Q1 2022 Eos Energy Enterprises Inc Earnings Call

May 10, 2022

Good morning, and welcome to the iOS Energy's first quarter 2022 earnings call.

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I would now like to turn the conference over to Joe Crinkly doses Communications manager. Please go ahead.

Thank you.

Everyone and thank you for joining us for <unk> financial results conference call for the first quarter of 2022.

On the call today, we have CEO , Joe Mr Angelo and CFO Randy Gonzales.

Before we begin allow me to provide a disclaimer regarding forward looking statements.

This call, including the Q&A portion of the call May include forward looking statements related to the expected future results for our company, which are subject to certain risks uncertainties and assumptions.

Should any of these risks materialize or should our assumptions prove to be incorrect. Our actual results may differ materially from our projections are that was implied by these forward looking statements.

The risks and uncertainties that forward looking statements are subject to are described in our earnings release and other SEC filings our remarks during todays discussion should be considered to incorporate this information by reference.

Forward looking statements represent our beliefs and assumptions only as of the date such statements are made we undertake no obligation to update any forward looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law.

Today's remarks will also include references to non-GAAP financial measures additional information, including reconciliation between non-GAAP financial information the U S. GAAP financial information is provided in the press release.

non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP and.

In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.

This conference call will be available for replay via webcast through iOS Investor Relations website at investors <unk> Dot com.

John Randy will now walk you through the company highlights financial results and business priorities before we proceed to Q&A with that I'll turn the call over to Joe.

Thanks, Joe and welcome everybody to the <unk> earnings call for <unk> energy storage proud to be here with everyone. I just wanted to start off on page three walking through.

Some recent milestones that have occurred since the end of quarter close you know first we recently signed a large letter of intent with the northeast solar developer for 300 megawatt hours of future business to be delivered over the course of 2023, we're going to be working with that customer as we've always talked about with our commercial model get the LOI signed yet.

On the same side of the table closeout. The overall deal. So we'll be working here over the next 30 to 60 days to bring that one Noah Bookable order at the same time, we talked about the last call expanding capacity and in a new <unk>.

Dish into our facility in Turtle Creek, we've added 65 megawatt hours of that capacity in the first two months that we've been in the facility and are producing product out of that facility and just over 60 days really proud of what the operating team has been able to do on the picture to the right you see we shipped our 100th energy block about a week ago.

Tremendous milestone by the team really great accomplishment that energy block there number 100 is going to be headed to.

Blue Ridge, and Pine Gate renewables for the E. Silver project that we've been executing on here over the past.

30, 60 days the same time, we also announced a financing commitment for up to $200 million with Yorkville advisors, we're proud to be partnering with your work Phil Randy will walk through a little bit more of the details around this agreement that we are comfortable we talked about finding the most effective means to raise additional capital to achieve our growth plans.

I think this is one of the first moves that we'll be making here to shore up and be able to deliver on the plan that we laid out in our last call. If we go to page four you can see on the operating highlights I really want to focus in here on the growth side of the business we booked.

$67 million of orders of 241 megawatt hours, our total order backlog now stands above $200 million is rapidly approaching a gigawatt hour and I'll walk through the opportunity pipeline, which now stands at $6 2 billion and is up over a gigawatt hour of opportunity since the last time, we were together Randy will give you the bridge in.

The walk through on the revenue that we delivered in the first quarter and cash on hand, right now stands at $55 million exclusive of the financing arrangement that we that I previously talked about from from Yorkville. We're proud of where the company is heading and how the team is executing and you can see quarter over quarter sequentially you continue.

See progress across these core metrics as the team continues to get out in the market, we're seeing an uptick in demand for energy storage and we're also seeing a shortage of available product and that gives us an opportunity as we bring our capacity expansion online to continue to grow the company and I'll walk through a little bit more of the details on that in the next <unk>.

Okay, let's focus now on our commercial pipeline and orders backlog. So if we go to page six.

This is our traditional.

Commercial activity, our pipeline page I always want to start off on the left hand side of this page to talk about lead generation lead generation, our projects where customers are asking us for feasibility studies. They are coming with ideas. They wanted to develop a project plan, they're looking at different regulations and revenue starts to come up with ideas. When we look at this now that <unk>.

<unk> five $4 billion or 28 gigawatt hours up $1 3 billion versus the last time, we spoke and we're starting to see more and more activity and more and more customers approach us to see how our technology can fit their use cases, when you think about this this has.

<unk>.

A 30% hit rate, where you go from a lead generation that becomes current pipeline. When you look at the current pipeline current pipeline today, which is active proposals and LOI firm commitment stands at $6 2 billion.

That's up almost 50% from last time that we were together you're seeing a couple of things happening in there there is normal churn in and out of projects, but overall the core projects are up around $700 million.

And at the same time as we've been looking and analyzing our cost position and also looking at the demand in the marketplace. There's been an increase in the price that we're bringing to the market, which is also driving up the dollar value of the current pipeline. We now stand about $100 a kilowatt hour higher on price versus where we were at the end of last.

Here, we continue to see that momentum carry forward and you see the booked orders, which we talked about on the earlier page $67 million that we closed to feel really good about that center part of the page and us being able to continue to convert and drive towards our $400 million order target for 2022.

The uptick in lead generation is also important because we have more and more people, calling us earlier in the deal cycle, which allows us to tailor their project specs and help them deliver more value to their end user by using <unk> technology. So overall, we see the commercial pipeline strengthening and thats growing the current up.

Orders backlog. So if you go to page seven and you look at the breakout that we've that we always that we always give you we booked $62 million almost $60 million to $63 million of booked orders inside our order increase we also had change orders you know when you start looking at what's happening in the execution of projects cost inflation that we see print.

<unk> around transportation and change in scope to be able to deliver on our projects. Our project team is creating value as they go through and execute on the projects and then you've got customer shipments coming out of that number where we stand now at $212 million in backlog really proud of that 827 megawatt hour.

<unk> 28 projects with 15 different customers. So we are seeing customers purchased more than one project from us and we're seeing that pipeline of projects for individual individual customers increase backlog deliveries and when you look at where we are a backlog of $177 million of that is for new equipment deliveries and $35 million of that.

As for long term service revenue now when you think about what we've always wanted to target as a company is a 20% ratio and right now we stand around 17% of long term service revenue of our total backlog. That's a number that we're going to keep driving as we move as we move forward. What we're trying to do is get customers to commit on a long term service agreement.

