Earnings Call Transcript - EOSE Q4 2023

Operator, Operator

Good morning, and welcome to Eos Energy Enterprises Fourth Quarter and Full Year 2023 Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. With that, I would like to turn the call over to Liz Higley, Director of Investor Relations. You may begin.

Liz Higley, Director of Investor Relations

Good morning, everyone, and thank you for joining us for Eos's financial results and conference call for the fourth quarter and full year 2023. On the call today we have Eos’s CEO, Joe Mastrangelo; and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements, including, but not limited to current expectations with respect to future results and outlook for our company and statements regarding our ability to secure final approval of a loan from the Department of Energy, LPO, or our anticipated use of proceeds from any loan facility provided by the U.S. Department of Energy 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 expectation 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 the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today, or to reflect new information or the occurrence of unanticipated events, except as required by law. This conference call will be available for replay via webcast through Eos's investor relations website at investors.eose.com. Joe and Nathan will walk you through the company highlights, financial results, and business priorities before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Joseph Mastrangelo, CEO

Thank you, Liz, and welcome everyone. It's great to have everyone on the call this morning. Let's get started on Page 3 to review some highlights from last year. First, I want to mention the improvement in gross margins following the launch of the Z3 product. In the fourth quarter alone, we observed a 41% year-over-year improvement, with a 66% increase in gross margins compared to the same period last year. This reflects our consistent messaging about the Z3, which is now becoming evident in our financial results as we start deploying the product in the field. Looking at the year overall, it was a significant period for us, transitioning from our last full quarter of Gen 2.3 production in Q1 to our first Z3 production quarter in Q4, which were also our two highest revenue quarters. As Nathan will discuss, we anticipate similar dynamics for 2024 because of our ongoing cost-cutting efforts and the implementation of our new state-of-the-art manufacturing line. The Z3 is proving its ability to drive revenue with our semi-automated line, lower costs, and enhance gross margins, reinforcing our optimism about delivering the Z3 to customers. Another key achievement was becoming the first non-lithium-ion battery company to qualify for a Title 17 loan with the Department of Energy. Nathan will provide an update on our progress there, but we remain confident in our path to finalize the loan as we prepare to launch our first automated line in the second quarter of 2024. We are developing our state-of-the-art line in Wisconsin with ACRO Automation, and I have visited the site multiple times to monitor its progress. The craftsmanship is impressive, and it's inspiring to see our vision for the Z3 starting to take shape. While we have much to celebrate in 2023, we know there are still challenges to address, particularly regarding profitability, which is our primary focus as we look ahead to 2024. On Page 4, we have some quick operating highlights. Our opportunity pipeline has grown by 77%, now totaling $13 billion. In 2023, we fell short of our order targets, but I will explain the dynamics in our pipeline that are setting us up for stronger orders as the Z3 enters the market. Despite this, our backlog increased by 15% year-over-year, which is commendable under ordinary circumstances, but we recognize the need for even faster growth given the industry's evolving landscape. Our discharge energy has reached 1.8 gigawatt hours, with 1.4 gigawatt hours currently deployed in the field. Each cycle we run serves as a learning opportunity, improving our software and helping us understand how customers monetize our product. Revenue for 2023 was $16.4 million, a slight decline from the previous year, but we believe we navigated the transition to the Z3 successfully while also managing the DOE loan and capital raises effectively. By the end of the year, we had $69.5 million in cash, not accounting for $15 million in restricted cash for the loan with Atlas. Our team is dedicated to maximizing every dollar, fostering a culture where every employee acts as an owner. Our commitment is to transition from a research and development-focused company to a profitable operating entity by the end of 2024. On Page 5, I want to give a quick update on the Z3. Looking at the left side of the page, we have 1.9 gigawatt hours of late-stage opportunities, where customers await approvals, permits, or grants from the DOE. Our goal is to convert these opportunities into concrete orders. We have reduced our semi-automated manufacturing line's cycle time from ten minutes to three minutes and managed to keep our scrap rate around 3% when normalized for run rate. We achieved power on status for all motion systems in the line as of mid-February and are preparing for factory acceptance tests in Milwaukee and system acceptance tests in Turtle Creek in Q2. Our partnership with ACRO has proven beneficial, allowing us to leverage their expertise during the final stages of debugging and integration. Regarding our cost roadmap, we've achieved 30% of our planned expense reductions since December 12th, with additional cost-cutting benefits expected in Q1 2024. We've delivered Z3 cubes to four customers, with installations underway that will help us generate valuable field data. Our container performance varies based on energy duration, but we anticipate improvements throughout the year, culminating in an 800-kilowatt hour container by Q4 due to contributions from our R&D team. We have received UL 1973 approval and have ensured compliance with the NDAA, which is vital for our standing in the energy storage sector in the U.S. Our products not only offer safety and recyclability; they also prioritize domestic sourcing to enhance energy security. On the right side of the page, let’s review our cost reduction progress, starting at 100% and now reaching 71%, targeting a total reduction of 29% to 30%. A substantial part of this reduction stems from ramping up production, as well as lowering material costs; the Z3 product is simple and cost-effective due to its design. Moving to Page 10, we have an efficient capital model for capacity expansion. We estimate that $30 million in capital expenditure can yield 1 gigawatt hour compared to $85 million for lithium-ion technology. We remain on budget as our state-of-the-art line is being finalized at ACRO. Witnessing this progress has been remarkable, demonstrating how far we've come and positioning us for future growth. As our teams rotate regularly at the ACRO facility, we are ensuring everyone is familiar with the new line's operation before it arrives at Turtle Creek. We're on track for installation and commissioning in Q2. Turning to Page 11, our supply chain is evolving as we pursue agreements with U.S.-based suppliers for key components. We aim to enhance our cost structure while ensuring stability in our supply chain, particularly for our battery's cores. Lastly, we are excited about our advancements in product design, which features greater surface area for energy generation while reducing production costs. Our work so far has allowed us to improve our performance metrics and contest success rates, and we plan to continue refining costs as we move through 2024. Thank you everyone for your attention. I will now hand the floor over to Nathan.

