Eos Energy Enterprises, Inc. (NASDAQ:EOSE) Q1 2023 Earnings Call Transcript May 10, 2023

Eos Energy Enterprises, Inc. misses on earnings expectations. Reported EPS is $-0.82 EPS, expectations were $-0.69.

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: Thank you. Good morning everyone. And thank you for joining us for Eos’s financial results in 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 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: Thanks, Ellis. Let’s move quickly to page three. I mean, this is a really a capstone page of the progress that the company has made in its 15-year history. And really when I sit back and think about my five years in the company and just being able to sit here and talk about discharging a gigawatt hour of energy on the field, it’s very exciting. You think about that gigawatt hour of energy on the field, 700 megawatt hours of that came in 2023. And when you put that in perspective, that’s the equivalent of powering 140,000 homes for up to four hours. So this is just a lot of work here done by the entire team throughout the history of the company to get to this moment. And it’s just one of those modes where you’re going to get the news from the team sit back and reflect how far the companies come but then also realize how much more work we have to do to move forward around the potential of this product that’s delivered this gigawatt hour of energy to date.

Moving on to page four on the operating highlights, you continue to see good progress commercially. I go through some more details on the pipeline in a future slide. But we continue to see the opportunity pipeline increase. We booked the larger order for $87 million, nearly $87 million and that brought our backlog up to $535 million with a representing 2.2 gigawatt hours of power. Talk about the discharge energy I think another piece of this and Nathan will get into some more detail later as around revenue, delivering $8.8 million of revenue, 168% increase over first quarter of 2022 along with seeing the progress of our cost out in the product where you can see in the numbers, revenue coming up. The gross market, the loss rate gross margin coming down and closing the gap on our losses of operating profit.

Cash on hand, we closed the quarter with $16 million that doesn’t include the funds that we raised in $2.25 million in Nathan will walk through later on. Our financing strategy, I think we put in place that financing strategy over a year ago, we’ve been very consistent about how we talked about using the different tools. And we continue to use those tools to allow us to position the company for growth and deliver the results that you’re seeing in the progress that you’re seeing against the overall strategy of becoming a profitable operating company. Now, let’s move forward and talk about the commercial pipeline and orders backlog, go to page 6. Where we go to our classic, our classic page of how we look at pipeline, we keep the page in the same format, so you don’t have to figure out the format when you look at it and focus on the numbers.

So focusing on the numbers, lead generation once again, these are people coming to us customers coming to us with ideas of projects that stands at $9.5 billion 57 gigawatt hours. There’s a lot of it churn in that one billion increase, you have things that drop out, things that move in the current pipeline and things that come in. The team is doing a great job building relationships with potential new customers and really working through and showing the power of the Eos technology and how it can help deliver a longer duration energy storage, which is critical for the energy transition. When you look at our current pipeline, current pipeline is up in Q2 and we signed over $500 million of LOI. Now think again about how we think about the movement through our pipeline.

We don’t call it current pipeline unless we have a technical use case where we can provide a technical proposal to the customer, which then leads us to giving them a non-binding financial code, which that stands at $6 billion of itself. Our goal with that combined $7 billion is to then get customers to sign an LOI with us, so we get on the same side of the table with them and close the project out to allow them to generate revenue and allow us to put product out in the field. That stands now at a billion and a half with seven gigawatt hours of potential. We work through those and when you think about the timing of LOI to firm commitment, you’re working through various different aspects on commercial terms permitting land rights and interconnections to be able to get to a firm commitment that then goes into our backlog, which as I stated earlier stands at $535 million, up 71 million versus fourth quarter.

So starting the system traction on the team closing orders, starting to see opportunities moving to LOI. And I think as we get more clarity around the IRA legislation in the United States, we’re going to see more and more orders to work through the pipeline opportunities to work through this pipeline. While at the same time you’re starting to see, Europe looking at what they’re calling their green new deal, which is going to drive more activity over Europe. And we’re starting to see pipeline grow there as well and our focus on that on that on the European continent as far as where we can deliver product as they look to diversify their energy next. Moving on to page seven, this is a page where wanted to take a look back to our original customers when we first went public, nearly two years, over two years ago.

We had, three, what I would call emerging customers in IEP and are smart and carcin energy. I mean, when you look at, when you look at what those customers and what we’ve done, this is really building a relationship back in 2020 creating a letter of intent and booked orders delivering on some of those booked orders, but also working with the customer from letter of intent into a booked order into delivery. And I think this just shows that process that I just talked about in real life with real orders that are going to be shipping here in 2023 and early 2024. We’re excited about these relationships and these are the types of customers that when you look at the space you’ve got to go out and grow with them and find ways for them to grow and find ways for us to deliver profitable solutions for them.

