ESS Tech: Darling Of The Shorts Or Storage Panacea (GWH)

In 1883, Thomas Edison warned that chasing the perfect battery is a fool’s journey: “a catchpenny, a sensation, a mechanism for swindling the public by stock companies,” he wrote. Working on the latest, greatest battery brings out a man’s “latent capacity for lying.”

Wow! As an ESS (NYSE:GWH) shareholder, and shareholder and director of a privately held consumer sized rechargeable battery company, Edison’s century old words sting! I bought and quickly sold ESS stock in the teens, selling once I saw the S1 dealing with the lockup expiry. I have re-entered at $4, so have now been stung twice on a technology that works, I think. More on that later. I guess that’s 3 stings in one paragraph.

So what’s the current short seller battle?

Here’s the recent report from Grizzly. And here’s what I think is the company’s too brief and too mushy denial.

This is not the first time short sellers have gone over this target. Here’s an older report from Bonitas Research released on October 22, 2021

Grizzly’s particular beef seems to be that the Australian partner of ESS has not fully broken ground and is not completely up and running. They have lots of nice satellite images of undisturbed land, ownership records, etc. To me this is not dispositive as a glaring lie on what the company has disclosed. Did I think the Australian company was farther along just glancing at the disclosures? Sure. Did I think they were at a point where they’d be pumping out batteries any day? Nope. Did I bother to go digging further on the future tense of this Australian enterprise in articles and disclosures? Nope. Was this Australian venture central to enticing me to invest twice? Nope.

Then, in a rather glaring bit of recycled copy and paste in a report preaching transparency, they lift the section from the Bonitas report, pictures and all, of prior ESS installs they say have failed. Only a slight tip of the hat to that author. If you are going to live in the glass house of urging transparency on your short sale targets you ought to be more transparent yourself. There didn’t appear to be any attempt to verify the status of the previous projects outlined in the Bonitas report by, say, calling them. [Kind of like this author relying on a secondary source to hope his lead-in Edison quote is correct!]

Some Grizzly specifics

Despite their screaming denunciation of the Australia partnership as some fraud, the company’s disclosure actually looks pretty spot on. Here’s part of a November 2022 article:

Also during the quarter, ESS Inc cemented a deal for its batteries to be shipped and sold in Australia, before the technology is then licensed for manufacturing and sale locally. Partner Energy Storage Industries Asia-Pacific (ESI) will distribute and manufacture Energy Warehouse units for the Australia, New Zealand and Oceania markets.

Starting with delivery of 70 units this year and next, ESI, will then build its own iron flow battery factory in Queensland by 2024. [Author’s emphasis added]

Based on that I wouldn’t expect Grizzly’s perusal of satellite images to show a completed facility. It ain’t 2024 yet.

I was interested that Grizzly came down hard on early investor BASF:

• The multinational chemical giant BASF is an ESS investor since 2017. Despite being an investor, BASF has yet to pay ESS any revenues for its product and decided to forego both Series-C rounds.

But I know from another venture investment that BASF with its German base is reeling from the cutoff of Russian gas. Pulling in their horns on ESS is not unique to this company, its across their entire portfolio. Here’s the lead sentence in a recent BASF release:

FRANKFURT, Oct 12 (Reuters) – BASF (BASFn.DE) is to reduce annual costs by 500 million euros ($485 million) in Europe up to 2024, including job cuts, as the German chemicals group took a 740 million euro writedown linked to the Nord Stream 1 pipeline.

A main beef I have with the Grizzly report, and the prior Bolinas report, is the lack of primary research. Call the Queensland politicos pictured at the ground breaking of ESIAP and ask them about the situation. Call any of the prior installs of ESS batteries and ask them about their findings. File a FOIA request on the US Army Corps and tell us what comes back.

My own first call was to an Australian hedge fund guy with a deep rolodex of players over there. He looked over the names in the Grizzly report and said some of them are solid financial citizens and were not known as scumbags. If his calls on my behalf turn up anything I will post it in the comments. If his calls don’t turn up anything I will ask a few others of his ilk to help out. In other words Grizzly and Bolinas: make the calls and report those findings, and not just stale pictures of installs and cute satellite photos.

So what are some pros and cons of ESS?

