for common stockholders and participating security holders. The remaining earnings or “undistributed earnings” are allocated between common stock and participating securities to the extent that each security may share in earnings as if all the earnings for the period had been distributed. Once calculated, the earnings per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each year presented. Diluted income (loss) attributable to common stockholders per common share has been computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding plus the dilutive effect of outstanding options, warrants, and restricted stock units (“RSUs”) during the respective periods. In cases where the Company has a net loss, no dilutive effect is shown as options, warrants, and RSUs become anti-dilutive.

Cash and Cash Equivalents—Cash and cash equivalents include cash in bank accounts, money market funds, and investments with a maturity of three months or less at the date of purchase. Cash equivalents are recorded at carrying value, which approximates fair value.

Restricted Cash—Restricted cash is required as collateral for certain of the Company’s lease agreements and contractual supply and service arrangements. Restricted cash includes a certificate of deposit for the Company’s lease agreements, collateral associated with a standby letter of credit issued to a customer, and a performance and payment bond for the Company’s supply and service arrangements. The certificate of deposit and bond are recorded at carrying value, which approximates fair value. Restricted cash amounts are reported in the condensed consolidated balance sheets as current or non-current depending on when the cash will be contractually released.

Accounts Receivable, Net—The Company evaluates the creditworthiness of its customers. If the collection of any specific receivable is doubtful, an allowance is recorded in the allowance for doubtful accounts which is included in accounts receivable, net in the condensed consolidated balance sheets. The Company had no allowance for doubtful accounts recorded at either September 30, 2022 or December 31, 2021.

Investments—Investments consist primarily of U.S. Treasury securities, U.S. agency securities, and commercial paper and are classified as trading securities as they are bought and held principally for the purpose of selling them in the near term. Trading securities are carried on the condensed consolidated balance sheets at fair value. Unrealized gains and losses on trading securities are included in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. For trading securities still held at the reporting date, the Company recorded net losses of $79 thousand and $110 thousand for the three and nine-month periods ended September 30, 2022, respectively.

Revenue Recognition—Revenue is earned from the sale, installation and commissioning of energy storage systems and is derived from customer contracts. Revenue is recognized in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring the promised goods and/or services to the customer, when or as the Company’s performance obligations are satisfied which includes estimates for variable consideration (e.g., liquidated damages). For product sales of energy storage systems, the Company’s performance obligations are satisfied at the point in time when the customer obtains control of the system.

Revenue recognition is deferred for each unit until written customer acceptance has been received, after site acceptance testing, or until the Company has established a history of successfully obtaining customer acceptance. In the near term, as the Company’s products are newly developed, this is likely to be a longer process than when the products are mature and the Company has an established history of customer acceptance. No right of return exists on sales of energy storage systems. Performance obligations for services, including the optional Ironclad Services Plan (“ISP”) extended warranty and ongoing operations and maintenance program provided to customers, are satisfied over time as the respective services are performed.

The transaction price of the underlying customer agreement is allocated to each performance obligation based on its relative standalone selling price. When the standalone selling price is not directly observable, revenue is determined based on an estimate of selling price using the observable market price that the good or service sells for separately in similar circumstances and to similar customers, and/or an expected cost plus margin approach when the observable selling price of a good or services is not known and is either highly variable or uncertain.

Costs to obtain a contract relate primarily to commissions paid to the Company’s sales personnel related to the sale of energy storage systems. The Company expenses costs associated with obtaining new contracts as incurred if the amortization period of the asset recognized by the Company is one year or less.

The Company invoices customers in accordance with customer agreements and in advance of recognizing revenue as the Company has not satisfied certain performance obligations that transfer control to the customer. Payment terms generally include advance payments to reserve capacity and/or upon issuance of the customer’s purchase order with the remainder due upon the achievement of various milestones including but not limited to shipment readiness, delivery, commissioning of the system, and completion of final site testing. Advanced customer payments and unsatisfied performance obligations are recognized as deferred revenue in the condensed consolidated balance sheets.

Sales tax collected from customers is recorded on a net basis and therefore, not included in revenue. Sales tax is recorded as a liability until remitted to governmental authorities. Shipping and handling, freight costs and other reimbursable costs are accounted for as fulfillment activities and included in revenue. Related costs are included in research and development expenses while the Company is in the research and development phase.

Product Warranties—Warranty obligations are incurred in connection with the sale of the Company’s products. The Company generally provides a standard warranty for a period of one year and an extended warranty through the optional ISP. 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 service-type warranty which is a distinct service and a portion of the transaction price is allocated to that performance obligation.

Costs to provide for standard warranty obligations are estimated and recorded as a liability at the time revenue is recognized on the sale of the energy storage system. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors, including the use of actual claim data to date. Adjustments to warranty reserves are recorded to research and development expenses while the Company is in the research and development phase.

Stock-Based Compensation—The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). The Company measures and recognizes compensation expense for all stock-based awards based on estimated fair values on the date of the grant, recognized over the requisite service period. For awards that vest solely based on a service condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. The compensation expense related to awards with performance conditions is recognized over the requisite service period when the performance conditions are probable of being achieved. The compensation expense related to awards with market conditions is recognized on an accelerated attribution basis over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved, and is not reversed if the market condition is not satisfied. The Company accounts for forfeitures as they occur. Stock-based awards granted to employees are primarily stock options and RSUs.

