The following discussion and analysis provide information which
Energy Vault'smanagement believes is relevant to an assessment and understanding of Energy Vault'sconsolidated results of operations and financial condition. The discussion should be read together with our unaudited interim condensed consolidated financial statements, the respective notes thereto, and other financial information included elsewhere in this Quarterly Report. The discussion and analysis should also be read together with the audited consolidated financial statements for the year ended December 31, 2021, and the related notes included in Amendment No. 1 to the Current Report on Form 8-K filed by us with the SECon March 31, 2022("Amendment No. 1"). This discussion may contain forward-looking statements based upon Energy Vault'scurrent expectations that involve risks, uncertainties, and assumptions. Energy Vault'sactual results may differ materially from those anticipated in these forward-looking statements. You should review the section titled "Cautionary Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and the section titled "Risk Factors," for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Quarterly Report. Energy Vault'shistorical results are not necessarily indicative of the results that may be expected for any period in the future. Unless the context otherwise requires, all references in this Quarterly Report to "we," "our," "us," "the Company," or "Energy Vault" refer to Energy Vault Holdings, Inc., a Delawarecorporation, and its subsidiaries both prior to the consummation of and following the Merger (as defined below). Our Business Energy Vaultdevelops sustainable, grid-scale energy storage solutions designed to advance the transition to a carbon free, resilient power grid. Energy Vault'smission is to identify, develop, and bring to market the most economical, flexible, and sustainable energy storage solutions. To achieve this, Energy Vaultdelivers turn-key energy storage solutions and energy management software systems to utilities, independent power producers, and large energy users to significantly reduce their levelized cost of energy while maintaining power reliability. Energy Vaultwas founded to address one of the greatest impediments to efficient renewable energy adoption - energy storage. Renewable energy solutions struggle to replace fossil fuel power due to intermittency of the generation source and the lack of economic and sustainable energy storage solutions. Variable renewable energy sources such as wind and solar only produce energy when the sun is shining, or when the wind is blowing. Cost-effective energy storage is required to increase the amount of electricity that can be delivered to the grid from renewable energy sources in a balanced way that supports grid integration resiliency during low generation and eliminates over-generation and the risk of changes in energy delivery, or ramp rate. Ramp rate is measured as the percentage of change in energy delivered per second. Power plants are designed to operate within a range where the amount of energy delivered to the grid must always equal the amount of energy that is being consumed. Blackouts and other issues can result when the balance is disrupted, when the energy levels fall out of the set range due to low generation periods, or high energy demand periods. The system also may become overloaded because of abrupt changes in renewable energy generation. Energy storage helps to maintain the balance of energy delivery with energy consumed and to mitigate ramp rate to stay within range and avoid blackouts or other grid resiliency problems.
• EVx: our proprietary gravity-based energy storage system, which is a technologically and economically viable system currently being deployed.
•Energy Vault Solutions (“EVS”): EVS develops our energy management software to maximize the applications and economic performance of various energy storage assets, including batteries and gravity-based systems.
The company’s market-ready turnkey energy storage solutions portfolio currently includes:
• Gravity Energy Storage Systems (“GESS”),
• Battery Energy Storage Systems (“BESS”), and
• Energy management software (“EMS”)
Gravity Energy Storage Systems
Energy Vault'sgravity-based solutions provide long-duration energy storage of four to twelve hours, while providing competitive economics and a lifetime round-trip efficiency ("RTE") of over 80%. The Company's gravity-based solutions are based on the well-understood physics and mechanical engineering fundamentals of pumped hydroelectric energy storage, but replace water with custom-made composite blocks, or "mobile masses", that can be made from low-cost and 28
locally sourced materials, including local soil, mine tailings, coal combustion residues (coal ash) and decommissioned wind turbine blades at end of life.
Energy Vault'sgravity-based solutions build upon the core, proven energy storage technology of pumped hydroelectric energy storage and incorporates a simplified building design that is modular, flexible, and not limited by the same topographical/geological constraints of pumped hydroelectric energy storage plants. Applying the fundamental principles of gravity and potential energy, Energy Vault'sEVx solution combines advanced materials science and proprietary machine-vision software to autonomously orchestrate the charge, storage, and discharge of electricity in grid-scale applications. Energy Vaultsynthesized technologies from four established industries: crane/elevators, shipping, motor/generator, and materials science. Combining potential and kinetic energy cycles, Energy Vault'ssystems are automated with advanced computer control and machine vision software to create a gravity energy storage innovation designed to meet the market demand for storage duration of four to twelve hours. Our storage, when combined with low-cost wind and photovoltaic solar, is designed to achieve an attractive levelized cost of energy delivered. The EVx system can be deployed as stand-alone storage connected to the grid or alongside any generation source, such as wind or solar farms. Energy Vaultis focused on enabling cost-effective renewable power on a global scale at a lower cost than existing, fully-depreciated fossil fuel plants, and with high sustainability standards. The potential energy of the system can be stored with the composite blocks in the raised position for unlimited periods of time and with nearly zero expected loss of the storage capacity over time. Additionally, Energy Vaultis uniquely positioned to work with traditional fossil fuel companies to help utilities and coal plant operators make a more cost-effective transition to green power by utilizing energy waste materials such as coal ash in the production of the mobile masses that charge our gravity energy storage solutions. In July 2020, Energy Vaultcompleted mechanical construction of a five MW commercial demonstration unit ("CDU") located in Arbedo-Castione, Switzerlandbased on the EV1 Towerdesign. In July 2020, the CDU was connected to the Swiss national electricity grid. Following the successful commercial scale deployment of the CDU, Energy Vaultannounced the new EVx platform in 2021 concurrent with its announcement of an investment in Energy Vaultfrom Saudi Aramco Energy Venturesinvestment. EVx is expected to offer performance enhancements designed to have RTE of over 80%, a 35-year life, and a flexible, modular design that is 45% lower in height than the EV1 Towerdesign. Round trip efficiency is the ratio between the amount of energy that is delivered from the charged system and the amount of energy that was used to charge the system, expressed as a percentage. For example, a round trip efficiency of 80% means that a system is able to deliver 80% of the energy that was used to charge the system to the end user. It is important to note that no energy storage system is 100% efficient and that there is always a loss of energy in the storage/delivery process.
