Q3 2022 Eos Energy Enterprises Inc Earnings Call

November 8, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good morning, and welcome to <unk> Energy Enterprises third quarter 2022 conference call.

This time as a reminder, today's call will be recorded and your participation implies consent to such recording.

This time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation with that I would like to turn the call over to Joseph Crinkly E. O S. Communication manager. Thank you you may begin.

Thank you.

Everyone and thank you for joining us for <unk> financial results conference call for the third 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.

<unk> current expectations with respect to future results for our company, which are subject to certain risks uncertainties and assumptions.

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.

The risks and uncertainties that forward looking statements are subject to are described in our SEC filings.

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 reconciliations between non-GAAP financial information to 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.

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

Conference call will be available for replay via webcast through <unk> Investor Relations website at investors about <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 now turn the call over to iOS CEO , Joe Ms. Angela.

Thanks, Joe and good morning, everyone. Thanks for joining us for our Q3 2022 financial results introduce walk through the framework around the results that we delivered in the third quarter, how we see that shaping up here as we look forward to.

Q4, Randy will walk through the financial the financials after I get a little bit of context around the operating results and then we'll open up for Q&A for some of your questions coming out of the filings.

Move to page three just wanted to start off I think with one of the biggest things that we have in the business right now and Thats.

The IRA incentives and how this 10 year program really creates an opportunity not only for <unk>, but also for energy storage as a whole to really take its place in the in the United States and the United States Global Energy mix. What makes me excited is that it has a 10 year program it incentivize as domestic.

<unk> production.

Both companies like <unk> is both an opportunity for its customers to gain investment tax credits for Es itself the gain.

Production tax credits.

When you look at the framework, that's there and just how the team is delivering how we position. The company looking forward, we have demonstrated an ability to produce and deploy energy storage systems at scale walk through the operating performance here as we move forward, but it's important to note that we're now up to 258 energy blocks shift.

We finished shipping the pines east over project here.

At the beginning of November .

November which is our largest project to date. We've also implemented a new version of our battery management system. We discharged now 640 megawatt hours of energy, which I think is very important and I think we can show. The line graph later on on that performance, you're just going to see more and more of a field performance taking over as we deploy asked.

It's out in the field and then and one of the most challenging.

Supply chain environments of my 30 year career. The team has done a great job of not only expanding capacity in our factory building the workforce.

<unk>, our supply base, while delivering those.

Energy blocks.

Filling on our largest project to get the same time, we will walk through details around our <unk> battery performance the design of it and the testing I mean, we feel really good about what we've been able to deliver here and this is our same proven technology and a new exciting way of how we.

Packages to deliver lower cost and higher performance to our customers.

There's 50% fewer cells in each battery module, and there's 98% fewer wells to assemble that battery module and then from a customer standpoint, Youll get two times the energy density per square foot with the same safety and reliability that we've always talked about in our product when you take those three things together. The fact that we have a long.

Term framework to incentivize the growth and penetration of made in America energy storage along with the fact that <unk> has demonstrated over the last two years its ability to not only scale production, but deliver at scale and the fact that we're coming out with a new mechanical configuration of a proven tech.

Knowledge, we get very excited about what the future looks like for the company and in the short term as we discussed the week ago, we've worked with our customers around that framework to push out orders that we're going to be delivered in 2022 into 2023, we've revised our revenue expectation, which I think makes sense for both our shareholders.

A company at our customers and as a result of that we've been able to conserve some capex, while still positioning the factory to grow as the <unk> III comes online at the beginning of next year. If we go through the next page I just want to quickly highlight a couple of things around the iras that I think are very important.

What's important here is this decade or 10 year program.

And in my career, both the uptake in wind and the uptick in solar and what makes me excited about this program for energy storage and the fact that it is 10 years, so youre not going to see the ups and downs that we've seen as wind and solar have ramped into the energy mix at the same time, we're incentivizing.

Made in America technology, I think what is very important.

This legislation as we move forward is the fact that we really want to make sure that's domestic.

Battery module producers received this.

Domestic content credit this is not about packaging batteries made in another country. This is about revitalizing and relaunching a supply chain in the United States to take the lead in this next phase of the development of the industry value chain. It. Both occurs if you look at the left hand side of the page customer benefits and as the <unk>.

Same time, if you look at the right hand side of the page as we scale. There are significant direct paid portions for the first five years, they're going to help us with our capital requirements, but also over 10 years allow us to have a tax credit as we move forward. So.

Pretty excited about what this can deliver because as we've seen time and time again in the industry. This has worked for both wind and solar but what makes this different is the duration of the programming and the fact that were incentivising domestic production to have a U S supply chain around this critical asset in our energy mix with that let me now move to our.

Operating performance.

Yeah.

Let's now move to page six to go through our operating highlights our opportunity pipeline stands at $7 3 billion I'll walk through some of the details on this later on in the presentation, but now that now represents 28 gigawatt hours of opportunity booked orders and order backlog relatively flat in the quarter, but I think.

You probably saw at the end of last week, we announced that I think is a key order for us with the California Energy Commission in India Energy in California, as they start to launch their long duration energy storage.

Program in California, I think this is a leading indicator of <unk> ability to be able to deliver this technology in the near term, which is scheduled to happen in 2023 and also the fact that the safety reliability that we bring to the market is going to be a key enabler of the energy goals not only in California, but.

Across the United States and around the world as I talked about earlier, our discharge energy its up 18% versus the last time, we together, which is which is great. As we continue to operate the assets both at outlet field and test and our facility in Edison, New Jersey revenue was $6 1 million, which is a 15, we had 15%.

Increase in the core energy blocks that we recognize revenue line versus Q2, Randy will walk through some of the more some of the details on that in cash on hand at the end of the quarter stood at $38 4 million again, Randy will give a bridge to that number as we get to the financial section, but once again.

We continue to show improved that we are an operating company now the next page page seven talks about some of the challenges that you have as an operating company we.