The bottom of the page talks about some more established customers, Pine Gate Eastover, that’s the project that I showed on the first page. This was a booked order back in 2021. We started delivering it in 2022. That was the focus of ramping up the factory. See that project running cycles around 50 megawatt hours per day is very exciting for the team. And that also will lead us to additional add-on projects under our MSA with Pine Gate as we look to move forward in the future. The California Energy Commission or the CEC, this is something that started back in like 2017, 2018. Running pilot projects, the CEC relationship started with running individual cells, then doing individual pilot projects in California, which then led to a commercial order in 2022 which was the bulk of the revenue that we delivered in first quarter of 2023 with additional shipments to come in the second half of 2023.

But an exciting development for us as you think about developing that relationship and proving out your ability for your technology that delivered the operating needs of customers, which then is going to create additional pipeline for us in California remains an important market for us as we look to the future. I talked earlier about Europe and Enhol [Ph] is another, another, another, and [Indiscernible] power is another customer that we’ve been building a relationship with over time. Going back again to pre public company days to come up with a booked order in 2021 to work through with them to get all the sighting and shipping and logistics around getting that project installed in Europe and operating in 2024 with the delivery in 2023. It’s exciting for us when you look at what’s going to come in Europe and working with the partner like Enhol adds credibility to what our technology can and will do out in the marketplace.

We shift now from the commercial side and go into operating actions. What I want to leave the commercial section on is the concept of your planting seeds to eventually grow trees to eventually create an installed base to eventually create a service, a service annuity for our company. That takes time to do that in an industry that’s very thoughtful because all of us are users of our product in that one. We flip the light switch in our home, we expect the light to come on, so you’ve got a high hurdle to prove out your technology. And that’s what the team year at EOS has been working on every day in the five years I’ve been here and that really takes us to slide nine, so you look at slide nine. Now this is the proof point of Eos being able to rapidly scale production in a very cost effective manner.

When you look back at March of 2022, we had an empty building in Turtle Creek with two infrared holders in there. When you think about where we were in April 2023, you wind up with a, well, that is a picture of the production line as we delivered the last new units to the field for Gen 2.3. This, this facility, not only ramp up, but it also achieved cost out, which, which needs, and we’ll talk about, we ship 208 energy blocks. We’ve produced over 334,000 batteries, and as I talked about, we’ve run what we believe is one of the largest cycles ever done by a non-lithium ion technology in the world. And when you think about documented cycles, as far as we can tell, this might be the largest one, but we’ve got some more work to make sure that that’s true, but we’re proud of the fact that this 47 megawatt hour cycle proves out that the technology can scale.

What we did in the fact that over the last 12 months proves out our ability to scale our technology and our ability to produce product quality product down to the field. Now, that foundation takes us to page 10, which is the Eos Z3, the next generation of our technology, same proven electrolyte inside of a new mechanical design inside of a new tube configuration that not only allows us to take cost out, but also improves performance. So, where are we in the journey? When you think about what we did in 1Q, deliver those last units for Gen 2.3, inside of that, that was part and parcel, if you will, with our strategy in 4Q of delivering the product in 2023 to generate the investment tax credits for our customers and the production tax credits for ourselves.

But what we’ve been also working on at that same time is getting the discrete manufacturing operations up and running for the Z3 battery. Now, we’re very excited about what we’ve done here. We’ve invested a million dollars that the line today could do 110 megawatt hours of annualized capacity, but more importantly, what you do with that one million dollar investment is you learn how to make your product. There’s a list of little things that we learned that if you would have gone out and put a massive factor in place, you would have crippled the company with the learning that you had in each individual discrete manufacturing step. So when you think about what we do, first figure out how to get your manufacturing steps correct, then go to assembly automated manufacturing cells, and that’s where we are, and what we’re doing in Q2.

So Q2 is now investing an additional incremental $5 million to $7 million to expand the capacity of that line. Get more throughput, take the lessons learned, and codify them into our manufacturing processes, to start delivering commercial product into the field. Second quarter is a transition quarter from us, from the Gen 2.3 into the Z3. Now, while we’re doing that, when you think about this from physical location, the pictures I showed you on the prior page, that’s the downstairs forum, what is called building 700 in turtle creeps. The pictures you see here are the upstairs floor, where we’re doing the modeling of steps 1 and 2 for the Z3 manufacturing line. At the same time we’re doing that, we’re taking that downstairs floor that was an empty building in March of last year, and emptying it out again, to set up a spare part manufacturing line to manufacture batteries for services, and start to lay the groundwork for phase 3 of our scale up, which is a fully automated manufacturing line, which we’re forecasting to bring online by the end of this year.