Nathan Kroeker, CFO

Thanks, Joe. And thanks, everyone, for joining us this morning. Let me start with an update on cash. We ended 2023 with $69.5 million in cash on the balance sheet. And since year-end, we have collected some customer deposits and milestone payments and we have current line of sight to collecting on three or four significant customer payments in the next couple of months as we continue to work towards getting the first advance on the DOE loan. We are also in the process of finalizing negotiations with the expectation to monetize our 2023 production tax credits in the coming weeks, and we also expect to monetize our 2024 credits on a monthly or quarterly basis going forward. Consistent with previously announced transactions in the market, we anticipate there to be a 5% to 10% discount on these credits upon monetization, with the economics improving as the size of the credits increases over time. With that, let's get to our financial results. Turning to the next few slides, I will walk through the fourth quarter and full-year financial performance along with an outlook for 2024. Now for the fourth quarter, revenue in the quarter was $6.6 million, up 148% compared to revenue of $2.7 million in Q4 of 2022, and up 866% compared to revenue of $0.7 million in Q3 of 2023. The year-over-year growth in revenue was a result of our transition from Gen 2.3 to the Eos Z3 Cube, while the sequential quarterly growth was driven by higher production volumes off the semi-automated manufacturing line as we ramped up production. We shipped our first Eos Z3 cubes at the end of September to two different customers, and we are in the process of delivering a much larger project in Orchard, Texas to a key customer owned by a large North American infrastructure fund, which is scheduled to be completed in the next few weeks. Cost of goods sold for the quarter was $30.4 million, a 1% decrease versus prior year despite higher production volumes, resulting in a 66% gross margin improvement year-over-year, primarily attributable to better unit economics of Z3. During the quarter, we saw a decrease of approximately 30% in costs as a result of improved labor and overhead absorption, in addition to bill of material cost reductions. These reductions were partially offset by increased scrap costs from process control changes. Fourth quarter operating expenses were $18.5 million, a 10% decrease from the prior year period, primarily attributable to there being no write-off of assets this quarter and partially offset by an increase in payroll-related expenses such as stock-based compensation in the quarter. Total operating expenses of $18.5 million included $4.1 million of non-cash items, including stock-based compensation, depreciation, and amortization. The resulting operating loss for the quarter was $42.2 million, or $35.8 million, when you exclude non-cash items such as stock-based compensation, depreciation, and amortization, and a net loss of $41.2 million. This compares to an operating loss of $48.6 million and a net loss of $56.6 million in the fourth quarter of 2022, despite 2022 having lower production volumes. So as Joe highlighted earlier, you can see all of our hard work beginning to pay off. Now turning to slide 15 to review 2023 full-year performance. Revenue for the full year 2023 was $16.4 million, a slight decrease compared to revenue of $17.9 million for full year 2022 as we concluded our Gen 2.3 production in the first half of 2023 and stood up the Z3 manufacturing processes in an effort to launch production at the end of the third quarter. Cost of goods sold was $89.8 million, a $63.5 million decrease compared to the prior year, delivering an improvement of 41% in gross margins year-over-year, driven by lower input costs combined with improved Z3 manufacturability. During the year, we recognized $3.3 million in production tax credits, net of the anticipated monetization discount. We are now recognizing both the 45x and the 10% electrode active material credits. And we are working towards monetizing both the 2023 and 2024 tax credits at a small discount, as we discussed earlier. We invested $18.7 million in research and development in 2023, of which $2.3 million was related to non-cash items such as stock-based compensation, depreciation, and amortization. This was in line with what we discussed on December the 12th and we believe this is a good run rate for R&D on a go-forward basis. We continue to invest in our Z3 battery technology, optimize our BMS system, and