Earnings Call Transcript - EOSE Q1 2023

Operator, Operator

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

Laura Ellis, Vice-President of Investor Relations

Thank you. Good morning everyone. And thank you for joining us for Eos's financial results conference call for the first quarter of 2023. On the call today, we have Eos' CEO, Joe Mastrangelo; and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements, including but not limited to current expectations with respect to 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 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 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 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, Ellis. Let's move quickly to page three. This is really a capstone page of the progress that the company has made in its 15-year history. When I think about my five years in the company, just being able to sit here and talk about discharging a gigawatt hour of energy in the field is very exciting. That gigawatt hour of energy, 700 megawatt hours of that came in 2023. To put that in perspective, it's the equivalent of powering 140,000 homes for up to four hours. This reflects a lot of work done by the entire team throughout the company's history to reach this moment. Moving on to page four on the operating highlights, you can see continued good progress commercially. We booked a larger order for nearly $87 million, which brought our backlog up to $535 million, representing 2.2 gigawatt hours of power. We delivered $8.8 million of revenue, a 168% increase over the first quarter of 2022, along with progress on cost reductions in our product. Cash on hand at the close of the quarter was $16 million, not including the funds raised of $2.25 million that Nathan will discuss later. Over a year ago, we put our financing strategy in place and have been consistent in using the different tools to position the company for growth and deliver results. Now, moving forward to page 6, focusing on the numbers, lead generation stands at $9.5 billion with 57 gigawatt hours. This reflects ongoing engagement and relationship building with potential new customers based on the strengths of Eos technology. Our current pipeline is robust, with $6 billion in potential orders, and our backlog standing at $535 million, up $71 million versus the fourth quarter. This is a period of significant traction for our team as we commence order closure and engagement with LOIs. We anticipate a solid trajectory, especially with more clarity expected from the IRA legislation in the U.S., which could facilitate additional orders. Meanwhile, Europe is initiating its green deal driving increased activity, and we recognize this as a vital market opportunity. When we shift focus to our original customers over the past two years, we've actively worked to establish relationships and convert those from LOIs into booked orders with tangible delivery schedules set for 2023 and early 2024. Our ongoing projects include the Pine Gate Eastover and California Energy Commission, balancing growth while maintaining quality service and delivery. Now, moving to page 9, this outlines our ability to scale production. From March 2022, we transitioned from an empty facility to achieving substantial production quantities and cycles. This highlights our capability to execute quality production at scale, which we intend to sustain as we evolve into the Z3 next generation battery. Speaking of which, on page 10, we have made significant investments to ensure our Z3 line enhances performance and reduces costs. Our goal is to accelerate production and ensure material advancements happen simultaneously, facilitating placements and opportunities created by the IRA credits.

Nathan Kroeker, CFO

Thanks Joe, good morning everyone. I want to begin by walking you through our first quarter financial performance, discuss our liquidity position, and provide updates on our 2023 objectives. Overall, we finished the quarter with a strong performance, transitioning production from Gen 2.3 energy blocks to the Z3 battery. Revenue for the quarter was $8.8 million, almost three times that of last year, driven by increased production and deliveries. The cost of goods sold for the quarter was $26.9 million, an $8.6 million decrease compared to last year, primarily due to a 25% reduction in unit product costs amidst supply chain challenges and high inflation. We're continuously focused on improving product cost through several strategic initiatives. R&D investment stood at $5.4 million, slightly above last year, as we develop the Z3 battery. SG&A was $14.0 million, which included $3.1 million in non-cash items. We are committed to managing corporate overhead efficiently, with a significant portion of our personnel handling essential battery system functions directly. Interest expense amounted to $18.6 million for the quarter, contributing to an operating loss of $38.3 million, with a net loss of $71.6 million, reflecting an improvement year over year when adjusted for non-cash items. Year-to-date, we've raised $90 million using various financing instruments. In the first quarter alone, we raised $35 million, which included convertible notes and a private placement. These funds are crucial for supporting ongoing operations and the construction of our automated Z3 production line. We have substantial capital flexibility with an effective S3 shelf registration for $300 million and are well-positioned to navigate funding options in alignment with market interests in clean energy. Additionally, we expect increases in production credits as we scale operations effectively. The IRA has benefited our financials with an $800,000 recognition recorded in our Q1 results. We are making progress with our Department of Energy loan application, moving toward a schema that could provide a significant influx of capital to support growth as we improve our competitiveness in the clean energy market. Despite the challenges in capital markets, we are strategically positioned and expect substantial pipeline growth moving forward. The first quarter reflects a strong start, bouncing off a solid year within our overall strategy. We've captured new opportunities in the market, increased our pipeline by $1 billion, and booked over $86 million from new orders. We're working towards a targeted revenue of $30 million to $50 million for 2023, with an expectation of strong back-end weighted revenue from Q2 onwards. Additionally, our critical priority remains reducing costs across our product line. We're on track to achieve a 15% reduction in product cost due to our rigorous focus on efficiency and resource management. We appreciate your support and look forward to navigating our next steps with anticipatory eagerness.

