Greetings. Welcome to Eos Energy Enterprises First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to Jared Ehm, Investor Relations, Eos Energy. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Eos’ financial results conference call for the first quarter ending March 31, 2021. On the call today we have Eos CEO, Joe Mastrangelo; and CFO, Sagar Kurada. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company, which are subject to certain risks, uncertainties and assumptions.

Thanks, Jared, and welcome everyone to our 1Q 2021 financial results call. I would like to thank everybody for joining us today. And jump in on page three to walk through some operating highlights. This page I think is the snapshot that we like to use to track how we’re progressing on building the company to get all starts on the upper left-hand side of our page where we look at discharge energy and that’s how the product and the technology is operating out in the field and how it’s performing in our test facility in Edison New, Jersey. Since our last earnings call, we’ve added 20% to the discharge energy and we’re now over 2 million cycles of operation. So this technology that’s proving itself, not only in the lab, but also out in the field. At the same time, we’re very proud of being able to report that we’re at $33 million of orders with a $51 million order backlog.

Thanks, Joe. Good morning, everyone. Over the next two pages, I’ll be discussing a summary of our first quarter 2021 reported financials. Detailed financial statements and relevant management discussions are available in our 10-Q and supplemental disclosures. Page five is a summary of our first quarter income statement. We reached an important milestone in the quarter as we recognize revenue of $164,000 from our first container shipped out of Hi-Power to a micro grid storage solution in Nigeria, powered by Nayo and the Shell foundation. Our cost of sales in the first quarter, with $0.1 million was favorably impacted by the reversal of $1.6 million reserved for losses on firm purchase commitments that we had recorded in Q4 2020. We reverse this accrual because the batteries that we acquired under the firm purchase commitment in Q1 were ultimately used for R&D purposes, and therefore, we expense these costs with R&D in the first quarter. This reversal largely was offset by the cost of sale of $1.7 million that are included within disposition. We recorded $5 million in R&D expenses for the quarter. R&D expenses increased mainly for two reasons. First, we incurred $2.2 million higher battery testing costs than prior year due to our UL Certification process, partially offset by the accrual reversal in cost of sales I discussed earlier. Second, as we are continuing our investment in new technologies, specifically our Gen 3 or Z3 program. We increased our investment in R&D headcount and thus incurred $0.5 million of higher payroll and personnel costs.

Thanks, Sagar. Now, let’s focus for a second on UL Certification, which is critical to deliver on those growth numbers that Sagar just talked about. So moving on to page 13, there’s two UL Certifications that we go after. One of them is on the battery module itself, which is the 9540A, which is safety for thermal runaway or the risk of fire and explosion. And we’ve completely passed that testing and I’ll walk through some results on that testing in a moment. The second is the overall storage system, which is UL1973, which we have gone through the testing for that certification and are now just qualifying the material, the plastics that we use in our frames for the RTI, a Relative Temperature Index of 80 degrees C. We’re halfway through that testing as we speak and we anticipate that we’ll be able to close out the UL1973 Certification by the end of June. Tremendous results by the team. A lot of this was done virtually and over Zoom and Microsoft Teams. So really great work by the team to get us to this point in this period of time. If we flip quickly to page 14, just want to talk quickly about the results of our 9540A tests. We like to say is that our battery is inherently fireproof, in that it will not catch on fire or explode and does not need ancillary systems like HVAC cooling systems or software to manage the risk of thermal runaway. If you look at the four main tests here, the first one is over discharge, if you over discharge the battery beyond down to zero voltage, you don’t see any degradation in the battery itself. There’s no loss of capacity or performance and you can rest the battery and get…

Thank you. Our first question is from Chris Souther with B Riley. Please proceed.

Hey, guys. Thanks for taking my question here. So based on the slide deck here, we are looking at about $10 million in sales over the next five months. I’m just curious, are all those Gen 2.3 products and then any sense to split between second quarter and third quarter recognition, and should we assume the rest of the $50 million in revenue that we’re targeting for this year will be that Z3 coming in the fourth quarter?

Hey, Chris. Good morning. So the $10 million that we talked about here and really into the fourth quarter and also there is going to be a mix of Gen 2.3 product that will be shipping throughout the year. So there’s going to be -- it’s not going to be a hard stop. There is going to be a transition depending on customer requirements. Sagar, I’ll let you talk a little bit about the split over the next five months but as we ramp-up the ramp page, Chris that we had earlier in the presentation is all Gen 2.0 product.

