Earnings Call Transcript - EOSE Q3 2021

Operator, Operator

Greetings. Welcome to the Eos Energy Enterprises Inc. third 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. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Laura Ellis, VP of Investor Relations. Thank you, you may begin.

Laura Ellis, VP of Investor Relations

Thank you. Good morning everyone and thank you for joining us for Eos’ financial results conference call for the third quarter ended September 30, 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. 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 earnings release and other SEC filings. Our remarks during today’s discussion should be considered to incorporate this information by reference. 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 statement 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 the 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 U.S. 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.eos.com. Joe and Sagar 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 Joe.

Joe Mastrangelo, CEO

Thank you, Laura, and thank you all for being here today to discuss Eos Energy Storage's third quarter operating results. It's been another quarter filled with significant achievements for our team, starting with our technology. We are continuing to discharge energy and run operating cycles, demonstrating both the robustness and operational flexibility of our offerings. This morning, we announced the largest order in the company's history, bringing our booked orders to over half a gigawatt and our backlog to $150 million. We are excited about the project with Blue Ridge and Pine Gate, as well as the follow-on order from Duke and a new order from Amaresco. Our opportunity pipeline remains strong with over 22 gigawatt hours. We are observing ongoing growth in opportunities in the market. While we are experiencing some challenges and uncertainty regarding when orders will close, customers are actively seeking to understand how our technology can meet their needs. Our factory team in Turtle Creek had a strong quarter, achieving $3.4 million in shipments year to date, and we currently have $144 million in cash to support our operational strategy. Overall, the team has performed well and is positioning the company for future growth. As we look at the environment, similar to many other companies, we are experiencing supply chain headwinds on labor, materials, and logistics. Currently, our factory is operating two shifts rather than three due to labor shortages, but we've managed to navigate through that. We've secured three sources of supply for the containers used in our systems, and we're handling the logistics of receiving these containers to ship to customers. Challenges remain in semiconductor availability, but with careful planning, we should be able to manage those as we move forward. On the inflation front, our main concern pertains to the resin used in our battery modules, and we are actively managing our costs in that area. We recognize the secure growth in the market, yet there is uncertainty in the timing of that growth, which we notice from opportunity generation through to equipment start-up in the field. Our leadership team remains focused on managing the company tightly to address any day-to-day challenges. On the positive side, we continue to see strong demand for storage. The market is expected to grow, with BNEF forecasting a 23% compound annual growth rate in the near term. We are noticing a shift in the market towards flexible duration discharge systems, moving beyond static two-hour and four-hour systems to those that can last anywhere from two to 15 hours. Our technology is well-equipped to meet this demand, and we anticipate a new mix of technologies emerging as the market develops. Additionally, we have made significant improvements in our operational capabilities, resulting in higher factory output and better yields. We are consistently achieving solid battery and system performance as we ship out into the field. Moving on to our business priorities, we have booked our largest order in company history in October and are building a strong portfolio of reputable customers. We are making substantial progress with major power developers and utilities during their qualification processes, which is encouraging for the company's future growth. On the revenue side, we are on track to manage the risks associated with our $5 million revenue target. Our revenue for the second half is six times that of the first half and is expected to continue growing as we enhance our factory capacity. By the end of next year, we plan to scale our manufacturing capacity to 800 megawatt hours at our Turtle Creek facility with a $35 million planned investment. We also secured an equipment financing deal to support our capital needs, and we appreciate our asset-light capital expenditures manufacturing model, which supports growth alongside market expansion. In terms of next-generation technology, we are currently testing a working prototype and have begun receiving initial parts. We anticipate starting manufacturability tests in the coming weeks, with plans for our first commercial shipments by the end of next year. It's an exciting period for us, and I will provide further details on the next-gen product as we conclude this presentation. Overall, the team has delivered strong performance, and now I will hand it over to Sagar, who will discuss the financials and commercial aspects of the business.