At the time of the new equipment order, but in some instances they want to wait until they go through just in the normal cycle and it's something that I've always seen as I've been in this industry for 30 years, if thats, how the market will behave but we're really seeing.

Great activity here on the commercial side and then as it relates to asset leasing and things we talked about in the past there's been no change in the portfolio here as we go more and more with just street product sales out into the market with the follow on service agreement. So we're looking to continue to drive this number up we're proud to have a number above $200 million year. When you think about where we started when we went public.

Being around $5 million, just great progress by the commercial team in getting the product out into the marketplace is shifting gears now to talk about operational excellence, we've really seen about our progress in the business here in the team that is running the facility and Turtle Creek has really done a fantastic job of improving our performance. If you go to page nine.

And we talk about building operation Excellence, you can see the factory for the people who have come and visited US every time, we come if you weighed about two weeks should come back in and it looks like a totally different facilities and the last time you were there we are increasing our operational scale, we had 69% increase in the number of energy blocks that we got out of the factory.

In the first quarter, we took a 50% increase in test fill line output and the picture on the upper right hand side of the page shows our new fill line layout. What the team has done has really been taking both lean six sigma and improving performance and output they've taken.

We are filling batteries before we're touching the battery 27 times to go from a welded battery to fill battery and we're now down to four with a target to get that down to three which allows us to drive tremendous productivity over existing asset base at the same time the picture on the upper left shows our current battery.

Welding room in the existing facility and the picture on the right is the new machine that we brought into our into our new facility as we expand that facility. This machine gives us the ability to use artificial learning to be able to improve the performance of our welders and the throughput on the machines and other key thing on that picture on the upper left.

Hand side and the big change that was made by the team is that we now have one operator running two welders, which has a tremendous amount of productivity for us across the existing asset base and also reduces the need for labor input on the on the product that we put out of the factory taking.

Taking that all into account the same time, we're also reducing the test cycle time, as we've improved and dialed in our manufacturing processes, we're getting more and more consistent batteries off the line, which is taking us less time to form those batteries and prove that they work and get them out to our customers in the field and what you've seen is a lot of work.

Being done by the team and taking product cost out. So the work that we've been doing here over the last two weeks is now translated into a 14% cost out on an input basis. This youll see as we go through and we talk about the financial performance in the quarter Youre not going to see that 14% on a quarter by quarter output basis, but we are starting to see.

Core product cost out as we scale up manufacturing you can see the battery volume and what we shipped in the first quarter is up 56% and at the same time, we increased our battery yield to 4%. If you remember our target is to get to 90% and at the end of the quarter. We ran on a weighted average of <unk>.

88%, which has again been great performance by the overall team what I wanted to do now a shift to the next page and really talk about the operating environment that we're running the business and today. This is one of the most challenging supply chain environments that I've seen in my 30 year career, we start off on the left hand side of the page we see.

Like everyone else tremendous inflationary pressure on our overall on our overall product when you look at the battery our core materials theres been a 10% to 20% inflationary pressure on those materials, but what we've been able to do is go out and get multiple suppliers signed long term agreements and look for lower spec and alternate materials.

To take down costs on the energy block or the containerization and and battery management system, we've been able to increase our U S supply chain content and we've gone for a non ISO container design, which will take cost out of the overall landed product in the second half of this year and then.

Finally, one of the biggest cost drivers I think across the globe right. Now is just freight costs and what we've done to be able to start managing that is that our product now has a non hazardous rating, which gets us into a lower cost shipping when we're shipping.

<unk> product, we've increased the U S content, which reduces the shipping costs that we have and then on the customer side, we're working with customers on the transportation, where we're holding the cost of battery material and the energy block as we bid out into the market, but then telling the customer that as we bid freight we're going to have to do that on a call.

Plus basis, just because of the uncertainty around that design now while that's happening out in the marketplace. We are taking cost out with the production scale design and sourcing activities. So if you look at these two lines.

Line that starts off at 100% is the index bill of material costs on an input basis for our energy block.

If you think about this we took 14% cost out and you can see the cost curve coming down to where we are targeting taking nearly 50% of cost out of our product by the end of the year. While at the same time, we ramp up production in the new facility from from up to adding the 550 megawatt.

What hours to get to 800 megawatt hours of total cost below that graph. When you look at that you see the timing of the interaction of taking cost out while ramping production there'll be a lag where we'll start to see savings on an output basis in the second half of the year as we ramp up production. So we are going.

Through this process of driving down costs, while ramping up capacity and as you get into the second half of the year, we're going to start see cost come down on an output basis, we feel good about that because if you look at the right hand side of this page, we're locking in our material pricing and capacity with suppliers, 76% of our 2022 material requirements.

<unk> are under.

7% have already been delivered to us and are either either have been shipped to customers or in inventory and we've got 17% still to go which ties to some of the actions that I talked about on the left hand side of the page, we're getting good tiered pricing and volume discounts from our suppliers, we're signing up long term agreement.

You saw that with the Tetra agreement that we announced at the end at the beginning of this year at the same time. This comes with a cost on cash we've put out $11 million in advanced payments to suppliers to lock in capacity and now it's up to US is despite chain and operations team to manage the delivery risk of that material coming into the factory.

<unk> that into finished products and getting that out into the market feel really good about the team that we have in place how they're managing and mitigating the risks and this is something that we work on on a daily basis to really keep in front of this and new things pop up every day, but the team has shown tremendous grit and flexibility to be able.

Well to manage through these and continue quarter over quarter to deliver more output with a higher yield at a lower cost. So really proud of the work that's being done there with that let me turn it over to Randy who will walk through the financial results and then wrap up and get us into Q&A. Thanks.

Thanks, Joe and good morning, everyone. We appreciate you joining us this morning.

First of all I wanted to say that what this team has accomplished and it continues to accomplish on a daily basis is nothing short of inspirational.

This collective team is working cross functionally to navigate the inevitable daily challenges and to overcome hurdles, including those presented by supply chain disruptions. The best that I've seen in my career, we still have a lot of work to do but we have a plan and this is the right team to execute that plan. This team just gets it done.

Sure.

Before we jump into the financial results I wanted to mention that as many of you know we encourage in person visits to our facilities.

Because of what we do as a domestic supplier of energy storage systems and the role we play in the world's energy transition, especially in a world where energy security is top of mind, we naturally get a lot of attention and visits from local state and federal officials.