Battery energy storage systems
Energy Vault'sBESSs have expected lives that range from 10 to 20 years and provide short-duration energy storage of one to four hours. Our BESSs utilize a purpose-built AC block system leveraging an innovative architecture to lower cost, improve performance, and ensure the highest level of project safety. The Company's BESS integrates hardware components from a diverse network of battery and power electronics manufacturers, and incorporates modular inverters to improve uptime and insulate against the potential consolidated damages of lost capacity. Our battery systems utilize flexible system architecture for long-term asset resiliency as grid conditions and market parameters change, as well as improved augmentation by avoiding reliance on a single manufacturer.
The Company launched EVS to provide customers with (i) a technology neutral platform for the integration and delivery of multiple energy storage technologies and (ii) an advanced software energy management system, using artificial intelligence, predictive analytics and software optimization algorithms, to orchestrate the ideal economic dispatching of energy generation and storage assets. EVS is expected to offer EMS as a software as a service, bundled with the sale of energy storage assets, or an energy storage technology license. Recent Developments In
February 2022, Energy Vaultannounced a License and Royalty agreement for renewable energy storage with Atlas Renewable LLC("Atlas") and its majority investor China Tianying Inc., an international environmental management and waste remediation corporation engaged in smart urban environmental services, resource recycling and recovery, and zero-carbon clean energy technologies. The agreement supports the deployment of Energy Vault'sproprietary gravity energy storage technology and energy management software platform within mainland Chinaand the Special Administrative Regions ("SAR") of Hong Kongand Macau. Atlas agreed to pay $50.0 millionin IP licensing fees, for use and deployment of Energy Vault'sgravity energy storage technology. The Company has collected $45.0 millionof the $50.0 millionof cash and expects to collect the remaining $5.0 millionof cash before the end of 2022. The Company recognized revenue 29
In connection with the Company's licensing agreement with Atlas, the Company agreed to make a refundable contribution to Atlas in the amount up to
$25.0 millionduring the period in which Atlas constructs its first gravity energy storage system ("GESS"). As of September 30, 2022, the Company has contributed $22.5 millionof the $25.0 million. The refundable contribution will be returned to the Company upon Atlas' first GESS reaching substantial completion and meeting certain performance metrics. In April 2022, the Company purchased a $2.0 millionconvertible promissory note from DG Fuels, LLC(" DG Fuels"). The maturity date of the note is the earlier of (i) 30 days after a demand for payment is made by the Company at any time after the two year anniversary of the date of issuance of the note; (ii) the four year anniversary of the date of issuance of the note; (iii) five days following a Financial Close ("Financial Close" means a project finance style closing by DG Fuelsor its subsidiary of debt and equity capital to finance the construction of that certain biofuel facility currently under development by DG Fuels), or (iv) upon an event of default determined at the discretion of the Company. The note has an annual interest rate of 10.0%. The Company intends to hold and convert the DG Fuels Note into the equity securities issued by DG Fuelsin their next equity financing round that is greater than $20.0 millionat a 20% discount to the issuance price. The principal balance and unpaid accrued interest on the DG Fuels Note will, at the option of the Company, convert into equity securities upon the closing of such next equity financing round. On July 1, 2022, Energy Vaultdelivered a notice of redemption for all of its outstanding public warrants to purchase shares of Energy Vaultcommon stock. After delivering the notice of redemption, 2.2 million shares of common stock were issued upon the cashless exercise of 8.7 million public warrants. 0.2 million in unexercised and outstanding Public Warrants as of August 1, 2022were redeemed at a price of $0.10per warrant. No Public Warrants remain outstanding as of September 30, 2022. In August 2022, the Company entered into two contracts with Jupiter Power("Jupiter"), a leading battery energy storage developer and owner/operator of utility-scale battery energy storage projects in the United States, whereby Energy Vaultwill supply equipment, engineering, procurement, construction, balance of plant services, and the energy management software for two of Jupiter's battery energy storage projects. The projects include a 100 MW (200 MWh) battery energy storage system near Fort Stockton, Texas, which will provide energy and ancillary services to ERCOT, and a 10 MW (20 MWh) system in Carpinteria, California, to provide grid services through participation in the CAISO Resource Adequacy program as well as energy resiliency in southern California. The projects will provide critically needed dispatchable capacity to these electricity markets and are expected to be completed in 2023. In September 2022, the Company entered into a contract with Wellhead Electric Company, Inc.("Wellhead") and W Power, LLC, (" W Power"), a woman-owned business enterprise that has developed and owned power generation facilities in California, whereby Energy Vaultwill construct a 275.2 MWh battery storage project at W Power'sEnergy Reliability Center in Stanton, California. The project is on an accelerated timeline to meet critical power needs for southern Californiaand is expected to be completed by mid-2023.
