Eos Energy Enterprises, Inc. (EOSE) Q2 2023 Earnings Call Transcript

Hi. Good morning, and welcome to Eos Energy Enterprises Second Quarter 2023 Conference Call. As a reminder, today's call is being 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 like to turn the call over to Liz Higley, Acting Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for Eos's financial results and conference call for the second quarter 2023. On the call today, we have Eos CEO, Joe Mastrangelo, and CFO, Nathan Kroeker. 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 but not limited to current expectations with respect to future results for our company, which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our expectations 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. This conference call will be available for replay via webcast through Eos's Investor Relations website at investors.eose.com. Joe and Nathan will 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.

On behalf of the 300-plus employees at Eos, I want to welcome everyone to our Q2 earnings call. It's a very important moment in time for both Eos and for our industry. As I said before, I've been in the energy industry for nearly 30 years and Eos has been in existence for 15 years. We're at an important inflection point as you look at what the world needs to power its future. When you look right now in the United States, Texas in the ERCOT market is operating at record highs. California is experiencing high temperatures, which are straining their ability to produce energy on the grid. You see numerous fires on energy storage projects, which has caused significant concern about how we can deliver and integrate renewables safely into our grid. Nathan's going to go through later on the details around our order pipeline, backlog, and some specific customer examples. But what I wanted to talk about is what's required to truly grow our business and ultimately what's required to help decarbonize our energy grid. What's important here is not just the intent of decarbonization. It's having the policies in place to deliver that. At the same time, as you have the policy framework in place, which I believe we do in the United States with the IRA legislation, it's then taking those policies and acting. And where we need to work on as an industry and as a company is acting and moving faster to deliver on that demand. What the world is asking for right now is not a two-hour energy storage solution, but a flexible energy storage solution that provides the safety and reliability that we all demand from our power grid. We believe that we have that solution over time to deliver into that market, and it's evidenced by the fact that we've discharged 1.4 gigawatt hours of energy over the lifetime of our product. We still have work to do. We still have things that we need to fix, improve, and refine, but we have a technology that can deliver upon the need in the marketplace that we see and talk about every day. At the same time, we're focused on being able to deliver that product out of the state-of-the-art factory that we like to say is a technology that was designed with American minds, built with American hands, using predominantly American materials on American manufacturing equipment. That's important to note as we talk about energy security and our ability to deliver the future growth of our country. If you flip to Page 4, look, a picture tells a thousand stories. Here's a picture of our semi-automated manufacturing line in Turtle Creek, Pennsylvania, with our employees manning their stations and building batteries. Now we are in the early days of commercial production, but we feel really good about where we are, and we are very proud of what the team is doing and delivering on a day-by-day basis. If we move to Page 5, I just want to hit on three core concepts here as to why we feel like we have a product that can deliver the future needs of our industry and the world. First, we've taken a product that has been around for 15 years. We've used the basic same core chemistry, and our challenge technologically has always been how do you do that and seal the battery so that it can perform over a 20-year lifespan? How do you do that at a cost where you can deliver a product and how do you do that at a cycle time that you can scale into a fast-growing market? We've learned a lot over the various generations of our technology. And in every step of the way, we've incorporated that into this new Z3 design. The initial results of this new Z3 design that the team has developed are very promising, but you have to realize what our technological team was able to do in Edison, New Jersey, is take out the highest cost component in our battery that is titanium and replace it with conductive polymer, learning from the sealing challenges that we had with leaking batteries and taking that and incorporating it into the design of the Z3 battery which enables us to both reduce cycle time and improve performance. If you move to the center of the page, our initial battery performance is very promising. Now here, I think what we have to do is take an insider's view of what performance means. So I heard people say and talk about how Eos's round-trip efficiency is lower than lithium-ion. And that's true. We sacrifice a couple of points of round-trip efficiency for the safety and to reduce the fire risk around our technology that you see in lithium-ion. But at the same time, if you