identify various initiatives to reduce battery and system costs. SG&A for the year was $53.7 million, a 12% decrease compared to $60.6 million in 2022 as we worked on tighter cost control and reducing outside services. Full-year SG&A included $12.3 million, or approximately 23% of non-cash items, including stock compensation, depreciation, and amortization. Total operating expense for the year was $79.5 million, a 7% decrease versus prior year, of which $14.7 million or approximately 20% was non-cash related and $7.2 million was related to asset write-offs as we transitioned manufacturing to Z3. Full-year operating loss was $152.9 million with a net loss of $229.5 million or $145.3 million excluding non-cash items including the fair value treatment of our derivative liabilities, non-cash interest expense, stock-based compensation, depreciation, and amortization. A 30% year-over-year improvement. Now moving to slide 16, I want to spend some time looking at our past production and what we should expect going forward as we get into the expected financial performance for 2024. As you can see on the left-hand side of the page, Q4 revenues increased 866% over Q4 of this year and 148% over Q4 of last year as we significantly increased production volumes off the semi-automated line. As discussed earlier, we shipped our first Z3 cubes at the end of September and then ramped up production in Q4, while still producing well below capacity on the semi-automated manufacturing line. While this resulted in us coming in below our initial 2023 revenue guidance, we made the decision to balance factory output with critical customer commitments. We expect to continue making these trade-offs as we prioritize working capital conservation ahead of securing our long-term financing. We continue to work alongside our customers to understand delivery timelines based on their site readiness and aligning these obligations with our cost out roadmap. As a result, we currently expect production rates for the first half of the year to be similar or slightly above what we saw in Q4 of 2023. Before we conclude, we want to initiate guidance for 2024 on both revenue and profitability. Regarding our revenue estimates for 2024, we expect to be between $60 million and $90 million based on our current production schedule and anticipated customer delivery schedules, which includes us running the semi-automated line for the first part of the year and then transitioning to initial production of batteries on the new state-of-the-art line before the end of the second quarter. As we have discussed in the past, we have a list of customer projects scheduled that supports this revenue plan, and we are continuously working with customers to finalize delivery dates based on their site readiness. From a profitability perspective, we expect to achieve positive contribution margin in the fourth quarter. Positive contribution margin is defined as revenue, less direct labor, and direct materials, also taking into account the benefit of the production tax credits. As discussed on December the 12th and as Joe detailed earlier, we have a roadmap to reduce material and labor costs while increasing energy density that is expected to result in an 80% reduction in overall product costs on a dollar per kilowatt hour basis from initial launch to scale, currently anticipated in early 2025. In calendar 2024, we expect to reduce costs by approximately 76% from initial commercial launch, with further cost out to be achieved when we increase our capacity in the beginning of 2025. Once we achieve positive contribution margin, we intend to increase our production significantly, now that every incremental unit that we produce helps to cover our fixed costs. Since the Z3 launch in mid-2023, we have achieved approximately 30% of the total expected cost reductions, with additional initiatives to begin cutting in by the end of the first quarter. So as we move into 2024, we expect to continue balancing key customer schedules with necessary workforce development, product design enhancements, and cost reduction, up until the critical point at which each individual battery module we build contributes to our bottom line. We believe this disciplined manufacturing approach will allow us to conserve capital as we work on closing the DOE loan and lead to positive contribution margins in Q4 of this year. With that, I want to thank everybody for their time and for listening today. I would now like to turn it over to the operator for questions.