Hey, Chris. Good morning. Hope you are getting some sleep with baby and everything. So, that said, look, to answer your first question, the deliveries that we have over the next five months will all be 2.3. At this point, we are not giving any additional quarterly guidance. So as the shipments go along, we’ll be sure to keep you posted and they’ll fall into the quarter that they go. The rest of the year after that, i.e., the fourth quarter will be a combination to Joe’s point of 2.3 and 3.0, and to the extent that split is concerned level, it will be determined both by the customer’s needs, wants and expectations, plus our delivery schedule, but we intend to be fully functional on both products and that’s about the level of visibility we are willing to offer right now.

Okay. That makes a lot of sense. So we’ve seen nice product…

Yeah.

… progress here on building the order book, 50% of the 2021 targeted orders are booked at this point. Can you talk about how much of the balance that you’re looking to close for revenue this year that is either late stage or LOI or firm commitments? How should we think about some of the coverage there.?

Yeah. Look, I mean, the -- there are indicators that we can talk about. As we talked about on page either, there is $3.9 billion of pipeline of which the LOI and firm commitments are $600 million. As we discussed, $13 million of that $0.6 billion has been converted. So there’ll be a portion of that that will continue to turning to booked orders over the course of the next few months and we feel good about that team. Secondly, the remaining portion of it will come through from our active pipeline that we are discussing. There are a variety of projects in different stages, but how transactions go. They need to take the right time for both economic benefits to both customer and ourselves, as well as to make sure that we do the right thing for yields in totality. So, I would say that, by the end of…

And Sagar, the one, yeah, the one point I would, Sagar, Chris, the way that we build the model is, we assume a 20% to 30% transition rate from pipeline into order. So, when you think about the $50 million we have more than enough opportunities to be able to close that. As Sagar was discussing, I think we just have to work through the timing of how projects closed, where customers are in closing out their financing and other things, and we’ll continue to work that, but we have enough in front of us to get to that $50 million revenue target.

Got it. Okay. No. That’s very helpful. And just kind of curious, are any customers waiting on full system UL before putting in orders, is that kind of gating factor or is it the mostly kind of just typical stuff that’s going to be on the customer end to hit the $50 million and $300 million targets?

Yeah. Look, UL testing is expected to be complete here in the second quarter of prior to the close of it. Now, all booked orders are subject to UL testing and certification. So, it’s just as a part of our overall operating rhythm from a commercial perspective today.

Okay. That makes sense. And as a pipelines continued to expand for some of those earlier stage opportunities. How many customers through those upticks in lead generation non-binding quotes represent or is it -- would you say it’s more about having customers who are already in that pipeline just coming back with other potential project?

Yeah. There are a few repeat customers. Of our booked orders we have new customers, which is predominantly what’s driving the improvement in backlog by 2 times between in the last 100 days. With that said, our pipeline today is more than 90% in the U.S., and to Joe’s point, we’ll be focusing on expanding that globally and our customers are growth front of the meter, behind the meter, utilities, microgrids and they are evenly distributed. Now, some of the larger projects will take a little bit time here to turn them into booked orders, but that’s just the nature of the course of having initiated commercial activity in the last less than one year and we are on our way to having a very balanced portfolio going forward.

Yeah. And I would just add, Chris, on your question. I do think we are seeing a good uptick in repeat customers coming back in with other projects as they work with us on the orders that we’ve closed. What I’d like to see us do here over the next few months, just to continue to expand and add more customers too. As Sagar said, we have some traction, but I do think we can do more, particularly like and I think what we always try to balance is, we look good against ourselves. So, we’re growing the opportunity pipeline versus where we were the last time we thought. But, we really have to focus on is, where is the market and how do we grow that pipeline vis-à-vis the available market and that’s why we’re expanding the commercial.

Okay. And as we looking at obviously there’s been a lot of discussion in the market about lithium-ion shortage issues. I’m curious is that causing any incremental near mid-term opportunities for you guys and how it’s impacting the pricing you’re going out to the market risks? And also you highlighted the wide availability of your materials, are there any commodity or component supply chain issues you’re seeing within the market that might provide concern for you guys or is it pretty clean?

Yeah. The…

So on the last part -- go ahead. Sagar, go ahead.

No. I was going to say, Joe, the pricing side of it. Look, our pricing hold steady and firm to what our guidance has been in the past and any improvements we see here will come through as we discuss more about pricing over the course of this year. With that said, Joe. I’ll let have you talk about the lithium side of it.

Yes. So, Chris, what I was just focus on was on our supply chain. So we don’t see any shortages today and the material inside of inside of our product. We’re trying to balance and keeping an eye out for is just around the power electronics that we have in the product to be able to run our battery management system. But right now, we’re okay with the sources supply on that. On the lithium side, we are seeing more and more near-term projects that are out there that have commitments coming to get quotations from us and that’s one of the things that’s been driving up the pipeline. But as you know, when we do our process, there is an education process we have to go through of explaining how we’re different and where the value is and we’re working through that with these new customers that are coming to understand how the technology works.

