Q3 2024 Eos Energy Enterprises Inc Earnings Call
Good morning and welcome to the EOS Energy Enterprise's third quarter 2020-44 Conference Call.
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A brief question and answer session will follow the formal presentation.
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Please press star zero on your telephone keypad. With that, I'd like to turn the call over to Liz Higley's director of Investor Relations. Thank you. You may begin.
Liz Higley: Good morning everyone and thank you for joining us for EOS's financial results in conference call for the third quarter 2024. On the call today we have EOS CEO, Joe Mastrangelo, and CSO Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-leding statements. This call, including the Q&A portion of the call, may include forward-leding statements including but not limited to current expectations with respect to future results in outlook for our company and statements regarding our ability to the energy LPO, or are anticipated use of proceeds from any loan facility provide the U.S. Department of Energy, which are subject to certain risks and certain
should any of these risk materialized or should our assumptions prove to be incorrect, our actual results may differ materialies from our expectation, or those implied by these forward-looking statements. The risks and search and use 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, may during this call, to reflect events or circumstances after today or to reflect new information or the occurrence of uninsupposed events and the exact is required by law.
Today's remarks will also include references to non-gap financial measures. Additional information including reconciliation between non-gap financial information to US-gap financial information is provided in the press release.
Non-gap information should be considered as supplemental and nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with Gap.
Joe and Nathan will walk you through the company highlights, financial results, and business priorities before we proceed to Q&A. With that, I now turn the call over to CEO Joe Mastrangelo.
Joe Mastrangelo: Thanks, Liz. Welcome, everyone. Thanks for taking the time this morning to listen in. We start off on our page with operating highlights. I just want to start off with
The tremendous progress that we're making commercially, and I think that's shown by the announcement that we made this morning on the $73 million order with the City Utilities of Springfield, Missouri. Really a phenomenal job by the commercial team.
getting our first large order in the municipal market. This is the largest order that City Utilities has ever placed for an energy storage system. We're proud that they selected EOS as the technology.
Joe Mastrangelo: For this project, we're looking forward to start delivering this project throughout 2025. It's a really exciting time for us. I think showing the power of the V3 and what it can do out in the marketplace. At the same time, we also have what people would think is a small order with a lot more, a lot more as a repeat customer. It just shows the relationships of the team.
Joe Mastrangelo: is building out in the marketplace and the fact that the technology also really works in a microgrid application. So two really strong examples of the commercial offering and performance of the product on the field.
Joe Mastrangelo: The same time, two big things that we also announced recently regarding finance. Nathan has been working on creating the financing capacity for a scalability company. Last week we announced achieving the milestones and getting the $65 million funding from Cerberus. That cash balance you see on the lower right-hand side of the page does not reflect that $65 million. It's a great job, not only in partnership with Cerberus, but also the team in delivering and bringing that funding in. At the same time, we submitted our paperwork to finally get U.S. government approval for a loan with the loan programs office for a Title 17 loan. Very excited to bring that to closure here by year-end.
Joe Mastrangelo: have been a process of going through that as the company has evolved and changed. We feel really good about the partnership we've built and the ability to allow us to scale the company further.
Joe Mastrangelo: This technology continues to prove itself out in the field. We're now at 4.4 gigawatt hours, over 4 gigawatt hours discharged out in the field.
Liz Higley: You know, that discharge out in the field is very important because it shows customers using the product, that incremental 400 megawatt hours that you have to get to the 4.4 is also very important because that's the energy that we're generating when we test and prove out the resiliency, performance, and operating characteristics of the product. Every battery is tested before it gets out in the field. We're really excited about the performance that we see.
Liz Higley: The middle of this page, the bottom of the middle of this page, is the area where, you know, we're disappointed in our performance, you know, executing our supply chain strategies, doing a million things correctly. If one of those things don't go well, you have a problem. And that's what happened to us here in the third quarter.
Liz Higley: We have some challenges in opening and bringing that supply chain online, which we're working through with the supplier to be able to bring that product online. Now, we're going to work through that, we're going to work through it with the supplier, we're going to continue to develop and grow. The good news is it hasn't had any impact on our backlog. We continue to work with customers.
Liz Higley: on timing of deliveries and continue to work on supply chain diversification.
Liz Higley: We can and expect to do better than this in the future. What's important here is we've brought in some new leadership around the operational team and some new talent that I've experienced across the industry, both in other battery technologies
Liz Higley: and other competitors and integrators. So we're bringing in experienced people that have done this before to help us scale the company as we move forward. While we're not happy with where we are, I feel very confident with the team's ability to execute and deliver as we look to the future.
Liz Higley: Going to the next page, we're going to talk about some of these on the prior page. I just want to hit on a couple things around...
Liz Higley: the Severus Milestone, the line continues to perform and we're really happy with our ability to build a good battery.
Liz Higley: You know, cycle times are less than 10 seconds and the first patch yield is greater than 97%. We continue to see the performance of that line and what it means to us as far as being able to scale and deliver on large projects would be really the foundation for everything we're going to do going forward.
Liz Higley: We're also the team that's also the head of Target on its concept model, so we'll talk a little bit more about that as we get into the presentation here on the next page. But really, I think the foundation, the thesis of the investment from Cerberus, we're proving that out. To be true every day, we're just going to continue, noticeably grindstone, execute, and deliver.
Liz Higley: for Customers and Shareholders.