Operator, Operator

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

Christopher Souther, Analyst

Thank you for taking my questions and congratulations on the continued progress. My first question is about the guidance of $60 million to $90 million compared to the $75 million to $100 million you mentioned back in September. Is there a slight difference? Are you only including items in the backlog for this guidance? Is there any shift in production or customer timing, or is it simply a matter of being conservative on either front? I would like to understand what factors are included in the $60 million to $90 million range. Thank you.

Joseph Mastrangelo, CEO

Yes, Chris. Good morning. So look, it's all the above. So there's a piece of this here where we're looking at the pipeline of opportunities when customers need to execute on projects at the same time the ramp of the line and coming up with a range of revenue that makes sense for us to be able to handle as we execute on ramping the line up in the second half of this year. Along with timing the customers and we'll keep everybody updated on how that evolves throughout the year.

Christopher Souther, Analyst

Got it. Okay. I appreciate all the details about the cost reduction progress. Can you clarify the two charts on Slide 5 regarding the 4Q 2023 COGS and the breakdown with the cost reduction? Should we remove the Gen 2.3 from COGS to get a clearer idea of what we've included in the cost reduction so far and going forward? Is that the best approach, or should we also exclude other costs like launch expenses or labor?

Nathan Kroeker, CFO

So Chris, I see a few different factors at play here. If you look at the top chart on Slide 5, we are highlighting a 29% cost reduction achieved so far, which was reached in the fourth quarter. This reduction stems from both operational improvements and supply chain enhancements. We also provide an outlook on where we anticipate ending the year based on ongoing efforts from research and development, supply chain operations, and other areas of our cost reduction initiative. I believe we will achieve 76% of the total 80% target we set in December. We still have work to do in the early part of 2025, but as shown in the chart, the majority of the cost reductions we expect will occur in 2024. On the bottom of the page, we aim to illustrate the remaining progress needed to achieve a positive contribution margin. If we examine our $30.4 million in cost of goods sold for the quarter and exclude items unrelated to the cost reduction initiative, like Gen 2.3, which is legacy, and one-time Z3 launch costs, we see that labor and overhead costs related to a large factory are being absorbed by a limited number of units. Normalizing for actual production units in the quarter, we can remove about 25% from the total. This leaves us with approximately $18 million as the focus moving forward in reducing costs related to materials and labor, particularly labor associated with automation. This $18 million is where we will concentrate our efforts to drive costs down in 2024, and with the ongoing cost reduction program outlined in the chart above, we expect to reach a positive contribution margin by the fourth quarter.