Operator, Operator

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

Christopher Souther, Analyst

Hey guys, thanks for taking my questions here. Maybe we're starting off on the DoE loan process. Any additional color you can share around timing and the term sheet negotiation process. I think it would be pretty helpful.

Nathan Kroeker, CFO

Sure, Chris, it's Nathan. It's good to hear your voice. We can’t say much more than previously stated. I've spent time in DC several times in the past weeks, and we feel good about our progress. The size of the loan remains consistent with what we've projected, and we’re optimistic about an upcoming announcement.

Christopher Souther, Analyst

Okay. And then maybe just on the cost of goods sold decline. Can you give us a walk for the first quarter? It’s nice to see the reduction along with the big uptick in revenue. Just curious about the fixed portion of costs in the quarter and the cadence of that as we transition into Q2.

Nathan Kroeker, CFO

Yes, I can’t detail the walk quarter-to-quarter, but I can share that about 40% of COGS is materials and freight related to manufacturing, 15-16% is labor for building and installing batteries, with another 15% attributed to depreciation. The remaining 30% covers miscellaneous costs.

Joe Mastrangelo, CEO

Just to add, this reduction reflects the cost-out work we undertook last year. We focused on manufacturing product in Q1 to take full advantage of IRA incentives, generating $780,000 in initial production tax credits.

Martin Malloy, Analyst

Good morning, congratulations on the transition here, the Z3, and the backlog build. I wanted to just ask about the procurement of raw materials as you ramp up. Are there any raw materials or components that might be more of a concern, particularly regarding zinc bromide procurement?

Joe Mastrangelo, CEO

Good morning, Martin. We have sufficient supply from Tetra and they can meet our demand for 2023. While there are standard supply chain challenges, we have secured our core raw materials to ensure seamless production. Our goal is to synchronize the timing of material receipt with increased production.

Martin Malloy, Analyst

Okay, and my second question is about your customer conversations regarding IRA clarification. Are customers delaying orders pending clarification on key provisions?

Joe Mastrangelo, CEO

Yes, I agree, there’s a degree of pent-up demand as customers wait for more guidance on IRA provisions. They're locking in technology and delivery with LOIs while awaiting clearer details, particularly around domestic content provisions, which we believe could create significant demand as the market stabilizes.

Joseph Osha, Analyst

Hey, good morning. A couple of questions. First, regarding the 45X manufacturing credits, do you have a plan to monetize those, or are you waiting on the IRS?

Joe Mastrangelo, CEO

We are evaluating options for monetizing those credits, but we don’t have more definitive plans to announce at this stage.

Joseph Osha, Analyst

What's the path to positive gross margin as you transition to Gen 3?

Joe Mastrangelo, CEO

We're confident positive gross margins will result from our fully automated line implementation. Timing on that will depend on securing the necessary funding, but we are dedicated to achieving operational efficiency.

Operator, Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Joe Mastrangelo for closing remarks.

Joe Mastrangelo, CEO

Thank you for your continued support. The team is making measurable progress, and while we focus on revenue growth and product cost reduction, we remain committed to developing long-term industry relationships. We operate with a vision of profitability, despite challenges. Our aim is to maintain high standards while navigating the market's dynamics. I look forward to keeping you updated on our progress.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.