Earnings Call
Eos Energy Enterprises, Inc. (EOSE)
Earnings Call Transcript - EOSE Q4 2021
Operator, Operator
Good morning and welcome to the Eos Energy Enterprises Fourth Quarter and Full Year 2021 Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. With that, I’d like to turn the call over to 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's financial results conference call for the fourth quarter and full year ending December 31, 2021. 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 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 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. This conference call will be available for replay via webcast through Eos's Investor Relations website at investors.eose.com. Joe and Randy 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
Thanks Laura, and welcome everyone. Great to walk you through our 4Q and 2021 operating results. If we move to Page 3, I’m going to start where we always do and that's with how much energy we’ve discharged from our systems. Since the last time we were together, at the end of 3Q, we've discharged nearly 100 megawatt hours of energy from our systems, both out in the field or on test. We’re now over 400 megawatt hours and it continues to show the robustness and proven nature of the technology that we have out in the marketplace. For me personally, the journey here over the last year or so, it's really fantastic to be sitting here and thinking about having nearly 600 megawatt hours of orders and backlog, almost totaling $150 million. But the lion’s share of the work that the team has done over the past few months is really beefing up our opportunity pipeline. As we've gone out and proven the technology and shown the value, our pipeline is now 25 gigawatt hours of opportunities and over $4 billion. That bodes well as we walk through here today, and what we think we can do as we go through 2022. Lastly, when you think about the operations of the company, we were able to recognize $4.6 million of revenue. The team had a really good fourth quarter, which Randy will walk you through a little bit more details on that. But I think when you summarize this page, you're really starting to see the company now transitioning from an R&D company to a full-fledged operating company. If we move to the next page, you can see we show some of the core operating highlights for the quarter for the company. We are on a rapid growth trajectory as a company. When you look at growing our operational scale, which is really positioning us for the future, we signed and announced earlier this week the doubling of our manufacturing footprint in Turtle Creek, Pennsylvania to be able to build our 800-megawatt hour a year capacity. At the same time, we are piloting a manufacturing line here in Edison, New Jersey for our new Z3 product. That product has been on test and we've produced our first units. I think one of the more important things which you may think of as a soft thing, but it's very important out in the market, is the fact that we received ISO 9001 certification for our manufacturing facility in Turtle Creek. This is critical for us as we go out and show customers the capabilities that we have, and the maturity that we're starting to gain in our manufacturing process. When you look at those manufacturing processes, we had a very strong quarter. We had a 68% increase in output versus the first half of 2021. Our first pass yields towards the end of the year were approaching 90%. We're consistently going above that, as you look at the first few days here in 2022. We’ve reduced our cycle time by nearly 75%. That’s shown in the financial results that we're delivering today. We have shipped more than 50 containers out in the field, which is really great performance by the entire operating team. On the commercial side, sales volume is up 4x versus the third quarter. We signed $176 million of new customer LOIs and firm commitments. When you think about our business model, which I'll talk about in the next section, that's a leading indicator for orders that are going to come in the near-term as customers close out their contracts. As I said earlier, the pipeline is rapidly growing. We see more and more people wanting to have longer duration storage and coming to Eos as the provider of that solution as they think about what they want and how they want to monetize their assets. When we move forward and shift into orders, growth and revenue, I want to start off on Page 6, just to baseline back on how we think about the market segmentation. We always break this down into three segments: short duration, zero to three hours, where lithium-ion is really strong and provides a great solution to the marketplace; long duration, 12 plus hours, where there are a lot of competitors that are developing technology and starting to ramp up their manufacturing processes, much like we've done over the last 18 months; and then you have this medium or intraday, or what I like to call truly the flexibility, simplicity and safety segment of the marketplace. It's going to be 115 gigawatt hours. Eos has the perfect solution for this customer need. When we think about delivering solutions that need to offset the intermittency of renewables, we need flexibility. They can't be static, rigid systems. That's exactly what our technology does, and that’s exactly why you see us with this nearly 600-megawatt hour backlog and a pipeline that's rapidly growing and expanding as the commercial team was out selling our solution into the customer base. When you take a look at this next