Christopher Souther, Analyst

Okay.

Joseph Mastrangelo, CEO

I would like to add to Nathan's comments by highlighting that this page illustrates not only the advancements and positives associated with the Z3 product but also outlines our strategy for scaling and the capital efficiency of our manufacturing process. We are shifting production of Gen 2.3 to accommodate the Z3 line. Within the 150,000 square feet available, there were 50,000 square feet that were not active, so increasing the volume will lead to better absorption. Some have questioned why we don't launch all four lines simultaneously, but we need to be mindful of lithium companies that are trying to ramp up production and the capital needed for their factories, as they lack cost efficiency at the lower volumes similar to ours. Our approach is to establish line one, stabilize operations, enhance absorption, work towards profitability, and then expand, ensuring we avoid excessive under absorbed costs that could drain our capital while we grow the business.

Christopher Souther, Analyst

Got it. Okay. Yeah, so that $18 or so million is what you're using for that kind of top of the chart as well. The other stuff is not included up there it sounds like, right?

Joseph Mastrangelo, CEO

I'm saying that's the area that we're focused on which is driving down the labor and the materials costs.

Christopher Souther, Analyst

Yes. Okay.

Joseph Mastrangelo, CEO

There are various factors involved, including the launch costs and the under absorption. This is why, when you observe the drop from $75 million to the end of the year, we indicate that the $25 million attributed to under absorption will eventually be eliminated as we increase our volume, leading to a reduction in per unit costs by utilizing more of our factory capacity.

Nathan Kroeker, CFO

Yes. It is. We don't have to do anything other than increase production to achieve those savings.

Christopher Souther, Analyst

Yes, that's great. Thanks for all the time there. I'll hop in the queue.

Joseph Mastrangelo, CEO

Thanks, Chris.

Operator, Operator

Thank you. Our next question comes from Chip Moore with ROTH MKM. Your line is open.

Chip Moore, Analyst

Can you hear me?

Operator, Operator

Yes, we can hear you.

Joseph Mastrangelo, CEO

There we go. Hi, Chip.

Chip Moore, Analyst

Hey, thanks for taking the question. Hey, Joe. Hey, Nathan. I'm wondering if you can expand a bit on the energy density improvements you've got coming along for Q4. Any changes on the automation side you need to take into account and maybe you can help us put a bit of a finer point on that ramp in that quarter.

Joseph Mastrangelo, CEO

Yes, Chip, that's a great question regarding automation. We have developed a system that we don’t want to modify, which means you won’t need to rework existing lines. Everything we discuss will integrate into the current line. Depending on developments, we might need to adjust some end-of-arm tooling on a few workstations, but this won't take long and won't be costly considering the benefits we expect. We have identified projects aimed at improving performance. During our 12/12 strategy call, Francis Richey and Pranesh Rao detailed our initiatives. This entails a combination of changing materials in the batteries, which are already progressing, and improving how we containerize the batteries to maximize output. We have assessed these projects for risk and are confident in our current position based on the team's efforts we discussed on 12/12.

Chip Moore, Analyst

Got it. That's helpful. Appreciate it. And for a follow-up, maybe on the cash side, right? I think maybe you could talk about current cash positions. I think it sounds like you've collected some money since year-end and you've got line of sight on some more. Just help us there. And then I think you've got another $15 million or so to deploy in the new line. Just give us an update on the financing side.

Nathan Kroeker, CFO

Yeah, I mean, I don't know that there's a whole lot more to add than what I talked about. We ended the year with $69.5 million. We've had some customer deposits come in, we've got customer milestone payments that are scheduled over the next couple of weeks and months, and we also anticipate additional customer deposits on some large orders that we're working on. Our focus really, in addition to those customer payments and customer deposits is really focusing on meeting the CPs and closing on the DOE loan. So that's where our focus is from a capital raise standpoint at this time.