Sagar Kurada, CFO

Thanks Joe. Good morning everyone. In the next few pages, I will talk you through the third quarter financials. Let’s start with the income statement. We delivered $718,000 in revenue from the quarter. As you know, motor oil was one of our first commercial orders. Third quarter revenue recognizes the second shipment which was also included in our first shipment recognized in the second quarter financial statements. We also successfully delivered on two other orders this quarter, River Valley in Massachusetts for one megawatt hour, and Renew in India for 0.5 megawatt hours. Our cost of sales in the quarter were $12.9 million. This included $2.8 million of expense related to fair market value adjustments to inventory attributable to future booked orders, additionally, $3.6 million in expenses related to improving our current manufacturing yield, $4.1 million of costs were incurred as we bring the factory up to capacity and entitlement, and lastly, $1.2 million in logistics, freight, and other transportation costs. Moving on, our R&D expenses were $1.5 million higher versus Q2, related to ongoing investment in our Z3 product here in 2022. General and administrative expenses were $2.5 million lower, driven by staff-related accruals and outside service spend. Moving to interest expense, the primary driver of interest expense is related to the accounting for the convertible notes specific to the $100 million in investment from Koch Industries earlier in the year. Lastly, other income includes $9.9 million for the change in fair value of existing derivatives and $0.7 million on fair value for our private warrants, both of which are attributable to Eos share price in the third quarter. Moving onto the next page on our cash balance, as of 9/30 we had $144 million in cash. We finalized a $25 million strategic partnership with Trinity Capital to finance our investment in equipment purchases as we increase our manufacturing capacity here in 2022. An initial tranche of $6 million inflow is as a result of that. We additionally received $4 million in warrants exercised during this quarter. From business operations, we expended $41 million this quarter. $20 million of that is directly related to the cost of sales, $6 million in general and administrative expenses, $4 million in capital expenditures, $3 million in R&D, $1 million in customer financing and an additional $1 million in commercial operations, and lastly, we had $6 million in one-time transaction expenses. Let’s go onto the next section. We’ll review our progress on commercial pipeline and booked orders to deliver on our 2021 and beyond financial commitments. Page 9 is a snapshot of our commercial activity as of October 2021. This is a page you are now familiar with from previous presentations. Let’s start with lead gen. Lead generation is where we work with our customers to materialize ideas and assess the feasibility, regulations, project plans and economics related to specific projects. We today have $2.9 billion or 18 gigawatt hours in review within this bucket. Our commercial pipeline at $3.7 billion or 22 gigawatt hours, this constitutes of two key segments, active proposals for $3.2 billion and customers with whom we have a firm commitment of another $0.5 billion. Like we have discussed on previous calls, only a project or a customer with a clear mandate on requirements, technical specifications, and only a use case that satisfies Eos specifications will be included in our pipeline. In this stage, we actively present our commercial and technical proposals to customers. Our experience is about 30% of our pipeline over the long run translates into booked orders. In specific circumstances where we have reached an agreement on commercial terms with select customers and have agreed to terms with a letter of intent supported by clearly defined next steps that require actions on behalf of the customer, we categorize these projects as an LOI or firm commitment. Our experience indicates that on average, 60% within this category translates into booked orders. Now lastly, we have to the right-most of the page $137.4 million in booked orders. We consider a project a booked order where there is an agreement for Eos to procure material, manufacture and deliver storage solutions. We see a strong momentum in demand. Booked orders have increased $58 million since the second quarter earnings call. On the next page, here’s a snapshot of our orders backlog, which is now a reflection of our 2021 year-to-date booked orders plus 2020 year-end backlog, minus any shipments to meet customer commitments. This backlog comprises of 30 projects with 16 customers and 613 megawatt hours. As of second quarter earnings presentation, we reported orders and backlog of $95.6 million. Since then, we have recorded $58.3 million in new booked orders. We have also successfully shipped $2.1 million, resulting in a total of $151.8 million in backlog. Delivery on these commitments is expected to be in 2021, '22 and beyond. Equipment sales constitute $118 million of our backlog and $34 million in long term service revenue. Our backlog as increased in the third quarter is 100% driven by cash sales and service revenue. I’ll hand the conversation back to Joe now on Page 11.

