Joe Mastrangelo - Chief Executive Officer Randy Gonzales - Chief Financial Officer Joseph Crinkley - Communications Manager

Good morning, and welcome to the Eos Energy Enterprises Third Quarter 2022 Conference Call. 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 mode. A brief question-and-answer session will follow the formal presentation. With that, I would now like to turn the call over to Joseph Crinkley, Eos Communications Manager. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for EOS financial results conference call for the third quarter of 2022. On the call today we have Eos' CEO, Joe Mastrangelo 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, including current expectations with respect to the future results of our company, which are subject to certain risks, uncertainties and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our projections 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 reconciliation 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. This conference call will be available for replay via webcast through Eos Investor Relations website at investors.eose.com. Joe and 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 Eos CEO, Joe Mastrangelo.

Thanks, Joe. Good morning, everyone. Thanks for joining us for our Q3, 2022 financial results. So I’m going to just 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. If we move to page three, just want to start off I think with one of the biggest things that we have in the business right now, and that's the IRA incentives and how this 10 year program really creates an opportunity, not only for Eos, but also for energy storage as a whole, to really take its place in the United States Global Energy mix. What makes me excited is that it is a 10 year program. It incentivizes domestic production and gives bold companies like Eos, both an opportunity for its customers to gain investment tax credits and for Eos itself to gain production tax credits. I think when you look at the framework that's there and just how the team is delivering, how we position the company looking forward, you know we have demonstrated an ability to produce and deploy Energy Storage Systems at scale. Walk through the operating performance here as we move forward, and it's important to note that we're now up to 250 Energy Block shift. We finished shipping the Pine Gate Eastover Project here through – in the beginning of 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…

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 Eos long duration energy storage technology invented in the U.S. and Made In America with a near source supply chain as a clear differentiator. With that said, I wanted to reiterate a few critical points about the tax credits framework that we believe are a strategic advantage for Eos, and for which we think improves 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 projects placed in service after December 31, 2022. Besides the base tax credit, the IRA offers an extra 10% credit if an energy storage project satisfies domestic content requirements, which will be further defined and set forth when the implementing regulations and guidelines are finalized. We currently anticipate that projects utilizing Eos Energy Storage Systems will qualify for this domestic content bonus, because of the domestic content of our systems. The 10% is applied to the entire cost of the project, not just the cost of 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 Eos. The direct pay option is valid for up to five tax years, after which any such tax credits can be sold to other companies for cash. Now turning to slide 17, revenue…

Thank you. [Operator Instructions] And our first question comes from the lien of Chip More with EF Hutton. Your line is open.

Hey! Good morning, Joe and Randy. Thanks for taking the question.

Good morning, Chip.

I guess first, just maybe you can expand on – you know great to see you are navigating the challenges, I guess. Finalization of the manufacturing process and ramp up of the Z3, it sounds like there's some acceleration on that ramp up. Just help us think about that as we look into next year, I guess would be a great starting point.

Yes. So Chip, the way I would think about this is, we've got three phases. So 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 for the beginning of 2023, which will basically be our individual or discrete 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 and then integrated it into the Energy Block, and we'll do that without automation. And then as we get to the second half of the year, we'll automate that process and ramp up into our first manufacturing line, with subsequent lines to come after that.

Okay, got it, that’s helpful. And in terms of finished goods inventory and just existing products out there that they maybe haven’t recognized yet, is there any way to help us just for that sort of near-term stuff?

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 you know in quarters past we've talked about the performance obligations and recognizing revenue. It’s not just the Energy Blocks, it's also the installation and commissioning primarily that are revenue recognition, performance obligations. So we'll see most of that come through in Q4 and that's contemplated I think in the revenue target that we've given for the year, the $17 million to $20 million.

Got it, no that's perfect Randy. Okay, and maybe I can sneak one last one in. Just any update on DOE loan and due diligence process there and then just update us on that process.

Yes. So we're – as we've announced before, we're in the formal due diligence process with the DOE active engagement, and so you know – I mean timing to be determined, but you know we're confident in where we're at with the you know engagement that we have with the DOE.

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

Thanks Chip.

Thanks Chip.

Thank you. One moment while we get our next question, please. And it comes from the line of Chris Souther with B. Riley Securities, please proceed.