Chip Moore, Analyst

Perfect, and maybe one more related. On the international side, you talked about developing some of those markets. Have you explored any strategic potential there, licensing models or anything like that? Thanks, guys.

Joseph Mastrangelo, CEO

Yes, Chip. We're not going to comment specifically on that. Obviously, beyond what we said, I think when we look at this, the product was designed, and this goes back a little bit to what we were explaining on the conversation with Chris. The way we designed this manufacturing model is, you can put a line in, you don't need a complex factory, there's no clean rooms. With the way we've designed the new product now you don't even need a crane. So you can localize capacity as markets grow and that's what we're talking about. And I think we're in early innings here to say what that's going to look like, but we'll keep everyone updated as it evolves.

Chip Moore, Analyst

Understood. Appreciate it. Thanks.

Joseph Mastrangelo, CEO

Thanks, Chip.

Operator, Operator

Thank you. Our next question comes from Martin Malloy with Johnson Rice. Your line is open.

Martin Malloy, Analyst

Good morning. Congratulations on all the progress and the cost reductions already achieved to date. I did want to follow-up on the financing and funding. And I appreciate what you said about the customer deposits. So will you need additional funding now, given the customer deposit outlook here this year, or until you get the DOE loan proceeds coming in?

Joseph Mastrangelo, CEO

So Marty, I wouldn't go beyond what Nathan said on the call today. We're working through a bunch of different things. We're finalizing the agreement to monetize the tax credits. We're starting to see operations where receivables are coming in from customers, and we continue to drive the orders book to bring deposits in. To bridge us to the line, I wouldn't say yes, and I wouldn't say no from where we are today. And as it evolves, we'll give more details as we see them.

Martin Malloy, Analyst

Okay, for a follow-up question, you mentioned that you've had two Z3 installations online since September. Have you received any feedback from customers on how those are operating?

Joseph Mastrangelo, CEO

So Marty, what we mentioned is that they are currently being installed and commissioned. We never indicated that they are operational yet, which seems to have caused some confusion. As you can see on Page 5, if you look halfway down, there are various factors we can control and some that we can't on the customer side. The priority right now is to ensure that the units already shipped out in the field are up and running so we can collect that field data.

Martin Malloy, Analyst

Okay. Thank you very much.

Joseph Mastrangelo, CEO

Thanks, Marty.

Operator, Operator

Thank you. Our next question comes from Thomas Boyes with TD Cowan. Your line is open.

Thomas Boyes, Analyst

I appreciate you taking the questions. Maybe just following up on that point, in your mind for companies that are awaiting field data before they kind of move forward with booked orders, how much data do they require? I mean, I have these, it's different for every customer, but I'm just wondering what you think would be a sufficient amount of operating data for units in the field before it kind of moves more individuals off the sideline. Is it months? Is it quarters? How should we think about that?

Joseph Mastrangelo, CEO

It depends. I mean, the answer is yes. It depends on the profile of the customer that you're talking to. Thomas, if you think about what we said previously, if you're dealing with an independent power producer or developer, they'll take risk sooner on new tech. If you're talking to a utility, it takes a little bit longer. We are in various stages with all different kinds of players that have laid out and done different things. We're not going to comment specifically on those conversations, but we have a roadmap of what we need to take people and convert them from opportunities into orders.

Thomas Boyes, Analyst

Got it, understood. It's great to see the first cube shipped to Italy. I know we are still in the early stages regarding our manufacturing base, but what are the international work plans for Europe specifically? Are there other countries with market support mechanisms that you find appealing? Also, of the 1.9 gigawatt hours late-stage pipeline, is some of that international, or is it mainly part of another category?

Joseph Mastrangelo, CEO

So, we outlined three areas of focus in the presentation. Given the size and evolution of the company, we can't expand into every area simultaneously, as it would stretch our resources too thin. Therefore, we are concentrating on the three specific geographies mentioned. We specifically discussed Italy due to the auction and our current status there. While we are engaged in discussions with other European countries, those are the three regions we are currently prioritizing. Regarding your second question, the majority of our late-stage efforts are focused on domestic, US-based projects.