measure us at two hours of energy delivery against lithium-ion, we also need to then take lithium-ion and measure them at four, six, eight, ten, and twelve hours discharge time. You get the same performance that an Eos battery can do with that same round-trip efficiency without requiring the HVAC systems to operate. That's important when you think about these systems operating in higher temperature environments. That's why you have the high power demand here this summer. So you need something that's going to be safe and that doesn't require sophisticated complex cooling systems to allow them to perform. That's the product the team has been able to develop. And when you look at the performance of nine modules, this is a small subset of technology, but it is performing exactly as it was designed in the lab. There are going to be challenges as we move forward. I've done numerous new product introductions throughout my 30-year career. You don't know what you don't know until you start building and executing your roadmap. But what we've seen from our initial performance is really promising as we look to deliver in the future. And then on the far right-hand side of the page, you don't sell an individual battery cell. You don't even sell an individual battery. You sell a system. Inside that system, you've got to look at how you make it cost-effective and how you make it operate. The team here has done a fantastic job of simplifying our system. Our whole goal here is to reduce the number of wires you have out in the field, reduce the complexity that you have in the field, allow more energy cubes to operate off of the same power electronics to reduce costs, simplify the system, and allow it to perform in a difficult operating environment, delivering what's expected of the industry and this product. So we take those three fundamentals and then flip to Page 6 and talk about our line launch. Look, I am proud to say that I work at Eos. I'm proud to be part of this team. The team amazes me every day with the work they do. If you start off on the left-hand side of this page, that’s day one of commercial production that happened a few weeks ago. We've been very purposeful about turning on commercial production because of the speed that you manufacture. If you have an inherent problem inside your battery or inside the production process, the compounding cost it would be to shareholders of cash burn, and we've been very cautious about how we've launched this product to ensure that we're spending every dollar wisely. We've learned at every step of the way how to improve how we build the battery. We started off, you remember, I've said this before, Gen 2.3 had a 90-minute cycle time to build a battery. First day we built batteries, we were at four minutes on the semi-automated line, and we believe we have a path to take that down to two minutes of cycle time as we move forward. This initial production comes with less than 1% scrap, and the batteries that are coming off the line are performing as expected. Now we're going to put these batteries to the test. We're going to get them out in the field and start operating them. What the team is doing out in Turtle Creek is nothing short of amazing in my viewpoint. At the same time, I talked about this before, you don't just sell batteries, you sell an overall system. We call that the Eos Z3 cube. If you look at that middle picture, that's us starting to run our strings inside of a cube that would go out into the field. We're spending a lot of time here again in Edison, New Jersey in our R&D facility, in our software facility, developing a simpler battery management system. What we do differently than other technologies is we allow our battery to operate across a wide temperature range, we allow it to operate charge and discharge over a wide number of hours, but we do that with a very simple battery management system that allows flexibility for the end users. The trick here is to reduce voltage in the system to increase throughput and to decrease the output of the system. It's not just about what your individual battery does, but how your system performs. The team has spent a lot of time doing that. At the same time, I get a lot of questions about where we are on the state-of-the-art manufacturing process. Well, the far right, that's the design of the new line that's going into our factory in Turtle Creek. We're in the midst of developing the software and controls logic around that. We've made some purchases of long lead items around robotics. We feel really good about the progress that we're making around this, but this all comes back to how we manage the timing of investment in that line versus the timing and spend on getting product out in the field. Everybody has to remember here before I turn this over to Nathan to talk about becoming profitable in the commercial pipeline, this is an industry where you have to prove yourself out in the field. It's not proving yourself in the laboratory. So we've got to get the Z3 out in the field operating on customer sites, perfect what we're doing, then automate, then scale, and we're trying to do that in a very compressed cycle time. I feel really good about where we are. We'll keep everyone updated on the challenges as we move forward, but I want to turn it over to Nathan, who's going to walk you through some more details around our pipeline, our path to profitability, and the financials for the second quarter. Thanks for listening today.