We’re very excited, we’ve picked our automation partner, a proven partner in both the battery space and with a lot of experience and automation. And you’ve got to remember, and I said this before, page 8, page 9, excuse me, where we talk about Gen 2.3, that’s a 90 minute cycle time from components to a finished battery. Phase 3 here on page 10 is about 90 seconds. So the throughput that we’ll get on an asset base is really significantly higher than what we’re doing as we go through generations. That’s why we’ve made the transition to the Z3. When I was telling you before turning the turning it over to Nathan to walk through the financial results and how we’re performing in several objectives, we’re really proud of it. We get me excited every day coming in to work.

The fact that this is a company where the technology was invented by American minds, it’s built with American hands using predominantly American raw materials on American made manufacturing equipment. This proves that in the United States we manufacture equipment. This proves that in the United States we can still manufacture product. We can still innovate and we can still lead the next generation of energy technology. So it’s an exciting time with a lot of work to do still and you have a team that’s committed to delivering that and I’ll turn it over to Nathan now to walk us through the financial thanks.

Nathan Kroeker: Thanks Joe, good morning everyone. I want to begin by walking you through the first quarter financial performance, discuss our liquidity position and capital structure and then provide progress against our 2023 company objectives. Overall, a strong performance by the team is we finished the last production of the Gen 2.3 energy blocks that were shipped in the quarter and now we’re beginning to transition the factory to Z3 production. Revenue for the quarter was $8.8 million, almost three times our revenue from one year ago, driven by increased production and deliveries over last year. Cost of goods sold for the quarter was $26.9 million a decrease of $8.6 million compared to the first quarter of 2022 primarily driven by a 25% reduction in unit product costs and all of this in a world that’s characterized by supply chain disruption and high inflation.

As we’ve said previously, we have a number of clearly defined product cost out initiatives that fall into three primary categories better pricing and quality from our supply chain increased energy density and improved manufacturer ability of our battery systems. While we have made very good progress on our cost out initiatives to date despite deferring some of our Q4 shipments into 2023 in order to take advantage of the IRA credits. We expect unit costs to continue to train down going forward as we implement incremental changes and realize further savings. R&D investment was $5.4 million, a slight increase compared to the first quarter last year as we’ve made product and processed design improvements in anticipation of manufacturing the Z3 battery.

It’s important to note that $400,000 was non-cash related items. SG&A for the quarter was $14.0 million, including $3.1 million of non-cash items, which is $300,000 lower than the first quarter of the prior year, driven primarily by reduced third-party spend as we brought much of our initial start-up overheads in-house at a lower cost. We continue to focus on managing our corporate overhead expenses at 85% of our 300 plus employees are directly involved in designing, building, selling, or commissioning our battery systems. Interest expense was $18.6 million for the quarter of which $4.8 million was driven by the senior secured terminal with Atlas and the equipment financing facility with Trinity capital. The other $13.8 million was related to the interest expense and amortization from our convertible notes.

The resulting operating loss was $38.3 million with a net loss of $71.6 million. This translates to $38.6 million in net loss when you exclude $33 million in non-cash items. The primary non-cash items are the interest that we pick on our convertible notes, the change in fair value of our derivatives, stock compensation, and depreciation. This compares to $48.5 million in net loss adjusted for non-cash items in one-two of 2022, which represents a 20% improvement year over year. Now, if turning to slide 13, I want to provide some insight into how we’re positioning ourselves to fund the future growth of our manufacturing capabilities in order to meet our increasing backlog of demand. While capital markets have been challenging in general, we’ve been working hard to provide funding optionality to best position Eos for further growth and capture the opportunity that sits in front of us as the market is accelerating and overall demand for long-duration energy storage continues to increase.

Year-to-date, we’ve raised $90 million utilizing a variety of different financing instruments. In the first quarter, we raised $35 million, which is $13.75 million raised through convertible notes with existing investors, $21.25 million under our standby equity purchase agreement that we have in place with Yorkville. And in most recently, in April, we announced a $40 million registered direct offering in private placement. These funds will support our on-going operations as well as enable us to begin constructing the automated line for Z3. I’ll take this opportunity to reiterate that if these investors exercise their warrants after they become exercisable in October, we could receive up to $50 million in additional proceeds. You can see from the middle column on this slide that we have capital, you can see from the middle column on this slide that we have capital flexibility and we’ll continue to use our financing facilities on an as needed basis to capture market share and deliver on customer commitments.

As a reminder, Eos has an effect of S3 shelf registration filed with the SEC for up to $300 million of common stock preferred stock and or debt securities. $100 million of this is allocated to our ATM, $75 million to the CPA and $40 million for the registered direct offering that we just announced in April. I do want to clarify how these tools work. The ATM is one of our most cost-effective ways to raise equity capital. However, it is subject to blackout periods, market demand, and daily trading volumes. The issuance of convertible notes under supplements to the CPA is similar to the ATM but also provides us with the key benefit of certainty in the amount raised with each issuance. While our most recent capital raise was equity, we continue to see significant interest from debt investors and will continue to evaluate these options for future capital needs.