Business combinations and public company costs
February 11, 2022, Energy Vault, Inc.("Legacy Energy Vault") completed the merger with NCCII Merger Corp., with Legacy Energy Vault surviving as a wholly-owned subsidiary of Novus Capital Corporation II ("Novus") (the "Merger"). Immediately following the completion of the Merger, Novus changed its name to Energy Vault Holdings, Inc.On February 14, 2022, Energy Vault'scommon stock and warrants began trading on the New York Stock Exchangeunder the symbols "NRGV" and "NRGV WS," respectively. The Merger was accounted for as a reverse recapitalization in accordance with United States Generally Accepted Accounting Principles ("GAAP"). Under this method of accounting, Novus was treated as the "acquired" company for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of the combined entity upon consumption of the Merger represented a continuation of the financial statements of Legacy Energy Vault with the Merger being treated as the equivalent of Legacy Energy Vault issuing stock for the net assets of Novus, accompanied by a recapitalization. The net assets of Novus are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger are presented as those of Legacy Energy Vault in future reports of the combined entity. All periods prior to the Merger have been retroactively adjusted using the exchange ratio of 6.7735 (the "Exchange Ratio") for the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization. Energy Vaultraised gross proceeds of $235.8 million, including the contribution of $40.8 millionof cash, net of redemptions, held in Novus' trust account from its initial public offering and an aggregate purchase price of $195.0 millionfrom the sale and issuance of shares of common stock in a private placement (" Private Investmentin Public Equity" or 30
$10.00per share. Energy Vaultand Novus paid $44.8 millionin transaction costs, resulting in total net cash proceeds to Energy Vaultfrom the Merger and PIPE of $191.0 million. See Note 1 and Note 3, in Part I, Item 1. "Financial Statements" for additional information about the Merger. As a result of the Merger, Energy Vaulthas become the successor to a publicly reporting company, which has required the hiring of additional personnel and the implementation of procedures and processes to comply with public company regulatory requirements, including the Exchange Act, and customary practices. We have begun to incur and expect to continue 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 audit and legal fees.
Main 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 Part II, Item 1A. “Risk factors.”
Product development and deployment plan
Our cost projections are heavily dependent upon raw materials (such as steel), equipment (such as motors, inverters, and power electronic devices) and technical and construction service providers (such as engineering, procurement, construction firms). The global supply chain, on which
Energy Vaultrelies, has been significantly impacted by (i) the COVID-19 pandemic, (ii) economic uncertainties, including the war in Ukraine, and (iii) high inflation pressure on project budgeting resulting in potential significant delays and cost fluctuations, particularly with respect to microchips and many other raw materials that are within the motor and power electronic supply chains. These future timing and financial developments may impact Energy Vault'sperformance from both a deployment and cost perspective. To date, the only operating energy storage system that utilized Energy Vault'stechnologies was the CDU. Energy Vaultused the CDU for testing and software improvement until it was dismantled in September 2022. Building on its experience with the CDU, Energy Vaultdesigned its EVx system. The EVx platform is designed to be a scalable, modular product line starting from 40 MWh to multi-GWh to address grid resiliency needs in shorter durations while supporting longer duration and power needs in the event of power outages or powering industrial processes over long periods. There are no commercial installations of Energy Vault'sEVx system at this time.
Energy storage industry
Our future revenue growth will be directly tied to the continued adoption of renewable energy storage systems. As the sector is relatively nascent, we expect the markets for renewable energy storage to increase. Furthermore, our systems rely on an alternative technology to the dominant and accepted storage technologies such as lithium-ion, flow batteries, and thermal storage. Our business depends on the acceptance of our products, including the EVx systems, in the marketplace. Even if renewable energy and energy storage become more widely adopted than they have been to date, potential customers may choose energy storage products from our competitors that are based on technologies other than our gravity-based energy storage technology.
The spread of the COVID-19 has caused an economic downturn on a global scale, as well as significant volatility in the financial markets. Government reactions to the public health crisis with mitigation measures have created significant uncertainties in the
U.S.and global economies. The extent to which the COVID-19 pandemic impacts Energy Vault'sbusiness, operations and financial results will depend on numerous evolving factors that management may not be able to accurately predict. The ultimate outcome of these matters is uncertain and, accordingly, the impact on our financial condition or results of operations is also uncertain.
Components of operating results
January 1, 2022, Energy Vaulthad not recognized any revenue. During the three and nine months ended September 30, 2022, Energy Vaultrecognized revenue of $1.7 millionand $45.6 million, respectively, from the building of energy storage systems and from the licensing of the Company's intellectual property.
We plan to generate revenue from the sale of energy storage solutions, through four complementary sales programs based on customer preferences.
Under the first program, Storage Asset Owners, the customer owns both the energy storage system and the service, that the system provides (i.e., the energy storage and dispatch of electricity).
Energy Vaultanticipates that this program will constitute the substantial majority of future sales and that utility companies, independent power producers, and industrial customers that consume large amounts of power or are making a transition to 24/7 renewable power may be interested in being Storage Asset Owners. The Company recognized revenue of $1.2 millionduring both the three and nine months ended September 30, 2022related to this sales program. Under the second program, Storage Service Customers, customers such as community choice aggregators, independent power producers, and utility companies would sign long-term power purchase agreements and/or tolling agreements to purchase power on a fixed dollar per kilowatt on a monthly or hourly basis, while Energy Vaultand potentially other equity co-investors would retain an ownership interest in the system. An investment tax credit of up to 30% could be applied against the costs incurred by the Company for U.S.based project installations if Energy Vaultdecides to combine other renewable energy components into a combined storage project. See the section titled "Risks Related to Government Regulations" in Item 1A. Risk Factors for further details. The Company has not yet recognized any revenue from this sales program. Under the third program, the customer would enter into a Software as a Service ("SaaS") agreement with Energy Vault, and would be granted access to Energy Vault'sEnergy Management System that helps the economic dispatching of its energy storage and generation assets. The Company has not yet recognized any revenue from this sales program. Under the fourth program, the Company would enter into intellectual property license and royalty agreements associated with our energy storage technology. The Company recognized revenue of zero and $42.9 millionduring the three and nine months ended September 30, 2022related to this sales program.
Revenue cost primarily includes the costs of subcontractors, direct labor and consulting fees associated with constructing energy storage systems and providing construction support services to Atlas.
Sales and marketing expenses
Sales and marketing expenses consist primarily of expenses relating to professional service costs, trade shows, marketing and sales related promotional materials, public relations expenses, website operating and maintenance costs, and stock-based compensation expenses for marketing, sales personnel, and related support teams. We expect that our sales and marketing expenses will increase over time as we continue to hire additional personnel to support the overall growth in our business.