Thomas Boyes, Analyst

Great. And so if I could sneak one more in just on the monetization for the 2023 credits, how are you seeing the kind of transferability market develop? I've seen some reports where you're looking at like $0.90 cents on the $1 and your comm term is modest. I'm just kind of wondering if that's in shooting distance.

Joseph Mastrangelo, CEO

Yes. And that's what we said. There's a range that we're seeing kind of $0.90, $0.95. Obviously you take a bigger discount if you're monetizing a smaller number of credits, you take a lesser discount if you have more credits. We've recorded these at $0.90. We believe that's where the market is for a company of our size. And we anticipate that discount tightening up over time as their volume of credits to sell increases.

Thomas Boyes, Analyst

Great. I appreciate the call. I’ll hop back in the queue.

Operator, Operator

Thank you. Our next question comes from Tom Curran with Seaport Research Partners. Your line is open.

Thomas Curran, Analyst

Good morning. Thanks for taking my questions. I believe an earlier commercial version of your Z3 container had a total of 672 modules. Can you tell us how many modules are in the current long duration offering at an energy rate of 695 kilowatt hours? Also, what should the module count be with the target or target ranges when you reach 800 kilowatt?

Joseph Mastrangelo, CEO

The product features a capacity of 672 kilowatts. The cube maintains the same capacity. When discussing long duration versus short duration, it refers to how the product is utilized, and there are varying levels of energy that can be input and output from the system depending on the discharge method and power used. This principle applies to all battery technologies. The performance will change when any battery shifts from a two-hour discharge to a six-hour or an eight-hour discharge. It's important to clarify how our technology operates across different durations. Looking ahead, our aim is to keep the module count in the cube consistent.

Nathan Kroeker, CFO

A lot of the energy density improvements we discussed in December are within the battery module itself.

Thomas Curran, Analyst

Right. And that was clear and I assume that. I just wanted to make sure we weren't also missing another variable where the configuration or physical density of the actual modules was increasing as well within the container, but very clear.

Joseph Mastrangelo, CEO

To clarify, our battery module is contained within a box. The outer dimensions of this box remain unchanged, while the internal components are engineered for better performance. If you look closely at the left-hand side of the last page, you will see that there is an increase in active surface area within the battery, which helps drive the enhanced performance.

Thomas Curran, Analyst

Crystal clear. Thank you. And then, when it comes to the scheduled deliveries that underpin your expected volume scale up over the second half of this year. Are there any major external gating items that you're aware of in monitoring? Or for most of those scheduled deliveries, does it really just come down to staying on track for your own SotA 1 line ramp at this point?

Joseph Mastrangelo, CEO

Yeah. I think it's a combination of staying on track with the line ramp and then coordinating with customers on customer deliveries. And so, yes, I don't think there's any one single big gating item. I think it's just focusing on executing against that plan.

Nathan Kroeker, CFO

Part of the reason why there's a range, Tom, is I think the $60 million to $90 million range is not all line risk that's in there, so that's why we gave the range.

Thomas Curran, Analyst

That's sort of what I was alluding to, is that when it comes to the swing factors within that range, you're not 100% internal. They're not all variables you would expect to be have control over.

Joseph Mastrangelo, CEO

Right. And when you look at the industry in general right now and the risk you have around finalizing permits, getting the civil works done in a timely manner, we're being prudent in how we're forecasting that risk to make sure that we get within the range this year. I think that's very important.

Thomas Curran, Analyst

Yeah, as you should be. Perfectly fair. I appreciate all the transparency and thoughtful detailed presentation.

Joseph Mastrangelo, CEO

Thanks, Thomas.

Operator, Operator

Thank you. Our next question comes from Joseph Osha with Guggenheim. Your line is open.

