Earnings Call Transcript - EOSE Q4 2022

Operator, Operator

Good morning, and welcome to Eos Energy Enterprises Fourth Quarter and Full Year 2022 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 Joe Crinkley, Communications Manager. Sir, you may begin.

Joseph Crinkley, Communications Manager

Thank you. Good morning everyone and thank you for joining us for Eos financial results and conference call for the fourth quarter and full year 2022. 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 current expectations with respect to the future results of our company, which are subject to certain risks, uncertainties and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our projections or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. Today's remarks may also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to U.S. GAAP financial information, is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies. This conference call will be available for replay via webcast through Eos Investor Relations website at investors.eose.com. Joe and Nathan will now walk you through the company highlights, financial results and business priorities before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Joe Mastrangelo, CEO

Thanks, Joe. Thanks everyone for joining this morning as we deliver our 2022 financial results. I'd like to move right into Page 3 and go through our operating highlights, the classic format we use every quarter. When you look at how we see the market growing, and we'll go through it in a little bit more details as we go through the presentation, but our opportunity pipeline stands at $7.5 billion, representing 29 gigawatt hours of potential orders. We've seen a significant strengthening in growth in this number since the passage of the IRA, and I'll talk later on in the presentation about how we see that evolving here over the next 12 months. Booked orders, we booked almost $340 million of orders, about 1.4 gigawatt hours, which when you think about where we were at the end of last year, represents tremendous performance by the team. We had a lot of momentum going into Q4 that made us feel good about increasing our orders commitment for the year. However, with the passage of the IRA, we’ve seen a slowdown on the order side as everyone is waiting to understand how the treasury rules regarding the investment tax credit and the production tax credit will roll out. I think more to come, but I feel really good about what we're seeing in the opportunity pipeline. On discharge energy, we're above 800 megawatt hours of energy discharge, which continues to grow quarter-over-quarter. Today, as we get later into the presentation, I'll walk through and discuss the containers we've built, their locations in the field, and how we're moving that forward with our team in the field. Revenue came in at $17.9 million, marking a 290% increase compared to last year, which is below our initial guidance at the beginning of the year. If you recall, at the end of last year, we reduced that guidance just as the IRA legislation came into effect, and we are working with our customers to have shipments go out in 2023 so that both sides can benefit from the full advantages of the IRA program. We ended the year with a little over $17 million in cash on hand available for us to utilize, plus another $14 million of restricted cash tied to our senior secured loan with Atlas Credit Partners. So when you take all those factors into account, we have witnessed really strong performance from our entire team as we move forward. Now, going back to Page 4 to discuss where we stand versus what we outlined in Q3, we addressed the impact of orders and shipments at the end of 2023, but I feel very optimistic about how that's set to evolve over the next few months. We are observing significant movement from blue chip customers and a notable shift toward longer duration storage, which is increasing the pipeline considerably. I think you’ll see this converting into orders as we progress through the year. Regarding our existing product, we delivered our largest project to date to Pine Gate for their Eastover project, and we are currently finalizing the commissioning on those units. Our team has done a phenomenal job executing on this large project. In my opinion, having been in the industry for 30 years, this execution is remarkable for us. The level of expertise we've brought into the company has empowered us to navigate these challenges as we get the project up and running for our customer. For Z3 development, we began manufacturing the product in Turtle Creek, and we are excited about its performance. The shift to the Z3, which offers a safe product that delivers operational flexibility while simplifying manufacturing with fewer components, reduced cycle times, and enhanced performance, was certainly a wise decision for the company. The results from our low rate initial production line here at Turtle Creek have been overwhelmingly positive, and we are optimistic about how we can advance this in the future. In terms of capital allocation, we installed our initial Z3 manufacturing stations to produce those units. This transition from an empty room to a fully operational line with minimal capital investment reinforces our long-standing assertion that our technology is scalable and provides measurable benefits to customers, all while enhancing capital efficiency in a way others have yet to achieve. From our revised strategy, we have followed through on our commitments made in Q3 and feel confident entering 2023. Nathan will provide more insight on this later. The crucial point for us is now integrating these elements, securing the capital necessary to scale the business. We’re actively working with the Department of Energy on our loan application. We're currently in the due diligence phase and are pleased with the cooperation we've received. This is a landmark moment for our industry and also for the LPO. We are being very deliberate as we navigate this process to reach conditional approval and funding in the latter part of 2023. I’m optimistic about our positioning; there’s more developments to come as we move