Thanks, Joe. Good morning, everybody. I want to take a moment to explain how we're thinking about our path to profitability. Not only are we improving our bottom line, but we are also focused on improving our top line. As you know, the first step to profitability is achieving positive gross profit. From this point, we can begin to cover our operating expenses, which tend to be more fixed in nature as we achieve economies of scale. Looking at this graph, what you see here is sales prices are currently expected to increase over time. This is a result of increased market demand for long-duration storage combined with a shortage of manufacturing capacity in the market. Some of these price increases are already baked into our backlog and are expected to be realized following the delivery of some earlier projects which were sold at lower prices to secure a foothold in a lithium-dominated marketplace. As we establish our technology and credibility in the market and secure the needed financing to expand our manufacturing capacity, we expect to see our pricing increase over time. The IRA’s 10% domestic content bonus credit is an added tailwind. With our domestic content levels, we expect customers to see this benefit not only for their storage assets but potentially in helping their overall projects qualify for this added 10% credit. Moving on to COGS, while sales prices are increasing, one of the top priorities of the company is to continue focusing on taking costs out of the product. With our planned cost-out initiatives in place, we expect to reach gross profit breakeven as we scale our first automated line. This would enable higher throughput, allowing us to absorb more of our fixed costs and gain operating leverage. Our cost program for 2023 includes seven discrete projects that are anticipated to either lower our supply costs, increase energy density, or improve the manufacturability of our product. All three of these goals are essential to getting Eos to profitability. On top of taking costs out, another benefit available to us is the $45 per kilowatt-hour production tax credit. As we produce storage systems, we are able to realize this benefit as an offset to COGS, which we have already begun accounting for in the first half of the year. While this $45 tax credit will help to accelerate our path to breakeven, we do not believe it is essential to achieve profitability. We believe this business makes economic sense even without the tax credit, but it certainly acts as an added benefit to us over time. Despite the progress we are making on improving our backlog and driving out costs, we still expect negative margins as we come down our cost curve and deliver on early backlog orders. Moving on to Slide 9. I'm now going to walk you through our classic pipeline page that many of you are familiar with. This page is broken out into three key buckets: lead generation, current pipeline, and backlog. Starting on the left side of the page is lead generation, which, at the end of the quarter, was $10.9 billion, representing 59 gigawatt hours of storage, up $1.2 billion from the previous quarter. You should think about this stage as customers coming to us with an idea for a project in which they do not have a technical use case for us to quote on yet. We do not count lead generation in our current pipeline. Generally, there is a lot of churn here as things drop out or progress into our pipeline. Moving to the right, we get to our pipeline. We define the pipeline in three segments. One, does it have a technical use case? Two, have we provided a non-binding quote? And three, do we have a signed letter of intent? We do not call something current pipeline unless we have a technical use case where we can provide a technical proposal to the customer, which then leads us to giving them a non-binding quote. Our current pipeline is now at $9.7 billion and is up $1.1 billion from the prior quarter. We have $1.6 billion in signed LOIs, an increase of $93 million versus last quarter, representing over 7 gigawatt hours. From there, the intention is to materialize projects into booked orders, which then get added to our backlog. We currently expect roughly 30% to be converted from LOIs into booked orders over time. The backlog stands at $534 million as of June 30, including some long-term service revenue, which represents less than 6% of the total value of our backlog. We expect to grow service revenue as more projects become operational in the field. During Q2, we booked a new industrial order in California, and we removed two small projects that no longer met our qualifications to be considered in our backlog. While we didn't see a large increase in orders during the quarter, we continue to feel our pipeline is strong, and we believe many potential customers may be waiting to see our state-of-the-art factory in operation as well as additional clarity on the IRA tax credits. Each quarter, we assess the health of our reported backlog. Doing so requires us to exercise judgment about uncertain factors. We sometimes come to a view that a project that was booked in the past is unlikely to materialize or a change order has been executed, in which case, we may adjust our backlog. This assessment has resulted in projects being removed from our backlog in each of the last two quarters. While we've previously shipped products to 12 customers, our current backlog consists of 13 customers, representing 2.2 gigawatt hours, which includes a mix of utilities, developers, IPPs, and industrial customers. Over 50% of our backlog is in the California and ERCOT markets, with the remaining 50% spread across other US and international markets. Now let's take a deeper dive on a few of the larger customers that we have in our backlog, beginning with Bridgelink. We first signed an MSA with Bridgelink