The fair value of each stock option granted is estimated using the Black-Scholes Merton option-pricing model using the single-option award approach. The following assumptions are used in the Black-Scholes Merton option-pricing model:

Risk-Free Interest Rate—The risk-free interest rate is based on the implied yield available on the date of grant on U.S. Treasury zero-coupon issued with a term that is equal to the option’s expected term at the grant date.

Expected Volatility—The Company estimates the volatility for option grants by evaluating the average historical volatility of a peer group of companies for the period immediately preceding the option grant for a term that is approximately equal to the option’s expected term.

Expected Term—The expected term for employees represents the period over which options granted are expected to be outstanding using the simplified method, as the Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term. The simplified method deems the term to be the average of the time-to-vesting and contractual life of the stock-based awards.

Dividend Yield—The Company has not declared or paid dividends to date and does not anticipate declaring dividends. As such, the dividend yield has been estimated to be zero.

Fair Value—The Company follows ASC 820, Fair Value Measurements (“ASC 820”), which establishes a common definition of fair value to be applied when U.S. GAAP requires the use of fair value, establishes a framework for measuring fair value, and requires certain disclosure about such fair value measurements.

ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about what market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities to which the Company has access at a measurement date.

Level 2: Observable inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs for which little or no market data exists and for which the Company must develop its own assumptions regarding the assumptions that market participants would use in pricing the asset or liability, including assumptions regarding risk.

Because of the uncertainties inherent in the valuation of assets or liabilities for which there are no observable inputs, those estimated fair values may differ significantly from the values that may have been used had a ready market for the assets or liabilities existed.

Recent Accounting Pronouncements—Pursuant to the Jumpstart Our Business Startups Act (“JOBS Act”), an emerging growth company is provided the option to adopt new or revised accounting standards that may be issued by the FASB or the SEC either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company has elected to use the extended transition period for complying with any new or revised financial accounting standards. As a result, the Company’s condensed consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective date for new or revised accounting standards that are applicable to public companies. The Company also intends to continue to take advantage of some of the reduced regulatory and reporting requirements of emerging growth companies pursuant to the JOBS Act so long as the Company qualifies as an emerging growth company.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model, which will result in earlier recognition of credit losses. ASU 2016-13 is effective for emerging growth companies for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. As the Company does not expect to have material accounts receivable at January 1, 2023, it has determined that the adoption of ASU 2016-13 will not have a material impact on its condensed consolidated financial statements or related disclosures. In future periods, as revenue and accounts receivable increase, ASU 2016-13 could have a material impact on its condensed consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. ASU 2019-12 is effective for emerging growth companies for fiscal years beginning after December 15, 2021, and interim periods within fiscal years

beginning after December 15, 2022. The Company has determined that ASU 2019-12 will not have a material impact on its condensed consolidated financial statements or related disclosures.

Recently Adopted Accounting Pronouncements—On January 1, 2022, the Company adopted ASU 2016-02, Leases (ASC 842), which superseded previous guidance related to accounting for leases within Topic 840, Leases. The Company elected the practical expedient provided under ASU 2018-11, Leases (Topic 842) Targeted Improvements, which amended ASU 2016-02 to provide entities an optional transition practical expedient to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. As a result, no adjustments were made to the consolidated balance sheet prior to January 1, 2022 and amounts are reported in accordance with historical accounting under Topic 840, while the condensed consolidated balance sheets as of March 31, 2022 and onward are presented under Topic 842.

The Company elected the package of practical expedients permitted under the transition guidance, which allowed it to carry forward historical lease classification, its assessment of whether a contract was or contains a lease, and its assessment of initial direct costs for any leases that existed prior to January 1, 2022. The Company also elected to combine its lease and non-lease components and to keep leases with an initial term of 12 months or less off the condensed consolidated balance sheets and recognize the associated lease payments in the condensed consolidated statements of operations and comprehensive loss on a straight-line basis over the lease term.

For new required disclosures and further information see Note 9, Leases. Adoption of the new standard resulted in the recording of lease assets and lease liabilities of $4,534 thousand and $5,229 thousand, respectively, as of January 1, 2022. The transition did not have a material impact on the Company’s results of operations, cash flows or liquidity measures.

3.BUSINESS COMBINATION

As discussed in Note 1, on October 8, 2021, the Company consummated the Business Combination pursuant to the Merger Agreement, with Legacy ESS surviving the Business Combination as a wholly owned subsidiary of the Company. Upon the Business Combination closing (the “Closing”), each share of Legacy ESS’s common stock, par value $0.0001 per share (“Legacy ESS Common Stock”) and Preferred Stock, par value $0.0001 per share (“Legacy ESS Preferred Stock”), were converted into the right to receive shares of the Company’s common stock at the Per Share Consideration as calculated pursuant to the Merger Agreement. The aggregate consideration paid to Legacy ESS stockholders in connection with the Business Combination (excluding any potential Earnout Shares (see below for definition)), was 99,700,326 shares of the Company’s common stock (including 125,958 shares of common stock issued following the Closing as a result of a transaction expense adjustment as disclosed in the Company’s Form 8-K filed with the SEC on November 15, 2021).

Pursuant to the Merger Agreement, the Company was permitted to issue to eligible Legacy ESS securityholders, on a pro rata basis, up to 16,500,000 shares of additional common stock (the “Earnout Shares”) less any RSUs issued pursuant to the Incentive RSU Pool, issuable in two equal tranches upon the occurrence of the respective Earnout Milestone Events. The Earnout Milestone Events were achieved on November 9, 2021 and Legacy ESS issued 15,674,965 shares to securityholders.