But we've also seen acceleration of visits to turtle Creek by customers and potential customers and the reaction has been overwhelmingly positive when they see batteries coming off the line energy blocks being assembled in our capacity expansion in flight, especially at a time when energy storage is severely supply constrained.

Turning to slide 12, I'll walk through the first quarter performance.

<unk> to last quarter revenue increased from $3 1 million to $3 $3 million.

First quarter revenue includes NRG block deliveries to four customers and included some of the first for the 80 megawatt hour Pine Gate renewables Eastover project.

We saw a sequential increase in energy block volume of 69% on a revenue recognition basis from fourth quarter of 2021, which was largely on plan.

There are several reasons why revenue didn't increase at the same rate as volume customer.

Customer mix is one of the drivers the revenue per DC energy block is lower in the first quarter than the fourth quarter of 2021, as we deliver against different orders.

Please keep in mind that we are currently fulfilling orders against the backlog that had lower pricing dynamics when they were booked last year and prior.

Since then we've seen a rapid and dramatic increase in the pricing landscape due to a variety of factors, including scarcity of supply of energy storage, particularly for the stationary storage market.

This increase in pricing is reflected in current quotes and we anticipate this price realization to take hold starting in the second half of next year as we start delivering on new orders.

Next there is D C versus AC scope mix, which is unfavorable quarter over quarter.

In the fourth quarter, we had more projects, where we recognized AC scope revenue.

We are just starting to ship on the Pine Gate East over project and so AC scope is not required on that until later in the year.

In a project based business like ours revenue can be volatile on a quarter to quarter basis. As there are multiple performance obligations embedded in our customer agreements. We only recognize revenue is contractual performance obligations are met consistent with the revenue recognition standard of ASC 606.

Various performance obligations and our agreements can include among other items delivery of the stand alone <unk> energy block installation commissioning and or training and there can and will be incremental revenue recognized per energy blocks that have already been shipped and delivered where a portion of the rev.

<unk> has been recognized in a previous quarter.

Cost of goods sold in the first quarter was $35 6 million, which.

Which includes a $1 $7 million lower of cost or market incremental adjustment versus the fourth quarter.

This adjustment is attributable to the increase in work in process inventory from last quarter with the associated increase in overall production of batteries and energy blocks.

Quarter over quarter cost of goods sold excluding lower of cost or market adjustment increased 60% compared to the 69% sequential increase and NRG block volume.

In short cost of goods sold is increasing at a decreasing rate and we expect that trend to continue as we execute on our strategic priority of taking cost out of the entire energy storage system.

As Joe discussed on Slide 10, we reduced the overall energy block bill of material cost by approximately 14% in the quarter.

This is calculated by comparing the bill of material base cost at the beginning of the first quarter to the bill of material costs at the end of the first quarter.

There is temporary lag to this cost reduction benefit since the reductions happen over the course of a period and the on hand inventory, which has a higher cost basis has to work its way through the system.

As a result, we saw the average energy block cost net of the lower of cost or market adjustment decreased seven 4% in the quarter.

These cost reductions are a result of a multitude of factors, including manufacturing scale and higher efficiency continuous improvement initiatives on the factory floor improved product and system design.

And various strategic sourcing initiatives.

We invested $5 million in research and development in the quarter to improve battery performance to reduce both the cost of the product and lifetime operating cost of our battery system and to develop future generation technologies.

SG&A for the quarter was $14 $3 million.

$5 million of this total is structural 3 million is noncash related to stock comp expense.

There was another approximately $3 million of one time items and the remainder is discretionary spend associated with scaling the business.

Overall, our first quarter operating loss was $51 $7 million.

Going forward sales volume is expected to substantially increase as capacity expands and product cost is projected to decrease by almost 50% by year end.

At the same time, we see positive pricing on 2023 shipments and we will continue to manage our SG&A spend.

Turning now to slide 13, we had $55 million of cash on hand at March 31 2021.

As we've discussed before we have been actively working to lock in raw material delivery to match, our sales plan and as a result first quarter cash outflows include about $11 million of advanced payments to suppliers to secure volume commitments.

This was an increase of approximately $6 million from last quarter due to our rapid scale and we expect the level of advanced payments to decrease going forward.

In addition, there is another $2 million of advanced payments to capital equipment Oems for Capex in conjunction with the turtle capacity expansion, which is consistent with last quarter.

As we discussed last quarter. The plan, we are executing requires the company to raise additional capital.

On April 28, we announced that we secured a financing commitment of up to $200 million.

Through a standby equity purchase agreement or CPI.

The facility gives us the right, but not the obligation to sell up to $200 million of equity to the investor. We believe this gives us the greatest flexibility to access capital as required while continuing to pursue additional funding options.

For example, as previously announced we continue to actively pursue alone from the U S Department of energy and currently anticipate submitting an application under part two of the loan program this quarter.

Now turning to slide 14, we wanted to give an update on our progress against the 2022 full year company commitments.

The facility expansion is currently underway and on track to increase our capacity to a total of 800 megawatt hours in.

In the quarter, we achieved 65 megawatt hours of a 550 megawatt hour annualized battery manufacturing capacity expansion plan in two months.

We are managing capital equipment deliveries and phasing commissioning of assets.

We're on plan for the full year Capex investment of $25 million to $30 million and see a path to even further expansion to support the accelerated commercial pipeline if additional capital is available.

The backlog is secure to achieve $50 million of revenue in 2022, and our production volume is expected to significantly ramp in the second half of the year as the facility expansion continues to come online.

Although the team has successfully managed through supply chain issues to date. The current supply chain environment is volatile for everyone and has the potential to disrupt production going forward.

We continue to make progress on our 90 plus percent first pass manufacturing yields.

In the first quarter, we achieved 88% an improvement of four percentage points from the fourth quarter.

Regarding our backlog growth, we booked $67 million of orders in the first quarter, which is already about half of the total amount we booked in the entire year of 2021.

Our strategy is to have 20% of our orders backlog and long term service commitments.

Currently we are tracking at 17%, which is mainly driven by timing of new order bookings of battery energy storage systems and signing of service contracts.

With that I want to thank everybody for their time and listening in today.

I'd now like to turn it over to the operator for questions.

Operator, we please open up the line for Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

Youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from <unk> Chandra with the Benchmark company. Please go ahead.

Hi, Joe Hi, guys.

Okay. So much so I guess on the.

The 55 million revenue target and.

If this is in the.

The preamble I missed it I think it was a lot of numbers there so I apologize but.

So with.

I guess, a good chunk of that.