Joe Mastrangelo, CEO

Thank you, Sagar. I want to expand on the points Sagar made regarding our commercial efforts, how we’re managing our pipeline, and closing the orders in our backlog, including over $150 million from 16 different customers. Much of this backlog consists of front-of-the-meter projects which we are seeing grow in size. I will elaborate on that, but behind-the-meter projects currently represent a smaller segment of our backlog. This is primarily due to our ongoing experimentation to determine where the technology performs best and developing a strategy for that market moving forward. While there is a significant concentration on front-of-the-meter projects, we believe that behind-the-meter technology will also be important, and we are actively seeking the right partners to penetrate that market. On the use case front, our technology was initially developed to integrate solar into the grid, ensuring that solar can provide power not just when the sun is shining but also during evenings, helping to manage the traditional duck curve. We've noted an increase in locational capacity available due to grid firming, and you can see how our technology fits into that. Additionally, our work on microgrids is relevant to the earlier point about behind-the-meter projects. One of our significant achievements is the growth in backlog and project size. This demonstrates the credibility we’re building as we bring customers to our Edison facility to showcase one of North America's largest test facilities where we have operated this technology for over a decade. We also take them to our Turtle Creek factory to see our products being manufactured, tested, and shipped. One of our primary goals when we went public was to become an operational company, and the information I’ll share here reflects our progress in that direction. As we move on to manufacturing capacity, we have an excellent team in our Turtle Creek facility, and you can see operators diligently building equipment on the shop floor. We’ve improved our yields by 10%, which is detailed on the right side of the page. Our current production capacity stands at 250 megawatt hours per year. As mentioned earlier, we have recorded $3.4 million in year-to-date shipments, with overall improvements observed across all four of our main manufacturing processes, notably in quality. Our significant advancement is in the infrared welding of our battery modules, achieving higher throughput in battery assembly, which contributes to better yields as we ship products to the field. We've conducted extensive testing to ensure the products delivered meet specifications. The hard work on the shop floor is beginning to pay off in improved output, and our focus now is on scaling that high quality to grow the company. We’ve established a solid foundation at Turtle Creek for this. The graphs on Page 14 show our improvements over time. The top three graphs represent current output from containers during tests, while the bottom three show voltage output at various times. The variations in these lines illustrate performance discrepancies as we refined our manufacturing approach. A year ago, our operators were still learning how to build the equipment, which resulted in significant variability. Moving to a more recent timeline, we’ve made substantial progress with reduced variations in performance. Presently, post-manufacturing, we see consistent performance, with batteries in a container performing within 2% of each other upon leaving the production line. This aligns with our strategy of optimizing individual processes before enhancing the overall system. The results from our manufacturing line confirm our process is getting better, and our next focus is on productivity and scaling for future growth. Page 15 highlights that this consistency provides operational flexibility to our customers. The chart illustrates a battery performing varied operating cycles over different days. This showcases the battery discharging across different timeframes consistently. Addressing the intermittency of renewable energy sources requires adaptable storage solutions, and our technology offers that flexibility while maintaining product performance and lifecycle. We achieve higher round-trip efficiency and are enhancing battery performance through software advancements rather than solely hardware improvements. Turning to Page 16, this page is significant as it outlines our asset-light capital expenditure model for scaling manufacturing. We've demonstrated this through our facility in Turtle Creek. We've outlined our development phases and proved that with a $16 million investment and 60,000 square feet, we can achieve 260 megawatt hours of output. Looking ahead to 2022, we plan to expand to 110,000 square feet with the capability of producing over 800 megawatt hours for an investment of about $50 million. This model demonstrates our scalability, and we can deploy it within nine to twelve months, bringing our capacity close to a gigawatt hour for that investment, as we indicated during our public offering. On Page 17, I would like to share our latest developments. Our initial products, such as the Z3 battery, are coming off the line. We are transitioning to a more compact form factor akin to a computer server while ensuring operational safety and flexibility. Additionally, our new generation of infrared welders is being implemented to enhance battery assembly processes. We aim to produce batteries that are one-third the current size, allowing for lower material requirements and improved system costs while facilitating varied configurations. Our focus for the coming year is to optimize the overall system for better performance while ensuring operating flexibility for our customers. In conclusion, as we look ahead to the remainder of the fourth quarter and into 2022, we plan to continue expanding our pipeline, particularly focusing on utility-scale projects. We acknowledge the uncertainty surrounding project timelines, but we feel confident about the company's growth. We anticipate booked orders to range from $175 million to $300 million by year-end, entering 2022 with a stronger pipeline. We also remain vigilant in managing supply chain risks, and the team has excelled thus far in overcoming challenges while preparing to fulfill our backlog. We will continue to scale our Turtle Creek facility and provide updates in January. I'm proud of our team's accomplishments and the output from our factory, and we will keep refining our processes over time. We aim to launch the Z3 product, validating and building prototypes as we transition from 2021 to 2022. Our first commercial endeavor is on track for the latter half of next year. Our primary goal is to develop multiple configurations of the battery to support various use cases moving forward. Overall, the operating results for the third quarter have been impressive amid uncertainties, and our team is dedicated to becoming the leading stationary energy storage company in the market. We will continue collaborating with our customers to deliver value and grow shareholder returns. Thank you for your attention, and I will now turn it over to the Operator for questions and answers. Thank you.