In addition to debt and equity markets, we continue to pursue other opportunities for funding and leveraging the incentives for U.S. clean energy companies so that we can continue to accelerate our competitiveness in the marketplace. We expect to secure state and local incentives alongside federal support. You may have noticed that we recorded an $800,000 benefit in our key one financials related to the IRA tax credits. And while the industry continues to wait on additional clarity on how and when these can be monetized, we expect this number to grow as we scale up production. We have substantially completed the due diligence for our department of energy loan and are actively negotiating the final provisions of a term sheet with the loan program office.

The combined federal state and local industrial policy tools that have come together in recent years is allowing the US to be competitive in the clean tech space and we believe this will help accelerate our own competitiveness. In addition, we are forming a consortium of community leaders, universities and supply chain partners in anticipation of pursuing grants issued under the bipartisan infrastructure law. The application process for these grants is currently expected to open an early summer with the awards being announced early next year. In summary, we believe we have significant capital flexibility and we will continue to use these finance and facilities on an as needed basis to capture the market and deliver on customer commitments. We believe we are well positioned to capture a once in a generation opportunity.

Now, turning to slide 14, we want to provide an update on our progress against the full year 2023 company objectives. The first quarter reflects a strong performance by the team as we’re shifting the manufacturing process from Gen 2.3 to Z3. While we are off to a good start, there’s still a lot of work for us to do in order to reach these full year goals. In the first quarter, we increased our opportunity pipeline by $1 billion and we booked over $86 million with two new orders. The first is with one of the largest operators of energy storage in the U.S. and the second is an additional project with one of our existing customers. We also signed three new letters of intent for a total of 850 megawatt hours. We continue to see market demand surging and we expect to convert these letters of intent into booked orders in the coming quarters.

Next, we are on track for a $30 million to $50 million revenue target. In the first quarter, we had revenue of $8.8 million and as we think about 2023, we expect the revenue to be back-end weighted as Q2 is very much a transitional quarter for us as we make the shift from manufacturing Gen 2.3 batteries to the Z3 cubes. Securing adequate funding will allow us to rapidly scale capacity in the next 12 months and we expect our first fully automated line in the fourth quarter of this year. Lastly, while all of this is occurring, one of our main priorities continues to be to take cost out of the product. We have identified seven key projects to increase energy density, improve our supply chain and streamline the manufacturer ability of our product.

And we believe we should realize a 15% product cost reduction from the current expected launch cost of the Z3 product. As a reminder, with the delivery of a couple of recent cost-out projects, the Z3 battery is expected to launch at half the launch cost of the Gen 2.3 product back in 2020. We have seen clear advantages with the Z3 over the Gen 2.3 product in efficiency, energy density, material quality and overall manufacturing ability. And we’re excited to scale this product and deliver it to the market. With that, I want to thank everybody for their time today and listening into our call. I would now like to turn it over to the operator for questions. Operator, please open the line for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Christopher Suther with B. Riley. Your line is open.

Operator: Thank you. Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is now open.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Joseph Osha with Guggenheim. Your line is now open.

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: Thanks. Look, I think the team we continue to make progress here. And it’s progress that you can see and measure in the numbers. And I think one thing that I’d like to hit on is I’d like to take, we talk about revenue growth, we talk about gross margin growth, cost out of the product. But what I’d like to take a moment on is just kind of flip this and look at this on how I think about the performance as also an investor in Eos. Our earnings per share, if you look at the EPS numbers year-over-year, we were at $0.85 loss last year. And we were at an $0.82 loss this year. But I think we got to peel back the onion and think about how we run the company. We really run this company on a cash basis. So if you take those same numbers and strip out the non-cash numbers in that EPS loss, you would have been at a $0.90 loss in 1Q last year.

If you take out the non-cash items, which were principally driven by the increase in our stock price as it’s tied to our convertible notes that we had for capital raise, our loss on an earnings per share basis goes down to $0.44. So it’s half of what it was a year ago that shows the journey of where we want to get to and gives me the confidence that we have the team, the plan, and we’ve got a lot of risk and opportunity that we’ve got to manage to get there. But you’re starting to see in our third year here of being public the roadmap of how we’re going to get to profitability. With a lot of risk inside of it and a lot of things we still have to do, but you’re starting to see those numbers tying back to the vision that we laid out three years ago.

That’s also why I really wanted to include in there our commercial page to talk about this is not a sell it, ship it market where it’s very easy. It’s a winding road where you’ve got to develop long-term relationships in an industry where the customers want to make sure they get it right the first time. So you’ve got a high bar to prove yourself. And we’re challenging ourselves every day to meet that high bar, both on how we went out in the marketplace and how we deliver the product and drive this company to become profitable over time. And we’re continuing to be committed on that, and I want to thank everybody for their time this morning. I look forward to keeping you updated on the journey as we move forward from here.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.