In the back half the run rate would be up to be a lot.

Higher than it is.

Do you have any color on the second quarter with second quarter kind of halfway done at this point.

So.

Sebastian I guess, if you look at page 10, we will have increased capacity.

Coming online here as we go through the quarter. So I think youll see the second quarter come in from a revenue standpoint.

North of where we are in the first quarter with the majority of the revenue coming in in the second half because that's when the capacity will come online.

Randy if you want to add anything no I think thats I think thats exactly right.

Okay.

And then on.

Cost of goods sold I guess with.

Whats the direction, there with some of that being sort of pre funding of <unk>.

We're all materials and pre funding.

After the expansion.

Yes, so as <unk> referenced back to slide 10 so.

The trajectory is it's that it's that line that starts with an index of 100, which represents.

The bill of material cost at the beginning of the year.

And then the 86 represents 14% of cost reduction on a bill of material basis at the end of Q1.

And then you can see we've given what our estimates are as we continue through the year on a quarter by quarter basis, getting the costs down too.

What we believe to be the cost entitlement by the end of the year.

Our next question comes from Chris <unk> with B Riley. Please go ahead.

Hey, guys. Thanks for taking my questions here.

So would you be able to frame the price increases for the pipeline versus the uptick we've seen in lithium ion competition, there kind of a target benchmark to that competition youre going out with on a nameplate capacity price per kilowatt hour.

How are we thinking about kind of pricing strategy matching your cost.

These cost increases versus.

The market overall.

Yes, Chris.

So so there's a couple of things in there that I would like to talk through if you don't mind. So.

Firstly when you look at the market right now there is a shortage.

Lithium ion availability for shipment over the next 12 to 18 months.

And when you when you look at where the pricing of that lithium ion is when there is availability.

It's higher than where we were a year ago and in fact that what we said is on our pipeline for us we're seeing increases in pricing of $100, a kilowatt hour, which are kind of in line with the inflationary pressure that we've seen on our raw materials.

As we've gone through the last eight to 12 months and then going back that on page 10.

Being an early cycle technology versus lithium being.

Our mature technology, there's a lot of work that we can do.

And ramping up volume tiers, with our suppliers of finding alternate materials and driving cost out of the product to make the cost more competitive in the marketplace, but from where we were a year ago to where we are today I think we're in a range.

Our bid price.

In the in the high two hundreds low 300 kilowatt hour.

Okay got it and then just on the cost visibility can you walk through what the 17% that still is remaining here.

And if you could provide any update on where we see gross margin inflection point.

From either a timeline or volume revenue run rate.

Given kind of the cost inflation, the cost out efforts and price changes.

Where do we think costs are going to shape out from.

Dollars per kilowatt hour basis versus.

We're running at that 800 megawatt hour target at the end of the year here.

Yes.

You had a couple of things in the question, Chris So the 800 megawatt hours that will be at capacity in the factory the annualized capacity in the factory and we're on we're on track to be able to deliver that right. Now I think the team has done a great job producing out of the building and two months ago, we are producing.

<unk> batteries out of the building, we will start filling batteries.

In the new building here in the next four to six weeks and then ramping up production over the second half of the year to get to the 800 megawatt hours.

Do you think about what that what the team has been able to do on driving cost down.

From an index starting point.

Cost you know we've already taken cost out here in the first quarter, we see line of sight to taking almost 50% cost out of the existing product as we get into.

The back half of this year, we feel good about that cost curve because that grab that pie chart on the far left of page 10, a lot of the volume agreements had been locked in on tiered pricing with suppliers and when we look at where the $50 million revenue target is for the year, we feel comfortable.

<unk> shipping out of the backlog and then having the tiered pricing with suppliers and then continuing to do material substitution and value engineering to drive the cost down to position the company as we talked about last time.

We said at.

At the end of <unk>.

At the end of last quarter being 18 month journey to get to gross margin positive, but I think we're still on that trajectory, where we stand today I don't know Randy if you want to add anything to that yes no.

Totally agree so Chris I mean, the representation again to reference on slide 10 in the middle.

There has been a lot of work done here at iOS over the over the last six months with regards to.

The plan on cost reduction and specific actions thereof.

So that's why that's why we have so much confidence around it that's why we laid it out this way.

Because as I mentioned in the prepared remarks. It is it is a.

Strategic priority item for the company.

Okay. So the 17% to go is there any specific components in there.

Yeah.

On the on the field still to be purchased so so I got it now so that 17% look.

There are some there are some things that we're working on on the container side is really the.

What are the biggest items, where we haven't locked in the volume for the year because we're designing.

Made in America product and were waiting to place orders to see how the prototypes come from the local suppliers versus buying internationally. That's probably the biggest item that we still have to go there are some other vol.

Volume pieces that we'll look at it as we get closer into the third quarter just under order on our ordering points that we have in place the orders yet because it is a little bit early as far as pulling the pulling the volume trigger on that until we get further into the year.

Okay, maybe just last one for me do you have a target for kind of the cash burn rates for second quarter third quarter, given kind of the.

The high needs in the near term are there any other payments, we should take into the next quarter or two or is the $48 million ish.

Yes that we would see this past quarter ex.

Prepayment type stuff.

Kind of more comparable to what we should expect in the near term.

So so.

A lot of lot of work as you can imagine Chris in terms of cash forecasting and funding requirements.

So what I will tell you is the.

The one the one thing that you do have to remember is that on these bigger LOI and bigger projects Loi's msas et cetera.

Part of the agreements on the Msas are <unk>.

Downpayments required from customers when it gets to especially the purchase order point.

Customers really understand that.

We have the requirement when we get a purchase order and startup of raw material that we need the cash in order to do that so so I just wanted to just wanted to make sure that you understood. The fact that.

We do get customer down payments those will grow as as we get these bigger orders, which we're seeing.

But but specifically a number.

<unk>.

I don't I don't.

I don't think we're prepared to give kind of a target and the only thing I would say, Chris like as we go through second quarter into third and fourth quarter. It. So so.

Second quarter will continue to see a mix between the PMA coming into the company to be able to scale manufacturing and then the ramp on the raw materials I think advance advances to suppliers given the environment that we're in and wanting to lock in volume, we're going to continue to do that to secure the relation.

Chip with the supplier and get the raw materials, where we get surety of supply I think youll see a little bit of shift from.

Pete a penny and a at a material raw material split on cash to much more of a raw material basis as we as we ramp up production in the second half of the year and then that'll be muted a little bit by the cost out that we're going to deliver here as we go as we go through the year. So it's.