I drive a Rivian R1T, having owned a Tesla Model S, and a Chevy Volt before that. My wife is a staunch believer in her Prius’s NiMh technology. Those vehicles and my own exposure to consumer sized rechargeable cells via my aforementioned privately owned battery company have given me a ring side seat on the problems and promise of lithium and NiMH chemistries and the need for bigger, grid scale batteries capable of many more cycles than today’s lithium cells. To me the ESS problems have been those of a plumbing nature and are surely fixable by those skilled in experience with salt water (the electrolyte in ESS’s chemistry), say the ship and boat building industry. Perhaps the company’s Wilsonville, OR headquarters is too land locked, but the ship and boat builders from Seattle and California can’t be too far afield. Problems with corrosion and pumps? Call the guys experienced with many years of work in salt water.

Here are some of the things I like about the company and its technology:

• While the SPAC merger and meltdown have been a disaster, it has left the company with a lot of cash, which should be north of $100mm at year end. Looking at the company’s 3Q 10Q the quarterly loss from operations (net income plus depreciation) is $17.4mm. Even at the company’s burn rate that’s a fair amount of runway.
• I like the utility names that are beginning to appear on the customer list. Portland General Electric, San Diego Gas and Electric, SMUD and the other utilities can buy whatever technology they like, and they seem to have chosen ESS to at least trial the technology.
• Softbank and Bill Gates and BASF are pretty good tech investors. Seeing them onboard pre-SPAC and seeing some of them around post meltdown is a good thing.
• I’m used to comparing small cells on a price per amp hour basis. Since they all have around the same cycle life, no problem. Here, the price of ESS technology is pretty high compared to other technologies. An “Energy Warehouse” [cutesy ESS naming with specs rarely spelled out in company docs or calls] is pretty high, compared to other techs. The company’s 3Q 2022 10Q spelled out the sale of an energy warehouse with now 600Kwh rating (apparently up from earlier iterations) at $189,000 which is a peppy $315/kwh, well above some LiOn large packs. But when one takes as correct the companies assertion that this technology should run for 20 years that implies 7,000 plus cycles and a very low cost per cycle. And, yes, Bolinas and Grizzly we can’t yet point to an install that’s operated for 20 years, so that may be a flawed assumption.
• For comparison here are relevant costs per kwh: “BNEF researchers found that quotes for system prices for a four-hour battery to be commissioned next year in the US ranged from $250/kWh to $400/kWh, compared with an average of $227/kWh reported in 2021.”

And what are some of the cons?

• I think management are terrible communicators. I’ve listened to one earnings call and learned more from analyst questions than from management.
• In my reading, the company has never clearly outlined the operating and maintenance costs of one of their flow batteries. Kudos to SA member Randy Dutton who posted that the pumps use 1-3% of the total energy in a post on October 20, 2021. Why doesn’t the company lay that out in a whitepaper? if they did, where is it? I’m looking for that sort of information, know where to look, and can’t find it. What are the ongoing revenue streams and expenses relating to warranty, maintenance, updates, and support?
• Why can’t the company lay out concisely what is involved in revenue recognition for the batteries they have shipped?

Why do I call the company’s response to Grizzly “mushy”?

OK I was being kind. They’ve signaled Grizzly and Bolinas that they are newbies in a war with short sellers. Here’s my partial prescription of what they should have said:

• We’ve spoken to our largest shareholders and urged them to take their stock holdings out of street name. This will reduce the supply of shares to sell short and could possibly start a short squeeze which would put upward pressure on the stock.
• We’ve engaged legal counsel to pursue a defamation suit against Grizzly and other shorts. Here are our specific assertion of errors in the Grizzly report: xyz, abc, etc.
• We’ve engaged a search firm to identify a new investor relations firm.
• We’ve engaged a technology consulting firm to prepare a whitepaper on comparative costs of ESS and other grid scale battery technologies which will be posted on our website as a discussion item for shareholders and analysts.

Conclusions

As my lead paragraph indicated, I’ve been stung three times but am holding tight with a small long position. If the price weakens, and no more negatives emerge, I expect to expand this position.

When I passed my Series 7 exam the office manager in my brokerage firm cautioned that shorting a $3 stock “was like jumping off a pancake”. On the other hand I’ve seen very large returns from other low priced shorts. This does not feel like that. I don’t find the Grizzly and Bolinas reports the most impressive examples of their genre and are mostly looking at the rear view mirror, which only sometimes is a good predictor of what is coming down the road.

I posted some reactions to the company’s last earnings call here. If they don’t realize some revenue on some of the six units in the field on which they had not realized revenue, I will be worried. If they are well off the mark on shipping 20 “Energy Warehouse” units in the fourth quarter, that they predicted on the call, I will be worried.

This is a long term bet with some very interesting long term numbers on addressable market. I’m staying with it for the time being even though Edison, Grizzly, and Bolinas have all put me on notice. Good luck ESS longs!