Overview
ESS is a long-duration energy storage company specializing in iron flow battery technology. We design and produce long-duration batteries predominantly using earth-abundant materials that we believe can be cycled over 20,000 times without capacity fade. Because we designed our batteries to operate using an electrolyte of primarily salt, iron and water, they are non-toxic and substantially recyclable. Our long-duration iron flow batteries are the product of nearly 50 years of scientific advancement. Our founders,Craig Evans and Dr.Julia Song , began advancing this technology in 2011 and formed Legacy ESS. Our 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. Our batteries provide flexibility to grid operators and energy assurance for commercial and industrial customers. Our technology addresses energy delivery, duration and cycle-life in a single battery platform that compares favorably to lithium-ion batteries, the most widely deployed alternative technology. Using our iron flow battery technology, we are developing two products, each of which is able to provide reliable, safe, long-duration energy storage. Our first energy storage product, theEnergy Warehouse , is our "behind-the-meter" solution (referring to solutions that are located on the customer's premises, behind the service demarcation with the utility) that offers energy storage ranging from four to 12-hour duration. Our second, larger scale energy storage product, the Energy Center, is designed for "front-of-the-meter" (referring to solutions that are located outside the customer's premises, typically operated by the utility or by third-party providers who sell energy into the grid, often known as independent power producers) deployments specifically for utility and large commercial and industrial consumers.
The Business Combination
OnOctober 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. " The increase in cash resulting from the Business Combination is being used to fund our growth strategy related to the commercial sale of our second-generation energy storage solution and the scaling of our manufacturing operations to meet customer demand. The cash raised from the Business Combination is also being used to fund investments in personnel and research and development as well as provide liquidity for the funding of our ongoing operating expenses. - 46 -
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The Business Combination was accounted for as a reverse recapitalization. Legacy ESS was deemed the accounting predecessor and the combined entity is the successorSEC registrant, meaning that Legacy ESS' financial statements for previous periods will be disclosed in our future periodic reports filed with theSEC . Under this method of accounting, STWO was treated as the acquired company for financial statement reporting purposes As a result of the Business Combination, Legacy ESS became the successor to anSEC -registered and publicly traded company, which has required, and may further require, us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. 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 depends on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section "Part I-Item 1A. Risk Factors" included elsewhere in this Annual Report on Form 10-K. We believe we have the opportunity to establish attractive margin unit economics if we are able to continue to reduce production costs and scale our operations. Our future financial performance will depend on our ability to deliver on these economies of scale with lower product costs. We believe our business model is positioned for scalability due to the ability to leverage the same product platform across our customer base. Significant improvements in manufacturing scale are expected to decrease the cost of materials and direct labor. Compared to 2022, we expect our indirect cost of goods and operating expenses to increase as we ramp up our research and development and manufacturing activities including with respect to our supply chain, parts and launch of our second-generation Energy Warehouses as well as higher general and administrative expenses related to operating as a public company. Achievement of margin targets and cash flow generation is dependent on finalizing development and manufacturing of Energy Centers.
Our near-term and medium-term revenue is expected to be generated from our Energy Centers and second-generation Energy Warehouses. We believe our unique technology provides a compelling value proposition and an opportunity for favorable margins and unit economics in the energy storage industry in the future.
COVID-19
The COVID-19 pandemic has disrupted supply chains and affected production and sales across a range of industries, and continues to impactthe United States and other countries throughout the world. There have already been multiple waves of the COVID-19 pandemic and COVID-19 cases continue to surge in certain areas of the world, including in certain countries that were initially successful at containing the virus. For example, the Chinese government has previously pursued and may reinstate a 'zero COVID' or other policy, imposing lock downs that have adversely affected and may continue to adversely affect supply chains. The evolution of the pandemic and the ultimate extent of its economic impact are still unknown. Due to the number of variables involved, the significance and the duration of the pandemic's financial impact are difficult to determine. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the virus, and the impact on our customers, employees and vendors. The ultimate outcome of these matters is uncertain and, accordingly, the impact on our financial condition or results of operations is also uncertain. We have issued several force majeure notices to customers as a result of delays caused by COVID-19 and future COVID-19 delays could further impact such agreements.