Upon the closing of the Business Combination, the Company’s certificate of incorporation was amended and restated to, among other things, increase the total number of authorized shares of capital stock to 2,200,000,000, of which 2,000,000,000 shares are common stock, $0.0001 par value per share, and 200,000,000 shares are preferred stock, $0.0001 value per share.

4.NET LOSS PER SHARE

The following table presents the calculation of basic and diluted net loss per share attributable to common stockholders (in thousands, except share and per share data):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Net loss attributable to common stockholders			$	(31,597)					$	(51,325)					$	(52,894)					$	(296,685)
Weighted-average shares outstanding – basic and diluted			152,861,300						67,670,709						152,427,346						65,520,584
Net loss per share – basic and diluted			$	(0.21)					$	(0.76)					$	(0.35)					$	(4.53)

Due to the net losses for the three and nine months ended September 30, 2022 and 2021, 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:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Stock options			3,443,679						4,113,472						3,443,679						4,113,472
RSUs			6,190,770						—						6,190,770						—
Warrants			11,461,227						—						11,461,227						—
Number of securities outstanding			21,095,676						4,113,472						21,095,676						4,113,472

5.PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

			September 30, 2022						December 31, 2021
Insurance			$	42					$	3,482
Vendor advances			2,964						1,103
Other			252						259
Total prepaid expenses and other current assets			$	3,258					$	4,844

6.PROPERTY AND EQUIPMENT, NET

			September 30, 2022						December 31, 2021
Machinery and equipment			$	6,060					$	2,868
Furniture and fixtures			184						90
Leasehold improvements			2,099						746
Software			138						—
Construction in process			9,722						2,517
Total property and equipment			18,203						6,221
Less accumulated depreciation			(2,255)						(1,720)
Total property and equipment, net			$	15,948					$	4,501

Depreciation and amortization expense related to property and equipment, net was $358 thousand and $140 thousand for the three months ended September 30, 2022 and 2021, respectively, and $815 thousand and $404 thousand for the nine months ended September 30, 2022 and 2021, respectively.

7.ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following (in thousands):

			September 30, 2022						December 31, 2021
Payroll and related benefits			$	3,437					$	1,876
Materials and related purchases			5,910						2,108
Amounts due to customers			1,084						—
Deferred rent			—						142
Professional and consulting fees			675						1,820
Accrued capital purchases			664						—
Other			881						541
Total accrued and other current liabilities			$	12,651					$	6,487

8.ACCRUED PRODUCT WARRANTIES

The following table summarizes product warranty activity (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Accrued product warranties - beginning of period			$	1,158					$	—					$	—					$	—
Accruals for warranties issued			348						—						2,153						—
Repairs and replacements			(358)						—						(1,005)						—
Accrued product warranties - end of period			$	1,148					$	—					$	1,148					$	—

9.LEASES

The Company determines if an arrangement is a lease at inception and whether the arrangement is classified as an operating or finance lease. At commencement of the lease, the Company records a right-of-use (“ROU”) asset and lease liability in the condensed consolidated balance sheets based on the present value of lease payments over the term of the arrangement. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As the Company’s leases do not provide an implicit rate, it uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company determines its incremental borrowing rate based on publicly available data for instruments with similar characteristics, including recently issued debt, as well as other factors. Contract terms may include options to extend or terminate the lease, and when the Company deems it reasonably certain that ESS will exercise that option it is included in the ROU asset and lease liability. Operating leases will reflect lease expense on a straight-line basis, while finance leases will result in the separate presentation of interest expense on the lease liability and amortization expense of the ROU asset.

ROU assets related to the Company’s operating leases are included in operating lease ROU assets, while the corresponding lease liabilities are included in current and non-current operating lease liabilities on the Company’s condensed consolidated balance sheets. ROU assets related to the Company’s finance leases are included in other non-current assets, while the corresponding lease liabilities are included in accrued and other current liabilities and other non-current liabilities on the Company’s condensed consolidated balance sheets.

The Company does not record leases with a term of 12-months or less in the condensed consolidated balance sheets. Short-term lease costs were immaterial for the three and nine months ended September 30, 2022.

The Company leases office and manufacturing space in Wilsonville, Oregon under operating leases and printers and copiers under finance leases. Each of the operating leases provides the Company an option to renew the lease for an additional 60 months which have not been included in the operating lease obligations.

Operating lease costs for the three and nine months ended September 30, 2022 were $371 thousand and $1,112 thousand, respectively. Finance lease costs for the three and nine months ended September 30, 2022 were not material. As of September 30, 2022, the weighted-average remaining term for the operating leases was 2.9 years and the weighted-average discount rate was 7.5%. The weighted-average remaining term for the finance lease was 4.5 years and the weighted-average discount rate was 7.5%.

As of September 30, 2022, future maturities of lease liabilities are as follows (in thousands):

			Operating Leases						Finance Leases
2022			$	411					$	7
2023			1,670						30
2024			1,720						30
2025			984						30
2026			—						30
Thereafter			—						7
Total minimum lease payments			$	4,785					$	134
Less imputed interest			(498)						(20)
Total			$	4,287					$	114

10.BORROWINGS

Borrowings consist of the following (in thousands):

			September 30, 2022						December 31, 2021
Total notes payable			$	2,306					$	3,769
Less current portion of notes payable			2,306						1,900
Notes payable, non-current			$	—					$	1,869

Notes Payable

In 2018, the Company entered into a $1,000 thousand note payable with a bank that was secured by all property of the Company, except for its intellectual property. The note payable’s original maturity date was July 1, 2021.