Liz Higley: Universal momentum, I talked about the two new orders that we want, very exciting, but at the same time, working with Service, we've been able to pull together a full bankability offering out in the marketplace. Some of the things we've talked about in the past when Nathan gets to our pipeline page is how do you move things down through that pipeline? We're now bringing, I'll talk about in more detail, the ability for customers to look at us and say, this is a bankable technology, and I have the backstop, so I need to take the risk to move with the new technology.
Liz Higley: You know, we see, because of that, we see the large utility pipeline strengthening.
Liz Higley: Nathan will talk about the numbers that we have on the line, but what I can tell you is that more and more people are coming to us, more and more customers are coming to us, to really look at the inherent benefits of the technology.
Liz Higley: What we've learned, you know, from the standpoint of operating the business through the due diligence that we've gone through, both with the DOE and with Cerberus, is that we have a technology with differentiated performance. We probably haven't done the best job, historically, in presenting that technology and what it means to deliver benefits to the customers.
Liz Higley: That's becoming very clear to us, and that's why we see things like seating utilities becoming a bookable order in less than six months from when we first got the request for votation in the door.
Liz Higley: So we've moved now to operational scale and capacity. We are delivering on our concept roadmap, and we are optimizing our production supply.
Liz Higley: On the left-hand side of this page, as far as cost-out progress, you know, very critical for us as we really look to switch our mindset from having a path to profitability to delivering profitable growth.
Liz Higley: Our goal as a company is to grow but deliver profits while doing so. The left-hand side of this page allows us to do that.
Liz Higley: On the direct materials side, from the launch we're down 42% of cost. That's ahead of our plan.
Liz Higley: 80% of our direct material target is achieved and locked in, will be cut in over the next few months to deliver on that initial strategy that we talked about almost a year ago. Now those two pieces there...
Liz Higley: really are achieved because what we have is a battery with readily available commodities that you can go out and get a great scale on. And as we've gone out and done this and look at doing things, we're also finding ways for suppliers to partner with us to find ways to take costs out of the overall system. On the direct labor side,
Liz Higley: We've seen a 77% improvement since we lost this disease.
Liz Higley: A lot of that has to do with the implementation of the moving runner. Our direct labor was 41% lower than Q1. Now while we only had 8% higher battery output with that 41%, we delivered 24% more energy out into the field to our customers.
Liz Higley: Now what's critical to think about here is, we could have done more if we had the cubes to be able to deliver. We timed it kind of the way we were manufacturing to what we had to be able to put into cubes to deliver out into the field.
Liz Higley: to customers. But when you look at this, when you think about this, the line...
Liz Higley: is using less hours to operate to deliver more power and batteries to the field. As we increase that, we're going to see more and more of the benefits, which brings me to the third bucket on the left-hand side, which is our overhead. You know, the overhead has seen an improvement 25% since we launched the product, and that 25%, now that the line is up and running, includes higher depreciation costs for the moving line. So we still see overall...
Liz Higley: Operating costs, or overhead costs coming down, even with the incremental costs for the line coming in.
Liz Higley: ... produce more batteries that gets better and better over time and that's one of the things that we've always talked about as being one of the drivers for future performance on our cost-cut road map. We feel very confident being able to deliver on this and Brian Miller who is our new...
Liz Higley: Our supply chain manufacturing leader has really brought a fresh set of eyes to this with a lot of experience across different companies to help us really streamline how we operate and improve the throughput of the assets that we have.
Liz Higley: The three areas that we're focused on there is on our sub-assembly process.
Liz Higley: So what goes into the moving line? It's still semi-automated. We talked about this on the last call. We've actually yielded more parts out of that process than we ever have before. We've increased the throughput out of that line. And implementing automation as we get into the beginning of next year allows us to take the moving line up to around 2 gigawatt hours of output annually. We see 57% lower direct labor costs with this incremental automation. Those direct labor costs are really avoiding having to hire labor to do the work that we're going to do.
Liz Higley: On battery manufacturing, as I said before, we achieved 10 second cycle class, we exceeded 97% first test yield.
Liz Higley: We continue to look at ways to make this line better. You know, as we've been operating the line, we get feedback from our operators. On the factory floor, we would have said, look, if the screens that we're using to control the equipment were simplified, we could make better decisions faster and allow better throughput. We're going through and adjusting those to allow us to control the availability of the line better. At the same time, you learn as you build, and every day, you know, we run that line, and then we stop and we look at what we learned, and then we go back and we fix and update and improve.
Liz Higley: So two of the areas that we've really looked at and are improving is the conveyor traffic management, so how batteries flow station to station on the line, while at the same time, how we program the robots to get better reliability and performance out of them.
Liz Higley: As volume increases, as I said before, that manufacturing overhead that I talked about earlier will actually improve and that number will get better and better as the cost comes down and that's how we will deliver profitable growth.
Liz Higley: On containerization, this is the area where we stubbed our toe here in the quarter. We had a slower ramp-up. We've got to work through that and diversify that supply base while continuing to invest with our existing supplier. We are implementing a cube automation in our factory here in Turtle Creek that will increase the output of cubes by 5x once implemented. That's already started and beyond. The initial stations are in place and that will continue here over the next few months.