Hey guys! Thanks for taking my question here. Maybe just – yeah, 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 and you know breakdown between material costs, what that kind of scrap impact is, fixed overheads and what the visibility on that number for the fourth quarter is, would be helpful. And then you know as we ramp up these three, can you give a sense of what volume run rate we should expect you know before we hit positive gross margins when we bake in that 50% immediate cost on opportunity.

Yeah, so Chris, with regards to the cost-of-goods sold, so you know I think the breakdown of the increase was volume and then an inefficiency aspect of the challenging environment we faced in Q3. And so, you know I would say that you know of the – you know I think it was $9 million increase as a result of the inefficiencies. You know a portion of that of course was scrap and rework and so you know with regards to the Z3 profile, right, so you know as we've talked about before, the guiding principles of the program were around design for cost, design for manufacturability and so you know I think you can see just looking at the pictures in terms of the, you know the simplicity, especially relative to the Gen 2.3. You remember on the Gen 2.3 we're building up a 40 cell battery, one cell at a time, with the infrared wells on each one of those cells. The Z3 design is a tub. It comes in as you know one piece in terms of the – in terms of the shell, and then you just put the – you insert the bipolars in there, right? So you know we also talked about other big cost reduction aspects. You know not just the automation cycle time, etc., but with regards to alternative materials. And so going from titanium to conductive polymer, so all those factors are you know what lead to the much reduced cost profile and being able to reduce the cost by 50% at launch from where we are now on the Gen 2.3.

And I think Chris, the only addition I would make to Randy's commentary around the Z3 would be what I've learned here the last couple of years with scaling up the factory for the Gen 2.3 is you know there is going to be a ramp-up and a learning curve. Now what we're seeing in the first units that we're building here in Edison right now is, you know 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. In the third quarter although I don't think they will be at the same level, because you're starting off on a slower or on a lower cost base as you think about that scrap that you'll incur and that training and ramping up of the facility. At the same time I think what I would say is that we hold with what we said last quarter with that. You know we're looking for the Z3 to become gross margin positive as we get into the second half of next.

Got it. Okay, no that's really helpful. And just you know, do we have any more clarity on the size of the DOE loan potential? You know you mentioned 3 gigawatt hours I think in that press release back in September, but just wanted to get a sense of what kind of a size ranges that we'd be looking at with that potential program.

Yeah Chris, we haven't disclosed it and I don't think we're prepared to at this point while we're working with the DOE.

Okay.

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

Okay, okay, it make sense. And then maybe just the last one. You know when we're looking at kind of the backlog, you know can you give any sense of what percent is for 2023, you know expected orders given the push of quite a few of the 2022 orders. You know just wanted to get any sense that we have there. You know obviously we're getting a little bit more revenue and from Gen 2.3 in the fourth quarter. But I wanted to see if we would also see some Gen 2.3 revenue within 2023 as well.

Yeah. So Chris what I would say is, the current backlog, you know $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 you know kind of multiyear master supply agreements. So with regards to the question on you know the Gen 2.3, so the customers that we worked with to push out from 2022 to 2023, we're still working with them to determine you know whether that should be Gen 2.3 product or Z3 products. So those are active discussions that are ongoing now.

Okay, it make sense. I'll hop in the queue. Thanks guys.

Thanks, Chris.

Thanks, Chris.

Thank you. [Operator Instructions] 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 – the 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 said before that you anticipated coming out of next year with all of the line output at Z3. Are you still comfortable 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 of the facility in Turtle Creek by the end of the year. And then just Joe, just to clarify the last part of the question. So your question is like by the end of the year we’ll only be shipping Z3 is what you're asking?

Yeah, or maybe even making Z3 I guess, because I know there's obviously that.

Right, yeah. There's a little bit – there’ll always be, and this is what we're trying and what we're working to do now. There’ll always be some Gen 2.3 product that will be manufacturing as we go through this mix, just for the service on the installed base that we have. But the majority, the new production going out the door for new unit shipments, that will be Z3 by year end.

The vast majority of production going out the door by the end of next year should be Z3?

Yes, yes.

Okay. And second question, I know its early days yet, but I'm wondering how your sort of price discovery conversations are going with your customers given the IRA, right. You got to sell mazel [ph] credit. You know they get the extra 10%, etc., etc. How is that manifesting in terms of the sort of growing pricing conversations you're having with customers.