We are demonstrating our capability to provide product to the market to our customers in a very challenging environment, we were able to stabilize our production at a run rate of two energy blocks per day with 33% welding capacity than we originally planned now that wasn't done without its challenges as we work through the summer.

I really want to explain.

What happened and how we expanded this capacity and the challenges that the team was able to overcome.

We started off on our capacity expansion. If you look at the left hand side of the page that's a picture of what our facility looks like today in Turtle Creek that was an empty building back in January and today is producing product as we were doing this we were bringing more in additional capital equipment online while relocating.

<unk> capital equipment from another building in the same industrial park into this facility, we had some delays in receiving our capital equipment and bringing that capital equipment online, particularly around infrared Wilder deliveries deal. They were eight eight to 12 week delays, which delayed our ability to transition into the new <unk>.

Building, but as we started doing this what the team was able to do.

Never waste a crisis was to streamline our operating processes and increase our output over the current asset base, which allowed us to avoid 3 million of Capex reduction as we hit our energy block production run rate towards the end of the quarter now as we move to <unk> I think you can go back to what I talked about before this core.

Process that we have will reduce the number of wells in a battery by 98% will go down from 41 to basically one well as we get into our new production. The same time on our supply chain, we've talked about expanding our supply base and qualifying lower cost components into the mix to take cost out of the product.

To do that but because of the delays in the capital equipment a lot of the testing that we wanted to do in qualification around those around those components. We did on production runs, which you never really want to do but we wanted to keep the factory running and be able to deliver our projects out in the field. So what we saw was that timing.

There will be expansion plus the new material coming in particularly around battery framework and the new resin supplier that we quantified resulted in a couple of months of lower yields and higher scrap and rework, which will be reflected in the cost of goods sold numbers that Randy will talk about later in the presentation at the same time, when we're able to do working with our supplier.

<unk> has overcome the challenge by deploying our manufacturing engineers, yeah, we've got a small team, but a great team of manufacturing engineers that worked with our suppliers to improve that component quality, and then bring that capacity expansion and supply chain diversification into harmony and allow us.

To produce a quality product throughout the quarter. The same time, we were doing this we increased our production workforce by 40% in 90 days now we because of the capacity expansion delays weren't able to do the training that we wanted to do so I think what happened to US was the ramp up of these new employees.

<unk> occurred at a slower rate than we originally anticipated, but it did allow us to come up with the right training program to bring new employees.

Our onshore team now this is going to be critical as you look to the <unk> three program because we were able to do is use this to set up a program. So you hear a lot out in the marketplace around being able to hire people. There was a point in time, where we were Onboarding 25, new employees are weak and we've come up with partnerships and ability to recruit train and scale up.

<unk> employees to be productive members of our team and that's going to help us here as we wrap up the Z three.

2023 at the same time, if we move to page eight page eight is a critical piece for us because this really shows the commercial viability of our product you look at the discharge energy $639 eight megawatt hours in total energy dispatched 329 megawatt hours in the field.

We had another almost 170 megawatt hours through factory acceptance testing at 143 megawatt hours in our lab on testing. If you look at the left at the right hand side of the page excuse me you can see that field line just growing at a much faster rate where the other lines look like Theyre flat just because of the growth that we see in the field as we start to bring more and more.

<unk> online at customer locations, we've talked about the Panga Eastover project and that's the bottom of the page. It's an 80 megawatt hour project 184 energy blocks delivered to the customer you can see that middle picture solar plus storage those are the energy blocks installed out in the field that the silver project and we're pretty proud here.

At the beginning of September to ship, the 200 manufactured energy block out of our Turtle Creek facility.

Two the <unk> east over E silver projects. So some great performance. When you look at this and continuing to show the robustness and the ability of our technology to be able to deliver across multiple operating.

Use cases and continue to show that the product out in the field is performing not without its challenges when I talked about earlier, bringing out a new BMS and introducing a new battery management system that was critical because we had some challenges on our earlier systems are being able to balance out those batteries and be able to run cycles and extract it.

<unk> the energy that comes out of an energy blocking with this new.

We're now able to improve the performance and reliability of the energy blocks out in the field and those are things you really don't learn as a company to get assets out in the field and up and running with that let me shift over now to <unk>.

Talk about our progress on <unk> III.

Let's move to page 10, and talk about our <unk> battery and how this will deliver a simpler and lower cost system to our customers. It starts off with the same chemistry that we validated with over $2 5 million cycles in that discharge energy that I've talked about before with a simpler.

More scalable mechanical design and Thats the picture that you see on the left hand side of the page Thats. The battery as you as you look at it today the battery module as you look at today.

We've talked about the Gen. Two three product we've talked about it being a 40 cell product that's about the size of a window air conditioner that weighs 250 pounds. What you see in front of you is a module that's 'twenty cells. That's the size of a computer server that weighs around 50 pounds to fewer cells we've taken.

Titanium out which allows us to reduce the wheat and the cost we've enhanced the performance of our proprietary zinc electrically which gives us higher discharge voltage and increases the energy density of the battery. It makes everything simpler and improves the performance and you see that in the center of the page, which is how we're going to build.

This battery. This is the first time in the history of our company, where we've been able to take our chemistry and mechanical design concepts and think about how we wanted to build that at scale and the resulting output now is that we have we can deliver a much more automated battery manufacturing and <unk>.

Semi automated containerization process, but we're taking 98% of the wells per battery out, which takes our cycle time from 55 minutes today to less than a minute. When we launch this product and if you go back to some of the challenges that I talked about earlier a lot of the things that we've talked about around scaling our processes have been around.

And bringing that welding process up to scale and we have learned through building the batteries that we built in deploying the systems that we've deployed out in the field to come up with a better way to design and build and deliver our system, which basically when you look at the far right of the page allows us to deliver a lower cost structure.

The market so what does this mean.

We did was we took our cost curve for the Gen. Two three battery and moving to the three we basically take that cost covenants like you've taken 50% of the cost out of the product when you launch it into the marketplace you combine that with the benefits of the Iras that I talked about earlier and you have the ability to take on.