Research and development costs
Research and development expenses consist primarily of internal and external expenses incurred in connection with our research activities and development programs that include materials costs directly related to the product development, testing and evaluation costs, construction costs including labor and transportation of material, overhead related costs and other direct expenses consisting of stock-based compensation and consulting expenses relating to study of product safety, reliability and development. We expect our research and development costs to increase for the foreseeable future as we continue to invest in these activities to achieve our product design, engineering, and development roadmap.
General and administrative expenses
General and administrative expenses consist of information technology expenses, legal and professional fees, travel cost, personnel-related expenses for our corporate, executive, finance, and other administrative functions including expenses for professional and contract services. Personnel related expenses consist of salaries, benefits, and stock-based compensation expense. To a lesser extent, general and administrative expense includes depreciation, investor relations costs, insurance costs, rent, office expenses, and maintenance costs. We expect our general and administrative expenses to increase in the foreseeable future as we hire personnel to meet the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the
SEC, legal, audit, additional insurance requirements, investor relations fees, SOX 404 implementation fees, and other administrative and professional services.
Energy Vaultbegan building a prototype of the EV1 in March 2020, resulting in the CDU, an EV1 Tower, which was connected to the Swiss national grid in July 2020. Thereafter, through design improvements and refinements of its technology, Energy Vaultannounced the new EVx platform in 2021 and the Company completed the dismantling of the 32
September 2022. The Company has recognized various impairments related to the CDU and production equipment for the EV1 Towerwhen components have been damaged or become obsolete. Other income (expense) Interest expense
Interest expense primarily includes interest related to finance leases.
Change in fair value of warrant liability
The Company's warrants are subject to fair value remeasurement at each balance sheet date. The Company expects to incur incremental income (expense) in the condensed consolidated statements of operations for the fair value change for the outstanding warrant liabilities at the end of each reporting period or through the exercise of such warrants. With the completion of the redemption of
Energy Vault'spublic warrants on August 1, 2022, Energy Vaultcurrently expects to incur incremental income (expense) in its consolidated statements of operations for the fair value change for outstanding warrant liabilities at the end of each reporting period in respect of outstanding private warrants.
Transaction costs include legal, accounting, banking and other costs directly related to the completion of the Merger and the PIPE.
Other income (expenses), net
Other income (expenses), net, mainly includes interest income related to our investments in money market funds as well as gains and losses related to foreign exchange transactions.
Main operating parameters
Reservations represent the total number of MWh to be delivered per signed customer contract, or the total dollar value of signed customer contracts entered into during the specified periods. The following table presents the reservations for the periods indicated (amounts in thousands, excluding amounts in MWh):
Three months ended September 30, Nine Months Ended September 30, 2022 2021 $ Change 2022 2021 $ Change Bookings [MWh] 495 - 495 495 - 495 Bookings [$]
$ 206,794$ - $ 206,794 $ 256,794$ - $ 256,794Backlog Backlog represents the amount of revenue we expect to realize in the future on uncompleted construction contracts, including new contracts under which work has not yet begun, as well as the remaining revenue to be recognized under the Company's intellectual property licensing agreement with Atlas. As of September 30, 2022, backlog totaled $211.5 million. The Company expects to realize the majority of the backlog as of September 30, 2022over the next twelve months. Timing of revenue for construction and installation projects included in our backlog can be subject to change as a result of customer, regulatory, or other delays or cancellations including from economic or other conditions caused by supply chain disruptions, inflation, COVID-19, weather, and/or other project-related factors. These effects, among others, could cause estimated revenue to be realized in periods later than originally expected, or not at all. Customers may postpone or cancel construction projects due to changes in our customer's spending plans, market volatility, changes in government permitting, regulatory delays, and/or other factors. There can be no assurance as to our customer's requirements or if actual results will be consistent with our estimates. As a result, our backlog as of any particular date is an uncertain indicator of future revenue and earnings.
Backlog is a commonly used metric in our industry. Our methodology for determining the backlog, however, may not be comparable to methodologies used by others. The Company’s backlog is the amount of our remaining performance obligations, which are described in Note 4 – Revenue recognition.
Consolidated comparison of the three and nine month periods ended
The following table presents our results of operations for the periods indicated (amounts in thousands):
Three months ended September 30, Nine Months Ended September 30, 2022 2021 $ Change 2022 2021 $ Change Revenue
$ 1,694$ - $ 1,694 $ 45,555$ - $ 45,555Operating Expenses: Cost of revenue 1,623 - 1,623 2,194 - 2,194 Sales and marketing 3,758 169 3,589 8,287 443 7,844 Research and development 16,731 1,697 15,034 36,155 4,920 31,235 General and administrative 12,960 3,759 9,201 33,434 8,620 24,814 Asset impairment 2,828 (11) 2,839 2,828 2,733 95 Loss from operations (36,206) (5,614) (30,592) (37,343) (16,716) (20,627) Other Income (Expense): Interest expense - - - (1) (7) 6 Change in fair value of warrant liability 6,706 - 6,706 2,061 - 2,061 Transaction costs - - - (20,586) - (20,586) Other income (expenses), net 920 (549) 1,469 1,205 (1,866) 3,071 Loss before income taxes $ (28,580) $ (6,163) $ (22,417) $ (54,664) $ (18,589) $ (36,075)Revenue
The Company recognized revenue for the categories of products and services as follows for the three months ended
2022 2021 Licensing of intellectual property $ - $ - Build and transfer energy storage products 1,153 - Other 541 - Total revenue
$ 1,694$ - Revenue for the three months ended September 30, 2022was $1.7 millioncompared to no revenue for the three months ended September 30, 2021. Revenue for the three months ended September 30, 2022primarily consisted of $1.2 millionrelated to the building and transferring of energy storage products. This $1.2 millionin revenue was earned from Jupiter as the Company began construction on their battery energy storage systems during the three months ended September 30, 2022. Revenue from Jupiter represents 68% of the Company's total revenue for the three months ended September 30, 2022. Additionally, the Company earned other revenue of $0.5 millionfrom Atlas related to providing construction support services during the three months ended September 30, 2022. Revenue from Atlas represents 32% of the Company's total revenue for the three months ended September 30, 2022.