Liz Higley: You can go to the queue to see if the third quarter encoded in strength, impact will impact our second effort
Liz Higley: Again, we don't like disappointing versus our expectations, but we feel as though we'll be able to work through here, through the end of the year, and get into 2025 and deliver the volume that we have committed to our customers. We're going to get better, and we're going to continue to refine, we're going to continue to learn, we're going to continue to improve, and continue to become a reliable partner for our customers and someone who reliably delivers for our shareholders as we reach.
Liz Higley: As we go to the commercial growth section, before I turn over to Nathan...
Liz Higley: Just want to spend a moment looking at how we're strengthening the value proposition.
Speaker Change: A lot of what we've talked about with our batteries is that we have lower round-trip efficiency than other technologies, particularly lithium-ion. The chart on the left shows this.
Speaker Change: Various round-trip efficiencies across a full depth of discharge, so 0 to 100, back down to 0. And what the round-trip efficiencies are. The lines that you see are a 4-hour, 6-hour, 10-hour, and a 16-hour.
Speaker Change: So we've now taken the V3 to the point of discharging at 16 hours. What we've done is we've gone and we've looked at how the industry quotes.
Speaker Change: It's round-trip efficiency. We were quoting and discussing zero to a hundred. Now, every battery that's out in the marketplace has a tell outside of that 20 to 80 discharge window.
Speaker Change: What happens to other technologies is they degrade their performance faster or they have problems being able to
Speaker Change: secure the life of their battery. With EOS, that doesn't happen. You just have a lower round-trip efficiency and the customer can benefit from it, if you can. But what we've learned is, as you are comparing us to other technologies, you need to compare us on the same basis.
Speaker Change: So, at a 15-hour discharge, we're above 90% production.
Speaker Change: That's a team-sized system that you would have for a four-hour discharge, that would be an 80% discharge.
Speaker Change: So as the durations get longer, the battery is more efficient, as we've always said. And as you think about us in the standard window...
Speaker Change: financial instruments that will help give the customer the assurity that they have to take that first order, to be the first of firsts instead of the first of second.
Speaker Change: Next is we've done some critical third-party validation, both with the due diligences with the DOE and Cerberus, adding in there being a BNEF Tier 1 supplier, and then refreshing our DNB bankability and our UL certification. All those things give the customers...
Speaker Change: The comfort of knowing that they have the warranty and the guarantee that they're going to get the product that they contracted for, they've got third-party level values that the technology will work, and then the last one is proving out this ability to deliver large-scale projects.
Speaker Change: We continue to work on and improve our supply chain as I talked about, we continue to ramp as we look at the moving line. I feel really good about a lot of the things that happened in this last quarter. I feel disappointed in the revenue, but know that we have the team, the resources.
Speaker Change: and the knowledge to fix and get better as we move forward, so with that, I'll turn it over to Nathan.
Nathan Kroeker: Thanks, Joe, and thanks, everyone, for joining us this morning. I will spend the rest of the time walking through our commercial growth, providing an update on our strategic partnership with Cerberus, and then review our third quarter financial performance and our outlook for the remainder of the year.
Speaker Change: Our commercial pipeline, as of September 30th, stood at $14.2 billion, which is up $400 million from the prior quarter and represents 59 gigawatt hours of storage, which is up 13% sequentially.
Speaker Change: This pipeline includes $1.7 billion in signed letters of intent, a 23% increase quarter over quarter, with most of these either awaiting customer financing or confirmation of InterConnect approvals.
Speaker Change: Notably, in July, we signed a 960 megawatt hour letter of intent with a solar plus storage developer in Puerto Rico, which is now reflected in these numbers. We expect that LOI to convert into a booked order as soon as the customer completes their financing.
Speaker Change: As we look forward, we expect Puerto Rico and surrounding island countries to be significant growth markets as we expand our presence in the region.
Speaker Change: As previously highlighted, we are currently tracking 2.2 gigawatt hours in late stage approvals which we define as projects awaiting financing, government grants, or final selection from project shortlists.
Speaker Change: This number includes a few key projects, such as the projects that are pending financing in Puerto Rico, or the notification of the next phase of DOE grants for three long-duration energy storage projects with one of the biggest names in the industry.
Speaker Change: and a long-standing developer relationship, which encompasses a deal predicated on California Energy Commission funding for a Marine Corps-based storage installation. This figure is pretty consistent with last quarter, showing minimal change as these projects progress through critical approval stages.
Speaker Change: The 3% increase in our commercial pipeline quarter over quarter reflects the healthy churn of new projects entering, progressing through, and sometimes completing interim stages within the pipeline, as Joe discussed earlier.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Our strategic partnership with Cerberus has clearly served as a positive catalyst, driving momentum within our pipeline.
Speaker Change: Cerberus has actively supported commercial initiatives in several important ways.
Speaker Change: Not only have they leveraged their extensive list of contacts and credibility in the marketplace to initiate and advance conversations with potential customers, but they have been working tirelessly to help us with developing a comprehensive bankability solution, as Joe discussed earlier.
Speaker Change: We feel very confident about our pipeline and the positive trends we are seeing. More specifically, with the recent efforts to improve overall bankability, we are seeing renewed interest in larger, utility-scale project opportunities with blue-chip customer projects in the southeast and western regions.
Speaker Change: Additionally, as we discussed earlier, we continue to experience promising developments with municipalities and electric co-ops, as well as microgrid and data center applications.
Speaker Change: Now, moving to the right, our backlog as of quarter end was $589 million, which is up 9% from this time last year and up slightly from last quarter.