Our launch systems and deliver that to customers at a cost position that will significantly improve the cash burn of our company as we go through its scale moving forward and get us to cash flow positive as we've talked about in our last earnings announcement and Randy will talk about later in the presentation. So I'm pretty excited about the work that the team has done.

Not only in our engineering and R&D department, but what our supply chain manufacturing team has been able to do to take those two things combine them together in a way that we're going to deliver a product that's going to deliver lower cost and higher performance to the marketplace and then if you go to page 11. The initial performance data of this <unk>.

<unk> has been outstanding it's been right on the specifications that we've had for the product we still have some things we have to work through as far as how we want to assemble at scale and how we want to deliver the yields that we want but the product thats untested. So if you look at the picture there in the middle that's that's an actual production.

Figuration battery on tests in our facility in Edison, New Jersey, we're seeing.

<unk> temperature and energy output being repeatable across multiple modules at the stage. We are in the development. We haven't seen this in the 13 year history of our company. So it's exciting to think about what this product will do once we finalize the manufacturing process and start ramping up production next year.

The output of this is on the right hand side of the page, we're going to deliver that higher discharge voltage that we talked about and 33% increased output to our customers. So those two results.

Bind with how we want to build and the mechanical design of this product and the change from titanium to a conductive polymer gives us significant cost reduction and shifts our cost curve down 50% as I talked about earlier, we've still got a lot of work to do and really one of the reasons why.

We've made the decision that we made to shift product into next year was to allow the team to really focus on getting this right at launch we are a company. When you look at the size of yields were around 300 employees.

One of the biggest things that I founded by four years here with the company is that when we are able to focus we are very good. So we're going to take our resources and focus it on doing this right and delivering and testing this product and launching its manufacturing in early 2023, so pretty excited about the work that the team is doing and the.

<unk> that they've delivered as we've developed this product in and started to put it on test at Edison.

Okay shifting gears to our commercial pipeline in our orders backlog, let's move to page 13, the pace that we have in every earnings announcement.

Lead generation lead generation is when the customer comes with a project idea it's.

The feasibility study we've got to come up with a project a project plan around it we also need to come up usually with a technical use case that has gone up a half a billion dollars in the last quarter. So we're pretty excited about this because when you think about how that translates into lead generation becomes current pipeline current pipeline now stands as we've talked about before.

It stands around $7 billion.

It's up over $300 million versus Q2, we're pretty excited about the customers that are coming into that current pipeline that actually proposals and the size of the projects that we're talking about I think one of the advantages that we're going to be bringing to the market. As we talk about that current pipeline is that capacity that we're going to be putting in place for the Z three which will.

Allow us to deliver product.

Throughout 2024 and 2025, so we're very excited about how this term pipeline lines up with the investment program.

The <unk> III product launch that we talked about on the prior page again, our booked orders.

Talked about the quarter a lot of activity around that.

Active proposals and people looking and working through and trying to understand the IRA legislation and how that plays into.

Our order booking order booked in timing source not really translate into a lot of orders in Q2 or Q3 I am sorry.

But we did as I talked about earlier closed at $13 $5 billion order with the Cc in California, which is a great launch commercialized order for us to do with the CDC.

In California, So we're pretty excited about that now when we look on page 14, the current orders backlog.

Much has changed versus last quarter other than the customer shipments the $5 $2 million.

Show that our translated through into our sales number.

We have one eight gigawatt hours of backlog that comprise itself of three multi year.

Sales arrangements, we have 24 projects in 14 different different customers. When you look at how that 452 splits out 419 as equipment deliveries and additional 33 is a long term service revenue to continue to work with customers to grow this I feel really good about the opportunity pipeline and how that's evolved.

The year over the next few months and then if we move to page 15, and just wrap up here on transitioning the strategy of the company the IRA legislation.

It's improving not only the market, but also the economics for.

FERC for iOS and its customers beginning in 2023, we've demonstrated the ability to manufacture and deploy energy storage systems at scale, we've come up and done that while we were doing that we came up with a better way to package, our technology and bring it to the market faster and at a lower cost position. It allows.

Us to better allocate our capital and focus our resources on bringing that G III product to market against the backlog, we talked about on the prior page, which now looks at our revised strategy of focusing reducing our output and focusing ourselves on the launch of disease 30 in 2023 to better utilize the <unk>.

IRA benefits, both ourselves and our customers so pretty excited about where the company sits in the shift and the transition and the strategy of focus inside the company and with that I want to turn it over to Randy who will walk us through the financials here. This morning.

Thank you Joe we sincerely appreciate everyone participating this morning, and being part of this energy transition journey with us.

We believe the radically changing energy landscape has only accelerated with recent geopolitical events and now against the backdrop of the inflation reduction Act.

It's our premise that iOS long duration energy storage technology invented in the U S and made in America with a near source supply chain is a clear differentiator.

With that said I wanted to reiterate a few critical points about the tax credits framework that we believe are strategic advantage for iOS and for which we think improve the long term prospects of the company.

First the investment tax credit production tax credit framework for Standalone storage is a 10 year program for energy product projects placed in service. After December 31 2022.

Besides the base tax credit the IRI offers an extra 10% credit if an energy storage project satisfies domestic content requirements, which will be further defined and set for when the implementing regulations and guidelines are finalized.

We currently anticipate that projects utilizing yield energy storage systems will qualify for this domestic content bonus because of the domestic content of our systems.

The 10% is apply to the entire cost of the project not just across the energy storage system.

For the production tax credits applicable to Eos as a manufacturer the IRA directs the internal revenue service to pay manufacturers. The cash value also known as direct pay of production tax credits for making battery components and therefore these credits may be a new source of cash flow for iOS.

The direct pay option is valid for up to five pack years, after which any such tax credits can be sold to other companies for cash.

Now turning to slide 17.

Revenue for the quarter was $6 1 million, which is primarily the result of the inner energy block deliveries on the 80 plus megawatt hours Pine Gate renewables Eastover project.