Okay. No. That’s very helpful. And just on the JV buyout impacts. Can you talk a little bit about how that changes the path toward positive margins? And where do you see the gross margin breakeven points from a revenue, run rate or utilization rate based on the cost reduction efforts and bringing that production in-house?

Yeah. So, clearly, as you know, we purchased the remaining 51%. The series of payments here are over the course of the next five years, $15 million in 2021 between paying back the contribution of $10 million plus $5 million here -- upcoming here in May and then the $5 million thereafter. So that for another four years. As far as that impacting, I think, a large majority of the impact has been positive on having our supply chain being vertically integrated and having our focus on both the cost out that Joe spoke about and the production of both 2.3 and 3.0 batteries. We’re very thankful for the investment and the focus Holtec has put into the company up to that point. With that said, as far as financials go, we continue to remain with our guidance on what the expected margins are from the five-year, four-year projection perspective that we had offered earlier in at the end of last year. As we have improved guidance for 2022 later in the year or in the or closer to the fourth quarter will be sure to come back to you guys. From a cash flow perspective, look, I think, we have always reported income from JV below the line. Now it’ll just be a matter of geography where to the extent that the guidance remains the same. It will now be reflected above the line and a lot of the cost out is going to be where the margins are going to expand here in 2022 and 2023.

Okay. And then just last one, maybe you could walk through the CapEx cadence for the rest of the year and also maybe the expected cash burn for 2021 between losses doing the ramp-up, CapEx and the project finance, just kind of bring that together for us the last one year?

Yeah. Of course. Of course. So we have committed capital on the project -- on the customer, so I will hit it in three parts, right? We’ll talk about customers first and then talk about the rest. From a customer’s perspective, as we discussed on page nine, we have development financing and project financing along with asset leasing. The committed capital between development and project financing is close to about $15 million. We will continue to meet our customer demands and expectations here with respect to that and we are actively looking for what’s the right financing strategy would be to syndicate that off our balance sheet and ensure that we continue to remain to our core competency of battery and storage facility. With that said, we will be applying similar financing strategies on the asset leasing side. We have been continuously evaluating who our strategic partners are but will not rush into it. Now, a big part of what Joe talked about our focus being on green bond rating will also substantiate a lot of the financing here. So that’s on the customer side of it. On the CapEx side of it the last time we spoke, look, we talked about $40 million to expand our investments in the in the manufacturing capacity. We continue to hold to that guidance. Now given that we’ve, sorry, there is a little bit of background noise. But given that we have purchased the high power facility from Holtec. There’ll be some level of incremental investment we’ll have to make call that somewhere between $15 million or so for the portion of the JV that they would have invested in. That along with the capital contributions that we repatriated back is on a two and a half year payback and very much in line with our capital allocation and return on investment strategy. So that’s on the CapEx side of it, but the investment in capacity continues to be a focus area for us. And then the rest of it is really operating cash flow and to the point I made on page six with our cash, our G&A per se on a run rate basis is about $3 million burn rate, it on a quarter-over-quarter basis, call it, even $4 million but the commercial team in there. The rest of our cash burn is really discretionary to either the CapEx we need to spend the testing we need to do and to the cost of sales, but we need to incur to produce the revenue and to commercialize the business as we are and that will continue to remain steady state from an operability point of view. As and how that impacts our overall cash strategy, which the Board continues to evaluate on a periodic basis. We’ll be sure to come back to you and the broader group on what that means going forward.

Excellent. I appreciate all the color there guys. I’ll hop in the queue.

Yeah. Thanks, Chris. Good luck for the baby.

Thanks, Chris.

Our next question is from Subash Chandra with Northland Securities. Please proceed.

Yeah. Good morning, guys. So, just to understand the revenue there includes the service revenue. So, I guess, the $50 million or so, should we consider say, $42 of that kind of a hard code in the revenue line and then the balance of it spread quarterly over the time frame that Sagar you’ve referenced?

Yeah. Look, great question Subash. So, off our booked orders called out the $50 million in backlog and/or the $33 million year-to-date. Of the $50 million about $8.5 million is service revenue and of the $33 million $6.3 million of service revenue that revenue is not contemplated to be accreted on our balance -- on our P&L from a reported earnings basis till year three and beyond. So, that’s on a -- that’s really building to the longevity of yields as a value proposition and the margins on that will obviously be much more accretive than equipment sales as you can expect. With that said, that’s not contemplated in our current $50 million projections. Now, as we come closer to the end of the year here, look, the service revenue will become an important part of our value proposition and our strategy, and we’ll be sure to discuss how that impacts the toggle of $50 million from the rest of the year reporting perspective, but even in our projections we never considered the service revenue to be accretive to current year recordings and will continue to hold to that guidance at this point.