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, 2021. The Company’s notes payable to the bank were recorded at fair value as part of the extinguishment. The $4,000 thousand note payable’s original maturity date was January 1, 2023.

In April 2020, the Company entered into a deferral agreement (“Deferral Agreement”) to extend the maturity date of the original $1,000 thousand note payable to September 1, 2022 and extend the maturity date of the additional $4,000 thousand note payable to January 1, 2024. The Company accounted for the Deferral Agreement as a debt modification based on an analysis of cash flows before and after the debt modification.

The original $1,000 thousand note payable was fully repaid in September 2022, pursuant to the terms of the Deferral Agreement.

The notes payable bear interest at 0.50% below the bank’s prime rate (5.75% on September 30, 2022). The Company makes monthly interest and principal payments on the note payable based on the schedule defined in the agreement.

At September 30, 2022 and subsequently, the notes payable were in technical default due to the Company entering into a primary banking relationship with another institution; however, no event of default has been declared nor has acceleration of indebtedness been triggered by the bank. The potential for such events to occur require the Company to classify long-term obligations as current liabilities. As a result, all of the notes payable have been classified within notes payable, current as of September 30, 2022.

Payroll Protection Program Loan

In April 2020, the Company entered into an unsecured promissory note under the Payroll Protection Program (“PPP Loan”) administered by the United States Small Business Administration. The principal amount of the PPP Loan was $936 thousand. The PPP Loan bore interest of 1.0% per annum and had a maturity date of April 20, 2022. 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 was recorded within other income (expense), net in the Company’s condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2021.

Bridge Loan

In July 2021, the Company entered into a six-month $20,000 thousand bridge loan (“Bridge Loan”), maturing on the earlier of January 12, 2022 or consummation of the Business Combination, which ultimately closed on October 8, 2021. See Note 3. The Bridge Loan bore interest of 9%, 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 Business Combination.

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 PIK 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.

11.COMMITMENTS AND CONTINGENCIES

The Company, from time to time, is 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 condensed consolidated financial statements.

As of September 30, 2022, and December 31, 2021, the Company 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. As of September 30, 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 nine months ended September 30, 2022 and 2021.

On September 1, 2022, the Company 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. As of September 30, 2022, $600 thousand was pledged 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 nine months ended September 30, 2022.

The Company purchases materials from several suppliers and has entered into agreements with various contract manufacturers, which include cancellable and noncancellable purchase commitments. As of September 30, 2022 and December 31, 2021, total unfulfilled noncancellable purchase commitments were $15,503 thousand and $10,160 thousand, respectively. In addition, total unfulfilled cancellable purchase commitments amounted to $20,931 thousand and $10,446 thousand as of September 30, 2022, and December 31, 2021, respectively. These purchase commitments were not recorded in the condensed consolidated financial statements.

12.LEGACY ESS REDEEMABLE CONVERTIBLE PREFERRED STOCK

All Legacy ESS redeemable convertible preferred stock classified as redeemable was converted into Legacy ESS common stock, which was subsequently exchanged for the Company’s common stock as a result of the Business Combination using the Per Share Consideration of approximately 1.47. All preferred stock amounts have been retroactively adjusted to reflect the Business Combination.

Immediately prior to the completion of the Business Combination on October 8, 2021, all outstanding shares of Legacy ESS’s redeemable convertible preferred stock converted into an aggregate 57,104,332 shares of common stock.

Legacy ESS Rights to Purchase Series C-2 Convertible Preferred Stock

Legacy ESS’s Series C redeemable convertible preferred stock financing agreement initially provided additional committed funding of up to $79,999 thousand, through the purchase of up to 39,971,716 shares of Series C-2 redeemable convertible preferred stock based on the completion of certain operational milestones at a predetermined price of $2.00 per share, to certain Series C-1 Investors.

Legacy ESS determined that its obligation to issue, and Legacy ESS’s investors’ obligation to purchase shares of Series C-2 redeemable convertible preferred stock at a fixed price represents a freestanding derivative financial instrument (the “Series C-2 Redeemable Convertible Preferred Stock Issuance Right”). The Series C-2 Redeemable Convertible Preferred Stock Issuance Right was initially recorded at fair value and was adjusted to fair value at each reporting date, with the change in fair value recorded as a revaluation of derivative liabilities as a component of other income and expense in the condensed consolidated statement of operations and comprehensive loss. The Series C-2 Redeemable Convertible Preferred Stock Issuance Right was initially scheduled to expire in August 2021 and was classified as a non-current derivative liability as of September 30, 2021.

The Series C-2 Redeemable Convertible Preferred Stock Issuance Right was initially valued at a fair value of $11,379 thousand.

Sale of Legacy ESS Series C-2 Redeemable Convertible Preferred Stock

In March 2021, Legacy ESS issued 5,746,003 shares of Series C-2 redeemable convertible preferred stock for $2.00 per share, totaling $11,500 thousand. Legacy ESS incurred $39 thousand in costs associated with the issuance. In connection with the sale of the Series C-2 redeemable convertible preferred stock, Legacy ESS issued warrants to purchase 861,896 shares of Series C-2 redeemable convertible preferred stock and extinguished a portion of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right for 5,746,003 shares. The warrants were 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 Legacy ESS’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 $5,096 thousand, respectively.