slide, you see that we have significant competitive advantages versus the incumbent lithium-ion technology, not just on our ability to operate across a wider range with a larger depth of discharge, higher operating range when it comes to temperature and lower degradation, but also a cost advantage that comes from the fact that we have principally five earth-abundant raw materials in our overall system. Our supply chain is domestically based. We’ve stabilized and de-risked it over the last four months. We ship our products unlike other products in the marketplace, it ships fully integrated in its container with zero voltage, which increases the safety of the product when it's being shipped to the site either over the ocean or over the roads on a truck. We have a longer operational lifetime, when you think about how our system charges and discharges with every cycle that we operate our battery. You're basically resetting that battery and increasing and maintaining its useful life to 15 to 20 years with the same performance. We don't have any auxiliary systems, either HVAC, heating ventilation air conditioning to operate in a narrow temperature range, or unlike flow batteries we don't have high pressure pumps to move our electrolyte out of large tanks through a membrane and catalyst to generate electricity. We are a self-contained system that's very safe and it's hard to damage the system when outside of the suggested operating specifications of the product. At the end of its useful life, 20 years from now, many of us probably won't be in the industry anymore, but this product will be able to be recycled very simply and cheaply, and all the raw materials can be put to new use. We think this offers flexibility, helps decarbonize our energy value chain and has a compelling overall lifecycle from birth to rebirth that adds to exactly what we're trying to do as we think about renewable energy for the energy value chain. If we move from Page 7 to Page 8, just want to walk through our traditional page on the pipeline. As everyone knows, we call our pipeline projects where we have a technical use case from our customers that we can provide a technical proposal and a financial overview. We do early generation ideation or idea generation with customers where we have another $4 billion of opportunities that we're working on with our customers. But these are things where people come with ideas. When you think about this page and you move it from left to right, that lead generation generally sees a 50-50 hit rate from lead generation into the pipeline. From the pipeline, what I would call active proposals and letters of intent and commitments, that's about a 30% hit rate, and then you have booked orders. When we think about where the company is and how we've positioned it for future growth, the company is well-positioned to continue to grow its backlog and continue to expand. We like what we see from the customers that we've been working with, and in that LOI firm commitment bucket is a 240-megawatt hour project with Bridge Link in West Texas, which is an air cut project, and we feel really good about what Bridge Link wants to do. We’re working with them on the same side of the table to close that out and turn that into an order here relatively quickly. So, we're excited about what the team has done to position ourselves for future growth, and we'll continue to keep everyone updated as we think about this. Now, although on the booked order side, when you look at it and see no change versus the last time we were together for earnings, we did book over $51 million in orders with blue-chip customers like Ameresco, Duke, Blue Ridge, and Pine Gate Power. We’re pretty excited about those booked orders for the year and where the backlog stands. If you go to the next page, when you think about the backlog, there are 28 projects of 14 customers. We do have customers coming back for multiple projects, which is a testament to what the team has done establishing us in the marketplace. When you think about the backlog in and of itself, it's important to note that $114 million of this is the capital equipment shipping the product out into the field. But we've already started to create a recurring revenue stream with long-term service agreements, which are $34 million of the opportunities that you have in the backlog. There are some asset leasing projects that we go through. When you think about that, and see why that number has gone down versus the third quarter, that's basically because we had one project where the customer found their own financing, and it's in the process of closing that, and Eos is no longer going to finance that project. But we're working now in the factory to be able to manufacture that product and get it out in the field. And that's another project down in Texas in the ERCOT zero cut operating regions. We’re very excited about where we are from a backlog standpoint and how the commercial model has evolved over the past 12 months. It will continue to drive growth and backlog for the company, starting to deliver higher revenue numbers as we look to the rest of 2022. If we now shift into and talk about manufacturing, and our ability to deliver products, again, I would start off and say, signing the lease and expanding our manufacturing capacity in Turtle Creek is very important for us to continue to grow the company. At the same time, being approved by the Department of Energy through its Phase 1 loan program and now starting off on Phase 2 offers us a way to be able to finance the future capacity growth of the