Commodities LLC back in March of last year. This was a multi-year MSA where Bridgelink locked in the price of 240-megawatt hours of storage over a three-year period and then increased the overall size of the MSA to 1 gigawatt hour in June of last year. Bridgelink is a developer of solar and storage projects and has informed us that there are projects in its pipeline that have received interconnections while others are well into the interconnection queue. This is important because an interconnection approval is essential for a project to be able to deliver power to the grid. In today's environment, an interconnection can take years to secure, meaning that these projects have a certain amount of intrinsic value, and we believe a number of them will ultimately be built. We were informed by Bridgelink management that its affiliate has reached a confidential settlement with its lender, and the related assets were not sold at auction. Bridgelink recently confirmed that they are actively seeking alternative financing for these projects. Moving on to IEP. In 2020, we entered into an agreement to supply 1 gigawatt hour of storage, which was added to the pipeline as a letter of intent. Of this, we have two Texas projects totaling 100-megawatt hours in the backlog, with the remaining 900-megawatt hours included in LOIs. Control of the two Texas projects was transferred to a large North American infrastructure fund, and we currently anticipate breaking ground on the first project later this summer, with delivery scheduled for Q4 of this year. Carson Hybrid is another significant customer for us. We have a project in California that is co-located with an active gas turbine peaker plant that is delivering power to the California grid to meet the high summer demand. Construction is expected to begin this fall as soon as we can access the construction site to deliver our products. In addition, we have a 300-megawatt hour project with Carson that has recently received its interconnection approval and is included in our backlog. We have received a deposit or down payment on both contracts. Next, we have a confidential customer that is a leading Northeast developer of solar and storage projects that has signed a multi-year MSA with us to lock-in the price of our storage systems. The customer is actively pursuing permitting in New York. Given the safety of our product relative to other alternatives and the recent fires that have been in the news, we currently expect this market to have significant growth potential. We anticipate cash coming in as POs are issued and production schedules are set under this MSA. Finally, we have another confidential customer that has a very large utility and one of the largest operators of energy storage in the US. This utility has signed a long-term framework agreement for up to 4 gigawatt hours of energy storage volume, which is included in our pipeline in the LOIs/firm commitment category, along with the PO for their first 47-megawatt hour project, which is in our backlog and we expect to deliver later this year. This is an important project for the team as it represents our opportunity to demonstrate the capability of Eos' technology to one of the largest utilities in the world. The balance of our backlog is a combination of smaller deals, both front of the meter and behind the meter with developers, IPPs, and investment-grade utilities. Now moving on to Slide 10. This is a page where we want to walk through the structure of our standard form customer contract as it relates to expected cash flows going forward. In order to offset the high working capital needs of the business, we strive to receive cash early to fund raw material purchases. Generally speaking, our template customer supply contracts are structured so that as we begin to manufacture and deliver storage systems, we expect to receive approximately 60% of cash prior to customer delivery. Amounts received are, of course, subject to the final negotiated terms in each individual agreement. Looking at the page, I want to walk you through the process of what we generally see from a signed letter of intent, all the way to commercial operation on the right-hand side of the page. As mentioned earlier, a letter of intent represents the last stage in our pipeline before a deal gets into backlog. You should think of this stage as a non-binding agreement that aligns our interests with the customers and has us on the same side of the table, especially in the case of a developer as they pursue projects out in the marketplace. If the customer wins, Eos wins. To clarify, LOIs never meet our criteria for a booked order. What you see next is that an LOI or any active proposal can be formalized into a master supply agreement or MSA. Alternatively, a customer can skip the MSA and go directly to a definitive supply agreement with a PO, which sometimes happens for smaller, more discrete projects. MSAs and POs can be considered booked orders provided they meet certain internal qualifications, and each agreement can have different cash milestones detailed in the contract. We typically require each of our customers to pay a deposit or down payment before they are allocated a slot in our production schedule. You should think of an MSA as a multi-year agreement that defines a commitment to a specific amount of storage capacity being purchased over a defined period of time. As time progresses and specific projects are identified, individual POs would then be executed under those MSAs. We often get a small deposit of up to 5% and/or a cancellation fee with our multi-year MSAs. Even if an MSA does not have a specific project identified, it helps us with long-term capacity planning. In the case of multi-year MSAs, POs are then issued when individual projects materialize. When we receive a purchase