As of November 2nd we completed manufacturing and shipped the final energy block for this project are largest shift project to date.

Revenue in the quarter increased 3% sequentially, while our corresponding unit volume increased 15%.

As a reminder, there can be variability in our revenue quarter over quarter because of the DC and AC scope mix.

<unk> over quarter energy block or DC scope revenue increased 20%, which was partially offset by an 82% decrease in AC scope.

The large decrease in AC scope revenue as a result of timing of project execution.

Most of the AC scope for the East over project was delivered and revenue recognized in the second quarter in preparation for energy block installation on the site.

Cost of goods sold was $50 million of $13 $2 million increase from last quarter $4 million of which was attributable to the 15% increase in unit volume.

The remaining $9 million increase was related to higher logistics cost plus inefficiencies, including scrap and rework that resulted from the challenges Joe highlighted earlier.

We invested $4 $5 million in research and development in the quarter, a $1 million decrease from prior quarter as the <unk>.

<unk> three battery program moved from components development and prototype testing to building the first battery modules and their scale manufacturing configuration.

Noncash items, and R&D were $400000, including stock comp expense depreciation and amortization.

SG&A expenses for the quarter were $14 7 million, a decrease of $4 $5 million sequentially, resulting from reductions in outside services and legal fees.

Noncash items in SG&A were $3 $3 million in third quarter, mainly stock comp expense.

The resulting operating loss was $63 $7 million.

We also incurred a $900000 loss on debt related to the early repayment of the high power note payable to whole pack, which was below the line.

Turning to slide 18, we had $38 $4 million of cash on hand as of the end of third quarter.

We received $3 million for customer inflows as we executed on project milestones.

Our net capital raise in the quarter was $87 million, which included $4 million of capital equipment financing under the facility with Trinity capital.

In addition, we added a new source of financing for the company in the third quarter with an aftermarket or ATM equity offering program through count.

This allows the company to offer and sell shares of common stock of up to $100 million at its discretion and was a takedown from the companies up to $300 million F. Three shelf registration.

During the quarter, we raised $29 million in net proceeds on the ATM with an average share price of $2 49.

Leaving $70 million of capacity under this facility.

Net cash to the balance sheet was $54 million from the senior secured term loan that we closed in July and announced in Q2 earnings.

Gross proceeds were $94 7 million of which $15 million was utilized to pay the outstanding balance on the high power note mentioned on the previous slide.

$11 $7 million for an insurance wrap <unk>.

$11 $7 million for escrowed interest and $1 8 million for transaction fees.

Our liquidity strategy remains to use the existing financing facilities on an as needed basis.

Remaining cash flows were $68 million with the detail on the right hand side of the slide.

Now turning to slide 19.

We announced last Monday, the passage of the IRA has changed the economics for both iOS and our customers.

As a result, we have shifted our strategy and revised our outlook for full year 2022.

We continue to increase our opportunity pipeline and are in active discussions with multiple parties regarding large scale individual projects and multiyear supply agreements for.

Sample, we believe the recent win in California that we announced last week demonstrates how the market is shifting to longer duration alternate storage technologies.

As a result, we are maintaining our $500 million booked order target for 2022.

Next we've revised full year 2022 revenue expectation in the range of $17 million to $20 million shifting the remaining revenue originally planned for 2022 into 2023 to better realize the potential benefits of the IRI for both us and our.

Customers.

We're extremely proud of all the work that the entire <unk> team has done to get us to 600 megawatt hours and annualized capacity.

Given the new revenue profile and the progress on the <unk> three program, we determined that the current investment level and our manufacturing capacity for the Gen. Two three product is sufficient at this time.

This decision allows us to focus management attention and capital resources on the <unk> launch.

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

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

Operator will you. Please open up the line for Q&A. Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Again that is star one one to get into Q1 moment, while we compile the Q&A roster.

Alright, and our first question.

Comes from the line of Chip Moore with Es Hutton and your line is open.

Hey, good morning, gentlemen, thanks for taking the question good morning, Jeff.

Good morning.

First just maybe you can expand on it.

Great to see you navigating the challenges I guess.

Elevation of the manufacturing process and ramp up of the three it sounds like there is some acceleration.

On that ramp up just help us think about.

As we look into next year, I guess would be a great starting point.

Yes, so chip the way I would think about this as.

We've got three phases.

So we're we're building.

Production configured batteries.

To learn the manufacturing process right now as we speak and those are going on test, we'll do that through year end then we'll go to a limited release low rate production.

So at the beginning of 2023, which will basically be our individual or discrete manufacture manufacturing processes. So think about how you build your bipolar electrode how you integrate those electrodes into its container how do you close the battery module then integrated into the energy block.

And we will do that without automation and then as we get to the second half of the year, we'll automate that process and ramp up in our first manufacturing line with subsequent lines to come after that.

Okay got it that's helpful.

And.

In terms of.

Finished goods inventory in just existing products out there that maybe have recognized yet is there any way to help us just put that sort of.

Near term stuff.

Yeah.

So chip this is Randy good morning.

So I think I don't know if the question is regarding incremental revenue from energy blocks that we've shipped but.

In quarters past, we've talked about the performance obligations and recognizing revenue.

It's not just the energy blocks. It's also the.

The installation and commissioning primarily that are.

Revenue recognition performance obligations. So so we will see most of that come through in Q4.

And that contemplated I think in the revenue target that we've that we've given for the year, the $17 million to $20 million.

Yes.

Perfect.

Okay.

Maybe I can sneak.

No.

One last one just any update.

The loan in due diligence process there.

Update us on that process.

Yes so.

Sure.

As we've announced before.

In the formal due diligence.

Process with the.

Active engagement.

And so.

I mean timing timing to be determined but we're we're we're confident in where we're at with the engagement that we have with the with the Doe.

Got it Okay I'll hop back in queue, thanks very much.

Thanks Chip chip.

Thank you one moment, while we get our next question. Please.

Any comes from the line of Chris <unk> with B Riley Securities. Please proceed.