company as we look to the future. I'm really proud of what the team has done out in Turtle Creek. If you focus on the left-hand side of the page, we've seen continuous yield improvement in the factory. I talked earlier about how we're getting more output out of the same asset base. We’ve expanded our manufacturing workforce. We’re really proud of the team that we have there. One thing I would say is, not only does our company do good things for the energy value chain, we're doing good things for the communities that we operate in. When you look at our supervisors on the shop floor today, they were the first employees that came into the factory 18 months ago. Our workforce is impressive, and nearly 15% are veterans and 40% are minorities. People can come in and we've got a really good growth trajectory and career trajectory for people to work in the green tech sector and what is the United States. We’ve also started to optimize our processes and cycle time. This never stops. You’ve got to be relentless about this and bring lean processes. We have a new supply chain leader who's joined the company with a very extensive background in both technology and manufacturing. He is only going to help us improve. On the right-hand side of this page, you can see the first shots of our new facility in Turtle Creek, and we've gone through and signed the lease, as I talked about earlier. What you can see on that far right picture is we started to layout mock manufacturing flow on the shop floor so that we can start looking at how the products and the raw materials are going to flow through the factory to optimize that and get more and more output off of the same asset base. This is critical because when you look at the investment in this facility, it’s $50 million to get 1 gigawatt hour of capacity, which is 60% less than what it would cost if you were doing a comparable lithium-ion facility. We've designed the entire business to be modular and the product configuration and how you ship in the field, but also be modular in our CapEx program so that we can either accelerate or slow down our capital spend depending on what we see happening in the marketplace. The team at Turtle Creek is something we're proud of, and all investors should be proud of what that team has built in such a short period. Better days are even coming now, as I said, the initial results of 2022 are better than what we saw in the fourth quarter and we’re excited about where we're going to be as we move forward. So, with that, I'll turn it over to our new CFO, Randy Gonzales. Please welcome him formally and publicly to the team and let Randy take it from here. Thanks.
Randall Gonzales, CFO
Thanks, Joe, and good morning everyone. Let me start by saying how excited I am to be part of the Eos team. I wanted to take this opportunity to explain why I chose Eos. First and foremost, the positive impact that Eos has in making the world a better place through accelerating decarbonization. I can't think of a better cause. Mid and long duration energy storage technologies like ours are a key catalyst for the continued adoption and higher capacity utilization of renewable energy solutions. Second, Eos has technology that works, which now requires industrial scale. I’m energized to apply my decades of experience in managing rapid growth, driving operational excellence, instilling discipline through performance management, and executing strategy. Finally, I was excited to partner with Joe and the rest of the leadership team to continue building on the platform of this critical technology, which has been developed in the U.S. and produced in the U.S. with a primarily domestic supply chain. Now turning to Slide 13, I'll walk through the fourth quarter, the full year financial performance, and the outlook for the full year 2022. The fourth quarter validates the rapid operational scale the company expected and is a good baseline for what to expect going forward as we produce against our backlog, especially as we bring the additional manufacturing capacity online in the second half of the year. In the quarter, we achieved significant operating leverage with revenue increasing 332% versus the third quarter to $3.1 million, while cost of goods sold only increased 64%. This is greater than 5x operating leverage on volume. We continue to see substantial improvements in productivity and efficiency in our operations through reductions in scrap rate, increasing first pass yields, and we have the right plan with the right resources to deliver a significant reduction in cost of goods sold over the course of 2022. On the expense side, we continue to invest in research and development to improve the technology we deliver to customers. We invested $5.4 million in the fourth quarter in R&D. As Joe mentioned earlier, we've made great progress on our next-generation battery development and we'll continue the intense focus on R&D efforts in 2022 to improve battery performance and reduce both the cost of the product and lifetime operating costs of our battery system. This includes developing manufacturing and process technologies that will improve throughput and yield, which will lead to additional operating leverage. Selling, general and administrative expenses for the quarter were $14 million as we continued to invest in the platform for growth. $5 million of this total is structural, $4.1 million is non-cash related to stock compensation expense. There is another approximately $1.3 million of one-time items, and the remainder is discretionary spend associated with scaling the