Inflation Reduction Act of 2022
OnAugust 16, 2022 ,President Biden signed into law the Inflation Reduction Act (the "IRA"), which extends the availability of investment tax credits ("ITCs") and production tax credits and makes significant changes to the tax credit regime that applies to solar and energy storage products. As a result of changes made by the IRA, the ITC for solar generation projects is extended until at least 2033, and has been expanded to include stand-alone battery storage. This expansion provides significant certainty on the tax incentives that will be available to stand-alone battery projects in the future. We believe the IRA will increase demand for our services due to the extensions and expansions of various tax credits that are critical for our customers' economic returns, while also providing more certainty in and visibility into the supply chain for materials and components for energy storage systems. We are continuing to evaluate the overall impact and applicability of the IRA as implementing regulations are issued, and the passage of comparable legislation in other jurisdictions, to our results of operations going forward.
Components of Results of Operations
As the Business Combination is accounted for as a reverse recapitalization, the operating results included in this discussion reflect the historical operating results of Legacy ESS prior to the Business Combination and the combined results of ESS - 47 -
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following the closing of the Business Combination. The assets and liabilities of the Company are stated at their historical cost.
Revenue
We earn revenue from the sale of our energy storage products and from service contracts. Revenue recognition is deferred until written customer acceptance has been received, after site acceptance testing, or until we have established a history of successfully obtaining customer acceptance. In the near term, as our products are newly developed, this is likely to be a longer process than when our products are more mature and we have an established history of customer acceptance.
Operating expenses
Research and development expenses
Costs related to research and development consist of direct product development material costs, including freight charges, and product development personnel-related expenses, warranty-related costs, depreciation charges, overhead related costs, consulting services and other direct expenses. Personnel-related expenses consist of salaries, benefits and stock-based compensation. We expect our research and development costs to increase as we continue to invest in research and development activities to achieve our product roadmap as well as due to inflationary pressures.
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 include professional services costs, travel costs, and trade show sponsorships. We expect that our sales and marketing expenses will increase over time as we continue to hire additional personnel to scale our business.
General and administrative expenses
General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, legal, and other administrative functions, as well as expenses for outside professional services and insurance costs. Personnel-related expenses consist of salaries, benefits and stock-based compensation. To a lesser extent, general and administrative expenses include depreciation and other allocated costs, such as facility-related expenses, and supplies. We expect our general and administrative expenses to increase as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of theSEC , legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Other income (expenses), net
Interest income (expense), net
Interest expense consists primarily of interest on our notes payable. Interest income consists primarily of earned income on our cash equivalents, restricted cash, and short-term investments. These amounts will vary based on our cash, cash equivalents, restricted cash and short-term investment balances, and on market rates.
Gain (loss) on revaluation of warrant liabilities
The gain (loss) on revaluation of warrant liabilities consists of periodic fair value adjustments related to Legacy ESS' Series B and C warrants outstanding prior to the Business Combination and the Public Warrants and Private Warrants (excluding the Earnout Warrants) subsequent to the Business Combination.
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 Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right liability and contingently issuable warrants prior to the Business Combination.
Gain (loss) on revaluation of earnout liabilities
The gain (loss) on revaluation of earnout liabilities consists of periodic fair value adjustments related to the Earnout Warrants issued in conjunction with the Business Combination. As used herein, "Earnout Warrants" refer to Private Warrants to purchase 583,334 shares of common stock which vest upon the meeting of certain 'Earnout Milestone Events' as defined in, and pursuant to the terms of, the Sponsor Letter Agreement, datedMay 6, 2021 .
Other (expenses) income, net
Other (expenses) income, net consists primarily of various gains and losses associated with our short-term investments and other income and expense items.