Joseph Osha, Analyst

Hey guys, good morning. A couple of questions. First, wondering if you can give us maybe a slightly more detailed walk through the milestones for the LPO draw to the extent that you can. And then I've got one or two others.

Joseph Mastrangelo, CEO

Yeah, like we've said in the past, Joe, it's one of the ones that we're focused on is getting the first state-of-the-art line up and running and implement it. Beyond that, we really haven't commented on what some of the other ones are, but that's the one that we're focused on. That's the one that's likely to drive the timing.

Joseph Osha, Analyst

But to be clear, since the line is being established in Wisconsin, you'll dismantle it and move it to Turtle Creek. Are you suggesting that this line needs to be operational at a certain level, or does it just need to be set up for inspection?

Joseph Mastrangelo, CEO

It needs to pass a performance test. We constantly refer to SAT regarding that line. SAT is expected to occur in the second quarter. The DOE has its own test, but it is effectively linked to SAT.

Joseph Osha, Analyst

All right. So remind me what that acronym stands for. I'm guessing the T is test. What's the…

Joseph Mastrangelo, CEO

It needs to pass a performance test. So we constantly refer to SAT on that line. SAT is expected to occur in the second quarter. That's effectively what - there is - the DOE has their own test, but it's effectively tied to SAT.

Joseph Osha, Analyst

Thank you. For my second question, I want to refer to the chart on Slide 5, specifically the scale projected at the end of 2024. At that time, we would expect the margin and costs to decrease. As we consider 2025 and beyond, can we assume that the main factors will simply be scale and cost absorption, given that your design will be finalized and most of the R&D adjustments will be completed? Will it largely involve straightforward fixed cost absorption from that point?

Joseph Mastrangelo, CEO

Look, Joe, my experience has always been, even if you have a 200-year-old product, you can continue to take costs out of it by improving the way you package it, by improving the way you manufacture it. So I think you'll continue to see an evolution of the product that we have. We think we have a product that we can continue to drive cost out beyond that. A large part of it is scale, but there are other things you can continue to do around software to improve performance, around packaging and how you containerize, and also continue to drive like we're doing right now. We'll learn more and continue to learn more about the battery and just improve performance by keeping it inside the same aspect ratio.

Joseph Osha, Analyst

Yes, okay. And then that kind of leads me to my third question, following on some of the other earlier lines of questioning. As your, I'll call it, functional density improves, is there any kind of set of thermal limitations you run up against, like where you said, hey, you don't have an HVAC and that's great, but I guess I'll just ask that simply. Are there any thermal limitations that you can run up against or are those not relevant?

Joseph Mastrangelo, CEO

No. Look, I think, Joe, what we've looked at, the theoretical round-trip efficiency when you back out thermodynamics and the inherent zinc-plating bromine absorption that happens with the chemical reaction in the battery, the theoretical round-trip efficiency that you can achieve is the high 80s, low 90s. There's a lot of things that you need to go in there to be able to do that, but when you look at how the battery performs and the temperature range that we have, we're not going to exceed that temperature range that we have right now. I mean, you're talking about going down to minus 20 up to plus 65 degrees C. That's a pretty wide range, and we don't see ourselves exceeding that as we continue to work on the product.

Joseph Osha, Analyst

Okay. Thank you.

Joseph Mastrangelo, CEO

Great. Thanks, Joe.

Nathan Kroeker, CFO

Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to CEO, Joe Mastrangelo for any closing remarks.

Joseph Mastrangelo, CEO

Thanks. Thanks everyone for listening. We'll keep everyone updated here as we progress through. I know there's a lot of important topics that everyone wants to hear about and learn about as we move forward. The most important thing here for us right now, when you think about this is getting the FAT successfully completed, then on to SAT, continuing to scale up production, and continuing to work that pipeline from opportunity into order closure. We'll keep everyone updated as we make progress on that. But thanks, everyone, for the time today.

Operator, Operator

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