A mix equation that we got that we have to continue to manage through I think from a from a outflow perspective.

We will continue to manage that tightly and you see that in in our SG&A and Ed will be consistent with where we are but as Randy said that as <unk>.

Customer projects start to close in the firm orders, we will see.

Deposits come in to offset the outflows that were doing to lock in the volume and be able to deliver.

Okay. Thanks, I'll hop in the queue.

Thanks, Chris.

Our next question comes from Joseph Osha with Guggenheim Securities. Please go ahead.

Uh huh.

Good morning folks thanks.

Congratulations on the progress I'm wondering if you can.

Talk us through a little bit what the prospective timing and process looks like on those.

OPO.

OPO loan.

Hey, Joe.

So we're.

We're in the process of finalizing the part two application and then we'll go into full due diligence.

With the Doe here as we go through.

This summer we've been we've been working through with them on our part to application we feel like we want to get the application right as it goes in because that will help us as we go through the due diligence process here, which will which youll, probably I think realistically will last through.

Through the summer into the early fall.

Okay.

What would happen then at that point is that a go no go.

Next.

Yes. The next phase of this Joe is.

It is conditional conditional funding on the loan and then from there you would get into.

Executing on the on the investment.

<unk> program to that drawdown on the low end as we move forward.

Okay. So wrapping that all up then if this works, which I'm sure it will when when Mike.

Possibly see funding hit.

From from that LPL.

Yes look I think I think realistically, we're looking at end of third quarter, beginning of the fourth quarter, depending on how the depending on how the due diligence goes here.

As we move forward through the part two.

Okay. Thank you.

And then just to shift gears I'm wondering are there.

M a rescue or unwind them I'm wondering if you're seeing any one out there actually commit at this point from with them.

And toggle over to to your technology is that something that you have seen happen.

So so so what we've seen happened Joe as many people come back with tight delivery timelines and saying look what we thought where we thought we're going to get delivery is now being challenged would you guys be able to deliver.

In late 2023 early 2024, and we are working on a lot of projects now where people are coming and saying.

Let's let's sit down and go through the project specifications work through on your technology in that and that's why you see the big uptick.

In the pipeline and the pipeline this quarter as far as them, having firm commitments and saying we've walked away from lithium ion I haven't heard them come and tell us that but I can say that there have been projects where.

We have we were told previously that customers are going in a different direction, who are now coming back and saying, we'd like to come and visit Turtle Creek and walk through where you are on your on your manufacturing scale up and then see if you can deliver the project and our project timeline and Theres a lot of those discussions going on right now.

So it's really more kind of people hearing that theyre going to itself.

The end of 2023 of the best and saying, Hey, I want to come back and perhaps bring yields in that conversation.

Right right exactly.

Okay. Thanks, very much thanks, Joe.

Yes.

Our next question comes from Tom Curran with Seaport. Please go ahead.

Good morning.

Hey, Tom.

Randy in your model that projects iOS can achieve its first positive gross margin by the second half of next year, what annualized sales or shipments run rate do you assume that that crossover point into positive territory.

Annualized revenue level does it require.

So and so I mean, let me let me answer it.

Arent way, because I am not going to give you a direct answer to the question.

So we're in the current generation product, we know what our cost entitlement is with regards to the.

The current generation product, we're on path to getting to that cost entitlement.

The gross margin positive is.

Is is getting to our next generation product, which is currently under under development and design.

And the design approach is all around.

Designed to cost designed to manufacture ability so yes as part of that there is volume assumptions.

But.

Wouldn't really be so worried about those volume assumptions since we have the backlog it's all about.

Particularly designing process mangum designing a product to begin with to be.

A lot a lot less than the current generation of product, but also designing for the process manufacturing in general So we can output.

More product in last time.

Got it.

Maybe ask.

From a different angle just directionally at the point you do.

Breakthrough to positive gross margin territory.

Would you expect the average revenue per <unk> system.

To be higher or lower because we kind of had these two conflicting.

Trends right on one hand, you've you've increased pricing recently.

On the other hand youre pursuing this is longer term.

Secular objective of bringing.

The price you need down.

To be as competitive as possible with <unk>.

The.

Cost curve for lithium ion batteries. So I'm just wondering how we should expect those cross currents to shake out for.

You know where pricing will be at that point.

Yes, so good question.

The pricing dynamics that we talked about and what we're quoting.

And the expectation of those current quotes to convert to orders and that'll be that'll be largely in line with the same timing as the new generation product comes online so.

I mean every day that passes given given the pricing dynamic I mean, we're more and more confident that we're going to have a solid gross margin.

On the on the product.

Not only because of the design work that we're doing but because of the pricing dynamics that we expect to last well into the future here and Tom.

One thing I would add on the cost side or on the cost side of the equation.

Even in the even in this high inflationary environment, where depending on how you look at where lithium pricing is from from a raw materials standpoint, and the inflation theyre experiencing when you look at our page 10, the inflation that the inflationary pressures that we see are much lower.

Then I think other technologies are seeing in the space and we need to manage that number down and continue to take and continue to take cost out of the product and thats part of what we're doing in the next generation products. So yes pricing is it is a is a tailwind for us here in the short term.

And I think that will carry through I don't think I don't think this is a month phenomenon. This is probably a reset of our baseline that will carry forward and then from there. We've just got to continue to drive our cost curve down in the environment that we that we operate in and I think we've got a core bill of materials.

With Earth abundant raw materials that don't see the same inflationary pressures that you see with other technologies.

So Joe then you'd give me the perfect segue to my final question on this.

Ross over timeframe into positive gross margin territory.

At that point, what should your operating cost structure look like.

Randy how should Cogs breakdown.

The major component and just looking for an idea of what the rough percentages should look like.

Yeah.

I mean.

So the I mean, the basics of the product itself are not going to change in terms of.

There's going to be the electrolyte component right I mean, we're taking a lot of cost out of the product in terms of the way. It's assembled so it's really it's really simplified so youll see a dramatic reduction in the matter of battery material component.

Yes.

With the way, it's actually manufactured and.

There's a lot of work being done in terms of alternative material from some of the material that we're using in the current battery generation and Tom what I would say what I would say is here's how I think about it if you take those three buckets to the left hand side of page 10.

<unk> is always going to be the battery component of the of the of the system that youre selling is always going to be 60 60 something percent of the total right then you've got another 2025.