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Results of Operations
Comparison of Year Ended
The following table sets forth ESS' operating results for the periods indicated: Year Ended December 31, $ % ($ in thousands) 2022 2021 Change Change Revenue$ 894 $ -$ 894 N/M Operating expenses: Research and development 71,979 30,275 41,704 138% Sales and marketing 6,938 3,041 3,897 128 General and administrative 27,469 27,286 183 1 Total operating expenses 106,386 60,602 45,784 76 Loss from operations (105,492) (60,602) (45,784) 74 Other income (expenses), net: Interest income (expense), net 2,187 (1,886) 4,073 N/M Gain (loss) on revaluation of warrant liabilities 24,475 (37,584) 62,059 N/M Loss on revaluation of derivative liabilities - (223,165) 223,165 N/M Gain (loss) on revaluation of earnout liabilities 1,313 (154,806) 156,119 N/M Other (expenses) income, net (452) 926 (1,378) N/M Total other income (expenses), net 27,523 (416,515) 444,038 (106.6) Net loss and comprehensive loss to common stockholders$ (77,969) $ (477,117) $ 398,254 (83.7)% __________________ N/M = Not meaningful Revenue Revenue for the year endedDecember 31, 2022 was$894 thousand compared to zero for the year endedDecember 31, 2021 . We commenced shipping our second-generation Energy Warehouses in the third quarter of 2021 and we received final customer acceptance for the initial unit shipped during the second quarter of 2022. We delivered and recognized revenue on an additional three units during the second half of 2022. Cost of goods sold for these units is zero as related costs have been accounted for as part of research and development expenses in the respective periods incurred; however, the production costs for these units significantly exceeded their selling price. This accounting treatment will continue until we meet the criteria for commercialization. After we exit the research and development phase upon meeting the criteria for commercialization, we expect to recognize a lower of cost or net realizable value charge as the cost of our inventories is likely to exceed estimated net realizable value.
Operating expenses
Research and development expenses
Research and development expenses increased by$41,704 thousand , or 138%, from$30,275 thousand for the year endedDecember 31, 2021 to$71,979 thousand for the year endedDecember 31, 2022 . The increase resulted primarily from an increase in material purchase costs, including freight, and increased personnel-related expenses due to significant effort on the development of the second-generationEnergy Warehouse as well as efforts to create an efficient manufacturing process for our products.
Sales and marketing expenses
Sales and marketing expenses increased by$3,897 thousand , or 128%, from$3,041 thousand for the year endedDecember 31, 2021 to$6,938 thousand for the year endedDecember 31, 2022 . The increase is primarily due to costs incurred for marketing related activities to build awareness of our products' capabilities and increased personnel-related expenses.
General and administrative expenses
General and administrative expenses increased by$183 thousand , or 1%, from$27,286 thousand for the year endedDecember 31, 2021 to$27,469 thousand for the year endedDecember 31, 2022 . The increase is primarily due to fees paid to outside service providers including external banking fees, legal fees covering a variety of corporate matters, accounting fees and external audit fees as well as increased personnel-related expenses including recruiting expenses as we expanded headcount and increased insurance fees. These increases were almost entirely offset by a reduction in fees and expenses related to the Business Combination incurred in 2021. - 49 -
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Other (expense) income, net
Interest income (expense), net
Interest income (expense), net increased by$4,073 thousand from$1,886 thousand of interest expense for the year endedDecember 31, 2021 to$2,187 thousand of interest income for the year endedDecember 31, 2022 . The decrease in interest expense resulted primarily from a decrease in borrowings for 2022 compared to 2021. The increase in interest income was driven by interest earned on our short-term investment portfolio.