Speaker Change: During the quarter, we booked an additional order with Wattmore, who is a repeat customer supporting an existing community microgrid in Lincoln, Nebraska. In our first project with Wattmore, we supported the City of Logan, Utah's electric utility for their first energy storage system.
Speaker Change: Yesterday, we also announced a large customer agreement with Citi Utilities to provide 216 megawatt hours of long-duration energy storage for two project sites in Springfield, Missouri, which will be included in next quarter's published backlog numbers.
Speaker Change: This was their largest investment to date in energy storage, and a significant win for our team. This is a great example of how a project can advance quickly through our pipeline as we moved directly from proposal to firm contract without going through the LOI phase.
Speaker Change: We are very excited about this city utilities relationship as we see this as a model that we can use to expand our presence with other municipal customers.
Speaker Change: The next page provides an update on our capital position and recent updates related to the Cerberus strategic investment in EOS.
Speaker Change: As many of you know, since joining the company, I have been laser-focused on securing the foundational capital needed to deliver on our profitable growth strategy.
Speaker Change: A significant amount of effort has gone into the capital sources on this page, and I believe we are now well positioned to scale the company with our Cerberus relationship and our upcoming DOE loan.
Speaker Change: As a quick reminder on the structure of that investment, it includes a $210 million delay draw term loan that funds in increments upon the achievement of certain performance milestones and a $105 million revolver that we may draw upon, if needed, at Cerberus' discretion.
Speaker Change: At the end of August, we announced the successful achievement of all four of the first performance milestones. This allowed us to draw an additional $30 million on the Delayed Draw Term Loan to fund our capital expansion and ongoing operations.
Speaker Change: These milestones included targets related to the company's automated production line, materials cost out, improvements in Z3 technology performance, and customer cash conversion.
Speaker Change: Included in this was our successful achievement of battery module production cycle times of less than 10 seconds while exceeding first pass yield targets in the high 90s on the state-of-the-art battery manufacturing line.
Speaker Change: This was a critical milestone and an important step toward profitability given the implications to our manufacturing throughput.
Speaker Change: I'm also pleased to state that just last week we successfully met the requirements for the second tranche of performance milestones. And as a result, we're able to draw down an incremental $65 million on the term loan.
Speaker Change: While achieving all four of last week's milestones, a key accomplishment was exceeding our cost-out target and already exceeding yield metrics for the two upcoming milestone dates.
Speaker Change: These accomplishments are important steps as we position the company for growth.
Speaker Change: We now have $170 million, or a little over 80% of the term loan funded without having to give up any incremental equity that was incorporated into the overall strategic investment structure.
Speaker Change: The next performance milestone date is scheduled for January 31st, and we are actively working towards the next funding tranche of $40.5 million alongside the next round of performance milestones.
Speaker Change: This $210 million is a critical piece of getting to profitability, but we also have the optionality presented by the revolver in the event that it is needed to escalate growth and meet customer demand.
Speaker Change: And finally, as we announced yesterday, we've made significant progress in working with the DOE over the last couple of months as we move closer
Speaker Change: to closing and funding on the previously announced DOE loan commitment. This loan provides reimbursement for previous eligible capital and operating expenditures associated with Project AMAZE, as well as funding additional manufacturing capacity at a lower cost of capital than the Cerberus Revolver.
Speaker Change: Depending on the final timing of the first advance, we expect to receive between $50 and $60 million.
Speaker Change: before funding certain DOE reserve accounts, and then we will be able to continue to submit additional eligible costs for reimbursement every few months as we continue to build out Project AMAZE. A lot of progress has been made on this loan since we last spoke to you.
Speaker Change: Working alongside Cerberus, we have reached agreement on all of the significant loan documents with the DOE and are currently awaiting final approvals.
Speaker Change: It's important to note that the size of the loan is expected to be reduced somewhat as, and you may recall Joe explaining this in previous quarters, some of our shakedown and operating costs are coming in lower than previously anticipated.
Speaker Change: In addition, with the Cerberus capital getting us closer to profitability, we just don't expect to need as much additional capital as we were thinking when we originally applied for the loan.
Speaker Change: We ultimately ended the quarter with $23 million in cash on the balance sheet, not including $7.6 million in short- and long-term restricted cash related to escrowed security deposits and our minimum liquidity covenant under the Cerberus loan.
Speaker Change: We continue to explore opportunities to monetize our production tax credits and recently sold our Electrode Active Material, or EAM, credits for the first time, netting over $800,000 just ahead of the October 15th tax return filing deadline.
Speaker Change: As you may recall, the EAM credits are related to the utilization of cathode and anode materials, as well as electrochemically active components like solvents, additives and electrolyte salts that are critical to our energy storage processes.
Speaker Change: We have calculated the credit as 10% of the costs incurred during production, excluding material costs. However, we continue to review and assess the final regulations and expect a sizable increase in the amount of our EAM credits as a result of these final regulations.
Speaker Change: This monetization is an important milestone given the added complexity and due diligence requirements on the EAM credits and shows the importance of being an American manufacturer, building American products with American materials.
Speaker Change: We feel confident that we will be able to monetize these EAMs along with our 45x credits going forward.
Speaker Change: In addition, customer deposits and milestone payments continue to be a source of cash to fund our working capital requirements as we ramp up operations.