Hey, guys. Thanks for taking my question here.

All right maybe just.

Maybe just a little more color around.

Like a breakdown in the cost of goods sold.

Could you provide a reminder of how we account for inventory within there.

Breakdown between material costs with the scrap impact is fixed overheads.

What's the visibility on that number for the fourth quarter as well.

It would be helpful and then.

As we ramp up these three can you get a sense of what volume run rate. We should expect before we had positive gross margins when we bake in that 50% immediate cost out opportunity.

Yes.

With regards to the cost of goods sold.

So.

I think the breakdown of the increase was volume and inefficiencies aspect of.

Of.

The challenging environment, we faced in Q3 and so.

I would say that of the.

Of the.

I think it was $9 million increase.

As a result of the inefficiencies.

A portion of that of course was scrap and rework.

And so with regards to the disease three profile right. So as we've talked about before the guiding principles of the program or around design for cost design for manufacture ability.

And so I think you can see just looking at the pictures in terms of the.

The simplicity, especially relative to the Gen. Two three.

You will remember on the Gen. Two three we're building up a 40 cell battery one cell at a time with infrared world on each one of those cells Vesey three design as a top it comes in.

As one piece in terms of the in terms of the shell and then you just put the you insert the bipolar is in there right. So we also talked about other big cost reduction aspects.

Not just the automation cycle time et cetera, but with regards to alternative materials and so going from titanium to conductive polymer. So all those factors are what lead to the.

Much reduced cost profile and be able to reduce the cost by 50% at launch from where we are now on the on the Gen. Two three.

And I think Christina.

Additionally, we made to randy's commentary around the <unk> III would be.

What I've learned here the last couple of years with scaling up the factory for the Gen. Two three.

There is going to be a ramp up on the learning curve now what we're seeing in the first units that we're building here in Edison right now is.

It is a much simpler as Randy said configuration to be able to manufacture, but I would assume as we go through we're going to have scrap and rework and ramp and ramp adjustments just like we talked about here.

Third quarter, although I don't think they will be to the same level because youre starting off on a.

On a slower or at a lower cost base as you as you think about that scrap that you will incur and that training and ramping up of the facility. The same time I think what I would say is that we hold with what we said last quarter was with that we're looking for the <unk> III to become gross margin positive as we get into the second half of next year.

Got it okay.

Very helpful and then just.

Do we have any more clarity on the size of the deal.

Bo.

Loan potential.

You mentioned three gigawatt hours.

I think in that press release back in September , but I, just wanted to get a sense of what kind of the size ranges that we'd be looking at with that.

Potential program.

Yes, Chris we haven't disclosed that and I don't think were prepared to at this point, while we're working with the Doj.

Okay.

That's exactly that's exactly the process that we're going through with the due diligence right now with them okay.

Okay. It makes sense and maybe just the last one.

When we're looking at kind of the backlog can you give any sense of what percent.

As for 2023 expected orders to given the push of quite a few of the 2022 orders.

Just wanted to get.

Any sense that we have there.

Obviously, we're getting a little bit more revenue from Gen. Two three in the fourth quarter, but.

Wanted to see if we would also see some gen. Two three revenue within 2023 as well.

Yes so.

Chris what I would say is the current backlog.

Sure.

<unk> 30, I think $35 million or close to $35 million is long term service agreements revenue. So the balance of that is product revenue.

Most of that is.

Kind of multi year.

Master supply agreements.

So so.

With regards to the question on the.

The Gen two three.

So the customers that we worked with the push out from 2022 to 2023, we're still working with them to determine whether that should be gen. Two three product or Z three products. So those are active discussions.

That are ongoing now.

Okay. It makes sense.

Thanks, guys.

Thanks, Chris.

Thank you and SME minder to get in the queue Press Star 111 moment for our next question.

And our next question comes from the line of Joseph Osha with Guggenheim. Please go ahead.

Thanks, Good morning, everyone. Just a few questions first to follow up a little bit on your timing of the manufacturing transition next year can you maybe just step us through.

What the cadence of that looks like and I seem to recall, Joe you've said before that you anticipated coming out of next year with all of the <unk>.

Why not put it three or are you still comfortable with that with that viewpoint.

Yes, so Joe again, what I would say is we're manufacturing.

Product now the goal is to get energy blocks on test by year end.

Then go into limited release.

Non automated production in the beginning of 2023, and then ramp into the first automated line coming online.

In the second half of next year, and then the ramp up into what will be the.

Output at the facility.

Internal Creek by the end of the year.

And then and then.

And then and then just Joe just to clarify just to clarify the last part of the question.

So your question is like by the end of the year will only be shipping Z. Three is what is what you're asking.

Yes, maybe even making the three I guess.

Theres officer right, yes, there's a little bit there will always be in this way.

We're trying to what we're working through now there'll always be some gen. Two three product that will be manual man.

<unk> manufacturing as we go through this this mix just for the service on the installed base that we have but the majority of the new the new <unk>.

Production going out the door for new unit shipments that will be the three by year end.

Goodbye.

Asked majority.

Production going out the door by the end of next year should be <unk>, yes.

Yes, yes, okay.

And second question I know, it's early days, yet, but I'm wondering how you're sort of price discovery conversations are going with your customers given the IRS right, you've got cell and module credit they get the extra 10% et cetera et cetera.

How is that manifesting in terms of the sort of broad pricing conversations youre, having with customers.

So from the standpoint of how.

The discussions back and forth, it's still forward, what I would say, we still see discussions focused on forward market pricing.

When you looked at it and depending on the years.

Youre talking about when you look at really what we're talking to customers about is mostly deliveries as you look for second half of 'twenty four into 'twenty five and beyond.

If they are discrete projects that might be early 'twenty four for longer term framework agreements, you're talking about longer term deliveries, which is pricing new a forward curve and really like when you look at the credit on the ITC side and the PTC side, they kind of wash out in the negotiations what I would say and then you are.

At year at market pricing. So I think what everybody is talking about it's less about.

Here's.