Operator, Operator

Our first question comes from Chris Souther with B. Riley. Please proceed with your questions.

Chris Souther, Analyst

Hey guys, thanks for taking my question here. Congrats on the 300 megawatt hour order with Blue Ridge and adding Amaresco and the Duke follow-on here. I wanted to talk a little bit about some of the pipeline here. Seeing the decline in the current pipeline for active proposals and late stage LOIs, obviously a portion of that is coming from booked orders, which is great. But I’m curious, on the projects that you’re taking out, is it a factor of lithium ion winning a few that you were going after, is it projects that are getting scrapped for supply chain costs or interconnection issues? I’m just kind of curious where you’re seeing some of those later stage ones that are falling out.

Joe Mastrangelo, CEO

Yes, hey Chris, good morning, and thanks. I think you’ve seen there’s a natural progression of active pipeline into LOIs, and both of those feeding into orders, so part of that is just moving through the life cycle of projects. I think when you look at the LOIs, part of that is projects that haven’t moved forward for interconnection, and also just looking at what the revenue models would be from the customer standpoint. Then on the active pipeline piece, it’s a snapshot in time and we do run a pretty strict process of what goes into that number. We took some things out. It was a mix of what you brought up - you know, there are projects that we’ve lost, large projects. As you see, we’re starting to go after bigger and bigger projects. There was one large project that the customer went with lithium ion as their preferred choice - it was a shorter duration project, so not unexpected, and we were going after it. We went after it really as a learning process to see where we were going to be. Then in the lead generation, you’ll see more of that move into active pipeline as we refine the use cases going forward, but for the point in time of where we’re at, you’re just seeing the different moves between the buckets and regular market as far as we see. We feel really good about what we have in there and about seeing the activity in the market coming more and more to longer duration, flexible duration storage.

Chris Souther, Analyst

Got it, okay. That’s very helpful. Regarding the target for booked orders by year end, which ranges from $175 million to $300 million, I’m curious about the number of larger potential orders that could impact the total from the low end to the high end. Specifically, how many orders similar in size to Blue Ridge are we anticipating? These could significantly influence our booked orders by the end of this year and potentially into early next year, considering all the moving pieces.

Joe Mastrangelo, CEO

Yes, it’s a great question, Chris. There’s three or four larger projects ranging up to where Blue Ridge/Pine Gate is and a little bit smaller than where they are. We’re giving that big range because it is lumpy, right, so from the standpoint of closing by the end of the calendar year, we see challenges just as you’ve been working through running the process of closing and negotiating, closing out the transactions and just saying that there could be that lumpiness, where things are going to happen after a quarter point but still will move forward, and we’re just trying to signal to everybody that we feel confident in what we have as far as what we’re working on, but there could be some timing risk in there.

Chris Souther, Analyst

Okay, that makes a lot of sense. Looking at the manufacturing capacity, it makes sense you’d kind of push the ramp of additional lines up to that 800 megawatt hours in Pittsburgh, given the push-out in some of the project timing. Could you walk through the cadence of those additional lines coming online between now and year-end 2022, and then you mentioned the scale-up to 1.5 gigawatt hours, I’m curious what are the plans as they stand today and timing expectations that we should look at there.