forward, and we'll keep you updated. If we move to Page 5 and examine the energy storage market, the integrated legislation put in place for the United States is accelerating growth in energy storage. Our technology was specifically engineered to be compatible with renewable energy sources such as wind and solar, but it also effectively enhances traditional energy sources. We are witnessing increasing demand not only for energy storage in general but also for longer duration applications. As the grid experiences more unpredictability due to changes in energy consumption and production, our technology is perfectly aligned with market needs. The market in the U.S. is enormous, and the growth potential is substantial. Establishing a successful presence in three markets will enable us to achieve significant growth. We’re actively engaged in the California market, collaborating on projects with the California Energy Commission and Indian Energy, which are currently underway. We are optimistic about further developments in this space as they lead the charge in long-duration non-lithium-ion storage solutions. In the ERCOT market in Texas, there is a whopping queue of 66 gigawatt hours. We have several projects from our backlog that will be delivered in '23, and we expect to see an uptick in our opportunity pipeline specifically within this market. Meanwhile, New York is another area poised for significant growth with bold goals set for green energy and carbon-neutral strategies. I feel confident regarding the overall legislative landscape that we are establishing to grow energy storage. Our investment strategies benefit from the addition of a 10% bonus to the investment tax credit for purchasing U.S.-made technology. We are advocating for a manufacturing supply chain focused on domestic production to enhance grid stability and energy security. Speaking of energy security, Europe has introduced a new green deal, which we are observing with interest, and Australia has rolled out a climate solutions package. Other global markets are recognizing that a fully integrated strategy can expand their capacity to generate electricity sustainably while reducing their environmental impact. In addressing the challenges our industry faces, we must consider that electricity demand is anticipated to surge by 50% over the next 20 years. Meeting that demand will require technologies such as ours, and I strongly believe we are positioned to deliver on this front. In wrapping up 2022, I'm immensely proud of our achievements. Observing the unwavering dedication of our team day in and day out is incredible. Their performance is commendable, and we must keep pushing forward on the path to full commercial scale with the Z3 product as our vehicle for achieving this. Year-over-year, we have increased shipments to customers by 4.4 times, achieving a remarkable 600 megawatt hours of capacity with an investment of $20 million to demonstrate our ability to scale efficiently and cost-effectively. As I mentioned earlier, we achieved $17.9 million in revenue from our backlog and surpassed a 90% efficiency in our manufacturing process for the Gen 2.3 product. Should we question why we are switching? The answer lies in the fact that the transition to the Z3 will allow us to reduce cycle times and improve yield above 97% even during the production of our initial batteries. Our booked order growth has accelerated significantly. We announced 1.3 gigawatt hours of signed customer master supply agreements, spanning multiple years. Customers are increasingly recognizing the tight supply in the lithium-ion market for electric vehicles and are turning to us because we have the largest manufacturing capacity for non-lithium-ion batteries. Thus, we are confident about the potential growth tied to the 1.3 gigawatt hour of master supply agreements. Lastly, let me quickly highlight six metrics that encapsulate our performance in 2022: our order pipeline has grown 83%, booked orders are up nearly 150%, order backlog has increased over 200%, shipments have risen over 300%, revenue growth stands at nearly 300%, and discharge energy has surged by 100%. This impressive performance leads us to a crucial point: as we envision our company profitability, we learned significant lessons from the Gen 2.3 product. There were production cycles involved that were costly, and by switching to the Z3, we believe we are starting our journey toward positive cash flow for the company. Now, transitioning into commercial viability for our product, it's essential to recognize that demand is strong, and we are well on our way to demonstrating that our product performs as expected. Moving to Slide 9 regarding shipments and installations, this slide effectively illustrates some dynamics we are experiencing in the market. To date, we have shipped 258 energy blocks since the company's inception, as of February 26, 2023. Currently, 6% of those are functioning in the market, while 75% are in commissioning, predominantly due to the Eastover project for Pine Gate, which is evident in the image of the project provided on the lower right-hand side of the page. Witness what we have built—not just from a small lab in Edison to a factory in Turtle Creek, but also to a project like this one in South Carolina. The 75% configuration will change as Eastover comes online. Additionally, there are 19% waiting for permitting and site readiness as customers finalize their processes for container installations. We are diligently monitoring this situation, and the effort from our field team is commendable, something everyone should be proud of. This clearly demonstrates that our product has moved beyond the lab and is now actively being employed by our customers. Continuing onto the next page, let's take a moment to consider how the installed base is being utilized in the field. A milestone we reached is crossing the threshold of 500 megawatt hours of energy generated from our systems in the field by customers. We are approaching the 1 gigawatt hour mark of output, which will become increasingly visible as the Eastover project goes live. The upward sloping line on the chart showcases