Yeah. And Subash remember on the way the service model works is, it won’t kick in until year three of after shipment. So there is always -- this is always a year where revenue would be 100% product shipments.

Okay. And just to clarify again so that is $50 million of product shipments?

Yes. For 2021, yes.

2021. Okay. That’s supposed to be one of that. Okay. Thanks. Thanks for providing that…

Yeah. Yeah. Yeah.

And back to the gross margin question just put another way. Should we consider that being in the positive category for understandably it wasn’t in this first quarter? But if it’s not positive when do you see gross margins flipping to positive this year?

Yeah. Good question, Subash. In 2021, we do not expect gross margin to be positive in line with our guidance. In 2022, in the fourth quarter on a quarter basis is when we expect to see gross margin positive and that will have its natural reflection on an year-to-date basis and 2023 is where we expect the run rate of gross margin to continue to yield positive results.

Okay.

That is exactly in line with our guidance and we are not offering, just to be clear, any revised guidance from that from what we had projected at that point.

Okay.

Okay.

And then the titanium alternatives, you talked about how you’ve been looking forward and now you’re sort of referencing there is a competitive element there that you want to anticipate. But previously was there a cost element or that this could have a meaningful impact on your battery cost?

Yeah. So, Subash, the thing on the titanium alternative, we’ve got some things on test that we have to work through and we’re proving out that it works in the battery. But when you start thinking through like once you get the material to work then you’ve got to get a source of supply, that you get the quality, that you get the manufacturing process. So we’re working through with that transition plan looks like and tying that into our CapEx model. It is a cost out opportunity for us in the long-term, but given the ramp that we have of adding capacity and bringing the factory up, we’re trying to come up with the best integrated plan to hit that target, but the ability if we have to flip a switch if something happens to accelerate that if we need -- if need be.

Okay. So when you think of cost out in the long-term sort of, say, the Z3 kicks, where do you think that transition happens? Is that sort of 2023 events when do you think that it can have an impact on manufacturing cost?

You mean the titanium question or sorry, that’s one..

Yeah. The substitution…

Yeah.

… of titanium.

Yeah. If you -- yeah. Yeah. Joe if it’s okay I’ll take this for you.

Sure.

Look, Subash, material substitution will always continue to remain a part of our cost out strategy. And frankly, it’s part of our optimization on manufacturing process that drives all of, right? So, from a -- if you take a step back as an -- as a technology company always looking to put the best product out there. We’ll be looking at a variety of different materials that replace and substitute for all five of our earth abundant materials at this point. Titanium and the ultimate materials is one such category. At this point we have not really contemplated when we would go live with Gen 4 or the next version of a battery. Our focus today is to get the manufacturability of Gen 3.0 and/or the Z3 product out in the marketplace, successfully have our customers continue to appreciate that value proposition and that cost out all of that is included in the 40% target that Joe spoke about on the page here on cost. I believe it was page 20. And titanium growth or the substitute material will have an impact that’s incremental to what’s on page 20 and that’s a core value proposition for the company. It will come through some time when we are ready to deploy it and we will be sure let you guys know what the timing of it is when we are ready.

Yeah.

Okay.

And I think, Subash, the one thing I would say is, there is no concern with titanium today for us from a supply standpoint. It’s readily available. Our -- what we are planning for and planning ahead on is if aerospace takes off you could see price inflation, you could see tightness on supply, but there is no urgency to be able to do that switch. But what I want to make sure everyone understands different than when you talk about other battery technologies, is we have readily available abundant raw materials and we’re building optionality supply chain to mitigate risk that we see in the future. So not something in the short-term, but something that we’re preparing for, in case there is changes in the market, so we don’t get caught out.

Okay. Understood. And then finally on the certification just, is there anything additional versus the New York, Florida part which you working with. Today is there additional certifications that they would require for urban placement of these batteries or does this get you over all those homes?

No. So, Subash, there are additional certifications both with the fire department and the building department in New York City, of which we’re working through those processes as we right now. What we want to do from a communication standpoint, we’re focused on getting UL, because that ties to the orders backlog in the pipeline we have in front of us. But we’ll give an update as we switch off to that to doing the CE marking for Europe and then also talk about where we are in the urban storage qualification process, which is well underway.

Okay. Got you. Great detail guys. Thank you.

Thanks Subash.

Thanks Subash.

We have been end of our question-and-answer session. I would like to turn the conference back over to Joe for closing comments.

Thanks and thanks everybody for listening in today. Thanks Subash and Chris for the great questions. We’re excited about the company that we’re building and the opportunity in front of us and we’ll keep everyone posted on the progress that we make and look forward to talking here at the end of the second quarter. Thanks for the time today.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.