business. Overall, our fourth quarter operating loss was $37.6 million. Turning to Slide 14, full year revenue was $4.6 million, which was in line with company estimates. Full year operating loss was $135 million, which includes $30 million to terminate the high-power JV agreement. Turning now to Slide 15, we had $105 million of cash on hand at December 31, 2021. In the current global supply chain environment, we've been actively working to lock in raw material delivery to match our sales plan. As a result, fourth quarter cash outflows include $5 million of advance payments to suppliers to secure volume commitments. In addition, there's another $2 million of advanced payments to capital equipment OEMs for CapEx in conjunction with the Turtle Creek capacity expansion. Now turning to Slide 16, I'll cover our outlook for 2022. As Joe highlighted in his remarks, our differentiated technology serves a large and growing market opportunity with strong secular tailwinds. Our product is resonating in the marketplace, as evidenced by the significant positive momentum in our sales pipeline, including a growing number of large utility scale projects with blue-chip customers in our backlog, which currently stands at close to $150 million. These tailwinds support our commitment to deliver on $50 million of revenue and $400 million in net new book orders in 2022. To support our growth, we expect CapEx investment in the range of $25 million to $35 million this year, as we scale up our manufacturing capacity to 800 megawatt hours with our recently announced expansion in Turtle Creek. We'll continue our focus on improving our operating performance to deliver on our customer commitments, with a goal of maintaining over a 90% first pass manufacturing yield. The hard work that our team is doing in our existing Turtle Creek facility has enabled significant progress we've made to date and strengthened our confidence in our plans to scale capacity in 2022. Our technology continues to fulfill a core need in today's and tomorrow's energy landscape, and we're positioning the company to deliver in 2022 and beyond. As we look at the way the market is accelerating and the need for our technology, we are now poised to operationally scale the company to actively capture that opportunity. The plan that we just outlined will require the company to raise additional capital to fully reach its potential. As you saw with our announcement regarding the Department of Energy Part I loan approval, we are actively seeking different funding options to achieve the company's full potential. This will allow us to not only grow the top line but also achieve profitability in the midterm. With that, I want to thank everybody for their time and listening in today. I would now like to turn it over to the operator for questions. Operator, will you please open the line for Q&A?
Operator, Operator
First question, Chris Souther with B. Riley.
Chris Souther, Analyst
Hey guys. Thanks for taking my question here. Maybe you could walk us through the cadence for the $50 million in revenue expected for 2022. Obviously, it started last year with some timing and ramp execution challenges throughout the year. I just want to get some color on why confidence is higher that we can achieve it this year. I think entering last year a lot more of the opportunities you were targeting were LOIs versus order backlog. So, any color you can frame the case in the current booked orders and how you have the confidence in the numbers here would be great.
Joe Mastrangelo, CEO
Hey, Chris, how are you doing? Look, first I'd start off with we're executing from the backlog of orders. So, the orders are in hand. There's always timing risk in the market like we saw last year, but we've created a clear roadmap with the customers that tie out to the $50 million around delivery and startup of the systems. From a production standpoint, we've highlighted a lot of the work that we've been doing with the team, locking in the supply base to be able to have the materials ramping up as we go through the year, the expansion of the Turtle Creek facility, and quite honestly, the yields that we saw at the end of last year and the beginning of this year, which are extremely promising as we dial in the manufacturing process. Running a factory is about making that factory better every day by applying lean principles and operational excellence. We see improvement every day in what we're doing and how the team is executing. Again, that all starts with executing from the backlog, locking in the supply chain, which is challenging right now, but we just battle that day by day and continue to improve the factory as we expand the capacity.
Chris Souther, Analyst
Got it. So, could you kind of frame the first half, second half of the year on cadence or by quarter based on the order backlog? What we should expect as far as that cadence?
Randall Gonzales, CFO
Well, Chris, I think we will see a ramp within the year, similar to how we're always ramping year-over-year and ramping quarter-over-quarter. We have to work through that, and really, when you look at where we are from an evolutionary standpoint, the $50 million for the year is solidified. We really don't give quarterly guidance on revenue.
Chris Souther, Analyst
Okay. Understood. And then on the gross margin picture, nice to see the strong leverage quarter-over-quarter. Can you talk a bit about how we should expect that to continue, where the breakeven points look from quarterly revenue run rate as we start to scale up here as far as getting to positive gross margin?