Speaker Change: The purchase order we announced yesterday includes a sizable deposit, which will help fund some of the up-front working capital requirements of production. And we continue to see positive momentum and anticipate an increase in customer deposits as Pipeline continues to convert to booked orders.
Speaker Change: With that, let's get into our third quarter financial results.
Speaker Change: In the third quarter, revenue was $0.9 million, which was unchanged compared to the prior quarter and roughly 25% higher than the prior year.
Speaker Change: As you may recall, last December we discussed some of the benefits and cost reductions associated with our new inline tube design.
Speaker Change: Unfortunately, our Q3 revenue is much lower than our expectation, as we were negatively impacted by the delays in these newly designed enclosure receipts, which are a critical component in the assembly of our new inline cubes.
Speaker Change: As Joe mentioned earlier, we've taken proactive measures to address the supply chain constraints we are facing. We are actively working with our key supplier and look at ways to diversify our supply chain and get more reliable performance and minimize the impact to our production schedule.
Speaker Change: Cost of goods sold was $25.8 million compared to $21.3 million in the prior year. The increase was mainly driven by two large projects undergoing commissioning in the quarter and a $6.3 million lower of cost or market inventory reserve adjustment.
Speaker Change: Just to remind everyone, given we still have negative margins on our finished product, the accounting requirements are to book a reserve to reduce the value of all finished goods and work in process inventory at the end of the quarter.
Speaker Change: And given the enclosure delays we discussed earlier, we had more whip at the end of the third quarter than we otherwise would have had.
Speaker Change: Including the LCM adjustment, there was $9.8 million, or 35% of COGS, in non-cash items such as depreciation, amortization, reserve adjustments, and stock-based compensation.
Speaker Change: As we increase production going forward, the fixed cost components of indirect labor and factory overhead will be absorbed across a greater number of units, driving down unit costs and supporting our path to profitability.
Speaker Change: Other operating expenses for the quarter totaled $28.4 million, an increase of 65% compared to prior year, mainly driven by shakedown costs associated with the state-of-the-art manufacturing line, which are eligible costs for reimbursement under the DOE loan.
Speaker Change: along with higher legal and professional fees related to financing activities and a $3.2 million non-cash PP&E write-off in the quarter as we made enhancements to Z3.
Speaker Change: Excluding non-cash items such as depreciation, amortization, stock-based compensation, and PP&E write-offs, other operating expenses were $19.8 million.
Speaker Change: The operating loss in the quarter was $53.3 million compared to an operating loss of $37.8 million in the prior year. Excluding non-cash items that I've already mentioned, our operating loss was $35.0 million.
Speaker Change: Net loss to shareholders for the quarter was $342.9 million compared to net income of $14.9 million in the prior year, while net loss to common shareholders was $384.1 million compared to $14.9 million in the prior year.
Speaker Change: These significant differences were mainly the result of a change in fair value of derivatives tied to mark-to-market adjustments as our share price increased by approximately 134% in the current quarter, comparable to our share price decrease of approximately 50% for the prior period.
Speaker Change: This quarter, we elected to introduce non-gap measures, including adjusted EBITDA and adjusted EPS, as we believe these metrics provide a more accurate and relevant comparison of our financial performance period over period, given the large non-cash movements included in our net loss.
Speaker Change: We plan to continue to report these non-gap metrics going forward. Adjusted EBITDA in the quarter was negative 46.1 million dollars compared to negative 30.8 million in the prior year with an adjusted EPS of negative 44 cents.
Speaker Change: Finally, let's shift our focus to 2024 Outlook on the next slide.
Speaker Change: As we discussed earlier, driven by the challenges we've had with our enclosure supply chain, we are reducing our revenue guidance and expect to recognize approximately $15 million in revenue for the full year.
Speaker Change: Importantly, this reduction is not driven by the cancellation of any orders or customer deliveries, but rather we have been working with our customers to reschedule deliveries to align with our latest estimates of enclosure availability.
Speaker Change: As with any supply chain disruption, it takes a while to get back on schedule, and our fourth-quarter revenue estimates now take this into account as well.
Speaker Change: The delayed deliveries and corresponding revenue from Q3 and Q4 of 2024 should occur in Q1 and Q2 of 2025 as the enclosure supply chain stabilizes to meet customer demand.
Speaker Change: While disappointed in the impact of this year's revenue outlook, we feel confident about our growth trajectory as we look at 2025 and beyond.
Speaker Change: Cerberus sees the strategic value in their investment and continues to support our strategy to deliver profitable growth. They have been very understanding as a partner as we've worked together to ramp up production and also reviewed the supply chain issue and agreed to give us a waiver on our September 30th revenue covenant without any additional fees for doing so.
Speaker Change: We anticipate a similar waiver or amendment for the December 31st Covenant as well.
Speaker Change: Since making our initial investment, Cerberus has not only provided financial support, but also valuable insights and resources that will improve our product offering, strengthen our product supply chain.
Speaker Change: and open up new commercial opportunities.
Speaker Change: Their commitment to our vision and operational goals is enabling us to navigate challenges more effectively and capitalize on emerging opportunities.
Speaker Change: Lastly, we expect to achieve positive contribution margin before year-end. And just to remind everyone, we define contribution margin as sales price less direct labor, direct materials, and also includes the benefit of the production tax credits.
Speaker Change: The team continues to be very focused on cost-out and has been driving both product performance improvements and material cost-out as we move forward on delivering key customer projects.