Joe Mastrangelo, CEO

Yes, so Chris, what you’ll see is we’ll go into first quarter with a similar run rate of when we come out of 4Q from a production standpoint, and then gradually ramp up as we go through the year. I think we’re doing this in phases, so we’re going to add welder capacity as we get to the end of the first quarter, that will then bring up the production of battery modules, and then from that standpoint, we will then go in and add container, where you form and test the container before you ship as you get into third quarter, to be ramped up into the first quarter to that 800 megawatt hour annual run rate. Now, the second part of your question on the 1.5, it’s going to be a mix of two things, right, so what we’ve learned as we’ve gone through here over the last three, four months is that we are starting to get more and more throughput out of our existing assets, and if you remember, what we’ve always said about how we want to run manufacturing is we want to get the process of manufacturing the part right, then go for productivity or automation. We’re at the point now where we consistently get the process right - you see that in our yields. Now it’s how do you get better throughput through the asset base that you have. That being said, when we look at where Turtle Creek is, you’re going to run into entitlement of the facility as you get into the end of next year, beginning of the following year in 2023, so we will be out looking for where factory number two will be located as we get into the middle of next year to get to the target that we have for gigawatt hour production.

Chris Souther, Analyst

Got it, okay. That’s really helpful. Then maybe just last one, could you talk a little bit about the opex trajectory, any additional costs we should be expecting in the fourth quarter or the first half of next year as we’re validating and launching Z3, ramping up sales activity. Just the capital plan as far as capex is very helpful, but I’m just curious where we see operating business going over the next couple quarters here and cash burning.

Joe Mastrangelo, CEO

Sagar, you want to start and then I can jump in?

Sagar Kurada, CFO

Yes, hi Chris. The opex for next year will be right in line with where we are for this year, plus maybe 5% to 10% to mark up for the incremental growth. That’s more so specific to your point on research and development and commercial operations as we ramp up both internationally as well as, to Joe’s point, balance out front of the meter and behind the meter.

Joe Mastrangelo, CEO

And Chris, regarding your question about the Z3 ramp, we validated, industrialized, and commercialized the current product all in one facility. For the Z3, we will have a partial production line in our Edison facility, which will allow us to handle the industrialization and validation of the product without needing to produce units for customer shipment right away. This will integrate with our production capacity in Turtle Creek or factory two to ensure we deliver the first commercial units by the end of next year. The process should go more smoothly as we incorporate lessons learned from the Gen 2.3 into the Z3 development, working closely with our technology team in Edison to effectively ramp up production and validate the product.

Chris Souther, Analyst

Got it, that’s helpful. I’ll hop in the queue. Thanks guys.

Joe Mastrangelo, CEO

Thanks Chris.

Operator, Operator

Our next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Tom Curran, Analyst

Good morning.

Joe Mastrangelo, CEO

Hey Tom.

Tom Curran, Analyst

When it comes to educating both investors and prospective customers, you’ve done a great job of articulating the advantages of Eos’ proprietary chemistry over lithium ion alternatives for long duration storage solutions. But if we shift the frame of comparison from the Znyth versus LIBs - you know, lithium ion batteries, to the Znyth versus other non-LIB storage technologies, which strengths would you emphasize? Specifically, how would you compare and contrast the Znyth with iron air technology and then with liquid metal and molten salt technology?

Joe Mastrangelo, CEO

Yes Tom, I believe the energy value chain will always consist of a mix of technologies, as no single technology can address all the requirements of that mix. The technologies you mentioned are focused on longer duration discharge, which is different from the market segment we target. When comparing them, I refer back to our capex-light model for increasing capacity and manufacturing products. Our operating flexibility allows us to perform cycles in shorter durations as well as those exceeding 12 hours, making us a bridging technology that is crucial for stabilizing the grid as more renewable energy sources are integrated. This flexibility helps manage intermittency effectively. However, directly comparing these technologies is challenging since they focus on much longer duration storage than we do. Our system is simpler, and the advantages we discuss regarding lithium-ion batteries also apply to these technologies: we utilize abundant and readily available raw materials, have straightforward system designs with competitive initial investments, and very low maintenance costs, along with high ease of use. These factors are key differentiators for us in relation to both short and long duration alternatives.

Tom Curran, Analyst

Great, so as the long duration non-LIB utility storage market matures and we do end up seeing room for several technologies rather than gravitate towards any one silver bullet or dominant solution, you think about that future demand pie consisting of several slices, which single use criterion is most likely to determine the size of each piece? Should it be duration range?