Amendment to Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right and Related Warrants

On May 7, 2021, Legacy ESS 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 Legacy ESS and purchased by investors under the C-2 Redeemable Convertible Preferred Stock Issuance Right were adjusted, and Legacy ESS issued Series C-2 warrants. The Series C-2 warrants were exercisable at a price of $0.00007 per share upon a successful Business Combination with STWO. The investors were permitted to purchase shares subject to the C-2 Redeemable Convertible Preferred Stock Issuance 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 were as follows:

			As of May 7, 2021
			Upon completion of the Business Combination
			Quantity						Price
Series C-2 Redeemable Convertible Preferred Stock Issuance Right			7,994,442						$	2.00
Series C-2 Warrant exercisable upon completion of the Business Combination			21,159,364						$	0.00007

The C-2 warrants and the Series C-2 Redeemable Convertible Preferred Stock Issuance Right were exercised in conjunction with the Business Combination which closed on October 8, 2021 and the Company received proceeds of $15,559 thousand, which were net of $439 thousand in issuance costs.

The Company recorded net increases in the derivative liability of $36,703 thousand and $248,691 thousand for the three and nine months ended September 30, 2021, respectively, for changes in the estimated fair value of the Series C-2 Redeemable Convertible Preferred Stock Issuance Right and C-2 warrant exercisable upon completion of the Business Combination.

Legacy ESS Warrants

Legacy ESS Series B redeemable convertible preferred stock warrants were issued at exercise prices ranging from $0.0007 per share to $0.83 per share. 100,161 shares of Series B redeemable convertible preferred stock warrants had a 10-year exercise period and the remainder did not expire until a significant transaction had occurred, as defined by the warrant purchase agreement. The warrants were fully vested at the issuance date.

Legacy ESS Series C-1 and C-2 redeemable convertible preferred stock warrants were issued with prices ranging from $0.00007 to $1.25 per share, a life of 10 years and were fully vested at issuance.

Legacy ESS common stock warrants, all issued at a price of $0.0007 per share, were recorded at fair value within equity. Legacy ESS common stock warrants were fully vested at issuance and did not expire until a significant transaction has occurred, as defined by the Warrant Purchase Agreement.

In connection with the Business Combination, all Legacy ESS warrants were exercised during the year ended December 31, 2021.

13.COMMON STOCK WARRANTS

As of September 30, 2022, the Company had 7,377,893 warrants to purchase common stock listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “GWH.W” (the “Public Warrants”), 3,500,000 warrants to purchase common stock issued in a private placement concurrently with STWO’s initial public offering (the “Private Warrants”) and 583,334 Earnout Warrants (as defined below) outstanding.

As part of STWO’s initial public offering, 8,333,287 Public Warrants were sold. The Public Warrants entitle the holder thereof to purchase one share of common stock at a price of $11.50 per share, subject to adjustments. The Public Warrants may be exercised only for a whole number of shares of common stock. No fractional shares will be issued upon exercise of the warrants. The Public Warrants will expire five years after completion of the business combination, on October 8, 2026, or earlier upon redemption or liquidation.

The Company may call the Public Warrants for redemption starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than 30 days prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of common stock equals or exceeds $18.00 per share or $10.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders provided there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants.

The Company may call the Public Warrants for redemption starting anytime, in whole and not in part, at a price of $0.10 per warrant, so long as the Company provides not less than 30 days prior written notice of redemption to each warrant holder; provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive a number of shares determined based on the redemption date fair market value of the shares, and if, and only if, the reported last sale price of common stock equals or exceeds $10.00 per share or $10.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sends the notice of redemption to the warrant holders provided there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants.

Simultaneously with STWO’s initial public offering, STWO consummated a private placement of 4,666,667 Private Warrants with STWO’s sponsor. In connection with the Business Combination, STWO’s sponsor agreed to forfeit 583,333 Private Warrants. Of the remaining 4,083,334 Private Warrants, 3,500,000 were immediately vested and 583,334 warrants (the “Earnout Warrants”) were vested upon meeting certain Earnout Milestone Events on November 9, 2021. Each Private Warrant and Earnout Warrant is exercisable for one share of common stock at a price of $11.50 per share, subject to adjustment.

The Private Warrants and Earnout Warrants, post vesting on November 9, 2021, are identical to the Public Warrants, except that the Private Warrants and Earnout Warrants and the shares of common stock issuable upon exercise of the Private Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants and Earnout Warrants are non-redeemable so long as they are held by the initial purchasers or such purchasers’ permitted transferees. If the Private Warrants and Earnout Warrants are held by someone other than their initial purchasers or their permitted transferees, then the Private Warrants and Earnout Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. Additionally, if the Company redeems the Public Warrants when the common stock equals or exceeds $10.00 per share for any 20 trading days within a 30-day period ending on the third trading day prior to the date the Company sends the notice of redemption to warrant holders and the closing price of

the common share for any 20 trading days within the same period is less than $18.00 per share, the Company must concurrently redeem the Private Warrants and Earnout Warrants.