Percent, that's that's kind of the raw materials that go into the system, you've got conversion cost, which as Randy is pointing out as we move to the next generation technology. The throughput goes up the ease of manufacturing goes up that will come down and then Theres a big bucket, which is just the freight and transport of getting things were.

You need to be which the approach we've taken which is a little bit different than what everyone else is doing in the market. As we've said look we've got to manage those first two buckets of how we handle the raw material and the processing cost of getting that out in the field and then on the freight side, what we're telling everybody is like let's get on the same side of the table and we.

We'll bid that out and put a handling charge on top of that but not.

<unk> is always going to be the higher component, we are using lower cost raw materials into that battery now as we move forward on the systems side, we're moving and making two moves to take cost out as we move forward. One is going away from an ISO imported ISO shipping container to a locally.

<unk> manufactured containerized product that takes cost out and takes out the free.

You have to deal with the uncertainty of getting deliveries of those units and then moving to standardized readily available electronics electronics to be able to take the cost down and expand your supply chain on the battery management system.

Great.

Helpful.

It helps us better understand the evolution of the economics Youre expecting as you scale up.

The manufacturing efficiency curve and.

Optimize our cost components.

That's what I was looking for thanks, Yes, right Tom the way the way that I always think about this and I think this is this is important if you don't mind just adding one other thing on clarification is the technology that we bring to market has not fundamentally changed the battery in and of itself of how it operates chemically.

Has remained the same for more than a decade, what we've been working on as a company and I think with every battery company goes through as they try as they try to scale as we went from mechanically bolting together sells them a battery.

Cycle times, along cost two high quality issues gluing the battery together high variation in manufacturing throughput.

<unk> was extremely hard to center and get a six sigma process around that manufacturing went to infrared welding, which gets us a perfect battery that we're now approaching yields that are in the six Sigma range, but cycle times long and add complexity to the next generation of the product being assembling the product which allow.

<unk>, a higher throughput at a lower cost point for your processing costs and that's really what we've been focused on here to drive down cost and improve the performance of the product.

Got it very clear.

Thanks. Thanks.

So.

Our next question will come from Martin Malloy with Johnson Rice. Please go ahead.

Yes.

Good morning.

Wanted to ask about this cash burn again.

So.

The current cash burn rate.

$40 $50 million, depending on the advance payments.

But you are making.

It looks like maybe <unk> got enough cash for another three to five months can you give us any help in terms of the capital that will be required to reach free cash flow positive I'm, just trying to get an idea of the potential dilution here.

With this.

SIPA arrangement and where your stock prices.

Yes Martin.

Good morning. Good question. So I mean, we're not going to be we're not going to be free cash flow positive this year. So.

In terms of the cash burn rate.

And the requirement for additional funding.

So we have the <unk> facility, we mentioned the Doe loan and kind of expected potential timing for that.

And so we are.

SIPA gives us flexibility think think of that as an elegant.

At the money.

Transaction, but with.

With our partner on the same side of the table as us that we can draw.

Draw down as necessary to bridge that gap.

Other options that we're pursuing.

Not not just potential equity options so.

I wouldn't I wouldn't assume that whatever you are modeling in terms of requirement for additional funding is going to be all equity.

Okay.

Thank you that's helpful that was my only question.

The rest have been asked.

Sure. Thanks Martin.

This will conclude our question and answer session I would now like to turn the conference back over to Joe <unk> for any closing remarks.

Thanks, and again, thanks, everybody for the for the for the Q&A. This morning and for listening in on the call again.

We continue to progress and the journey of becoming.

A profitable operating company I feel really good about where the market is and you heard some of the some of the dialogue that we had here. This morning around lithium availability versus us expanding capacity and having readily available cost effective raw materials. I think we will continue to navigate as we've always navigators and navigators.

Four years here with the company of conserving cash finding the right formula for growing the company, which will be a mix of vascepa, which allows us to feather in versus make big chunks of equity to manage through to when we <unk>.

Bridge to the Doe loan, which will help us expand the capacity to truly grow the company as we move forward and we'll continue to look at other opportunities here to be able to fund the company in the most cost effective way for our shareholders and to achieve the growth that's out there for the company as we know were experienced tough.

In the capital markets, but at the same time I would say in our operating market everyday becomes stronger and stronger the tailwind.

Low harder and harder pushing us forward here as you look at the World meeting cost effective more than four hour energy storage and us being able to deliver that and having a factory out internal creek that continues to set production and yields output milestones as we continue to operate and bring.

Into the factory so from an operating standpoint, it's an exciting time to be inside of Eos and watch the company grow we will continue to do that the most effective means possible.

From a capital allocation standpoint, we're very excited about how the market is progressing and how the company is positioned to grow and look forward to sharing that progress with you here in the future. Thanks for listening this morning and talk to everyone. Soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good morning, and welcome to <unk> Energy's first quarter 2022 earnings call.

All participants will be in a listen only mode.

You need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Joe Crinkly Yosef Communications manager. Please go ahead.

Thank you.

Everyone and thank you for joining us for <unk> financial results conference call for the first quarter of 2022.

On the call today, we have CEO , Joe Mr Angelo and CFO , Randy and Bill.

We begin allow me to provide a disclaimer regarding forward looking statements.

Should any of these risks materialize or should our assumptions prove to be incorrect. Our actual results may differ materially from our projections or those implied by these forward looking statements.

non-GAAP information should be considered a supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.

In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.

This conference call will be available for replay via webcast through <unk> Investor Relations website at investors that <unk> Dot com.

John and Randy will now walk you through the company highlights financial results and business priorities before we proceed to Q&A.

I'll turn the call over to Joe.

Thanks, Joe welcome everybody to the <unk> earnings call for <unk> energy storage proud to be here with everyone and I just wanted to start off on page three walking through.

Some recent milestones that have occurred since the end of quarter closed first we recently signed a large letter of intent with the northeast solar developer for 300 megawatt hours of future business to be delivered over the course of 2023, we're going to be working with that customer as we've always talked about with our commercial model get the LOI signed yet.

On the same side of the table closeout. The overall deal. So we'll be working here over the next 30 to 60 days to bring that one Noah Bookable order at the same time, we talked about in the last call expanding capacity and.

And a new <unk>.

<unk> to our facility internal Creek, we've added 65 megawatt hours of that capacity in the first two months that we've been in the facility and are producing product out of that facility and just over 60 days really proud of what the operating team has been able to do on the picture to the right you see we shipped our 100th energy block about a week ago.