Those the way that I'm seeing it evolve right now in the early days is it's accelerating discussions and people wanting to talk about how to bring online and the benefits that you get but at the same time I think we are they are both saying look let's prices to the market of what we get a return on and then what the ITC and <unk>.

<unk> will be will be.

Okay.

It makes sense and then just the last one Randy for you.

Obviously, you've got these production credits coming in they are direct pay my understanding is you got a file first.

There was a fairly substantial lag between when those those credits are.

Obviously recognize.

The actual money shows up is that true.

No.

Have any any thoughts or strategy and poised to about how you might sort of pull forward the actual monetization of those credits.

So Joe your understanding is the same as our understanding in terms of.

The pull ahead.

Not yet.

But just to put context around it.

Joe Joe showed the slide four.

Which which demonstrated.

Illustrative iOS customer impact.

And the illustrate of production scenarios.

So at 500 megawatt hours.

With just the $45 per kilowatt hour.

That's $22 $5 million of credits.

Going to be higher than that when you add on the 10% for the electric electroactive material costs. So.

So it's a good question in terms of the ability to pull ahead, but.

As of now.

<unk>.

Kind of kind of nothing further.

Okay, alright, thanks very much.

Thanks, Joe Thanks, Joe Thank you and one moment for last question.

And comes from Tom Curran with Seaport. Please go ahead.

Good morning.

I'm sorry, Tom.

Just trying to connect the dots here on the on the key milestones you shared on the expected path to profitability, so as you've reiterated that.

For the Z three you would expect to become gross margin positive.

At some point over the second half of next year.

Does that mean that crossing into.

Positive territory is predicated on achieving some level of automation in phase III and if so could you share some detail around.

Where exactly you would need to get to with automation.

Kipp could reach that threshold.

Yes, so Tom I'll start and then Joe can jump in.

So, yes, you're absolutely right.

The the the gross margin positive.

Is assuming your.

You have an automated process and that and that you are producing at scale, what what gives us more confidence.

As you know.

Now that with the with the production tax credits as well.

About the path to gross margin positive, but but.

But yes, I mean kind of kind of full scale production.

We've selected and automation partner.

So that's going well.

So if you have anything to add Jeff.

Only thing I would add to Randy's comments is even.

Even building by hand.

Building is E. Three without automation is faster cycle time than the welding process on Gen. Two three.

The the output of <unk> three in the second half would assume.

Fully automated battery manufacturing, so battery module manufacturing so.

Baking the bipolar integrating the bipolar into the tub.

Closing tub and filling with electrical eight that would be fully automated.

And some of what we've already developed for the for the Gen. Two three will flow into the <unk> and then we're assuming a semi automated process of integrating the battery modules into the enclosure prior to shipping, which today is 100% manual.

Got it thank you for expanding on that that's helpful detail and then Joe.

And sharing an update on the current pipeline you mentioned that you are excited to see some of that.

The new prospective customers.

You have been.

Engaging on technical proposals are a nonbinding quotes.

Could you just expand on that as well share some color around whether it's more about the nature of the customers in and maybe some granularity around who they are or is it about the use cases or a combination.

Yes, so it's a combination of both so what I would say we are seeing is.

More and more projects coming in with longer duration discharge beyond six hours. I mean, you look at I think the order that we announced that we could go with the <unk> I think as the start and I think you'll see more and more people looking for longer duration of flexible duration, which we deliver on at the same time.

The customers that are coming to us and the timing and the size are very encouraging now early days and a lot of work still to do there, but what we're seeing is those customers coming in who now with the <unk> builds.

Builds off of Joe's earlier question now with the IRA legislation, they're them coming to us and say, okay. How do we put together multi level a multi level sales agreement multiyear sales agreement that that allows us to get secure capacity with you and then allows us to go after projects that have longer duration flexo.

So the combination of those things along with the regulatory framework is.

It's very encouraging what we're seeing but early days and I think like names at this time.

Not ready to disclose those and neither are the I think the counterparty that we're talking to.

Understood.

Last one for me.

Here, we are early November .

And youre reiterating the target.

<unk> booked orders of $500 million.

It sounds as if we're still just sitting at.

Let's round it to $340 million.

Could you.

Give us.

A better indication of what's underpinning the confidence about.

Securing that.

That additional $100 million here before year end.

Do you expect it to consist of a few big projects or a lot of little ones that.

Maybe you have some seasonality or other factors that will lead them to kind of rush in here before year end.

Yes, Tom So in my prepared remarks, I mentioned that we're in discussions with.

Various customers on.

On large individual projects or.

Framework agreements in the.

Master supply agreement type.

Type arrangement and so I would say, it's the former to your question just based on where the market is and.

The recognition by customers that.

No.

We need to probably walk up energy storage here for the long term just given the dynamic supply demand in and.

The recognition that.

Customers shouldn't have.

An over reliance on a single technology.

Got it.

I appreciate the thoughtful answer Scott.

Thanks.

Thank you Im showing no further questions in queue I will turn the call to Joe Ms. Angela for his final remarks.

Thanks, Alright, thanks, everybody for listening today.

I sit here, having been with the company now for over four years and feel really good about where we are with the backlog that we have in the product that we're developing and the team that we built and feel like we've got to navigate through the liquidity of the company continue to work with the Doe.

To get to a conclusion on the LPL.

<unk> alone and really then positioned to capture what I think continues to be one of the greatest secular changes that I've seen in the energy industry in my 30 year career, and I really feel much more positive about all of those things given the fact that we have a 10 year framework of which we can operate under as energy storage I think energy.

Doors will become more and more important mix of.

Our global energy mix and I think that we continue to position the company to capture that growth as it comes so thanks again for listening and we'll continue working to build a better company.

And with that we conclude today's conference call. Thank you for participating and you may now disconnect. Good day.

Thanks.

And during Q&A, you can dial stone.

The conference will begin shortly.

Raise your hand during Q&A you can dial one one.

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The conference will begin shortly.

Raise your hand during Q&A you can dial one one.