the cycling we are observing in Eastover today, which is only expected to increase as the customer utilizes the technology. The next slide, on Slide 11, highlights our team's achievement with the first Z3 Cube becoming a reality. The Cube is now located in our facility in Edison, New Jersey, undergoing various performance tests and software updates for our system. I am proud of the dedicated group of individuals responsible for this accomplishment, as their hard work has brought us to the start of 2023 on a high note. Moving to Slide 12, we have visuals of our low rate initial production line. Currently, we are swiftly approaching 1,400 batteries in production. The remarkable aspect of this early production phase is that our line is achieving a 97% yield rate. To provide some context regarding our strategy for capacity expansion—many battery companies in the past have faced challenges by building a factory and then seeking volume. However, we aim to learn and solidify our production process before making substantial investments. Our approach involves implementing discrete manufacturing processes and ensuring they perform at a high quality level while understanding the machinery configuration necessary to optimize performance and output. Each machine will serve its purpose strategically, and automation will follow as we solidify our configuration. The most demanding aspect in flow production lines is the need for accurate positioning of line components; misplacement can lead to increased costs. Our thoughtful spending strategy ensures we execute this correctly. Our team in Turtle Creek is achieving a Six Sigma level of yield during these first seven weeks of production. The second point I want to emphasize is the Z3’s product simplification. We benchmarked our manufacturing process against that of EV batteries produced on an automated line. Our Z3 manufacturing line has only one-third the parts compared to the module involved. In addition, we utilize one-third the processes to create those batteries with one-third the stations and notably, no cleanrooms required. While it is precise, it is not complex. Our low level of complexity is evident as we utilize only 1/20th of the PLC automation codes—far less than the codes required in lithium-ion battery production. On the right side of the slide, significant achievements include passing UL 9540A testing on our battery. One of the critical tests included shooting a nail into the battery to verify whether it would result in a thermal event or explosion. I am pleased to share that the nail failed to penetrate the battery after multiple attempts, which demonstrates our battery's resilience, having exceeded specifications required regarding safety. We have gone through rigorous testing and are in the stages of UL 1973 testing, with great progress being made for a product ready for market introduction in a timely manner. Proceeding to Page 13, this slide illustrates the clear advantages the Z3 holds over the Gen 2.3 and reasons behind our decisions. The cost for achieving 1 gigawatt hour of output is 50% lower than that of the Gen 2.3. The cycle time for building the battery has decreased from approximately 55 minutes to around 90 seconds with the Z3 battery. The Gen 2.3 battery features more than double the components and parts of the Z3, leading to an impressive 9x increase in battery output on the automated line. This transition represents a significant step forward for us in terms of manufacturability, repeatability, and quality. Additionally, the energy density bought by our customers has increased by 35%, while the size has been reduced by 50%. This produces a power-dense product that can be constructed faster and with higher quality at scale. Importantly, we are starting at a cost position that is 50% lower than the Gen 2.3 at its launch, thanks to the materials used in our build process, which are 95% sourced and manufactured in the United States. A product designed and produced entirely in the U.S. is a source of pride for our team in Edison and Turtle Creek. Shifting focus, let’s review the commercial pipelines and orders backlog on Page 15. Our commercial pipeline is a standard metric we review quarterly. Lead generation refers to projects where customers have concepts but lack a technical use case and therefore cannot receive an offer at this stage. That figure has risen nearly $2 billion since last quarter. Typically, 30% of that figure converts into our current pipeline, defined in three segments: first, where we can provide a technical proposal, secondly where we can furnish a non-binding financial quote, and thirdly with a letter of intent or firm commitment from customers, essentially indicating if they secure the project, Eos will be their technology provider. Currently, our defined current pipeline stands at $7.5 billion. Notably, this figure includes a recently announced order from a prominent energy storage operator in the United States with a conditional off-take agreement of 4 gigawatt hours. The graph shows the impact of that conditional off-take agreement on our letter of intent and firm commitments, and from our perspective, it is promising to be aligned with that operator moving forward. Turning to the far right side of the slide, our orders backlog, exceeding $450 million, is divided into three main components: specific projects scheduled for delivery, the long-term multi-year service agreements discussed earlier, and service components required to ensure our installed base is operational. Although modeling this number proves challenging due to uncertainties regarding how those multi-year supply agreements will unfold, the existence of this backlog instills confidence in our strategic investments and product positioning. We have made substantial progress, but our focus must remain on successfully launching and commercializing the Z3 and moving forward on our path to profitability. I will now hand the call over to Nathan, who will provide an overview of the financial results. I'd also like to officially welcome him to the team. It has been a pleasure getting to know him and collaborating in Edison and Turtle Creek.