Speaker Change: We look forward to providing more information on our expectations for 2025 on a future call and look forward to keeping you updated on our progress. And with that, I want to thank everybody for their time today and I would now like to turn it over to the operator for questions. Operator?
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from Thomas Boyce with TD Cowan. Thomas, please go ahead with your question.
Thomas Boyce: Appreciate you guys taking the questions. Maybe just the first one, you know, could you give us any insight into the underlying issues that led to the new inline enclosures being delayed? You know, is it a manufacturing issue with molds, a shortage of capital equipment for the supplier's production setup, was there a shortage of raw materials? Just any insight there would be helpful.
Speaker Change: Good morning. I just want to clear up what we're talking about because we've got
Speaker Change: on our automated line, that production was at a higher, more productive rate than we've ever done in the past. We didn't have any issues with the plastics or anything else around us. We're manufacturing batteries and as we...
Speaker Change: Here right now, we have 27 cubes worth of batteries manufactured waiting for steel enclosures to show up.
Speaker Change: The steel enclosure, you put 672 batteries inside of that steel enclosure.
Speaker Change: There were some challenges with our supplier transitioning from prototype to scaled manufacturer.
Speaker Change: to be able to get the throughput that we needed and the quality that we require to get out in the field. We've been working with the supplier to be able to get to that point and to be able to flow production, but we're not wasting a crisis. At the same time that these things have been happening, we went into our process where we integrate the batteries into the cube, and we're finding ways to reduce cycle time and do that faster that will allow us to catch up once the supply chain catches up.
Speaker Change: At the same time that we're doing this, we're out in the market looking for second and third sources of supply. The natural question would be, why didn't you do that before? But I think everybody has to take a step back and realize that up until June of this year, we were an undercapitalized company.
Speaker Change: So it was hard to go out and get two sources of supply. So we bet on a supplier that's always delivered for us, and I believe will deliver for us in the future. And we had an acute supply chain issue that resulted in lower shipments.
Speaker Change: and Anticipated.
Speaker Change: We are working through it, we'll work through it, and we'll come back with updates to everybody as we have more information. But I just wanted to clear that up and make it clear of what we're talking about and get at the underlying issue that we have and how the team is working on that to resolve and get back to the flow that we expect coming off of our automated line and also out of the factory with the cubes.
Speaker Change: that go out to the field.
Speaker Change: That's very helpful. How quickly can this be dual source? Obviously it looks like just with this customer and it takes a little bit of time to get to the quality level that you're looking for.
Speaker Change: or if it's something that can be achieved in a relatively short amount of time. But, Tom, great question. When I say, like, we were out, like, no one supplier is going to be able to deliver what we need from a product as the company scales and grows.
Speaker Change: So you start looking at where we are, like the order that we signed, that we announced last night. You put on top of that the backlog that we have and the projects that we're executing on.
Speaker Change: We need more than one supplier to be able to do that. We're in the process of bringing in a second source of supply. We already have a prototype in-house from that supplier to be able to look at that design and do all the quality verifications with the goal of getting production started by the end of this year from the second supplier.
Speaker Change: Excellent. No, I really appreciate you answering the questions. We'll hop back in a few.
Speaker Change: Thank you. Thank you all.
Speaker Change: Our next question comes from Martin Malloy. Martin, go ahead with your question.
Speaker Change: Nothing, Tom, nothing that we're, sorry Marty, nothing that, we'll talk about that as we go forward here. In the future, what I would tell you on the modules themselves is that they perform well. We're in the process of installing them with the customers. We're being purposeful in how we're doing that. It is a new product for the customer and working through that and getting them up and operating. What I'd say is like the initial results that we're seeing are positive, we have more work to do with them.
Speaker Change: OK.
Speaker Change: And it is great to see a large order like what you announced with the utility. Can you maybe talk about customers?
Speaker Change: I think you have a pilot project in New Jersey or a demonstration project or the automated line. Has that type of customer... ... ... ... ... ... ...
Speaker Change: change or are you seeing more customers come through and wanting to to see what you're capable of here now that you've got the automated line up and running?
Joe Mastrangelo: Yeah, yeah, so what I think Marty is yes, we have a lot of people coming in
Joe Mastrangelo: The battery is moving down the line. People then look at this and say...
Joe Mastrangelo: We see that you can scale and we take them over to where we do the containerization and show them the processes that we're putting in place.
Joe Mastrangelo: to allow us to get the throughput that we want. I mean, that's ultimately why Citi Utilities felt comfortable with placing their largest order for energy storage that they've ever placed on us. And I think the team that we've built, you know, we continue.
Joe Mastrangelo: to build out talent on the organization. You know, we have we've had a talented team, but as the company scales, we need more of that talent on the field here, helping the company perform. We're doing that. We're bringing in people that have worked for competitors, that have worked in lithium ion, that have worked in the space.
Joe Mastrangelo: And they're coming to us because when they come and interview, they see what we have and they realize what the market needs, and they know that they can be part of building something that's going to change the way we power the future. I really believe in this, and I think the team believes in it. And unfortunately, we had this period of time where we had a hiccup. A supply chain is doing a million things right every day, a million simple things at the end of the day. When you look at what happened here, you say, wow, this is a simple steel cube. Yes. These things happen all the time. But when you're a company of our size, they can cause a big issue with being able to deliver on your commitments.