order, we usually expect to receive 10% to 30% of the total contract price as a down payment. We expect such payments to be a significant source of cash to offset increased working capital needs, as some portion of our active proposals, LOIs, and MSAs eventually result in purchase orders. Next, we expect to receive another 20% to 30% of the contract price during the manufacturing stage. During this stage, we're sourcing the raw materials, and we ask that our customers pay a cash milestone prior to manufacturing their systems and/or additional cash when the product is ready to ship. Revenue recognition does not necessarily follow the cash flows or manufacturing cycle but rather is determined based on our fulfillment of obligations to the customer. A meaningful portion of revenue is recognized when control passes to the customer, again determined by the specific terms of the applicable agreement. Next, we expect to receive another 25% to 30% when systems are fully delivered. At this point, Eos begins site installation and commissioning, and the last 5% to 10% would be received after commissioning is complete and the system is placed in operation. I'd like to point out that an item we have mentioned briefly in the past is the opportunity for long-term service revenue. While our contracts generally offer a standard two-year warranty, we also provide customers with the option to purchase a long-term service agreement, which can go out as long as 20 years. As we begin to get more systems in operation, we expect this to be an increasing source of cash and revenue in the future. Now let's move into our second quarter financial results. Overall, the second quarter was an important quarter for the team, and I'm very proud of our employees as we continue to keep our heads down and focus on getting the Z3 systems into the market. Each day, we become better than the day before, and we expect our financials to begin to reflect these improvements over time. Revenue for the quarter was $0.2 million as we recognized revenue on our last Gen 2.3 systems before beginning the transition of our factory to Z3 production. Cost of goods sold for the quarter was $11.2 million, of which $2.3 million is a non-cash related item, a decrease of $25.6 million compared to the second quarter of 2022, primarily driven by a decrease in unit volume, partially offset by increases in commissioning costs associated with the Pine Gate project. R&D investment was $5 million, a slight decrease compared to the second quarter last year, driven by a reduction in third-party services, partially offset by ongoing Z3 development. $0.3 million was non-cash stock compensation and depreciation. SG&A for the quarter was $13.1 million, including $2.2 million of non-cash items, which is $6 million lower than the second quarter of the prior year, driven primarily by decreases in outside consulting expenses as we brought several of these functions in-house. Interest expense was $19.6 million for the quarter, of which $4.9 million was driven by the senior secured term loan and the equipment financing facility with Trinity Capital. The other $14.8 million was non-cash related to the interest expense and amortization from our convertible notes. The resulting operating loss was $34.6 million with a net loss of $131.6 million or $28.9 million excluding non-cash items, which is a year-over-year improvement of 44%. Lastly, I will give you an update on our progress against our full-year company objectives. The second quarter was very much a transitional quarter, and there's still a lot of work for us to do in order to reach our goals. We increased our opportunity pipeline by $1.1 billion in the second quarter, and during the first half of 2023, we had $86.9 million in booked orders with three customers. While three customers may not sound like a lot, the largest order was with a repeat customer and another one was for an initial project accompanied by a larger framework agreement of up to 4 gigawatt hours. We also signed five new letters of intent for a total of 1.2 gigawatt hours during the first half of 2023. We believe there is a line of sight to achieving our booked orders objective for 2023 with nearly $10 billion in our pipeline. If we receive a positive outcome on our loan application, we expect to see increased customer confidence in our product and our ability to deliver long-duration energy storage projects. Next, we remain on track towards our $30 million to $50 million revenue objective. If you recall, we said that the upper end of the range was contingent on getting our automated line up and running in Q4, while the lower end was if the automated line pushed into next year. We are now tracking for the lower end of the range. In the first half of 2023, we had revenue of $9.1 million. As we think about the rest of the year, we currently expect remaining revenue to be back-end weighted in Q4. With the majority of our revenue recognition occurring at the time of delivery as opposed to when the product is produced, our revenue objective for the year can be somewhat binary depending on the exact delivery timing of one or two large projects. While we believe we will be able to achieve our revenue objective for the year, the specific revenue recognition criteria could potentially push some of this revenue into early 2024. Lastly, the team continues to stay focused on cost-out, and while we have discussed the key projects for 2023, it should be noted that we have line of sight into further cost-out initiatives that will come in 2024. Thus far, we have achieved two of seven key projects for our year-end cost objective, and we believe we remain on track to hit this metric. With that, I want to thank everybody for their time and for listening today. I would now like to turn it over to the operator for questions.