Nathan Kroeker, CFO

Thanks, Joe. It's great to be part of the team. Good morning, everyone. By way of quick introduction, I took over for Randy earlier this year and I'm happy to report the transition is going smoothly. I'm a CPA with a background in public accounting and M&A, and I've spent nearly 20 years in power generation, renewable risk management, electricity, and natural gas trading and marketing. I've been explaining to investors for years that we need an efficient long-duration storage solution to support the growing concentration of renewable generation on our electricity grids. When I realized that Eos has a proven technology that I believe is ready to scale, I became very excited about being part of this storage solution. Now, turning to the next few slides, I'll guide us through the fourth quarter and full-year financial performance along with our outlook for the full year 2023. Fourth quarter results were directly impacted by the passage of the IRA and our strategic decision to defer company production from the fourth quarter into 2023. We have proactively collaborated with our customers to delay certain orders so that we and our clients can fully realize the benefits offered by the ITC and PTC. The resulting decrease in production volume corresponds to the reduction in revenue and costs of goods sold seen in the fourth quarter. We completed delivery of the 80-megawatt hour Pine Gate Renewables Eastover project, and revenue for the quarter was $2.7 million, in line with revised guidance. Cost of goods sold for Q4 was $30.8 million, a decrease of $19.2 million compared to last quarter, primarily attributable to a 45% decrease in unit volume. COGS are down 38% quarter-over-quarter as we also produced commissioning spares to support the Eastover project. SG&A for the quarter was $12.6 million, which included $2.6 million of non-cash items and is $2.1 million lower than the prior quarter, driven by a reduction in professional services and incentive compensation. Furthermore, we incurred a $4.4 million write-down of existing PP&E related to replacing equipment and outsourcing specific production processes as we began transitioning production from the Gen 2.3 battery to the next generation Eos Z3 system. Interest expense amounted to $7.6 million for the quarter, reflecting a slight increase due to higher borrowings on our senior secured credit facility. The operating loss was $48.6 million, with a net loss of $56.6 million. Moving to the full year performance on Slide 18, the total revenue for the year was $17.9 million, which aligns with revised expectations and signifies a 3.9-fold increase compared to fiscal 2021. This growth resulted from nearly a fivefold increase in unit volume over the previous year. The total cost of goods sold for the year was $153.3 million, representing a 230% increase year-over-year, primarily driven by the boost in unit volumes. When comparing our revenue and cost of goods sold from year to year, we are witnessing an operating leverage improvement of about 1.3 times. On a per-unit basis, the cost of goods sold decreased by 44% compared to the previous year. We invested $18.5 million in research and development as we continue designing and developing the Eos Z3 battery in anticipation of scaling production in 2023. SG&A for the year totaled $60.6 million, reflecting an increase of $17.6 million compared to 2021. Notably, 51% of this increase resulted from organic growth related to headcount and payroll expenses, with 37% stemming from non-recurring professional services expenditures. The full year 2022 includes $12.3 million of non-cash items such as stock compensation and depreciation. The full-year operating loss was $221.3 million, with a net loss of $229.8 million. Transitioning to Slide 19, we