The table below shows the common stock warrant activities during the nine months ended September 30, 2022:

			December 31, 2021						Issued						Exercised						September 30, 2022
Earnout Warrants			583,334						—						—						583,334
Public Warrants			7,377,913						—						20						7,377,893
Private Warrants			3,500,000						—						—						3,500,000
Total Common Stock Warrants			11,461,247						—						20						11,461,227

The Company’s common stock warrants were initially recorded at fair value upon completion of the Business Combination and are adjusted to fair value at each reporting date based on the market price of the Public Warrants, with the change in fair value recorded as a component of other income and expense in the condensed consolidated statements of operations and comprehensive loss. For the nine months ending September 30, 2022, the Company recorded a net decrease to the liabilities for Earnout Warrants, Public Warrants and Private Warrants of $1,044 thousand, $13,206 thousand and $6,265 thousand, respectively.

SMUD Warrant

On September 16, 2022, the Company entered into a warrant agreement with the Sacramento Municipal Utility District (“SMUD”), whereby the Company agreed to issue a warrant for up to 500,000 shares of the Company’s common stock at an exercise price of $4.296 per share. The vesting of the shares underlying the warrant will be subject to the achievement of certain commercial milestones through December 31, 2030 pursuant to a related commercial agreement. As of September 30, 2022, none of the vesting conditions had been met.

14.STOCK-BASED COMPENSATION

Stock-based 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 condensed consolidated statements of operations and comprehensive loss (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Research and development			$	767					$	82					$	1,941					$	223
Sales and marketing			127						16						306						48
General and administrative			2,104						162						6,456						349
Total stock-based compensation			$	2,998					$	260					$	8,703					$	620

2021 Equity Incentive Plan

In October 2021, the Board of Directors of the Company adopted the ESS Tech, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan became effective upon consummation of the Business Combination. The stock awards may be issued as Incentive Stock Options (“ISO”), Non-statutory Stock Options (“NSO”), Stock Appreciation Rights, Restricted Stock Awards, or Restricted Stock Unit Awards. Only employees are eligible to receive ISO awards. Employees, directors, and consultants who are providing continuous service to the Company are eligible to receive stock awards other than ISOs. The number of shares available for issuance under the 2021 Plan will be increased on the first day of each fiscal year beginning with the 2022 fiscal year and ending with the 2031 fiscal year, in an amount equal to the lesser of (i) 15,260,000 Shares, (ii) five percent (5%) of the outstanding shares on the last day of the immediately preceding fiscal year, or (iii) such number of shares determined by the Company no later than the last day of the immediately preceding fiscal year. Under the 2021 Plan, the Company is authorized to issue 17,610,000 shares of common stock as of September 30, 2022.

Option prices for incentive stock options are set at the fair market value of the Company’s common stock at the date of grant. The fair market value of RSUs is set at the closing sales price of the Company’s common stock at the date of grant. Employee new hire grants generally cliff vest at the end of the first year and then 1/48th of the original grant ratably over the remaining three years. Grants expire 10 years from the date of grant.

As of September 30, 2022, there were 11,293,692 shares available for future grant under the 2021 Plan.

Stock Options and Restricted Stock Units

Stock option and RSU activity, prices, and values during the nine months ended September 30, 2022 are as follows (in thousands, except for share, per share, and contractual term data):

			Options Outstanding																								RSUs
			Number of shares						Weighted average exercise price						Weighted average remaining  contractual term (years)						Aggregate intrinsic values ($'000s)						Number of plan shares outstanding						Weighted average grant date fair value per Share
Balances as of December 31, 2021			3,796,530						$	0.83					8.08						$	40,274					3,392,153						$	10.69
Options and RSUs granted			65,717						8.00																		4,017,255						5.02
Options exercised and RSUs released			(341,196)						5.10																		(983,642)						10.37
Options and RSUs forfeited			(77,372)						2.29																		(234,996)						7.06
Balances as of September 30, 2022			3,443,679						$	0.99					7.63						$	10,674					6,190,770						$	7.22
Options vested and exercisable - December 31, 2021			1,827,374						$	0.31					7.20						$	20,337
Options vested and exercisable - September 30, 2022			1,928,708						$	0.69					7.23						$	6,564

In accordance with ASC 718, the fair value of each option grant has been estimated as of the date of grant using the following weighted-average assumptions:

			Nine Months Ended September 30,
			2022						2021
Risk-free rate			1.64		%				1.01		%
Expected volatility			73.95		%				75.00		%
Expected term			6 years						6 years
Expected dividends			—						—

As of September 30, 2022, there was approximately $25,319 thousand of unamortized stock-based compensation expense related to unvested stock options and RSUs, which was expected to be recognized over a weighted-average period of 2.81 years.

Employee Stock Purchase Plan

In May 2022, the Company commenced its first offering period under the ESS Tech, Inc. Employee Stock Purchase Plan (the “ESPP”), which assists employees in acquiring a stock ownership interest in the Company. The ESPP permits eligible employees to purchase common stock at a discount through payroll deductions during specified offering periods. No employee may purchase more than $25,000 worth of stock in any calendar year. The price of shares purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The total ESPP expense for the three and nine months ended September 30, 2022 was $99 thousand and $139 thousand, respectively.

15.FAIR VALUE MEASUREMENTS

The Company follows ASC 820, which establishes a common definition of fair value to be applied when U.S. GAAP requires the use of fair value, establishes a framework for measuring fair value, and requires certain disclosure about such fair value measurements.