The Company recognized revenue for the categories of products and services as follows for the nine months ended
2022 2021 Licensing of intellectual property
$ 42,884$ - Build and transfer energy storage products 1,153 - Other 1,518 - Total revenue $ 45,555$ - Revenue for the nine months ended September 30, 2022was $45.6 millioncompared to no revenue for the nine months ended September 30, 2021. Revenue for the nine months ended September 30, 2022primarily consisted of $42.9 millionrelated to the transfer of intellectual property to Atlas. Additionally, the Company recognized revenue of $1.2 million34
related to the building and transferring energy storage products to Jupiter and
$1.5 millionin other revenue related the Company providing construction support services to Atlas during the nine months ended September 30, 2022. Revenue from Atlas represents 97% of the Company's total revenue for the nine months ended September 30, 2022.
Cost of revenue was
$1.6 millionfor the three months ended September 30, 2022compared to no cost of revenue for the three months ended September 30, 2021. Cost of revenue for the three months ended September 30, 2022consisted of subcontractor and direct labor costs on the battery storage projects with Jupiter, and direct labor and consulting expenses related to providing construction support services to Atlas. Cost of revenue was $2.2 millionfor the nine months ended September 30, 2022compared to no cost of revenue for the nine months ended September 30, 2021. Cost of revenue for the nine months ended September 30, 2022consisted of subcontractor and direct labor costs on the battery storage projects with Jupiter, and direct labor and consulting expenses related to providing construction support services to Atlas.
Sales and Marketing
Sales and marketing expenses increased by
$3.6 millionto $3.8 millionfor the three months ended September 30, 2022, compared to $0.2 millionfor the three months ended September 30, 2021. The increase resulted primarily from an increase in personnel-related expenses of $2.9 millionand an increase in marketing and public relation costs of $0.3 million. The increase in personnel costs was due to expanded headcount, particularly at the senior levels, and increased stock-based compensation expense. Stock-based compensation expense was $2.1 millionfor the three months ended September 30, 2022, compared to $9 thousandfor the three months ended September 30, 2021. Sales and marketing expenses increased by $7.9 millionto $8.3 millionfor the nine months ended September 30, 2022, compared to $0.4 millionfor the nine months ended September 30, 2021. The increase resulted primarily from an increase in personnel-related expenses of $4.8 million, an increase in marketing and public relations costs of $2.0 million, and an increase in travel related expenses of $0.4 million. The increase in personnel costs was due to expanded headcount, particularly at the senior levels, and increased stock-based compensation expense. Stock-based compensation expense was $3.0 millionfor the nine months ended September 30, 2022, compared to $0.1 millionfor the nine months ended September 30, 2021.
Research and development
Research and development expenses increased by
$15.0 millionto $16.7 millionfor the three months ended September 30, 2022, compared to $1.7 millionfor the three months ended September 30, 2021. The increase resulted primarily from a $6.0 millionincrease in personnel-related expenses, a $5.1 millionincrease in depreciation expense, a $2.3 millionincrease in engineering and development costs, a $0.8 millionincrease in consultant expenses, and a $0.8 millionincrease in software costs. The increase in personnel costs was due to expanded headcount, particularly at the senior levels, and increased stock-based compensation expense. Stock-based compensation expense was $4.2 millionfor the three months ended September 30, 2022, compared to $0.2 millionfor the three months ended September 30, 2021. The increase in depreciation expense primarily relates to depreciation on the CDU and related components. Research and development expenses increased by $31.3 millionto $36.2 millionfor the nine months ended September 30, 2022, compared to $4.9 millionfor the nine months ended September 30, 2021. The increase resulted primarily from a $14.9 millionincrease in personnel-related expenses, a $7.4 millionincrease in depreciation expense, a $4.6 millionincrease in engineering and development costs, a $2.3 millionincrease in software expenses, a $1.0 millionincrease in consultant expenses, and a $0.7 millionincrease in travel related expenses. The increase in personnel costs was due to expanded headcount, particularly at the senior levels, and increased stock-based compensation expense. Stock-based compensation expense was $11.0 millionfor the nine months ended September 30, 2022, compared to $0.3 millionfor the nine months ended September 30, 2021. The increase in depreciation expense primarily relates to depreciation on the CDU and related components. General and Administrative General and administrative expenses increased by $9.2 millionto $13.0 millionfor the three months ended September 30, 2022compared to $3.8 millionfor the three months ended September 30, 2021. The increase resulted primarily from a $5.7 millionincrease in personnel-related expenses, a $1.7 millionincrease in legal and professional fees, a $0.7 millionincrease in consultant expenses, a $0.4 millionincrease in insurance costs, and a $0.3 millionincrease in travel expenses. The increase in personnel costs was due to expanded headcount and an increase in stock-based compensation expense. 35
Stock-based compensation expense was
$4.5 millionfor the three months ended September 30, 2022, compared to $9 thousandfor the three months ended September 30, 2021. The increase in legal and professional fees was attributable to external costs such as accounting, finance, tax, compliance, auditing, legal, and other professional fees associated with becoming a public company. General and administrative expenses increased by $24.8 millionto $33.4 millionfor the nine months ended September 30, 2022, compared to $8.6 millionfor the nine months ended September 30, 2021. The increase resulted primarily from a $15.4 millionincrease in personnel-related expenses, a $4.0 millionincrease in legal and professional fees, a $1.6 millionincrease in consultant expenses, a $1.2 millionincrease in insurance costs, a $1.1 millionin travel related expenses, a $0.7 millionincrease in software expenses, and a $0.5 millionincrease in employee recruiting costs. The increase in personnel costs was due to expanded headcount and an increase in stock-based compensation expense. Stock-based compensation expense was $12.7 millionfor the nine months ended September 30, 2022, compared to $54 thousandfor the nine months ended September 30, 2021. The increase in legal and professional fees was attributable to external costs such as accounting, finance, tax, compliance, auditing, legal, and other professional fees associated with becoming a public company.