Joe Mastrangelo, CEO

Well, I think it’s the total cycle that you’re looking at, so how fast do you want to charge, how long do you want to wait between discharge, so get up to whatever your charging is, and then how long or short do you want to discharge. It’s that total cycle, and I think what the industry needs to think about, and the way that I think about it having been in the industry 30 years and worked in different technologies, is we talk a generic cycle to make it easy for people to understand, but in the real world you very rarely run at that generic cycle. When I look at what we do as a technology, there is no generic cycle for us, and we showed it in that one chart that shows the battery on consecutive days running different discharge times. There is a tremendous amount of volume there because the whole purpose of wanting to bring energy storage into the energy mix is to give the system flexibility, so you want assets that can be flexible. When we operate like that across that flexible range, different power ratings, different discharge and charge times, you don’t damage the battery, you don’t reduce its useful life, it doesn’t degrade faster, and it gives you great performance, so it’s kind of like hey, what is your use case, how do you want to use it, and we know and I know after 30 years that no one day is going to be exactly the same as the next day, and you need to be able to meet the demands of those days. That’s what we love about our technology in the market.

Tom Curran, Analyst

That’s very helpful, thanks for that, Joe. Sagar, turning to the initial expectation that you would realize the 45 of the initial expected $50 million of revenue for 2021 over the first half of 2022, can you update us on how much of that remaining 45 you now expect to recognize over the first half, and then turning to the Blue Ridge power order, how much of the Blue Ridge power order revenue should we see recognized over the first half?

Sagar Kurada, CFO

Yes, I’ll start and then Joe will jump in. Look, first off, we expect at this point to provide a better perspective on 2022 when we report our fourth quarter earnings in February, largely driven by some of the near term secular headwinds that Joe alluded to when he started off the conversation with trends in the marketplace. Clearly all of the backlog is expected to be delivered sometime between 2022 and ’23, and both based on customer readiness and our ramp-up, which is fragmented to the demand at this point, we’ll be taking a look at what the first half looks like. As Joe said, the first quarter will look similar to the fourth quarter, and that’s really what our starting point for 2022 will be.

Joe Mastrangelo, CEO

Tom, I want to add to the timing of when we anticipate Blue Ridge and Pine Gate contributing to revenue. These projects typically have a cycle from order to connection to the grid that averages about a year, but it can range from nine months to up to 18 months. The order we announced includes several projects, so the revenue will be realized over time. In the first half of next year, we expect revenue to come from our existing backlog, and then in the second half of the year, we will start delivering the 300 megawatt order for Pine Gate along with the original order we had with them. As Sagar mentioned, we will provide more details on our plans once we meet with customers to better understand their timing needs, allowing us to outline the revenue expectations for 2022.

Tom Curran, Analyst

Great, thank you for taking my questions.

Joe Mastrangelo, CEO

Yes, thanks Tom.

Operator, Operator

Thank you. As a reminder, if you would like to ask a question, please press star, one on your telephone keypad. Our next question comes from the line of Martin Malloy with Johnson. Please proceed with your question.

Martin Malloy, Analyst

Good morning.

Joe Mastrangelo, CEO

Hey Martin.

Martin Malloy, Analyst

The Duke order is exciting because it's a repeat order from a valued customer. Could you share more details about how they are utilizing the batteries and any feedback they provided on what they appreciated?

Joe Mastrangelo, CEO

We conducted a pilot project with Duke over 24 months at their test facility near Charlotte, North Carolina. The consistent feedback from their team has been that they often can't tell when the system is operational because it doesn't draw power to run. The system's ability to maintain a stable temperature without requiring HVAC is a significant advantage, and it operates very quietly compared to other technologies. They appreciated the capability to deliver cycles around six hours for their specific use case, with the flexibility to adjust to two hours or extend beyond six when necessary. This positive experience inspired the follow-on order, which is a full commercial order, and we hope it will result in more orders in the future as we continue to demonstrate the effectiveness of our technology.

Martin Malloy, Analyst

Great. Thank you for that. I was wondering, and I don’t know if you’re willing to share this, but when we look forward to the 3.0, it looks like what’s in your backlog is about $244 per kilowatt hour. Can you maybe help us with pricing for 3.0 and how you expect it to trend over time, and also gross profit margins?