Tremendous milestone by the team really great accomplishment that energy block there number 100 is going to be headed to.

Blue Ridge and Pine Gate renewables for the silver project that we've been executing on here over the past.

30, 60 days the same time, we also announced a financing commitment for up to $200 million with Yorkville advisors, we're proud to be partnering with Yorkville, Randy will walk through a little bit more of the details around this agreement that we are comfortable we talked about finding the most effective means to raise additional capital to achieve our growth plans.

And I think this is one of the first moves that we'll be making here to shore up and be able to deliver on the plan that we laid out in our last call. If we go to page four you can see on the operating highlights I really want to focus in here on the growth side of the business, we booked $67 million of orders of 241 megawatt hours.

Our total order backlog now stands above $200 million is rapidly approaching a gigawatt hour and I'll walk through the opportunity pipeline, which now stands at $6 2 billion and is up over a gigawatt hour of opportunity since the last time, we were together Randy will give you the bridge in the walk through on the revenue that we delivered in the first quarter and cash on.

And right now stands at $55 million exclusive of the financing arrangement that we that I previously talked about from <unk>.

Yorkville, we're proud of where the company is heading and how the team is executing and you can see quarter over quarter sequentially. You continue to see progress across these core metrics as the team continues to get out in the market. We're seeing an uptick in demand for energy storage and we're also seeing a shortage of available product and that gives us an opportune.

City as we bring our capacity expansion online to continue to grow the company and I'll walk through a little bit more of the details on that in the next section.

Let's focus now on our commercial pipeline and orders backlog. So if we go to page six.

This is our traditional commercial activity our pipeline page I always want to start off on the left hand side of this page and talk about lead generation lead generation, our projects where customers are asking us for feasibility studies. They are coming with ideas. They wanted to develop a project plan, they're looking at different regulations in revenue stacks to come up with ideas.

When we look at this now stands at $5 4 billion or 28 gigawatt hours up $1 3 billion versus the last time, we spoke and we're starting to see more and more activity and more and more customers approach us to see how our technology can fit their use cases, when you think about this this has about a 30%.

Hit rate, where you go from a lead generation that becomes current pipeline. When you look at the current pipeline current pipeline today, which is active proposals and LOI firm commitment stands at $6 2 billion. That's up almost 50% from last time that we were together you are seeing a couple of things happening in there there is normal churn.

<unk> in and out.

Ah projects, but overall the core projects are up around $700 million.

Last year, we continue to see that momentum carry forward and you see the booked orders, which we talked about on the earlier page the $67 million that we closed to feel really good about that center part of the page and us being able to continue to convert and drive towards our $400 million order targets for 2022.

And the uptick in lead generation is also important because we have more and more people, calling us earlier in the deal cycle, which allows us to tailor their project specs and help them deliver more value to their end user by using Eos technology. So overall, we see the commercial pipeline strengthening and thats growing the current up.

Orders backlog. So if you go to page seven and you look at the breakout that we've always we always that we always give you we booked $62 million almost 62 60.

$63 million of booked orders inside our order increase we also had change orders you know when you start looking at what's happening on the execution of projects cost inflation that we see principally around transportation and change in scope to be able to deliver on our projects. Our project team is creating value as they go through and execute on them.

Projects, and then you've got customer shipments coming out of that number where we stand now at $212 million in backlog really proud of that 827 megawatt hour backlog. It's 28 projects with 15 different customers. So we are seeing customers purchased more than one project from us and we're seeing that pipeline of projects for.

Individual customers increase.

Backlog deliveries and when you look at where we are a backlog of $177 million of that is for new equipment deliveries and $35 million of that is for long term service revenue now when you think about what we've always wanted to target as a company is a 20% ratio and right now we stand around 17% of long term service revenue of our total backlog.

It's a number that we're going to keep driving as we move as we move forward. What we're trying to do is get customers to commit on a long term service agreement at the time of the new equipment order, but in some instances they want to wait until they go through just in a normal cycle and it's something that I've always seen as I've been in this industry for 30 years, if thats, how the market will behave but we're really seeing.

Great activity here on the commercial side and then as it relates to asset leasing and things we talked about in the past there's been no change in the portfolio here as we go more and more with just street product sales onto the market with the follow on service agreement. So we're looking to continue to drive this number up we're proud to have a number above $200 million year. When you think about where we started where we went.

Public being around $5 million, just great progress by the commercial team in getting the product out into the marketplace and shifting gears now to talk about operational excellence, we've really seen about our progress in the business here in the team that is running the facility internal Creek has really done a fantastic job of improving our performance. If you go to page nine.

And we talk about building operation Excellence, you can see the factoring for the people who have come and visited US every time you come if you weighed about two weeks should come back in and it looks like a totally different facility than the last time you were there we are increasing our operational scale, we had 69% increase in the number of energy blocks that we got out of the fab.

III in the first quarter, we took a 50% increase in test fill line output and the picture on the upper right hand side of the page shows our new fill line layout. What the team has done has really been taking both lean and six sigma and improving performance and output they've taken.

Well, we were filling batteries before we're touching the battery 27 times to go from a welded battery to fill battery and we're now down to four with a target to get that down to three which allows us to drive tremendous productivity over existing asset base at the same time the picture on the upper left shows our current batch.

<unk> welding room in the existing facility and the picture on the right is the new machine that we brought into our into our new facility as we expand that facility. This machine gives us the ability to use artificial learning to be able to improve the performance of our welders and the throughput on the machines now the key thing on that picture on the upper.

Left hand side of the Big change that was made by the team is that we now have one operator running two welders, which has a tremendous amount of productivity for us across the existing asset base and also reduces the need for labor input on the on the.

The product that we put out of the factory.

Being done by the team and taking product cost out. So the work that we've been doing here over the last two weeks is now translated into a 14% cost out on an input basis. This youll see as we go through when we talk about the financial performance in the quarter Youre not going to see that 14% on a quarter by quarter output basis, but we are starting to see.

Core product cost out as we scale up manufacturing you can see the battery volume and what we shipped in the first quarter is up 56% and at the same time, we increased our battery yields of 4%. If you remember our target is to get to 90% and at the end of the quarter. We ran on a weighted average of <unk>.

Like everyone else tremendous inflationary pressure on our overall on our overall product when you look at the battery our core materials. There has been a 10% to 20% inflationary pressure on those materials, but what we've been able to do is go out and get multiple suppliers signed long term agreements and look for lower spec and alternate materials.