Asset impairment was
$2.8 millionfor both the three and nine months ended September 30, 2022, compared to a credit to asset impairment of $11 thousandfor the three months ended September 30, 2021and asset impairment of $2.7 millionfor the nine months ended September 30, 2021. Asset impairment for the three and nine months ended September 30, 2022related to the CDU and the brick machines used to manufacture bricks for the EV1 tower design. The Company completed the dismantling of the CDU by September 2022and is no longer being used as a demonstration unit. Asset impairment of $2.7 millionfor the nine months ended September 30, 2021related to components of the CDU that were damaged. This impairment and other related costs were partially offset by an insurance claim received by the Company. Additionally, other components, which were not previously installed, were reclassified into prepaid expenses and other current asset at their estimated net realizable value during 2021.
Other income (expenses)
Change in fair value of warrant liability
The Company recognized a gain of
$6.7 millionrelated to the change in the fair value of the Company's warrant liability for the three months ended September 30, 2022due to a decrease in the fair value of our outstanding warrants as of September 30, 2022compared to the fair value as of June 30, 2022or as of the date the warrants were exercised. The Company recognized a gain of $2.1 millionrelated to the change in the fair value of the Company's warrant liability for the nine months ended September 30, 2022due to a decrease in the fair value of our outstanding warrants since the Closing of the Merger. The Company did not have any outstanding warrants during the three month and nine month periods ending September 30, 2021.
The Company did not recognize any transaction costs during the three months ended
September 30, 2022. The Company recognized transaction costs of $20.6 millionrelated to the consummation of the Merger during the nine months ended September 30, 2022. The Company did not recognize any transaction costs during 2021. Other income (expense), net Other income (expense), net improved by $1.4 millionto other income, net of $0.9 millionfor the three months ended September 30, 2022compared to other expense, net of $0.5 millionfor the three months ended September 30, 2021. The improvement resulted primarily from an increase in interest income and positive fluctuations in foreign currency transaction gain and losses. Other income (expense), net improved by $3.1 millionto other income, net of $1.2 millionfor the nine months ended September 30, 2022compared to other expense, net of $1.9 millionfor the nine months ended September 30, 2021. The improvement resulted primarily from an increase in interest income and positive fluctuations in foreign currency transaction gain and losses.
Cash and capital resources
Since our inception, we have financed our operations primarily through the issuance and sale of shares and the proceeds of the merger and the PIPE.
Fusion and PIPE
Short term liquidity
September 30, 2022, we had $274.7 millionof cash, cash equivalents, and restricted cash, representing an increase of $169.6 millionfrom cash, cash equivalents, and restricted cash of $105.1 millionat December 31, 2021. As of September 30, 2022, the Company had $25.1 millionin restricted cash. Substantially all of the restricted cash balance was held by banks as collateral for the Company's letters of credit. The Company did not have any restricted cash of December 31, 2021. Management believes that its cash, cash equivalents, and restricted cash on hand as of September 30, 2022will be sufficient to fund our operating activities for at least the next twelve months without regard to any cash proceeds we received or may in the future receive upon the exercise for cash of our warrants. The exercise price for any of our private warrants is $11.50per warrant, subject to certain specified adjustments. To the extent that the price of our common stock exceeds $11.50per share, it is more likely that our private warrant holders will exercise their warrants. To the extent that the price of our common stock declines, including a decline below $11.50per share, it is less likely that our private warrant holders will exercise their warrants.
Energy Vaulthas incurred negative operating cash flows and operating losses in the past. We may continue to incur operating losses for the next several years due to its on-going research and development activities. The Company may seek additional capital through equity and/or debt financings depending on market conditions. If we are required to raise additional funds by issuing equity securities, dilution to stockholders would result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of common stock. The terms of debt securities or borrowings could impose significant restrictions on our operations. The credit market and financial services industry have in the past, and may in the future, experience periods of uncertainty that could impact the availability and cost of equity and debt financing.
Our main commitments to
The Company committed to make a
$25.0 millionrefundable contribution to Atlas during the period in which it constructs its first GESS, and will be refunded to the Company upon Atlas' first GESS reaching substantial completion and meeting certain performance metrics. As of September 30, 2022, the Company has remitted to Atlas $22.5 millionof the $25.0 million. Our non-cancellable purchase obligations as of September 30, 2022totaled approximately $23.9 million.
The following table summarizes cash flows from operating, investing and financing activities for the periods indicated (amounts in thousands):
Nine Months Ended
Net cash used in operating activities
$ (47,795) $ (14,075)Net cash used in investing activities (2,679)
Net cash provided by financing activities 220,207
Effects of exchange rate changes on cash (123) 723 Net increase in cash
$ 169,610 $ 106,240Operating Activities During the nine months ended September 30, 2022and 2021, cash used in operating activities totaled $47.8 millionand $14.1 million, respectively. During the nine months ended September 30, 2022, cash used in operating activities was negatively impacted by a net loss of $55.0 millionand an increase in operating assets of $55.2 million. The change in operating assets was primarily due to a $24.7 millionincrease in contract assets, a $22.8 millionincrease in accounts receivable, and a $7.7 millionincrease in prepaid expenses and other current assets. Operating cash flows were positively 37
impacted by non-cash charges of
$35.5 millionand a $27.0 millionincrease in operating liabilities. The non-cash charges primarily consisted of $26.8 millionin stock-based compensation expense, $7.6 millionin depreciation and amortization expense, and $2.8 millionin asset impairments. The increase in operating liabilities primarily consisted of a $27.5 millionincrease in contract liabilities. During the nine months ended September 30, 2021, cash used in operating activities of $14.1 millionwas negatively impacted by a net loss of $18.6 millionand a $1.3 milliondecrease in operating liabilities. The decrease in operating liabilities resulted from a decrease in accounts payable and accrued expenses. Operating cash flows were positively impacted by non-cash charges of $5.1 millionand a $0.7 millionincrease in operating assets. Non-cash charges primarily consisted of $3.2 millionrelated to the write-down of inventory, $1.0 millionin depreciation and amortization expense, $0.3 millionin non-cash lease expenses, and $0.5 millionin stock-based compensation expense.