Joe Mastrangelo, CEO

What I would say specifically is that I would refer back to the model we established when we went public. What I would mention, Martin, is that our goal is to deliver more power per container and require fewer containers in a smaller footprint to meet customer needs. As the market evolves, grows, and accelerates, we will continue to compete on price, but it's challenging to provide a forward outlook since the market's future is uncertain. I think it would be difficult for us to provide guidance that we could adhere to. However, we will maintain our current model and the growth trajectory we have to ensure the company becomes gross margin positive and cash flow positive in the future.

Martin Malloy, Analyst

Okay. On round trip efficiency for 3.0, the range, any help you could give us there?

Joe Mastrangelo, CEO

Yes, depending on the use case and how it is utilized, we have observed some interesting patterns. It's important to consider the round trip efficiency. We operate our batteries by charging them to 100% and discharging them down to zero. When we refer to round trip efficiency, we are talking about the complete operating cycle of the battery. Our generation 3 product is expected to achieve a total round trip efficiency in the high 70s to low 80s. In comparison to lithium-ion technology, which often quotes round trip efficiency based on a discharge from 80% to 20%, our efficiency can improve significantly if we discharge only down to 20%. In such cases, our round trip efficiency can rise to the mid-80s, and we have conducted factory tests with current technology that confirm this. We will need some time to provide a more precise number on the next generation product after we conduct tests on the first production run units towards the end of this year and the beginning of next year. Nonetheless, we are optimistic about the performance of the prototypes we are currently evaluating.

Martin Malloy, Analyst

Okay, then what are the raw materials specifically that are both scarce or difficult to come by, or is it just the logistics issues that are plaguing everybody, is that what’s causing issues?

Joe Mastrangelo, CEO

Yes, for us it's about logistics and availability. You have to keep in mind that there are plenty of raw materials for the battery, including plastic resins for frames, titanium, carbonized and graphitized felt, and zinc bromine electrolyte. The main issue lies in coordinating the delivery of these materials with our production schedule. Our biggest challenge has been around shipping containers. Initially, there were more containers than needed, but now they're hard to find, which requires us to purchase in advance to ensure we have them available. Like everyone else, we're dealing with port issues, which affects one of the two parts we import. We need to carefully manage when they arrive and ensure they get to the factory. It's a daily process; we conduct production calls every day to stay updated on the situation, and we work to address any issues to maintain a steady flow of materials into the factory.

Martin Malloy, Analyst

Okay, and my last question on the software side, I thought I heard on the call that you’re seeing some improvements in efficiency as a result of improvements in the software. Could you maybe talk a little bit about the software that you’re developing and how that integrates with the customer’s software for controlling storage or solar units and using them in conjunction with each other, as an example?

Joe Mastrangelo, CEO

Yes, that's a great question, Martin. When we developed our system, we designed it on a building block basis. Our DC system features software that controls the battery modules and the overall container. This software is agnostic to the energy management systems that customers use, which was intentional. As a new market entrant, we wanted to avoid informing customers that they needed to retrain their workforce to adapt to a new software interface. We've integrated our system with various energy management systems that customers currently utilize. From what we're seeing with our software, particularly in managing battery performance, we're able to smooth out the variations we previously identified. As we enhance manufacturing consistency and first pass yield, we are achieving better battery performance. The essence of our system is straightforward: the least efficient component in the container dictates the overall performance. We're noticing the positive impact of our engineers' and R&D team's efforts to improve the battery. Consequently, we're adapting our software to offer customers various use cases, allowing them to operate the battery however they prefer.

Martin Malloy, Analyst

Great, thank you very much for your time.

Joe Mastrangelo, CEO

Thanks Martin.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Joe Mastrangelo for closing remarks.

Joe Mastrangelo, CEO

Thanks everyone for joining today. Extremely exciting time to be part of the company and really very exciting to be, either when you go through our labs here in Edison, where I am today, or on the factory floor in Turtle Creek, this is a dedicated workforce that every day comes in and realizes that we have an opportunity to change the way the world powers itself, making it cleaner and greener as we move forward with a product that can deal with the robustness and the real world demand. We’re going to continue to build a great operating company and look forward to coming back beginning of next year to update you on fourth quarter, and thanks again for listening in.

Operator, Operator

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.