ended the year with $17 million in cash on hand. We received $12.9 million in customer inflows as we achieved project milestones. Our net capital raise in Q4 was $15.3 million, inclusive of $9.5 million in net proceeds from our ATM, and $3.8 million in debt from our senior secured loan, along with a $2 million convertible note related to our standby equity purchase agreement with Yorkville. We anticipate a continued usage of our existing financing facilities as needed. During the quarter, cash outflows totaled $49 million, with specific details provided on the right-hand side of this slide. Finally, I will outline our outlook for 2023. As Joe highlighted earlier, 2022 marked a year of strong growth, and we intend to sustain this momentum as we enter '23. With the implementation of the Inflation Reduction Act underway, we foresee continuous market expansion. There is a consistent uptick in demand for longer-duration energy storage, and we expect to further this momentum in our marketplace, projecting $600 million to $800 million in new booked orders while delivering $30 million to $50 million in revenue for 2023. Through ongoing adjustments to our Eos Z3 battery design and incremental efficiencies within our manufacturing process, we have reduced unit product costs in anticipation of launching Eos Z3 production imminently. The Eos Z3 battery will launch at approximately half the cost of the Gen 2.3 and our aim is to reduce these costs further by an additional 15% this year. As we have consistently stated, the Eos Z3 provides clear advantages over the Gen 2.3 in terms of efficiency, energy density, materials, and production costs. With that, I want to thank everyone for their time and for listening today. I'd like to turn it over to the operator for questions.

Operator, Operator

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

Christopher Souther, Analyst

Hi, guys. Thanks for taking my question here. Nice to see the cost of goods sold reduction, about $30 million a quarter, a good run rate for the first half. Should that continue to decline as shipments go down in the first half as we're transitioning away from Gen 2.3, and really before the Z3 kind of launches and ramps? Really starting to get a sense of how much that $27 million in Slide 19 where that goes in the near term, and then whether you can kind of confirm that Z3 is still going to be positive gross margins out of the gate? Thanks.

Joe Mastrangelo, CEO

Yes, Chris, I'd say the run rate going into the first quarter is that we are in the last Gen 2.3 shipments in Q1, and then transitioning into Z3 in April of this year. I’d say on the margins of Z3, the goal is to reach a run rate by the end of the year that is gross margin positive. That’s still the plan as we proceed with this ramp-up. We're generally encouraged by what we're observing from the Z3 manufacturing line regarding yield and cycle time. We must continue to work on cost. As Nathan mentioned, one of our top three goals is to remind everyone that Z3 at launch is 50% lower than Gen 2.3 at its launch, and our plan is to further decrease that cost by another 15% as we progress through the year. This will arise from a combination of volume leverage as we ramp and also from ongoing work on system configuration to lower costs.

Christopher Souther, Analyst

Got it. Okay. It's nice to see the initial Z3 station cruise and battery tier. Can you explain how we should consider the capital expenditure needs to achieve the production ramp starting in April? In the update a month ago, you mentioned the Department of Energy loan for up to $250 million. I'm curious about how we should view the capital requirements as we await a commitment there, and whether delays in that timing would affect the revenue guidance for 2023.