Joe Mastrangelo: see the benefit of the product. You know, the page that I presented with the round-trip efficiencies, that's pretty powerful. Like, we never went up to a 16-hour discharge before, but when you look at that, when you look at that round-trip efficiency there in the normal operating window that everybody talks about, that's very powerful. The other thing I'd add inside of that is, you know, although the sound wasn't really great, I understand when I was talking, and hopefully we've fixed that now, but like,
Joe Mastrangelo: The performance of that battery is only going to improve over time. I mean, we are in the early stages of bringing this product to market. There's a lot more we can do, and we love sharing that with our customers because when they see it, they believe it, and then you see the impact of that in our pipeline.
Speaker Change: Great. Thank you very much.
Speaker Change: Our next question comes from Steven Gangaro with Stiefel. Steven, go ahead with your question.
Steven Gangaro: Thank you. Good morning, everybody.
Steven Gangaro: I think two questions for me, you talked a little bit about this, but when you think about the supply chain issues, I mean, obviously we're talking about small numbers turning into large numbers, so the revenue ramp and the pushout looks large, right, relative to what you reported, but how should we think about, I know it's early, but should we think about a major revenue inflection point in the first quarter next year, the second quarter next year? Is there any color you can give us around that?
Speaker Change: Yeah, that's a great question. So what I would say, we'll come out with 2025 guidance. But when we just talk about.
Speaker Change: ramping into the production, right? What I would say is, we'll get to a normalized rate of production here in December. You have to realize, like, even with those 27 cubes of batteries,
Speaker Change: sitting on the shop floor waiting for a cube to show up. We're not running the line to its full capacity, its number of hours per day. Like we're trying to manage to deliver for customers.
Speaker Change: while managing the cost of cash and inventory impact that we're having. So we're trying to time everything. I think we'll get to a normalization. We'll talk about that on a future call. But what I would say is I anticipate.
Steven Gangaro: a first quarter that's relatively, the higher obviously than what we're doing now, but relatively flat, ramping into growth as we get into the second quarter and second half of next year.
Steven Gangaro: Principally driven by, you know, when I spoke about the automation of the subassemblies to be able to get the line to be up above two gigawatt hours of production, that's what we're going to see the ramp. We're being very purposeful on that subassembly manufacturing and we're getting good performance out of our semi-automated line in order to get with good quality.
Steven Gangaro: Automating that process, which we've always talked about, gets us the throughput to get more batteries off the line. Time that with multiple suppliers coming in on the queue and the changes we're making in the containerization process. I think you really see the growth coming in as we get into the second quarter and second half of next year.
Speaker Change: Great. Now that's good, Carl. Thank you. And the other question I had was when...
Steven Gangaro: given sort of your stage of production growth and you obviously had the city utility order come in
Speaker Change: Is there any way to think about the LOIs and the commitments and how much of that is sort of in limbo until you guys prove?
Steven Gangaro: the production and the delivery, etc. So they're kind of on the cusp of being signed, but you need traction for those customers to sign or is it just other issues and timing that's driving when these things get signed?
Speaker Change: No, thanks for that question. Look, I think this is really, as we talked about earlier in the call, this is really about customers, you know, closing on their financing, getting their interconnections.
Speaker Change: getting, you know, important pieces of their projects pulled together. In many cases, they're on project shortlists and just waiting to get projects awarded. I would say it's really not about us proving out our manufacturing capabilities. It really has to do with normal project development milestones that customers are working through.
Speaker Change: So again, we continue to work with them as we talked about on the bankability side, coming up with insurance products and other warranty enhancements in order to help them with their bankability and their financing. I think you're going to see a significant increase in throughput through our pipeline as a result of that, and we're looking forward to talking more about that in future quarters as it comes to fruition.
Speaker Change: Excellent. Thank you.
Speaker Change: Standby for our next question.
Speaker Change: Our next question comes from Joseph Osha with Guggenheim. Joseph, go ahead with your question.
Joseph Osha: Hi, good morning. Thanks a lot. The first question I was going to ask has just been asked. It sounds like we can look forward to the fully automated line probably hitting its full stride kind of second half of next year. Is that fair from the comments I just heard?
Speaker Change: Second quarter, Joe, is what I would say.
Speaker Change: All right, okay, thanks. And then I thought this news item in the press release on the insurance wrap is interesting.
Speaker Change: Is this something that some of your customers are asking for in order to secure attractive financing, or just one or two of them, or all of them? I'm just trying to understand how important getting this done is going to be in terms of getting a revenue ramp and product in the field.
Speaker Change: Yeah, and Joe, I would say it's just a little bit of color on what we're doing, right? We have quotes.
Speaker Change: This isn't like, let's go out and find it, this is, which one do we want to use?
Speaker Change: I think what this helps us do is accelerate
Speaker Change: what's sitting in LOIs and what's sitting in late stage because it takes off the table any questions you would have about EOS being here to deliver the references of the product. So now that we're able to go in with the production that we have and then tell people, look, as you come in and you're making your first buy, here's the way you get comfortable with your first buy. And I think over time that goes away. So it's just to remind you, and I'll let Nathan comment as well, because he's leading the charge here. This is a way for us to accelerate pipeline conversion as we look forward here.
Nathan Kroeker: Yeah, and I would just add, I think it's...