Our first question comes from Joseph Osha with Guggenheim. Your line is open.

Good morning. This is actually Hilary on for Joe. I just wanted to first touch on some of your earlier comments on the transition to the Z3. If you could just share any more detail on kind of key learnings thus far, if there's been any kind of key manufacturing challenges that you've come across?

Hey, Hilary. Good morning. Yeah, I mean, look, at every phase of this, there have been learnings. I think what accelerated the development of the Z3 at a lower cost position was doing the discrete manufacturing processes first. So if you look at where we started on our line, like building our bipolars, integrating the bipolars into the hub, and then filling the battery, we've changed each one of those technologies as we've gone through. As we learn things, we found other technologies that either gave us a higher process capability or a better yield coming out of the overall process at a faster cycle time. So we made a lot of changes there. Inside of this was a lot of the design work that the technology team has done. Much of that work is done in Edison where we're prototyping product. When you bring it out and do it at production scale, you start learning things when you're trying to transport batteries. Certain things in the way that we designed the tops of the bipolars were causing potential slashing, where electrolyte could go between cells and causing imbalance in the batteries when you're transporting it by truck or by sea that we wound up having to fix. The last thing, which is the most important, is as you lay out the material flow in the factory, we start to learn where you want people positioned, where you want the material positioned, how much assembly flow you want to have going into each of your manufacturing processes to reduce cycle time. As we've gone through and done this, as I said, the continuous flow of the battery to the line is four minutes. We think we can halve that on the semi-automated line with some of the things that the team is finding. It truly is a learning process. We've only been at commercial production here for a little bit over a week when you really think about it in earnest. Every day, you learn the most from the people on the factory floor that are building the batteries, and that's going to make us better.

Great. Just as you look to transition to buying and execute on some of the cost-out initiatives, I was just wondering if you could provide some context for how quickly we'll see that start to drive positive gross margin?

So sure, happy to elaborate on that a little bit. If you look at the different cost-out initiatives that we've identified, they really touch on three different areas: supply chain efficiency, improving the energy density of the battery, and improving manufacturability. Some of these we are putting into effect now, like I said, with two of these already accomplished, specifically around volume discounts on our cube. The second one is improving the overall power density of the battery, which falls under the category of improving energy efficiency. These are things that we can do even on our semi-automated line. There are other cost-out initiatives that are dependent on getting to a fully automated line. You won't really see us fully achieve the cost-out until next year.