Gain (loss) on revaluation of warrant liabilities
Gain (loss) on revaluation of warrant liabilities resulted in a loss of
Loss on revaluation of derivative liabilities
The loss on revaluation of the Legacy ESS Series C-2 Redeemable Convertible
Preferred Stock Issuance Right was
Gain (loss) on revaluation of earnout liabilities
Gain (loss) on revaluation of earnout liabilities resulted in a loss of$154,806 thousand for the year endedDecember 31, 2021 compared to a gain of$1,313 for the year endedDecember 31, 2022 . The changes in fair value of earnout liabilities was driven by changes in the market price of our common stock over the same period. Other (expenses) income, net Other income was$926 thousand for the year endedDecember 31, 2021 compared to other expense of$452 thousand for the year endedDecember 31, 2022 . The other income recognized in the year endedDecember 31, 2021 is due to the gain on extinguishment recognized upon the forgiveness of the promissory note under the Payroll Protection Program. The other expense recognized in the year endedDecember 31, 2022 is primarily due to unrealized losses incurred on short-term investments.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through the issuance and sale of equity and debt securities and loan agreements. We have incurred significant losses and have negative cash flows from operations. As ofDecember 31, 2022 , we had an accumulated deficit of$618,579 thousand . Management expects to continue to incur additional substantial losses in the foreseeable future as a result of our research and development and other operational activities. As ofDecember 31, 2022 , we had unrestricted cash and cash equivalents of$34,767 thousand , which is available to fund future operations, and short-term investments of$105,047 thousand . We believe that our unrestricted cash and cash equivalents and short-term investments as ofDecember 31, 2022 will enable us to maintain our operations and satisfy our financial obligations for a period of at least 12 months following the filing date of this Annual Report on Form 10-K. Beyond 12 months we may need additional cash resources to the extent our current resources are insufficient to satisfy our cash requirements. Therefore, we may seek additional equity or debt financing. If such financing is not available, or if the financing terms are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects. InMarch 2020 , we borrowed$4,000 thousand through a note payable withSilicon Valley Bank that is secured by significantly all of our property, except for intellectual property. The$4,000 thousand note payable's original maturity date wasJanuary 1, 2023 ; however, the maturity date was modified and extended toJanuary 1, 2024 . The note bears interest at 0.50% below the bank's prime rate (7.50% and 2.75% rates atDecember 31, 2022 and 2021, respectively). As ofDecember 31, 2022 , the outstanding principal balance on the note payable was$1,733 thousand . See Note 10, Borrowings to our consolidated financial statements for the year endedDecember 31, 2022 included elsewhere in this Annual Report on Form 10-K. As ofDecember 31, 2022 , we had a standby letter of credit with First Republic Bank totaling$725 thousand as security for an operating lease of office and manufacturing space inWilsonville, Oregon . As ofDecember 31, 2022 , the letter of credit was secured by a restricted certificate of deposit account totaling$75 thousand . There were no draws against the letter of credit during the years endedDecember 31, 2022 and 2021. OnSeptember 1, 2022 , we executed a standby letter of credit withCitiBank, 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 ofDecember 31, 2022 ,$600 thousand was pledged - 50 -
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as collateral for the letter of credit and recorded as restricted cash,
non-current. There were no draws against the letter of credit during the year
ended
The following table summarizes cash flows from operating, investing and financing activities for the periods presented:
Years EndedDecember 31 , ($ in thousands) 2022
2021
Net cash used in operating activities$ (81,620) $
(51,849)
Net cash used in investing activities (117,884)
(2,767)
Net cash (used in) provided by financing activities (4,073) 288,454
Cash flows from operating activities:
Our cash flows used in operating activities to date have been primarily comprised of costs related to research and development, manufacturing of our energy storage products, building awareness of our products' capabilities and other general and administrative activities. We expect our expenses related to personnel, manufacturing, research and development, sales and marketing, and general and administrative activities to increase. Net cash used in operating activities was$81,620 thousand for the year endedDecember 31, 2022 , which is comprised of net loss of$77,969 thousand and noncash changes in the fair value of warrant liabilities of$24,475 thousand and earnout liabilities of$1,313 thousand , partially offset by stock-based compensation of$11,889 thousand . Net changes in operating assets and liabilities provided$8,457 thousand of cash driven by increases in accounts payable, accrued and other current liabilities, accrued product warranties, and deferred revenue, partially offset by increases in accounts receivable, prepaid expenses and other assets, and a decrease in operating lease liabilities. Net cash used in operating activities was$51,849 thousand for the year endedDecember 31, 2021 , which is comprised of net loss of$477,117 thousand , offset by noncash changes in derivative liabilities of$223,165 thousand , earnout liabilities of$154,806 thousand , warrant liabilities of$37,584 thousand , and stock-based compensation of$7,922 thousand . Net changes in operating assets and liabilities provided$2,087 thousand of cash driven by an increase in accounts payable and accrued and other current liabilities, partially offset by an increase in prepaid expenses and other assets.