During the nine months ended
September 30, 2022and 2021, cash used in investing activities totaled $2.7 millionand $76 thousand, respectively. Cash used in investing activities for the nine months ended September 30, 2022consisted of $2.0 millionfor the purchase of a convertible note and $0.7 millionfor the purchase of property and equipment.
Cash flows used in investing activities for the nine months ended
consisted of purchases of property, plant and equipment.
During the nine months ended
September 30, 2022and 2021, cash provided by financing activities totaled $220.2 millionand $119.7 million, respectively. For the nine months ended September 30, 2022, cash provided by financing activities was primarily attributable to $235.9 millionin proceeds from the reverse recapitalization and PIPE financing, net, and $7.9 millionin proceeds from the exercise of warrants. Partially offsetting these cash inflows was $20.7 millionin transaction cost payments related to the reverse recapitalization and $3.0 millionin tax payments related to the net settlement of equity awards. During the nine months ended September 30, 2021, cash provided by financing activities was primarily attributable to $105.5 millionin net proceeds from the issuance of Series C preferred stock and $15.3 millionin net proceeds from the issuance of Series B-1 preferred stock. Partially offsetting these cash inflows was $0.8 millionin debt repayments and $0.5 millionin payments related to Merger transaction costs.
Non-GAAP Financial Measure
We use adjusted EBITDA to complement our condensed consolidated statements of operations. Management believes that this non-GAAP financial measure complements our GAAP net loss and such measure is useful to investors. The presentation of this non-GAAP measure is not meant to be considered in isolation or as an alternative to net loss as an indicator of our performance. 38
The following table provides a reconciliation of non-GAAP adjusted EBITDA to GAAP net loss, the most directly comparable GAAP measure (amounts in thousands):
Three Months Ended
Nine month period ended
2022 2021 2022 2021 Net loss (GAAP)
$ (28,765) $ (6,163) $ (55,022) $ (18,589)Non-GAAP Adjustments: Interest income, net (1,024) (21) (1,355) (36) Income tax expense 185 - 358 - Depreciation and amortization 5,158 529 7,562 976 Stock-based compensation expense 10,894 202 26,757 452 Change in fair value of warrant liability (6,706) - (2,061) - Transaction costs - - 20,586 - Asset impairment 2,828 (11) 2,828 2,733 Foreign exchange (gains) and losses 219 550 163 1,889 Adjusted EBITDA (non-GAAP) $ (17,211) $ (4,914)
We present adjusted EBITDA, which is net loss excluding adjustments that are outlined in the quantitative reconciliation provided above, as a supplemental measure of our performance and because we believe this measure is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. The items excluded from adjusted EBITDA are excluded in order to better reflect our continuing operations. In evaluating adjusted EBITDA, one should be aware that in the future we may incur expenses similar to the adjustments noted above. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these types of adjustments. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net loss, operating loss, or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of our liquidity. Our adjusted EBITDA measure has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•it does not reflect our cash expenditures, our future capital expenditure needs or our contractual commitments;
•it does not reflect changes or cash requirements for our working capital requirements;
•it does not take stock-based compensation into account, which is a permanent expense;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and our adjusted EBITDA measure does not reflect any cash requirements for such replacements;
•it is not adjusted for all non-cash income or expense items that are reflected in our condensed consolidated statements of cash flows;
•it does not reflect the impact of income or expense resulting from matters that we believe are not indicative of our ongoing operations;
•it does not reflect the limitations or costs associated with the transfer of profits from our subsidiaries to us; and
•Other companies in our industry may calculate this measure differently from us, which limits its usefulness as a comparative measure.
Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to use to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using adjusted EBITDA only supplementally. 39
Off-balance sheet commitments and arrangements
The Company has not entered into any off-balance sheet arrangements, as defined in the rules and regulations of the
Significant Accounting Policies and Use of Estimates
Our consolidated financial statements are prepared in conformity with Generally Accepted Accounting Principles in
the United States("GAAP"). In preparing our financial statements, we make assumptions, judgments, and estimates based on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. Other than the policies described in Note 2 - Summary of Significant Accounting Policies in the Company's unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report, there have been no material changes to our critical accounting policies and estimates as compared to those disclosed in the notes to our audited consolidated financial statements as of and for the years ended December 31, 2021and 2020 included in Amendment No. 1.
January 1, 2022, Energy Vault'srevenue recognition policy is a critical policy due to the adoption of the guidance from ASC 606, Revenue from Contracts with Customers. We determine the amount of revenue to be recognized through the application of the following steps:
(1) Identification of the contract(s) with a customer.
(2) Identification of performance obligations in the contract.
(3)Determination of the transaction price.
(4) Allocation of the transaction price to the performance obligations of the contract.
(5) Recognition of revenue when a performance obligation is satisfied.