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<unk>.

[music].

Good morning, and welcome to <unk> Energy Enterprises third quarter 2022 conference call. At this time as a reminder, today's call will be recorded and your participation implies consent to such recording at this time all participants are in a listen only.

The mode. A brief question and answer session will follow the formal presentation with that I would like to turn the call over to Joseph Crinkly E. O S. Communication manager. Thank you you may begin.

Thank you good morning, everyone and thank you for joining us for <unk> financial results conference call for the third quarter of 2022 on.

On the call today, we have CEO , Joe Ms, Angela 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.

<unk> <unk> current expectations with respect to future results for our company, which are subject to certain risks uncertainties and assumptions should any.

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.

The risks and uncertainties that forward looking statements are subject to are described in our SEC filings.

Except as required by law.

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 the Investor Relations website at investors <unk> Dot com.

Gives both companies like is both an opportunity for its customers to gain investment tax credits for Es itself the gain.

Production tax credits.

Supply chain environments of my 30 year career. The team has done a great job of not only expanding capacity in our factory building the workforce and diversifying our supply base, while delivering those energy blocks and fulfilling on our largest project to get the same time, we will walk through details around our Z three battery.

Performance the design of it and the testing I mean, we feel really good about what we've been able to deliver here and this is our same proven technology and a new exciting way of how we package it to deliver lower cost and higher performance to our customers is simpler.

There's 50% fewer cells in each battery module, and there's 98% fewer wells to assemble that battery module and then from a customer standpoint, Youll get two times the energy density per square foot with the same safety and reliability that we've always talked about in our product. When you take those three things together. The fact that we have a long term framework.

I've seen in my career, both the uptake in wind and the uptick in solar and what makes me excited about this program for energy storage and the fact that it is 10 years, so youre not going to see the ups and downs that we've seen as wind and solar have ramped into the energy mix at the same time, we're incentivizing made.

And America technology, I think what's very important about this legislation as we move forward is the fact that we really want to make sure that domestic.

Battery module producers receive this.

Probably saw at the end of last week, we announced that I think is a key order for us with the California Energy Commission in India Energy in California, as they start to launch their long duration energy storage.

Across the United States and around the world.

I talked about earlier, our discharge energy is up 18% versus the last time, we together, which is which is freight as we continue to operate the assets. Both are out in the field and test and our facility in Edison, New Jersey revenue was $6 1 million, which is a 15, we had a 15% increase in the core energy blocks that.

We recognize revenue on versus Q2, <unk> will walk through some of the more some of the details on that in cash on hand at the end of the quarter stood at $38 4 million again, Randy will give a bridge to that number as we get to the financial section, but once again.

We continue to show improved that we are an operating company now the next page page seven talks about some of the challenges that you have as an operating company. We are demonstrating our capability to provide product to the market to our customers in a very challenging environment, we were able to stabilize our production at.

What happened and how we expanded this capacity and the challenges that the team was able to overcome.

We started off on our capacity expansion. If you looked at the left hand side of the page that's a picture of what our facility looks like today in Turtle Creek that was an empty building back in January and today is producing product as we were doing this we were Brittany more in additional capital equipment online while relocating.

To do that but because of the delays in the capital equipment a lot of the testing that we wanted to do in qualification around those around those components. We did on production runs, which you never really wanted to do but we wanted to keep the factory running and be able to deliver our projects out in the field. So what we saw was that timing.

What happened to US was the ramp up of these new employees occurred at a slower rate than we originally anticipated, but it did allow us to come up with the right training program to bring new employees onto our onto our team now this is going to be critical as you look to the <unk> three program because we were able to do is use this.

To set up a program. So you hear a lot out in the marketplace around being able to hire people. There was a point in time, we were Onboarding 25, new employees are weak and we've come up with partnerships and ability to recruit train and scale up employees to be productive members of our team and that's going to help us here as we wrap up the <unk> three.

In 2023 at the same time, if we move to page eight page eight is a critical piece for us because this really shows the commercial viability of our product you look at the discharge energy $639 eight megawatt hours in total energy dispatched 329 megawatt hours in the field.

We had another almost 170 megawatt hours through factory acceptance testing at 143 megawatt hours in our lab on testing. If you look at the left at the right hand side of the page excuse me you can see that field line just growing at a much faster rate, whereas the other lines look like Theyre flat just because of the growth that we see in the field as we start to bring more.

And more systems online at customer locations, we've talked about the Panga Eastover project and that's the bottom of the page. It's an 80 megawatt hour project 184 energy blocks delivered to the customer you can see that middle picture solar plus storage those are the energy blocks installed out in the field that east over project and we're pretty proud here.

At the beginning of September to ship, the 200 manufactured annual energy block out of our Turtle Creek facility.

The <unk> east over east over projects. So some great performance. When you look at this and continuing to show the robustness and the ability of our technology to be able to deliver across multiple operating.

It starts off with the same chemistry that we validated with over $2 5 million cycles in that discharge energy that I've talked about before with a simpler more scalable mechanical design and Thats. The picture that you see on the left hand side of the page Thats. The battery as you as you look at it today the battery module as you look at today.

What we've talked about the Gen. Two three product we've talked about it being a 40 cell product that's about the size of the window air conditioner that weighed 250 pounds, what you see in front of you.

As a module that's 'twenty cells, that's the size of a computer server that weighs around 50 pounds to fewer cells, we've taken titanium out which allows us to reduce the wheat and the cost we've enhanced the performance of our proprietary zinc intellectually, which gives us higher.

Charge voltage and increases the energy density of the battery it makes everything simpler and improves the performance and you see that in the center of the page, which is how we're going to build this battery. This is the first time in the history of our company, where we have been able to take our chemistry and mechanical design concepts and think about.

How we wanted to build that at scale and the resulting output now is that we have we can deliver a much more automated battery manufacturing and a semi automated containerization process, but we're taking 98% of the wells per battery out which takes our cycle time from 55 minutes today.

To less than a minute when we launch this product and if you go back to some of the challenges that I talked about earlier.