Randall Gonzales, CFO
Yes, Chris, good morning. This is Randy. What I would tell you is that we know what our cost entitlement is for both the current generation product and the future generation product. We expect to see significant reductions in our product costs. This comes from scale, as we're spreading fixed costs over a higher volume. It also comes from fundamental improvements in first pass yield and productivity of the plant. We're pulling levers from a procurement perspective, especially around commercial negotiations, material substitution. It's a finite number of projects that will get us to a very good place in the near-term. Our plan is clear for achieving gross margin positivity, which spans about 18 months, and we are excited about that as we continue our development efforts and scale the manufacturing process.
Chris Souther, Analyst
Okay. And then maybe just the last one. Great to see the progress on the DOE loan program there. Do you have a timing sense on when we could, I guess, get a decision on that final loan approval process? And ballpark, kind of numbers that we could be looking at as far as that program regarding cash?
Joe Mastrangelo, CEO
Yes, so, Chris, what I would say is that we got through the Part I to move into Part II very quickly. We want to continue that pace, and we are on a regular rhythm with the DOE working through that, but we've now got to work through the due diligence process. I wouldn't want to put a timeline on it, either too long or too short. We just got to keep working on it with the same intensity that we have been. What we're doing now is structuring the Part II program to support the expansion in Turtle Creek and bringing that facility up to full scale. As we look for future capacity expansion from there, there could be additional tranches of funding as we go forward. We've created about 150 green tech jobs in the U.S. and we’re looking forward to adding another 100 to 150 as we scale the factory, fitting perfectly into what DOE wants to achieve.
Chris Souther, Analyst
Okay. That makes sense. Thanks, guys.
Joe Mastrangelo, CEO
Yes. Thanks, Chris.
Operator, Operator
Next question, Tom Curran with Seaport Research Partners.
Tom Curran, Analyst
Good morning.
Joe Mastrangelo, CEO
Hey, Tom.
Randall Gonzales, CFO
Good morning, Tom.
Tom Curran, Analyst
Curious, given the visibility you have underpinning the expected $400 million in orders you're guiding to for 2022. If you’re on track to book those, could we see upside to $50 million in revenue? Would it be possible for some of those orders to turn quickly enough for you to actually exceed that revenue target?
Joe Mastrangelo, CEO
Tom, look, we feel comfortable with the pipeline that we have. Where we stand to get to that $400 million, that's a 4x growth rate. In this market, with where we are and the capabilities of the company to scale, yes, we will keep working to maximize value tied to capacity. We’ll keep everyone updated as we go through the year. We’re happy with the opportunities that we have with the LOIs we just signed, and we have confidence in closing those as planned.
Tom Curran, Analyst
And Joe, what do you expect the mix to be for the $50 million you'll ship in 2022 in terms of zinc models?
Joe Mastrangelo, CEO
2022 will principally be the Gen 2.3 with initial Z3. We've talked about initial Z3 getting into production by the end of the year. The majority of the sales for this year will be the Gen 2.3 as planned.
Tom Curran, Analyst
Got it. And then, Randy, welcome to your first call.
Randall Gonzales, CFO
Thanks, Tom.
Tom Curran, Analyst
Curious, for 2022, what specific cost targets do you have? And upon exiting the year, where would you like the cash balance on the balance sheet to be?
Randall Gonzales, CFO
With regards to the cost targets, we have those internally. We've talked about the visibility to gross margin positivity within 18 months, and we have a clear plan for that. In terms of cash balance, I don’t know if we have a target for the end of the year. We will actively look for funding sources. We'll keep the market updated as we progress.
Joe Mastrangelo, CEO
I’ll just add that we built this company to be modular. Everything we do, from installation out in the field to how we add manufacturing capacity. Where we look at the trajectory of the company, we can either accelerate or conserve depending on where we are in that growth trajectory. We want to keep options open and see where we are.
Tom Curran, Analyst
Understood. I appreciate the additional color.
Joe Mastrangelo, CEO
Thanks.
Operator, Operator
Next question, Subash Chandra with The Benchmark Company.
Subash Chandra, Analyst
Thanks. Hi, Joe. Welcome, Randy.
Joe Mastrangelo, CEO
Hey, Subash.
Randall Gonzales, CFO
Thanks, Subash.