The Company identifies performance obligations in our contracts with customers. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised goods and services to the customer. The transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized when performance obligations are satisfied. When a part or all of a transaction price is considered to be variable, an estimate of the constrained transaction price is recognized. Changes in variable consideration may result in an increase or a decrease to revenue. Building
Energy Storage Projects: The Company enters into contracts with utility companies and independent power producers to build energy storage projects. The Company has entered into battery-based energy storage projects and intends to enter into gravity-based energy storage projects in the future. Each storage project is customized depending on the customer's energy needs. Customer payments are due upon meeting certain milestones that are consistent with contract-specific phases of a project. The Company determines the transaction price based on the consideration expected to be received, which includes estimates of liquidated damages or other variable consideration. Generally, each contract to design and construct an energy storage project contains one performance obligation. Multiple contracts entered into with the same customer and near the same time to construct energy storage projects are combined in accordance with ASC 606. In these situations, the contract prices are aggregated and then allocated to each energy storage project based upon their relative stand-alone selling price. The Company recognizes revenue over time as a result of the continuous transfer of control of its products to the customer. The continuous transfer of control to the customer is supported by clauses in the contracts that provide enforceable rights to payment of the transaction price associated with work performed to date for products that do not have an alternative use to the Company and/or the project is built on the customer's land that is under the customer's control. Revenue for these performance obligations is recognized using the percentage of completion method based on cost incurred as a percentage of total estimated contract costs. Contract costs include all direct materials and labor costs related to contract performance. Pre-contract costs with no future benefit are expensed in the period in which they are incurred. Since the revenue recognition of these contracts depends on estimates, which are assessed continually during the term of the contract, recognized revenues and profit are subject to revisions as the contract progresses to completion. The cumulative effects of revisions of estimated total contract costs and revenues, together with any contract reserves which may be 40
deemed appropriate, are recorded in the period in which the facts and changes in circumstances become known. Due to uncertainties inherent in the estimation process, it is reasonably possible that these estimates will be revised in a different period. When a loss is forecasted for a contract, the full amount of the anticipated loss is recognized in the period in which it is determined that a loss will incur. The Company's contracts generally provide customers the right to liquidated damages ("LDs") against
Energy Vaultin the event specified milestones are not met on time, or certain performance metrics are not met upon or after the substantial completion date. LDs are accounted for as variable consideration, and the contract price is reduced by the expected penalty or LD amount when recognizing revenue. Variable consideration is included in the transaction price only to the extent that it is improbable that a significant reversal in the amount of cumulative revenue recognized will occur when the uncertainty is resolved. Estimating variable consideration requires certain estimates and assumptions, including whether and by how much a project will be delayed. The existence and measurement of liquidated damages may also be impacted by the Company's judgment about the probability of favorable outcomes of customer disputes involving whether certain events qualify as force majeure or the reason for the events that caused project delays. Variable consideration for LDs is estimated using the expected value of the consideration to be received. If Energy Vaulthas a claim against the customer for an amount not specified in the contract, such claim is recognized as an increase to the contract price when it is legally enforceable, which is usually upon signing a respective change order or equivalent document confirming the claim acceptance by the customer. Intellectual Property Licensing: The Company enters into licensing agreements of its intellectual property that are within the scope of ASC 606. The terms of such licensing agreements include the license of functional intellectual property, given the functionality of the intellectual property is not expected to change substantially as a result of the licensor's ongoing activities. The transaction price allocated to the licensing of intellectual property is recognized as revenue at a point in time when the licensed intellectual property is made available for the customer's use and benefit.
Accounting for stock-based compensation requires us to make a number of judgments, estimates and assumptions. If any of the estimates turn out to be inaccurate,
The Company's stock-based compensation arrangements are accounted for in accordance with ASC Topic 718, "Share Based Payments." Compensation expense is recognized over the requisite service period (usually the vesting period) on a straight-line basis and adjusted for actual forfeitures of unvested awards as they occur.
Equity awards that vest solely based on a service condition are valued based on the estimated fair value of the awards at the grant date using the Black-Scholes option pricing model, which has been influenced by the following assumptions:
•Expected Term - The expected term represents the period that
Energy Vault'sawards granted are expected to be outstanding and is determined based upon the simplified method, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. •Expected Volatility - Since we were privately held and did not have any trading history for our common stock prior to the Merger, the expected volatility was estimated based on the average volatility for comparable publicly traded companies over a period equal to the expected term of the stock award grants.
• Risk-free interest rate – We use the
• Expected dividend –
The grant date fair value of our common stock is determined using valuation methodologies which utilize certain assumptions, including probability weighting of events, volatility, time to liquidation, a risk-free interest rate, and an assumption for a discount for lack of marketability (Level 3 inputs). The fair value of the Company's common stock was estimated because the common stock of Legacy Energy Vault had not yet been publicly traded prior to the Merger.
Defined benefit pension obligation
Energy Vault'swholly owned subsidiary in Switzerlandhas a defined benefit pension obligation covering retirement and other long-term benefits for the local employees. The plan is a statutory requirement in accordance with local regulations which is accounted for and disclosed in accordance with the provisions of GAAP relating to the accounting for pension plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the projected benefit obligation, fair value of plan assets and an underfunded net benefit obligation. 41
Energy Vault'sfinancial statements reflect the impact of the publicly-traded warrants ("Public Warrants") and private warrants ("Private Warrants") that were assumed upon the closing of the Merger. The Company accounts for warrants for shares of the Company's common stock that are not indexed to its own stock as liabilities at fair value on the balance sheet. The warrants are subject to remeasurement at each balance sheet date and any change in fair value is recognized in the Company's statement of operations. With the completion of the redemption of Energy Vault'spublic warrants on August 1, 2022, Energy Vaultcurrently expects to incur incremental income (expense) in its condensed consolidated statements of operations for the fair value change for outstanding warrant liabilities at the end of each reporting period only in respect of its private warrants.
Accounting Election for Emerging Growth Companies
We are an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended, and have irrevocably elected to take advantage of the benefits of this extended transition period for new or revised standard. We are expected to remain an emerging growth company through the end of 2022 and expect to continue to take advantage of the benefits of the extended transition period. 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 for emerging growth companies because of the potential differences in accounting standards used.
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted/unadopted accounting pronouncements are described in Note 2 of the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report.
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