What are the things that we've talked about around scaling our processes have been around bringing that welding process up to scale and we have learned through building the batteries that we built in deploying the systems that we've deployed out in the field to come up with a better way to design and build and deliver our system, which basically when you look at the far right.

The page allows us to deliver a lower cost structure to the market. So what does this mean basically we did was we took our cost curve for the Gen. Two three battery and moving to the three we basically take that cost covenants like you've taken 50% of the cost out of the product when you launch it into the marketplace.

Find that with the benefits of the Iras that I talked about earlier and you have the ability to take our launch systems and deliver that to customers at a cost position that will significantly improve the cash burn of our company as we go through its scale moving forward and get us to cash flow positive as we talked about in our last earnings.

<unk> announcement and Randy will talk about later in the presentation. So I'm pretty excited about the work that the team has done not only in our engineering and R&D department, but what our supply chain manufacturing team has been able to do that.

Take those two things combine them together in a way that we're going to deliver a product that's going to deliver lower cost and higher performance to the marketplace and then if you go to page 11. The initial performance data of this product has been outstanding it's been right on the specifications that we've had for the product we still have.

Some things we have to work through as far as how we want to assemble at scale and how we want to deliver the yields that we want but the product thats untested. So if you look at the picture there in the middle that's that's an actual production configuration battery on tests in our facility in Edison, New Jersey, we're seeing bolt.

Page temperature and energy output being repeatable across multiple modules at the stage. We are in the development. We haven't seen this in the 13 year history of our company. So it's exciting to think about what this product will do once we finalize the manufacturing process and start ramping up production next year, but the.

Output of this is on the right hand side of the page, we're going to deliver that higher discharge voltage that we talked about and 33% increase output to our customers. So those with two results combined with how we want to build and the mechanical design of this product and the change from.

Titanium to a conductive polymer.

Gives us significant cost reduction and shifts our cost curve down 50% as I talked about earlier, we've still got a lot of work to do and really one of the reasons why.

<unk> made the decision that we made to shift product into next year was to allow the team to really focus on getting this right at launch we are.

Our company when you look at the size of yields were around 300 employees.

<unk> that they've delivered as we've developed this product in and started to put it on test at Edison.

Okay shifting gears to our commercial pipeline in our orders backlog, let's move to page 13, the pace that we have in every earnings announcement.

Lead generation regeneration is when the customer comes with the project idea.

Feasibility study, we've got to come up with a project a project plan around it we also need to come up usually with a technical use case that has gone up a half a $1 billion in the last quarter and we're pretty excited about this because when you think about how that translates into lead generation becomes current pipeline current pipeline now stands as we've talked about before it's.

Fans around $7 billion.

It's up over $300 million versus Q2, we're pretty excited about the customers that are coming into that current pipeline that active proposals and the size of the projects that we're talking about I think one of the advantages that we're going to be bringing to the market. As we talk about that current pipeline is that capacity that we're going to be putting in place for the Z three which will allow.

Us to deliver product.

Throughout 2024 and 2025, so we're very excited about how this term pipeline lines up with the investment program.

And the <unk> III product launch that we talked about on the prior page booked orders, we talked about the quarter.

Lot of activity around that.

Active proposals and people looking and working through and trying to understand the IRA legislation and how that plays into.

Order bookings order booked in timing source, not really translate into a lot of orders in Q2 or Q3 I am sorry.

But we did as I talked about earlier close at $13 $5 billion order with the Cc in California, which is a great launch commercialized order for us to do with the Cc and.

In California, So we're pretty excited about that now when we look on page 14. The current orders backlog not much has changed versus last quarter other than the customer shipments the $5 $2 million of that show.

Our translated through into our sales number.

We have one eight gigawatt hours of backlog that comprise itself of three multi year.

Sales arrangements and we have 24 projects in 14 different different customers. When you look at how that 452 splits out 419 as equipment deliveries and additional 33 is that long term service revenue to continue to work with customers to grow this I feel really good about the opportunity pipeline and how that's evolved.

The year over the next few months and then if we move to page 15, and just wrap up here on transitioning the strategy of the company the IRA legislation.

It's improving not only the market, but also the economics for.

For for iOS and its customers beginning in 2023, we've demonstrated the ability to manufacture and deploy energy storage systems at scale, we've come up and done that while we were doing that we came up with a better way to package, our technology and bring it to the market faster and at a lower cost position. It allows.

Us to better allocate our capital and focus our resources on bringing that Z three product to market against the backlog, we talked about on the prior page, which now looks at our revised strategy.

Focusing reducing our output and focusing ourselves on the launch of disease 30 in 2023 to better utilize the IRA benefits, both ourselves and our customers. So pretty excited about where the company sits in the shift and the transition and the strategy of focus inside the company and with that I want to turn it over to Randy who will walk us through the financials.

Here this morning.

Thank you Joe we can clearly appreciate everyone participating this morning, and being part of this energy transition journey with us.

We believe the radically changing energy landscape has only accelerated with recent geopolitical events and now against the backdrop of the inflation reduction Act.

It's our premise that Eos long duration energy storage technology invented in the U S and made in America with a near source supply chain is a clear differentiator.

First the investment tax credit and production tax credit framework for Standalone storage is a 10 year program for energy product projects placed in service. After December 31 2022.

We currently anticipate that projects utilizing Eos energy storage systems will qualify for this domestic concept bonuses because of the domestic content of our systems.

The 10% is apply to the entire cost of the project not just across the energy storage system.

For the production tax credits applicable to Eos as a manufacturer the IRI directs the internal revenue service to pay manufacturers. The cash value also known as direct pay of production tax credits for making battery components and therefore these credits maybe a new source of cash flow for iOS.

The direct pay option is valid for up to five pack years, after which any such tax credits can be sold to other companies for cash.

Now turning to slide 17.

Revenue for the quarter was $6 $1 million, which is primarily the result of the inner energy block deliveries on the 80 plus megawatt hours Pine Gate renewables Eastover project.