Subash Chandra, Analyst
Maybe a question for Randy here, following up on the last couple of questions. So, if one was to look at these numbers, could you kind of guide us on or off these assumptions? Say, yes, $50 million of booked revenues and then we annualized cost of goods sold in 4Q somewhere at $80 million, $85 million. Then $35 million of CapEx, which would be the implied draw on your cash balances, plus whatever the DOE loans are. Can you take those various pieces and sort of tell us where that construct might be flawed?
Randall Gonzales, CFO
Take the assumption of being gross margin positive within 18 months, $50 million revenue, and the understanding that we're going to need to raise capital. The DOE loan process is not the only thing that's being worked. We have a lot of confidence in the market, what’s going on from a pipeline and pricing perspective. There's a lot to be excited about here. For both 2022 and 2023, we expect pricing to continue to increase, with costs significantly decreasing.
Subash Chandra, Analyst
Yes. And what might also help is, if I look at the cost of goods number, how would you bucket that in terms of raw materials, labor, things like that? So, some sense of what is scalable in that number, and discretionary and what may not be?
Randall Gonzales, CFO
Keep in mind that we have a fixed cost base in the facility now, it's very low volume from 2021, started to ramp up like we expected in the fourth quarter. A large percentage of that fixed cost is a from having a facility with low volume. There's also a lot of other sub-optimal costs related to being early stage of learning curve from a process perspective. We’ll continue to see progress from increased productivity and first pass yield to drive down costs. The majority of the costs will come out from the raw material piece of it, and we’ve got confidence in our cost entitlement. That will naturally happen as we’re designing for cost and efficiency as we develop our next generation product.
Joe Mastrangelo, CEO
And Subash, the only thing I'd add is, you've been out to the facility, right? We've engaged the workforce. In December, we took a piece of equipment and improved throughput by 40% and improved yield by 15 points. We need to work each one of these improvements one by one. We have multiple suppliers on raw materials, and we’re looking to reduce logistics costs and the uncertainty of delivery from international suppliers. We will keep on unlocking more productivity as we optimize our processes.
Subash Chandra, Analyst
Okay, got it. Yes, and I guess on the top line, there's been local news reports anticipating sizable deliveries from you guys. Any visibility into the cycle times for those projects you have teed up, maybe even second quarter and certainly in the second half of the year for delivery and revenue recognition?
Joe Mastrangelo, CEO
Look, we announced the contract with Blue Ridge Pine Gate. We start to deliver the first project to Blue Ridge here in the first half of 2022. We have the NL project coming this year, and there’s an ERCOT project with IEP. We are focused on ensuring site readiness, installation, commissioning, and getting them on the grid. The company will have the large installations out in the field that show how the product operates in a scalable system, enabling us to grow the revenue and orders, take out costs, and deliver on profitability.
Subash Chandra, Analyst
Understood. Thanks, guys.
Joe Mastrangelo, CEO
Thanks, Subash.
Operator, Operator
Your next question comes from James West with Evercore.
James West, Analyst
Hey, good morning, Joe, Randy.
Joe Mastrangelo, CEO
Hey, James, how are you?
Randall Gonzales, CFO
Hey, James.
James West, Analyst
So, you're at this interesting point in time, Joe, that in a critical point in time where you’re transitioning from R&D to executing on the plan here and rapid growth. I recognize you had some good wins on yield improvements through expanding manufacturing. But as we go through this year, what are the top 1, 2, 3 concerns that might derail this compelling story right now?
Joe Mastrangelo, CEO
Yes, look, we’re operating in the unknown on the supply chain. That's a daily grind of managing delivery and being flexible. I feel good about the $50 million coming from the backlog. The challenges are site readiness, installation, and getting on the grid with customers. We need to focus on managing through these risk factors and the capacity expansion. But I feel good about the new facility and our ability to scale up output.
James West, Analyst
Okay. That's fair enough. Maybe a follow-up here regarding sales activity and the uptick in leads. What do you think it takes to get those leads transitioned into backlog? What can improve your win percentage?
Joe Mastrangelo, CEO
The number one selling tool is to walk the shop floor. A lot of companies entering the space don’t have the operational proof points we can show. The biggest proof point is the 400 megawatt hours of discharged energy, and watching batteries being built and tested. Customers see our capabilities and operational risk versus technology risk, and we need to keep delivering those proof points.
James West, Analyst
Right, okay, got it. Thanks, Joe. Thanks, Randy.