The following tables present the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis (in thousands):

			September 30, 2022
			Assets at Fair Value						Cash Equivalents and Restricted Cash						Short-Term Investments
Level 1:
Money market funds			$	35,998					$	35,998					$	—
U.S. Treasury securities			49,751						—						49,751
Total Level 1			85,749						35,998						49,751
Level 2:
Certificate of deposit			75						75						—
U.S. agency securities			44,320						—						44,320
Commercial paper			35,765						5,994						29,771
Total Level 2			80,160						6,069						74,091
Total assets measured at fair value			$	165,909					$	42,067					$	123,842

			December 31, 2021
			Assets at Fair Value						Cash Equivalents and Restricted Cash						Short-Term Investments
Level 1:
Money market funds			$	237,897					$	237,897					$	—
Level 2:
Certificate of deposit			125						125						—
Total assets measured at fair value			$	238,022					$	238,022					$	—

The following tables present the Company’s fair value hierarchy for its financial liabilities measured at fair value on a recurring basis (in thousands):

			September 30, 2022
			Level 1						Level 2						Level 3						Total
Liabilities:
Earnout warrant liabilities			$	—					$	432					$	—					$	432
Public common stock warrants			5,460						—						—						5,460
Private common stock warrants			—						2,590						—						2,590
Total liabilities measured at fair value			$	5,460					$	3,022					$	—					$	8,482

			December 31, 2021
			Level 1						Level 2						Level 3						Total
Liabilities:
Earnout warrant liabilities			$	—					$	1,476					$	—					$	1,476
Public common stock warrants			18,666						—						—						18,666
Private common stock warrants			—						8,855						—						8,855
Total liabilities measured at fair value			$	18,666					$	10,331					$	—					$	28,997

There were no transfers among Level 1, Level 2, or Level 3 categories during the periods presented. The carrying amounts of the Company’s notes payable and accounts payable approximate their fair values due to their short maturities.

Level 1 Assets: The Company invests in money market funds and U.S Treasury securities that have maturities of 90 days or less. These assets are valued using observable inputs that reflect quoted prices for securities with identical characteristics.

Level 2 Assets: The Company invests in a certificate of deposit, U.S. agency securities, and commercial paper. These assets are valued using observable inputs that reflect quoted prices for securities with similar characteristics and other observable inputs (such as interest rates that are observable at commonly quoted intervals).

Level 1 Liabilities: The Company values its public common stock warrants based on the market price of the warrants.

Level 2 Liabilities: The Company values its earnout warrant liabilities and private common stock warrants based on the market price of the Company’s public common stock warrants.

Level 3 Liabilities: The Company values the following as Level 3 liabilities:

Bridge Loan

The Company accounted for the Bridge Loan under the fair value option election wherein the Bridge Loan was initially measured it 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 was based on significant inputs including estimated time to maturity, which caused it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation used assumptions and estimates the Company believed would be made by a market participant in making the same valuation. The Bridge Loan was repaid on October 3, 2021 as part of the Business Combination described in Note 3.

Warrants

Freestanding warrants to purchase Redeemable Convertible Preferred Stock were 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 (expenses), net. The warrants were accounted for as liabilities as the underlying shares of Preferred Stock were contingently redeemable upon occurrence of a change in control, which was outside the control of the Company.

As of September 30, 2021, the Company measured its warrant liabilities using Level 3 unobservable inputs within the Black-Scholes Merton option-pricing model. The Company used 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 measured 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 income (expenses), net in the condensed consolidated statements of operations and comprehensive loss.

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

See Note 12 for a discussion of the Company’s Series C Redeemable Convertible Preferred Stock financing agreement.

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

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 redeemable convertible preferred 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 income (expense), net in the condensed consolidated statements of operations and comprehensive loss.

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):

			Three Months Ended September 30,
			2022						2021
Bridge Loan:
Beginning balance June 30			$	—					$	—
Fair value of Bridge Loan funded			—						20,000
Accrued PIK and final payment			—						1,432
Change in fair value			—						—
Ending balance September 30			—						21,432
Warrant liabilities:
Beginning balance June 30			—						22,860
Change in fair value			—						2,949
Fair value of warrants issued			—						—
Fair value of warrants exercised			—						(25,809)
Ending balance September 30			—						—
Series C-2 Convertible Preferred Stock Issuance Right liability:
Beginning balance June 30			—						211,747
Change in fair value			—						36,703
Fair value of derivatives extinguished			—						—
Ending balance September 30			—						248,450
Total			$	—					$	269,882

			Nine Months Ended September 30,
			2022						2021
Bridge Loan:
Beginning balance December 31			$	—					$	—
Fair value of Bridge Loan funded			—						20,000
Accrued PIK and final payment			—						1,432
Change in fair value			—						—
Ending balance September 30			—						21,432
Warrant liabilities:
Beginning balance December 31			—						3,329
Change in fair value			—						17,753
Fair value of warrants issued			—						5,096
Fair value of warrants exercised			—						(26,178)
Ending balance September 30			—						—
Series C-2 Convertible Preferred Stock Issuance Right liability:
Beginning balance December 31			—						22,911
Change in fair value			—						248,691
Fair value of derivatives extinguished			—						(23,152)
Ending balance September 30			—						248,450
Total			$	—					$	269,882

16.INCOME TAXES

The Company did not record an income tax provision for the three or nine-month periods ended September 30, 2022 and 2021, respectively, due to the Company’s history of losses, and accordingly, has recorded a 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.