So from the standpoint of how – you know the discussion is back and forth. It's still forward, but I would say we still see discussions focused on forward market pricing. You know when you look at and depending on the years that you are talking about, you know when you look at – really what we're talking to customers about is mostly deliveries as you look for second half of ’24 into ’25 and beyond. If they are discrete projects, they might be early ’24 for longer term frame agreements to talk about longer term deliveries, which is pricing to 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 is what I would say and then you're at market pricing. So I think what everybody is talking about, it's less about here's – you know I think 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 and they are both saying, ‘look, let's price this to the market of what we get a return on and then what the ITC and PTC will be, will be.’

Okay, that makes sense. And then just the last one Randy for you. Obviously you've got these production credits coming and they are direct pay. My understanding is you got to file first though, so there’s a fairly substantial lag between when those credits are you know obviously recognized and when the actual money shows up. Is that true? And if so, do you have any thoughts or strategies you have in place 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 you know just to put context around it, you know Joe showed the slide four, which demonstrated you know the illustrative Eos customer impact and the illustrative production scenarios. So you know at 500 megawatt hours, you know with just the $45 per kilowatt hour, that's $22.5 of credits. It's going to be higher than that when you add on the 10% for the electrode active material costs. So it's a good question in terms of the ability to pull ahead, but you know as of now, you know kind of nothing further.

Okay, all right. Thanks very much.

Thanks, Joe.

Thanks, Joe.

Thank you, and one moment for our last question. It comes from Tom Curran with Seaport, please go ahead.

Good morning!

Hey Tom!

Hi Tom!

Just trying to connect the dots here on the key milestones you've shared on the expected path to profitability. So as you've reiterated that for the Z3 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 three? And if so, could you share some detail around where exactly you would need to get to with automation to reach that threshold?

Yeah. So Tom, I'll start and then Joe can jump in. So yes, you're absolutely right. You know the gross margin positive is assuming you have an automated process, and that you're producing at scale. You know what gives us more confidence is you know the – now with the production tax credits as well about the path to gross margin positive. But yeah, I mean kind of full scale production, we've selected an automation partner, so that's going well. I don't know if you have anything to add Joe?

The only thing I would add to Randy's comments is, you know even building by hand, building a Z3 without automation is faster cycle time than the welding on Gen 2.3. Now the output of Z3 in the second half would assume a fully automated battery manufacturing, so battery module manufacturing. So making the bipolar, integrating the bipolar into the tub, closing the tub and filling with electrolyte, that would be fully automated and some of what we've already developed for the Gen 2.3 will flow into the Z3. 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, in sharing an update on the current pipeline, you mentioned that you are excited to see some of the new prospective customers you've been engaging on technical proposals or non-binding quotes. Could you just expand on that as well, share some color around whether it's more about the nature of the customers 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're 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 a week ago at the CEC, I think it's the start and I think you see more and more people looking for longer duration and flexible duration, which we deliver on. At the same time, you know 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 and I think this builds off of Joe Osha’s earlier question. Now with the IRA legislation there, them coming to us and saying ‘okay, how do we put together multi-level sales agreement, a multi-year sales agreement that then allows us to get – you know secure capacity with you and then allows us to go after projects that have longer duration and flexible sorts.’ So the combination of those things, along with the regulatory framework is very encouraging for 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. You know here we are, early November, and you're reiterating the target for booked orders of $500 million. It sounds as if we're still just sitting at, let's round at it $340 million. Could you give us you know a better indication of what's underpinning the confidence about securing that additional $100 million here before year end, and do you expect it to consist of a few big projects or a lot of little ones that maybe have some seasonality or other factors that will lead them to kind of rush in here before year end?

Yeah Tom, so in my prepared remarks, you know I mentioned that we're in discussions with various customers on large individual projects or framework agreements in the master supply agreement type arrangement. And so I would say, you know it's the former to your question just based on where the market is and the recognition by customers that they need to probably lock up energy storage here for the long term just given the dynamic supply demand, and you know the recognition that customers shouldn't have an over-reliance on a single technology.

Got it. I appreciate the answers guys.

Thanks.

Thanks.

Thank you. And showing no further questions in queue, I will turn the call to Joe Mastrangelo for his final remarks.

Thanks operator. Thanks everybody for listening today. You know 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, and 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 LPO loan, and really then position 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 those things given the fact that we have a 10 year framework of which we can operate under as energy storage. I think energy storage 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. 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!