Joe Mastrangelo, CEO

Yes, so let me start with the guidance number. We provided a range on guidance primarily due to the uncertainty surrounding the timing of the DoE loan and not knowing when it will materialize. When considering it, the low end of the range reflects what would occur in the absence of the DoE loan, executing with a partially automated manufacturing line and continuing to pursue other funding avenues for growth. Although nothing is guaranteed, we are having productive discussions with the DoE and working through negotiations to finalize a term sheet. We feel optimistic about it, but as always, nothing is complete until we sign the agreement. Therefore, we will commence manufacturing operations using the current equipment on our floor, which constitutes a full production line. I think it's vital to note, Chris, that regarding the Z3, we've implemented individual manufacturing stations as a means to refine our production process. We are producing batteries with minimal investment and excellent performance, and we're looking to scale up with further automated lines planned for the fourth quarter of this year, aiming for an upper revenue range.

Christopher Souther, Analyst

Got it. You cut out for just a second. I think it might have been on my end, but on the rate that you'd get with that automation, the annual run rate?

Joe Mastrangelo, CEO

1.2 gigawatt hours.

Christopher Souther, Analyst

Okay. Thanks. I’ll hop back in the queue. I appreciate it.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open.

Martin Malloy, Analyst

Good morning. Thank you for all the details about the manufacturing process and how you've been ramping it up. I want to ask about your comment regarding reaching gross profit margin positive by the end of the year. What sort of dollar per KWh does that imply?

Joe Mastrangelo, CEO

So, Martin, we don't provide guidance on that specific number strategically.

Martin Malloy, Analyst

Okay. And I'm sorry if I missed it. The dollar cost of getting that automated line will get to the 1.2 gigawatt hours. What approximately is the CapEx involved?

Joe Mastrangelo, CEO

The CapEx needed to develop a fully automated line is between $30 to $35 million. Development cost for the first line is approximately $10 million. In total, you’re looking at under $50 million to establish the initial line, while subsequent lines will range around $30 million to $35 million.

Martin Malloy, Analyst

Okay, great. I'll hop back in the queue. Thank you.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Joseph Osha with Guggenheim. Your line is open.

Joseph Osha, Analyst

Thanks. Good morning, Joe. I'm just wondering if we can return to the DoE for a moment, understanding that your ability to provide an update may be limited. Could you clarify where we stand? As I recall, we completed technical due diligence. Are there updates regarding whether you're still in the process of securing a term sheet and what this means for the timing?

Joe Mastrangelo, CEO

Yes, Joe, so in terms of progress, we successfully went through Phase 1, proving that we have a commercial product. We are now in Phase 2 for pre-due diligence, which assesses viability. We are presently engaged in full due diligence where we’re examining our business model assumptions. Good news for us is that, during this process, we’ve been involving the DoE team at Turtle Creek to familiarize them with the plans as we ramp production alongside our automation supplier. After this phase, it becomes a standard negotiation process where you finalize the term sheet, gain conditional approval, and move towards closing and funding. While we can’t guarantee timing, we anticipate conditional approval could occur in early Q2. From there, we would progress to complete the necessary funding processes.

Joseph Osha, Analyst

Okay. Not to be pedantic, but I thought you were previously through the technical due diligence process. Are you suggesting you are still working through potential issues there?

Joe Mastrangelo, CEO

No, this stage relates more to a modeling process where we examine our assumptions regarding ramping, costs, and market viability. We have proven that we have a working product, thanks to UL 9540A certification and extensive cycling tests. The current stage is about confirming those assumptions and how they relate to the financials of the loan.

Joseph Osha, Analyst

Okay. I’ll step back in queue in a moment. However, has the shift to Gen 2.3 and related economics influenced the timing of the loan process?