17.REVENUE

Disaggregated Revenue

The following table presents the Company’s revenue, disaggregated by source (in thousands):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Product revenue			$	186					$	—					$	792					$	—
Service and other revenue			6						—						86						—
Total revenue			$	192					$	—					$	878					$	—

The majority of the Company’s revenue is derived from the product sales of Energy Warehouse energy storage systems and related equipment. See Note 2 for further information regarding revenue recognition.

Contract Balances

Deferred revenues primarily relate to consideration received from customers in advance of the Company satisfying performance obligations under contractual arrangements. Contract balances are reported in a net contract asset or deferred revenue liability position on a contract-by-contract basis at the end of each reporting period.

The following table summarizes deferred revenue activity (in thousands):

			Nine Months Ended September 30,
			2022						2021
Deferred revenue - beginning of period			$	3,663					2,258
Deferral of revenue			4,471						850
Recognition of previously unearned revenue			(878)						—
Deposits returned to customers			(3,058)						—
Reclassification to accrued liabilities due to estimation of variable consideration			(652)						—
Deferred revenue - ending of period			$	3,546					$	3,108

18.RELATED PARTY TRANSACTIONS

In April 2021, the Company signed a framework agreement with one of its investors, SB Energy Global Holdings One Ltd (“SBE”), to supply energy storage systems to SBE in support of its market activities. Under this agreement, the Company has made various commitments to meet SBE’s potential need for energy storage systems and is obligated to reserve a certain percentage of manufacturing capacity to meet SBE’s future needs, subject to periodic reviews of its firm and anticipated orders. To date, no orders have been placed under the framework agreement.

Additionally, the Company entered into a preferred financing equity transaction with SBE and Breakthrough Energy Ventures, LLC as discussed in Note 12. These related parties were also issued 6,707,318 of the Earnout Shares discussed in Note 3.

As of December 31, 2021, the Company had recorded accounts receivable of $66 thousand and deferred revenue of $171 thousand for sales of energy storage systems to related parties.

During the three and nine months ended September 30, 2022, the Company recognized revenue of $1 thousand and $283 thousand, respectively, for sales of energy storage systems and extended warranty services to related parties. As of September 30, 2022, the Company had recorded deferred revenue of $6 thousand for sales of extended warranty services to related parties.

On October 8, 2021, ESS consummated the Business Combination. 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.” Refer to Note 3, Business Combination to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

COVID-19

Inflation Reduction Act of 2022

Revenue

Operating expenses

Research and development

Sales and marketing

General and administrative

Other income (expenses), net

Interest income (expense), net

Gain (loss) on revaluation of warrant liabilities

Loss on revaluation of derivative liabilities

Gain (loss) on revaluation of earnout warrants

Other income (expense), net

			Three Months Ended September 30,																								Nine Months Ended September 30,
($ in thousands)			2022						2021						$ Change						% Change						2022						2021						$ Change						% Change
Revenue			$	192					$	—					$	192					N/M						$	878					$	—					$	878					N/M
Operating expenses:
Research and development			20,127						7,672						12,455						162.3						49,190						19,546						29,644						151.7
Sales and marketing			1,815						1,048						767						73.2						5,217						2,261						2,956						130.7
General and administrative			5,981						2,316						3,665						158.2						20,567						7,667						12,900						168.3
Total operating expenses			27,923						11,036						16,887						153.0						74,974						29,474						45,500						154.4
Loss from operations			(27,731)						(11,036)						(16,695)						151.3						(74,096)						(29,474)						(44,622)						151.4
Other income (expenses), net:
Interest income (expense), net			781						(1,582)						2,363						(149.4)						999						(1,693)						2,692						(159.0)
Gain (loss) on revaluation of warrant liabilities			(4,351)						(2,949)						(1,402)						47.5						19,471						(17,753)						37,224						(209.7)
Loss on revaluation of derivative liabilities			—						(36,703)						36,703						(100.0)						—						(248,691)						248,691						(100.0)
Gain (loss) on revaluation of earnout liabilities			(234)						—						(234)						N/M						1,044						—						1,044						N/M
Other income (expense), net			(62)						945						(1,007)						N/M						(312)						926						(1,238)						N/M
Total other income (expenses), net			(3,866)						(40,289)						36,423						(90.4)						21,202						(267,211)						288,413						(107.9)
Net loss and comprehensive loss to common stockholders			$	(31,597)					$	(51,325)					$	19,728					(38.4)%						$	(52,894)					$	(296,685)					$	243,791					(82.2)%

N/M = Not meaningful

Revenue

Other income (expenses), net

Gain (loss) on revaluation of earnout liabilities

			Nine Months Ended September 30,
			2022						2021
Net cash used in operating activities			$	(56,620)					$	(28,343)
Net cash used in investing activities			(134,653)						(288)
Net cash (used in) provided by financing activities			(4,221)						31,548

Cash flows from investing activities:

Research and Development

Revenue Recognition

Product Warranties

•We have hired additional personnel and are continuing to expand our team. We are further designing and implementing a formalized internal control framework, including over journal entries and management review controls.

•We are continuing our efforts to improve and strengthen our control processes and procedures to fully remediate these deficiencies. Our management will continue to work with outside advisors to ensure that our controls and procedures are adequate and effective.