Cash flows from investing activities:
Our cash flows from investing activities have been comprised primarily of purchases and sales of short-term investments and purchases of property and equipment.
Net cash used in investing activities was$117,884 thousand for the year endedDecember 31, 2022 , which related to purchases of short-term investments and, to a lesser extent, purchases of property and equipment. Purchases of property and equipment primarily relate to our investment in automating production.
Net cash used in investing activities was
Cash flows from financing activities:
ThroughDecember 31, 2022 , we have raised capital from the Business Combination and financed our operations through the issuance of debt and equity securities and loan agreements. Net cash used in financing activities was$4,073 thousand for the year endedDecember 31, 2022 , which is comprised of repurchases of shares from employees for income tax withholding purposes of$2,808 thousand and payments on notes payable of$1,900 thousand . Net cash provided by financing activities was$288,454 thousand for the year endedDecember 31, 2021 and included$258,730 thousand in net cash contributions from the Business Combination and accompanying PIPE financing,$15,559 thousand in proceeds from the exercise of Legacy ESS Series C-2 redeemable convertible preferred stock issuance rights and Series C-2 warrants upon completion of the Business Combination and$10,995 thousand in proceeds from warrants exercised. Prior to the Business Combination, we additionally received$11,461 thousand in proceeds from the sale of Legacy ESS Series C-2 redeemable convertible preferred stock. These cash inflows were partially offset by payments made towards offering costs of$7,895 thousand . The further ramping up of our commercialization and the expansion of our business will require a significant amount of cash for expenditures. Our ability to successfully manage this growth will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations. - 51 -
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Contractual Obligations and Commitments
Our contractual obligations and other commitments as ofDecember 31, 2022 consist of operating lease commitments and notes payable. We also have a standby letter of credit that serves as security for certain operating leases for office and manufacturing space. The letter of credit is fully secured by restricted certificate of deposit accounts. There was no draw against the letter of credit during the year endedDecember 31, 2022 . Additionally, we are committed to non-cancellable purchase commitments of$21,540 thousand as ofDecember 31, 2022 .
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, or unconsolidated variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity withU.S. GAAP requires that management apply accounting policies and make estimates and assumptions that affect amounts reported in the statements. The following accounting policies represent those that management believes are particularly important to the consolidated financial statements and that require the use of estimates, assumptions, and judgments to determine matters that are inherently uncertain.
Fair Value of ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right
The Legacy ESS Series C redeemable convertible preferred stock financing agreement provided additional committed funding of up to approximately$80 million , through the purchase of up to 39,971,716 shares of Legacy ESS Series C-2 Preferred Stock based on the completion of certain operational milestones at a predetermined price of$2.00 , to certain Series C-1 investors. OnMay 6, 2021 , Legacy ESS entered into an amendment to the Legacy ESS Series C redeemable convertible preferred stock financing agreement with the two holders of the remaining Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right. Under the terms of the amended agreement, in conjunction with a successful Business Combination with STWO, two existing investors purchased 7,994,442 additional shares of Legacy ESS Series C-2 Preferred Stock and received warrants to purchase 21,159,364 shares of Legacy ESS Series C-2 Preferred Stock with an exercise price of$.00007 per share. The Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right was eliminated with the consummation of the Business Combination. We determined that our obligation to issue, and our investors' obligation to purchase, shares of Legacy ESS Series C-2 Preferred Stock at a fixed price represents a freestanding derivative financial instrument and was initially recorded at fair value. Subsequent changes in fair value at each reporting date are recorded as a component of other income and expense. The value of the Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right is determined based on significant inputs not observed in the market. Through the third quarter of 2020, the fair value of the Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right was determined using a Black-Scholes option pricing model. BeginningDecember 31, 2020 and thereafter, the fair value of the Legacy ESS Series C-2 Redeemable Convertible Preferred Stock Issuance Right was determined using a Black-Scholes option pricing model with consideration for a remain private scenario and a SPAC transaction scenario as described above. We utilized key assumptions, such as the fair value of the Legacy ESS Series C-2 Redeemable Convertible Preferred Stock, the volatility of peer companies' stock prices, the risk-free interest rate based on theU.S. treasury yield, and the expected term (based on the shorter of remaining term to a significant event or expiration date of the purchase right).