And, Hilary, the other thing I'd add that I always tell the team here at Eos, right? Prior to Eos, I was managing product lines at General Electric that were hundreds of years old. You were getting 4% to 5% cost-out productivity every year on a mature product. As we go through this, we'll be learning every day and finding ways to update our cost-out pipeline, looking at cycle time reductions and productivity ideas. This will be an iterative process where it's a funnel; you bring ideas in and want to realize ideas out the back end. I think we're starting to see, as you actually start building and operating the product, you start to find more and more ideas on how to take cost out. We've just got to keep our nose to the grindstone and keep finding ways to improve the competitiveness of what we put out into the field.

As I was listening to Joe, I realized I didn't fully address your question. You were asking about the timing of gross margin breakeven. We won't achieve gross margin breakeven until we get the efficiencies of the fully automated line. So that's how I would think of it in terms of timing. And the timing of that is somewhat dependent on capital investments.

Great. Thank you for taking my questions.

Thanks, Hilary.

Thank you. Our next question comes from Christopher Souther with B. Riley Securities. Your line is open.

Hey, guys. Maybe just following up on the initial Z3 ramp. Can you please frame some of the metrics you called out here for the semi-automated manufacturing? How do those four-minute cycle times and less than 1% scrap rates compare to what we saw with this stage with Gen 2.3? And can you update us on how the BOM cost today compares to Gen 2.3 and what the reduction would be post the three cost initiatives you called out for 2023? This is all before the full automation that you talked about.

Right, right. So, hey, Chris. Look, I mean, this is night and day. The team that went through Gen 2.3 remembers days during the first month as we were trying to perfect the infrared welding process. At the end of the first week of commercial production for Gen 2.3, our yields were in the 50% range on a good day. When you look at the stack up, the first day we built batteries for Z3, we're at a four-minute cycle time, which saves more than 1.5 hours per battery. Like you said, the new manufacturing operations leader has visual management reports hour by hour that the entire team is focused on, what they have to do in each of their stations. We're using the last three months to prepare ourselves to grow the company, and it's paying dividends in the start-up. So it is totally different from what we had on Gen 2.3. What I would say is, we learned a lot on Gen 2.3, especially about sealing technology to mitigate the issues we had with leaks. What we learned from that sealing allows us to come up with a mechanical design on Z3. We also learned a lot about software, controls, and optimizing performance. We spend time talking about the battery, but what we really provide to the field is a system, and that system with the Z3 is much more efficient. Our software and technology leader has done amazing work on the battery management system, and how we've been able to introduce this coming out of prototype development is nothing short of remarkable. We still have a lot of work to do, and we're going to be challenged as we move forward, but it's very exciting to think about where we started and how we developed this product.

Got it. And just on the BOM cost today, how does it compare versus more meaningful today versus kind of post the three cost initiatives you called out for this year? What is the reduction you think you can get? And where does it stand today?

Really, I think the picture hasn't changed from what we've said historically, which is this entire system on a kilowatt-hour basis is designed at half the cost of where we started with Gen 2.3. We've got seven cost-out initiatives we're focused on for this year, two of which are completed, yet we won't fully realize these savings until later. Our continuous improvement process will have significant efficiencies once we get to full automation. But even after that, we’ll continue to make improvements going forward. As for specifics on the BOM, that’s as much granularity as we can provide at this point.

Yeah, it's fair to say that your starting point of the launch is significantly lower than where we were at Gen 2.3. Just on the form factor of the battery and the fact that we have no titanium. The seven projects that Nathan discusses address the core of our battery production. We're a 300-person company building a pipeline of opportunities, and we’re implementing an American supply chain. There's tremendous cost-out opportunity here as we work on components and logistics. People are asking, can America innovate and manufacture? I say, yes, we can because 300 people are doing it.