To take down cost on the energy block or the containerization and.

Battery management system, we've been able to increase our U S supply chain content and we've gone for a non ISO container design, which will take cost out of the overall landed product in the second half of this year and then finally, one of the biggest cost drivers I think across the globe right. Now is just freight costs and what we've done.

To be able to start managing that is that our product now has a non hazardous rating, which gets us into a lower cost shipping when we're shipping final product we've increased the U S content, which reduces the shipping costs that we have and then on the customer side, we're working with customers on the transportation, where we're holding.

The cost of battery material and the energy block as we bid out into the market, but then telling the customer that as we bid freight we're going to have to do that on a cost plus basis, just because of the uncertainty around that design now while.

That's happening out in the marketplace, we are taking cost out with the production scale design and sourcing activities. So if you look at these two lines.

The line that starts off at 100% is the index bill of material costs on an input basis for our energy block.

You think about this we took 14% cost out and you can see the cost curve coming down to where we are targeting taking nearly 50% of cost out of our product by the end of the year. While at the same time, we ramp up production in the new facility from from up to adding the 550 megawatt.

Hours to get to 800 megawatt hours of total cost below that graph. When you look at that you see the timing of the interaction of taking cost out while ramping production there'll be a lag where we'll start to see savings on an output basis in the second half of the year as we ramp up production. So we're going through.

This process of driving down costs, while ramping up capacity and as you get into the second half of the year, we're going to start see cost come down on an output basis, we feel good about that because if you look at the right hand side of this page, we're locking in our material pricing and capacity what suppliers, 76% of our 2022 material required.

Rents are under.

You saw that with the Tetra agreement that we announced at the end at the beginning of this year at the same time. This comes with a cost on cash we've put out $11 million in advanced payments to suppliers to lock in capacity and now it's up to us as the supply chain and operations team to manage the delivery risk of that material coming into the factory.

<unk> that into finished products and getting that out into the markets feel really good about the team that we have in place how they're managing and mitigating the risks and this is something that we work on on a daily basis to really keep in front of this and new things pop up every day, but the team has shown tremendous grit and flexibility and being up.

To manage through these and continue quarter over quarter to deliver more output with a higher yield at a lower cost. So really proud of the work that's being done there with that let me turn it over to Randy who will walk through the financial results and then wrap up and get us into Q&A. Thanks.

Thanks, Joe and good morning, everyone. We appreciate you joining us. This morning first of all I wanted to say that what this team has accomplished and it continues to accomplish on a daily basis is nothing short of inspirational.

Sure.

Before we jump into the financial results I wanted to mention that as many of you know we encourage in person visits to our facilities.

What we do as a domestic supplier of energy storage systems and the role we play in the world's energy transition, especially in a world where energy security is top of mind, we naturally get a lot of attention and visits from local state and federal officials.

But we've also seen an acceleration of visits to turtle Creek by customers and potential customers and the reaction has been overwhelmingly positive when they see batteries coming off the line NRG blocks being assembled in our capacity expansion in flight, especially at a time when energy storage is severely supply constrained.

Turning to slide 12, I'll walk through the first quarter performance compared.

Compared to last quarter revenue increased from $3 1 million to $3 $3 million.

First quarter revenue includes NRG block deliveries to four customers and included some of the first for the 80 megawatt hour Pine Gate renewables Eastover project.

We saw a sequential increase in energy block volume of 69% on a revenue recognition basis from fourth quarter of 2021, which was largely on plan.

There are several reasons why revenue didn't increase at the same rate as volume.

Customer mix is one of the drivers the revenue per DC energy block is lower in the first quarter than the fourth quarter of 2021, as we deliver against different orders.

Please keep in mind that we are currently fulfilling orders against the backlog that had lower pricing dynamics when they were booked last year and prior.

This increase in pricing is reflected in current quotes and we anticipate this price realization to take hold starting in the second half of next year as we start delivering on new orders.

Next there is D C versus AC scope mix, which is unfavorable quarter over quarter.

In the fourth quarter, we had more projects, where we recognized AC scope revenue.

We are just starting to ship on the Pine Gate East over project and so AC scope is not required on that until later in the year.

And our project based business like ours revenue can be volatile on a quarter to quarter basis. As there are multiple performance obligations embedded in our customer agreements. We only recognize revenue is contractual performance obligations are met consistent with the revenue recognition standard of ASC 606.

Various performance obligations and our agreements can include among other items delivery of the Standalone VC energy block installation commissioning and or training and there can and will be incremental revenue recognized for energy blocks that have already been shipped and delivered where a porsche.

And of the revenue has been recognized in a previous quarter.

Cost of goods sold in the first quarter was $35 $6 million, which includes a $1 $7 million lower of cost or market incremental adjustment versus the fourth quarter.

This adjustment is attributable to the increase in work in process inventory from last quarter with the associated increase in overall production of batteries and energy blocks.

Quarter over quarter cost of goods sold excluding lower of cost or market adjustment increased 60% compared to the 69% sequential increase and NRG block volume.

In short cost of goods sold is increasing at a decreasing rate and we expect that trend to continue as we execute on our strategic priority of taking cost out of the entire energy storage system.

As Joe discussed on Slide 10, we've reduced the overall energy block bill of material cost by approximately 14% in the quarter.

This is calculated by comparing the bill of material base cost at the beginning of the first quarter to the bill of material cost at the end of the first quarter.

As a result, we saw the average energy block cost net of the lower of cost or market adjustment decreased seven 4% in the quarter.

And various strategic sourcing initiatives.

SG&A for the quarter was $14 3 million.

$5 million of this total is structural 3 million is noncash related to stock comp expense.

There was another approximately $3 million of one time items.

And the remainder is discretionary spend associated with scaling the business.

Overall, our first quarter operating loss was $51 $7 million.

Going forward sales volume is expected to substantially increase as capacity expands and product cost is projected to decrease by almost 50% by year end.

At the same time, we see positive pricing on 2023 shipments and we will continue to manage our SG&A spend.

Turning now to slide 13, we had $55 million of cash on hand at March 31 2021.

This was an increase of approximately $6 million from last quarter due to our rapid scale and we expect the level of advanced payments to decrease going forward.

In addition, there is another $2 million of advanced payments to capital equipment Oems for Capex in conjunction with the turtle capacity expansion, which is consistent with last quarter.

As we discussed last quarter. The plan were executing requires the company to raise additional capital on.