Joe Mastrangelo, CEO
Thanks.
Randall Gonzales, CFO
Thanks, James.
Operator, Operator
Next question, Martin Malloy with Johnson Rice.
Martin Malloy, Analyst
Good morning. Thank you for taking my question.
Joe Mastrangelo, CEO
Hey, Martin.
Martin Malloy, Analyst
Could you provide more insight on the recurring service from software revenue, including the associated margins and the timing aspect?
Joe Mastrangelo, CEO
Yes. Martin, in conjunction with the orders we have is your long-term service agreement that kicks in after the expiration of the warranty period, which is typically 2 years, could be 3 years in some cases. There’s a long tail, but probably greater than 50% gross margin.
Martin Malloy, Analyst
Okay, thank you. Very encouraging to see a repeat order from a company like Duke that had been pilot testing your equipment. When you look at the $400 million, are the orders that you're talking about for 2022? Could you help us with a view of recurring or repeat customer orders?
Joe Mastrangelo, CEO
Absolutely, we continue to expand into blue-chip energy, both IPP utility and behind-the-meter operators. Our current backlog has 28 projects with 14 customers, so multiple projects for the same customer. Partnerships are crucial as customers see collaboration. We're getting a lot of new inquiries for projects with longer discharge durations which is encouraging.
Martin Malloy, Analyst
Great. Thank you very much. That's helpful.
Joe Mastrangelo, CEO
Thanks.
Operator, Operator
Next question, Joseph Osha with Guggenheim Partners.
Joseph Osha, Analyst
Hey, good morning, gentlemen.
Joe Mastrangelo, CEO
Hey, Joe.
Joseph Osha, Analyst
To go back to the materials point, obviously, it's an inflationary environment. And so, I'm just wondering in practical terms, how far out have you been able to lock in on key input through the 6 months or whole year?
Randall Gonzales, CFO
Depends on the commodity job. We announced the strategic agreement with Tetra to supply core components about our electrolytes. Other agreements we've done for the other raw materials that we have. When we look at this, it's out beyond mid-year. We want to be careful and focus on unlocking raw material supply, reducing processing costs, and optimizing the overhead base to deliver a gross margin positive product.
Joseph Osha, Analyst
Okay, so it's fair to say that generally, you can manage about 6 months out, but after that, at this point, it's still kind of a work in progress?
Randall Gonzales, CFO
Again, depends but we’ve locked in some things that are longer than that. We feel good about the material supply capabilities to support the $50 million.
Joseph Osha, Analyst
Thanks, looking at the capital raise. Do you guys have a sort of plan B that would involve maybe slowing things a bit and conserving capital if you can't raise as you expect?
Randall Gonzales, CFO
Absolutely. The beauty of this business model is that we can dial up and dial down in an agile and flexible fashion. We’ve built this model on fulfilling capacity with existing orders. It's emphatic yes – we can manage and navigate the bridge into full-fledged operating status.
Joseph Osha, Analyst
Great. So, there is a path to scale this business more slowly with the resources you have on hand if necessary?
Randall Gonzales, CFO
Yes, that's exactly the model we've always talked about. We’ve designed this to never chase capacity but rather have orders fulfilling capacity.
Joseph Osha, Analyst
Okay, thanks. Can you maybe give us some visibility into run rates for the key elements of operating costs, R&D, and selling?
Joe Mastrangelo, CEO
We’re going to accelerate R&D spending. We won’t expect any decreases there. On the selling side, we need to continue growing our sales team to get more feet on the street as meetings start to normalize. On the G&A side, we want to keep things as light as possible.
Joseph Osha, Analyst
Okay, thanks very much, guys.
Joe Mastrangelo, CEO
Yes, thanks, Joe.
Randall Gonzales, CFO
Thanks, Joe.
Operator, Operator
I will now turn the floor over to Joe for closing remarks. Thanks.
Joe Mastrangelo, CEO
Thanks. Thanks everyone for joining today. I'm really excited about the results and what the team delivered in 4Q. I’m eager to start the journey on the operating targets that we laid out, and we’ll keep everybody updated on our progress. I'm proud to be part of this team shaping the future of the energy mix as we power people's daily lives. So, thank you.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.