Got it. And maybe just kind of shifting towards the focus on American made and all that. Everything in your commercial activity side, you’ve grown, except for the order backlog, and you called out the need for people to see the factory. Can you give us a sense of whether people in the current pipeline are waiting for the DOE loan to make order commitments before moving forward? What are customers saying about the DOE loan process?

Absolutely, Chris. We've had a number of conversations where they say exactly that, right? They want to ensure that we are well-capitalized and able to deliver the product and long-term service agreements. So I think capital is important. Just as vital is getting Z3 product out in the field so customers can see it, test it, and look at data and successes. The third piece customers mention is clarity around domestic content and IRA credits. As we gain clarity on these three aspects, we should see a significant increase in customers moving through our commercial pipeline.

And Chris, I’d add – Nathan gave you the technical perspective. In my 30-year career, when someone decides to place a purchase order, they're making a bet on us. For these types of projects, they're making a purchasing decision today for something that will happen two to three years from now. We need to speed up and do things faster to meet market demand. We need to show customers that we're there to deliver. Yes, displaying manufacturing helps, but we also have to show that we will stand by our commitments.

That's really helpful. I'll hop in the queue. Thanks, guys.

Thanks, Chris.

Thank you. Our next question comes from Vincent Anderson with Stifel. Your line is open.

Yeah, thanks. Good morning, everyone. So just to get it out of the way, it sounds like you've completed everything you needed to on your end of the loan process, including the term sheet. If that's the case, did the 30-day clock start on the treasury OMB approval process? Or does that still wait until the loan goes through this new pre-conditional commitment review?

Yeah, good morning, Vincent. I would say yes, we're definitely in a 30-day window. We have been responding to some questions over the last couple of weeks. Those questions have been getting fewer and easier to answer. So we've been working through this process, which makes me feel like we're in the final stages of answering questions. Multiple approvals have to occur, but we believe, and we've been informed, we're in the very final stages. We hope to have some great news by Labor Day, but we can't control the exact timing.

Okay. No, that’s helpful. And then Nathan, thanks for the deep dive on the pipeline. I was hoping we could go back to the overall industry view. Your customers include blue-chip utility companies that are going to be self-funding these projects, but there's a very different structure in the renewables market in terms of the structure and financing. Can you talk about how those projects compare to large-scale utility customers? Also, you hinted that interconnect delays feel like a challenge. Are those affecting the pace of leads moving through the pipeline or the funding of those projects?

Yeah. So Vincent, I'll take some of these and Nathan can fill in. The news about the new FERC processes is great for the industry. We need to get projects through and onto the grid. Texas is setting output records, and California is under strain. We need to move quickly and make the new energy future a reality. The project delays are due to waiting for approvals before we break ground and install assets. These delays slow down the process. Customers are working toward project goals, but financing can be tricky, and we need to partner through the entire process. We’re seeing more blue-chip customers putting us through our paces. The developers coming with storage projects are making partnerships with Eos to see them online. There are challenges along the way, but we can speed up this process with funding sources. Partnerships with people we know, like Nathan and myself from our backgrounds, aim to turn these LOIs and opportunities into booked orders. Keeping a strong backlog means project planning.

That’s very helpful. I appreciate it. I think that’s all from me. Thank you.

Thanks, Vincent.

Thank you. There are no further questions. I'd like to turn the call back over to Joe Mastrangelo for closing remarks.

Thank you. Thanks, everyone, for listening today. This is an exciting time. A lot of work is going on, but it's extremely energizing. I say that with a dual meaning of what happens every day whether at Edison or in Turtle Creek, and I'm excited about what we have to build here at this company. We will continue to focus on long-term value creation for our shareholders by bringing a product that markets demand and making it as competitive as possible while helping power the new energy future. I'm excited to be able to do that. On behalf of the 300-plus people who come to work every day at Eos to make this great company, thank you for your time today.

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.