Joe Mastrangelo, CEO

What I’d say is that with our transition to the Z3, we were in the drawing board phase last summer, moving into prototyping and lab work in Edison. By the time we reached December, we'd established production lines for individual stations. A significant portion of this phase has been documenting our production experiences with Gen 2.3 while introducing the benefits of Z3. Adapting to technological shifts naturally sparks inquiries and we meticulously present supporting documentation to reassure our stakeholders regarding product viability and production capacity. Moreover, we recognize that our battery technology must complement existing processes, allowing us to thrive in this highly competitive market.

Joseph Osha, Analyst

Okay. Thank you very much.

Joe Mastrangelo, CEO

Thanks, Joe.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Vincent Anderson with Stifel. Your line is open.

Vincent Anderson, Analyst

Thanks. Good morning. I was hoping you could provide an update on new orders as the market continues to navigate the details of the IRA. How many of the anticipated $600 million to $800 million in booked orders this year do you expect to include a deposit? And are those deposits factored into your mid-2024 positive operating cash flow target?

Joe Mastrangelo, CEO

Yes, Vincent. Good morning. To address your last question, yes, deposits do contribute to that. The target range is typically between 10% to 20%, depending on the size and timing of delivery. Regarding real-time market updates, our commercial pipeline continues to diversify as we've built strong relationships with our customers. Presently, there appears to be a cautious wait-and-see approach as businesses await guidance from the treasury on ITC implications. However, the growing interest in longer-duration storage solutions is encouraging, and our discussion with reputable customers is strengthening our backlog.

Vincent Anderson, Analyst

Excellent. You provided significant detail about the Z3 expansion. However, if you could highlight how many lines will undergo conversion versus new construction? I believe you mentioned a 9x output increase per line, but I may have misunderstood. Additionally, contextually speaking, how does this align with the current switch as we move into 2024?

Joe Mastrangelo, CEO

In simpler terms, the raw material to container cycle on a Gen 2.3 battery takes about 90 minutes, while the Z3 automated line is expected to reduce that to approximately 90 seconds, resulting in a 9x increase in throughput. A major advantage stems from the reduced component count—half the parts are needed compared to Gen 2.3. The design flow manufacturing of Z3 ensures a high flow, low cycle time, and high yield, and currently, our manual production process is about 10 minutes per unit in its seventh week of production.

Vincent Anderson, Analyst

Okay, that provides excellent context. Thank you. One final question—how does your backlog look regarding customer flexibility in transitioning from the 2.3 to the Z3 model? Are you seeing any requests for requalification?

Joe Mastrangelo, CEO

No, we were upfront with customers about the transition to Z3 from the start. Therefore, they anticipated this movement. As we converted backlog from 2.3 to Z3 in Q4, customers have shown clear support due to fewer containers and improved outputs resulting in lower civil costs combined with better performance. Our client feedback indicates a unanimous appreciation for the Z3's capabilities and how it symbolizes a significant shift within the company.

Vincent Anderson, Analyst

Excellent. Thank you once more.

Joe Mastrangelo, CEO

Great, thank you.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Chip More with EF Hutton. Your line is open.

Chip More, Analyst

Good morning. Thank you for taking my questions. I was hoping to follow up on your remarks regarding your collaboration with customers and the timing of the IRA implementation. Are there any implications as we analyze quarterly revenues considering the current limited automation year?

Joe Mastrangelo, CEO

Chip, regarding quarterly guidance, I would expect a revenue range of $50 million as the automated line is introduced this October. This indicates that we anticipate the first half of the year would reflect lower shipment volumes while we await IRA details.

Chip More, Analyst

Understood. Lastly, you mentioned noticing customers exploring multi-year agreements. Could you elaborate on that, particularly about the constraints facing lithium-ion capacity?

Joe Mastrangelo, CEO

Yes, these multi-year agreements reflect customers' desires to secure access to capacity due to expected constraints in lithium supply. They’re engaging in three-year agreements, enabling them to ensure volume availability as they manage comprehensive project pipelines. The six-year agreement we finalized in January is a strong example of mutual commitment to securing consistency in capacity moving forward, allowing both parties a level of certainty as we progress through our projects.

Chip More, Analyst

Thank you.

Joe Mastrangelo, CEO

Thanks, Chip.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of James West with Evercore. Your line is open.