Nathan Kroeker: specific to each individual customer, right? It depends on what, you know, how they're putting their financing together. In some cases, it's bridge financing, which is tied to ITC. So it's short-term insurance products around the ITC. There's insurance products around the ITC clawback. There's performance guarantee insurance. There's warranty backstop options. You know, we're talking also about extending our standard warranty terms. So again, it's case by case, customer by customer. What we're endeavoring to do is have a suite of products.
Nathan Kroeker: with a large name insurance underwriter who's done their due diligence on our technology, done their due diligence on our ability to manufacture and deliver and then tailor those offerings to a particular project or a particular customer in order to meet their needs, in order to get their deals closed and progress.
Speaker Change: shipping of any of this $589 million of hard backlog contingent on closing insurance or not?
Speaker Change: No, those are firm orders that we have in our backlog today, so what we're really talking about is how do we move things from opportunities into a pipeline through LOIs and into booked orders.
Speaker Change: Great. Thanks so much, guys.
Speaker Change: Thanks, y'all.
Speaker Change: Standby for our next question.
Speaker Change: Our next question comes from Chip Moore with Roth Capital Partners. Chip, go ahead with your question.
Chip Moore: Good morning. Thanks for taking the question.
Chip Moore: Hey, everybody. I just wanted to maybe follow up there, Joe, on sort of near-term pipeline conversion. I guess just any early thoughts.
Speaker Change: you know, given the new political environment.
Speaker Change: on what that could mean. Has that introduced some potential for delays, sort of near-term as people wait to see how things shake out, or what are your thoughts there? Thanks. Yeah, so here's how I would think about this, right?
Joe Mastrangelo: I think we need energy storage, regardless of who's in the White House. The industry needs it. There's global growth around it. There was growth five years ago in storage, and there's been growth here as technology gets adopted over the last 24 months.
Joe Mastrangelo: I think the other piece that we need is we need American built energy storage.
Joe Mastrangelo: And we need safe assets on our grid that we sleep well at night knowing that we can control them. And that's what EOS brings. I think it's very clear on making America a manufacturer again, which we've done proactively. And we look at accelerating into that demand for a product that the industry needs.
Joe Mastrangelo: combined with a long strategy that we've held for the last five years of being a U.S. manufacturer
Joe Mastrangelo: that we need to see, you know, with potentially a president-elect, I don't know, I've been busy here, I don't know where the election stands, but, you know, it looks like with a Trump administration that's come in and has been very clear about how they feel about importing from China. Well, we're here, we build our products.
Speaker Change: in Pennsylvania.
Speaker Change: Our suppliers go through Ohio, Michigan, New York, Massachusetts, I mean, it's the center of the country. It's 91% U.S. manufactured, moving towards 100 with the software being developed by an American company. I think that's pretty powerful, and I think we need this. We need...
Speaker Change: this technology. And I've said this many times every time everybody asks me about this. I'm an energy executive. I'm not a green tech person.
Speaker Change: I've worked across every possible area of the energy value chain. We need this technology, regardless of who's there. And it's being adopted because it's required and it can work.
Speaker Change: and Elizabeth Higley. Thank you.
Speaker Change: Very good. Appreciate that, Joe, and look forward to seeing you, everybody, next week. Thanks. Great, Chip. Thanks.
Speaker Change: This concludes our question and answer session. I would now like to turn it back over to Joe Mastralengo for closing comments.
Joe Mastrangelo: Thank you. And thanks everyone for listening in today. Just a couple of points I want to reiterate. We will come back with the progress that we're having on opening up the supply chain around bringing cubes in and where we stand on that. I think, you know, when we talk about bankability, we've got to be very clear that, you know, this was something that, given where we are with the capital available that Nathan's brought to the company, we now went out proactively with Cerberus to find Marsh to be able to go out and get quotes in to be able to do this. This wasn't a, oh my God, we have to do it. It was, let's play on our toes versus being on our heels when we're out in the market commercially. And that's where we're bringing it, I think, you know, once we're in.
Speaker Change: One of the things that we didn't talk a lot about on the call, I mentioned it in one of my answers, is being able to bring in this suite of analytics and performance monitoring to improve the way the technology performs out in the field.
Speaker Change: I think we're starting to expand the team and put a world-class team on the field to be able to do this. And I think the last thing, which we weren't asked, but I want to proactively address because we talked about it. As it relates to the covenant and the loan around revenue and service approach to EOS,
Speaker Change: about waiving that covenant. They approached us because they understand what was happening around the supply chain and that this was an acute issue, not a systemic issue, and they believe in the team, they believe in the ability to scale this business, and they have been a good partner for EOS in being able to do this. We look forward to continuing to work through, get the DOE loan closed.
Speaker Change: get the supply chain stabilized and running and continuing to work our pipeline and convert that pipeline through to bookable orders out into the field. I feel really good about the prospects of the company growing. I feel disappointed in the revenue that we delivered in this quarter, but this isn't a company that we should be looking at in individual quarters. This is a company that we have to look at over a period of time. And when you look at the product that we're putting out in the field, it's an amazing product, and it's an amazing product that proves that not only can you invent technology in the U.S., but you can manufacture technology in the U.S., and you can deploy technology in the U.S. And that's what the team at EOS has done and will continue to do.
Speaker Change: and we're hard at work making that happen every day. I thank everyone again for their time and we'll be back soon with further updates as they happen.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Speaker Change: The End
Speaker Change: Lim Nguyen Marguerite完 Apparel Benjamin Brod L. R. R. Poulin Lua André Roy
Speaker Change: 13th August, 2018