Convertible Preferred Stock Warrant Liabilities
Through the consummation of the Business Combination, we accounted for warrants to purchase shares of Legacy ESS Series B Preferred Stock and Legacy ESS Series C Preferred Stock as liabilities at their estimated fair values because these warrants may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a merger, acquisition, reorganization, sale of all or substantially all of our assets, each a change of control event. The warrants were recorded at fair value upon issuance and are subject to remeasurement to fair value at each period end, with any fair value adjustments recognized in the statements of operations and comprehensive loss. Through the third quarter of 2020, Legacy ESS measured the fair value of its warrant liabilities using unobservable inputs within the Black-Scholes option-pricing model. BeginningDecember 31, 2020 and thereafter, the fair value of the warrant liabilities was determined using a Black-Scholes option pricing model with consideration for a remain private scenario and a SPAC transaction scenario as described above. We utilized various key assumptions, such as the fair value of the Legacy ESS Series B Preferred Stock and Legacy ESS Series C Preferred Stock, the volatility of peer companies' stock prices, the risk-free interest rate based on theU.S. treasury yield, and the expected term (based on remaining term to a significant event). - 52 -
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All warrants were exercised prior to the consummation of the Business Combination.
Earnout Liabilities
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 theIncentive RSU Pool , issuable in two equal tranches upon the occurrence of the respective Earnout Milestone Events. The initial fair value of the Earnout Shares was estimated using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporated into the valuation the possibility that the market condition targets may not be satisfied. The Earnout Milestone Events were achieved onNovember 9, 2021 and Legacy ESS issued 15,674,965 shares to securityholders.
Research and Development
We are in the research and development phase. Therefore, all related costs are currently accounted for as part of research and development expense in the consolidated statement of operations and comprehensive loss. The criteria established to determine when commercialization has been reached includes the length of time the units have been operational in the field and the level of performance at which those units operate. As we transition from the research and development phase and into a full commercial phase, all inventoriable costs will be capitalized, net of any lower of cost or net realizable value charges. As ofDecember 31, 2022 , the criteria for commercialization has not yet been met.
Revenue Recognition
Revenue is earned from the sales of energy storage systems and is derived from customer contracts. Revenue is recognized in an amount that reflects the consideration to which we expect to be entitled in exchange for transferring the promised goods and/or services to the customer, when or as our performance obligations are satisfied which includes estimates for variable consideration (e.g., liquidated damages). For sales of energy storage systems, our performance obligations are satisfied at the point in time when the customer obtains control of the system. 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 shipment readiness, delivery, commissioning of the system, and completion of final site testing. 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. Revenue recognition is deferred until written customer acceptance has been received, after site acceptance testing, or until we have established a history of successfully obtaining customer acceptance. In the near term, as our products are newly developed, this is likely to be a longer process than when our products are more mature and we have an established history of customer acceptance.
Product Warranties
We generally provide a standard warranty for a period of one year and an extended warranty through our optional Ironclad Services Plan ("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 distinct service and is accounted for as a performance obligation where a portion of the transaction price is allocated to that performance obligation. We accrue an estimate of warranty costs at the time of recording the revenue for a unit. Warranty accruals include management's best estimate of the projected costs to repair or replace any items under warranty, which is based on various factors including actual claim data to date. Initial warranty data is limited at the early stage in the commercialization of our products. Thus, it is likely that as we sell additional energy storage systems, we will acquire additional information on the components requiring repair or replacement as well as the projected costs to repair or replace items under warranty which may result in a material difference between our estimated costs and our actual costs. We review our warranty accrual at least quarterly and adjust our estimates as needed to ensure our accruals are adequate to meet expected future warranty obligations. Adjustments to warranty accruals are recorded to research and development expenses while the Company is in the research and development phase.
Recently Issued Accounting Standards
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See Note 2, Significant Accounting Policies to our consolidated financial
statements for the year ended
Emerging Growth Company Status
We are an "emerging growth company" as defined in Section 2(a) of the Securities Act and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We expect to continue to take advantage of the benefits of the extended transition period for as long as we remain an emerging growth company, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
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