James West, Analyst

Hi. Good morning, guys.

Joe Mastrangelo, CEO

Hi, James.

James West, Analyst

Joe, as you await updates from the treasury department, when are you expecting those guidelines to be finalized? I'm aware you can't assure me a timeline on this. Additionally, how quickly do you anticipate transitioning from 'Okay, the guidelines are finalized;' to 'Now we can start deliveries and recognize revenue'?

Joe Mastrangelo, CEO

Yes. Looking ahead, we have specific projects planned for 2024, but broader production scaling will ramp up significantly in 2025. By that year, we project a global market demand for 100 gigawatt hours, half of which will stem from non-lithium-ion sources. We see 2025 as a pivotal year for industry growth.

James West, Analyst

Right, understood. Concerning the LPO office and their diligence process, will you need access to capital before the term sheet is finalized?

Nathan Kroeker, CFO

It's good to meet you, James. Yes, there may be a need for interim capital between now and the completion of that term sheet. Should this situation arise, we have our standby equity purchase agreements and ATM programs available.

Joe Mastrangelo, CEO

We are consistently positioning ourselves in the market to raise the necessary capital aligned with our ongoing growth strategy. As Nathan pointed out, we plan to leverage available programs judiciously. We will evaluate and raise capital as needed while remaining focused on sustaining our growth trajectory.

James West, Analyst

Sure. Just to clarify, are your existing programs capable of providing enough funding to cover any delays?

Joe Mastrangelo, CEO

Yes, our combined availability under the two programs exceeds $100 million.

James West, Analyst

Great, thanks, guys.

Joe Mastrangelo, CEO

Thank you.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Tom Curran with Seaport Research. Your line is open.

Tom Curran, Analyst

Good morning, guys. Tom Curran here from Seaport. Joe or Nathan, as we fine-tune our outlook, if you hit the high end of guidance, $50 million in revenue with the Z3 fully automated line of 1.2 gigawatt hours of capacity, and a 15% unit cost reduction leading to a positive gross margin exit—what will be the next critical milestones to target for that first quarter of breakeven in EBITDA?

Joe Mastrangelo, CEO

The primary factor remains scaling, which involves spreading our fixed cost base across a larger volume of units, and simultaneously, we aim to minimize costs in the products. While we have provided guidance on product cost expectations for this year, we envision ongoing efforts to reduce it even further during 2024 and beyond. Some of these adjustments will come from effective supply chain management, while others will emerge from the advantages flowing from our automated line as we ramp up production.

Tom Curran, Analyst

Just to clarify, if you were to achieve your high-end guidance, would you still be expecting to meet that mid-year breakeven goal?

Joe Mastrangelo, CEO

Yes.

Tom Curran, Analyst

Lastly, Blue Ridge Power and Pine Gate Renewables constituted around 81% of your revenue last year. For 2023, who is your largest customer, or what is your most significant project relative to revenue contributions?

Joe Mastrangelo, CEO

Our revenue distribution for 2023 will be much more balanced, with deliveries spread across five core customers rather than predominantly from Pine Gate.

Tom Curran, Analyst

Thank you for that clarification. Appreciate it.

Joe Mastrangelo, CEO

Thanks.

Operator, Operator

Thank you. I will now turn the call back over to Joe for closing remarks.

Joe Mastrangelo, CEO

Thank you. I want to express my gratitude to everyone for joining us this morning. We are dedicated to focusing on aspects within our control and building a robust company. I'm thankful to our shareholders for their unwavering support and to our customers for the trust they have placed in us to deliver projects. As we continue down our path to creating value, we are providing a product that addresses the future energy demands necessary for our society—a challenge for which our entire team is passionately committed. I also want to emphasize the remarkable individuals who make up our workforce. I apologize for any background noise as Nathan and I are situated right by the shop floor. Our crew here is not only generating green jobs but carving out sustainable careers for individuals within the Mon Valley area. Their contributions inspire us all. Thank you for your attention, and I look forward to keeping everyone updated as we progress throughout the year.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.