Eos Energy Enterprises, Inc.

Good morning and welcome to the EOS Energy Enterprises fourth quarter and full year 2021 conference call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. With that, I would like to turn the call over to Laura Ellis, VP of Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and thank you for joining us for EOS's Financial Results Conference Call for the fourth quarter and full year ending December 31, 2021. On the call today, we have EOS CEO Joe Mastrangelo and CFO Randy Gonzalez. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company, which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our projections or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Our remarks during today's discussion should be considered to incorporate this information by reference. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking 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 will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to U.S. GAAP financial information, is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. 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's Investor Relations website at investors.eose.com. Joe and Randy will walk you through the company highlights, financial results, and business priorities before we proceed to Q&A. With that, I'll now turn the call over to Joe.

Thanks, Laura, and welcome, everyone. Great to walk you through our 4Q in 2021 operating results. If we move to page 3, I'm going to start where we always do, and that's with how much energy have we discharged out of our systems. Since the last time we were together at the end of 3Q, we've discharged nearly 100 megawatt hours of energy from our systems, both either out in the field or on test. We're now over 400 megawatt hours and just continues to show the robustness and the proven nature of the technology that we have out in the marketplace. For me personally, the journey here over the last year or so, it's really fantastic to be sitting here and thinking about having nearly 600 megawatt hours of orders and backlog, almost totaling $150 million. But the lion's share of the work that the team has done over the past few months is really beefing up our opportunity pipeline. As we've gone out and proven the technology and shown the value, our pipeline is now 25 gigawatt hours of opportunities and over $4 billion. That bodes well as we walk through here today on what we think we can do as we go through 2022. Lastly, when you think about the operations of the company, we were able to recognize $4.6 million of revenue The team had a really good fourth quarter, which Randy will walk you through a little bit more details on that. But I think when you summarize this page, you're really starting to see the company now transitioning from an R&D company to a full-fledged operating company. And if we move to the next page, you can see we show some of the core operating highlights for the quarter for the company. We are on a rapid growth trajectory as a company. When you look at growing our operational scale, which is really positioning us for the future, We signed and announced earlier this week the doubling of our manufacturing footprint in Turtle Creek, Pennsylvania to be able to build our 800 megawatt hour a year capacity. At the same time, we are piloting a manufacturing line here in Edison, New Jersey for our new Z3 product. That product has been on test and we've produced our first units. I think one of the more important things What you may think of as a soft thing but is very important out in the market is the fact that we received ISO 9001 certification for our manufacturing facility in Turtle Creek. This is critical for us as we go out and show customers the capability that we have and the maturity that we're starting to gain in our manufacturing process. When you look at those manufacturing process, we had a very strong quarter. We had a 68% increase in output versus the first half of 2021, you know, our first pass yields towards the end of the year, we're approaching 90%. And we're consistently going above that as you look at the first few days here in 2022. And we've reduced our cycle time by nearly 75%. And that's shown in the financial results that we're delivering today, you know, we have shipped more than 50 containers out in the field, which is really great performance by the entire operating team. As we talked about on the commercial side, sales volume is up four times versus the third quarter. We signed 176 million of new customer LOIs and firm commitments that when you think about our business model, which I'll talk about in the next section, that's a leading indicator for orders that are going to come in the near term as customers close out their contracts. And as I said earlier, The pipeline is rapidly growing, and we see more and more people wanting to have longer-duration storage and coming to EOS as the provider of that solution as they think about how they want to monetize their assets. As we move forward and shift into orders growth and revenue, I want to start off on page six just to baseline back on how we think about the market segmentation. So we always break this down into three segments. The short duration, zero to three hours. This is where lithium ion is really strong and provides a great solution to the marketplace. The long duration, 12 plus, where there are a lot of competitors that are developing technology and starting to ramp up their manufacturing processes, much like we've done over the last 18 months. And then you have this medium or intraday, or what I like to call, truly the flexibility, simplicity, and safety segment of the marketplace. You know, it's going to be 115 gigawatt hours. EOS has the perfect solution for this customer need. And when we look at this, we think about, you know, when you're delivering solutions that need to offset the intermittency of renewables, you need to have flexibility. They can't be static, rigid systems. And that's exactly what our technology does, and it's exactly why You see us with this nearly 600 megawatt hour of backlog and a pipeline that's rapidly growing and expanding as the commercial team is out selling our solution into the customer base. When you take a look at this next slide, you see that we have significant competitive advantages versus the incumbent lithium-ion, not just on our ability to operate across a wider operating range with a larger... depth of discharge, higher operating range when it comes to temperature, and a lower degradation, but also a cost advantage that's derived from the fact that we have principally five earth-abundant raw materials in our overall system. Our supply chain is domestically based. We've stabilized it and de-risked it over the last four months. We ship our product unlike other products in the marketplace. It's shipped fully integrated in its container with zero voltage in there which increases the safety of the product when it's being shipped to the site either by over the ocean or over the roads on a truck. We have a longer operational lifetime when you think about our system and how it charges and discharges with every cycle that we operate our battery. You're basically resetting that battery and increasing and maintaining its useful life to 15 to 20 years the same performance. We don't have any auxiliary systems, either HVAC, you know, heating, ventilation, and air conditioning to operate in a narrow temperature range, or unlike flow batteries, we don't have high pressure pumps to move our electrolyte out of large tanks through a membrane and a catalyst to generate electricity. We're a self-contained system that's very safe, and it's hard to damage the system when you're outside of the suggested operating specifications of the product. And at the end of its useful life, 20 years from now, Many of us probably won't be in the industry anymore. This product will be able to be recycled very simply and cheaply, and all the raw materials can be put to use into a new use. So we think not only does this offer the flexibility, not only does this help decarbonize our energy value chain, but it also has a compelling overall from birth to rebirth life cycle that adds to exactly what we're trying to do as we think about renewable energy for the energy value chain. If we move from page seven to page eight, just want to walk through our traditional page on the pipeline, right? So as everyone knows, we call our pipeline projects where we have a technical use case from our customers that we can provide a technical proposal and a financial proposal against. We do do early generation ideation or idea generation with customers where we have another 4 billion of opportunities that we're working on with our customers. But these are things where people come with ideas. So when you think about this page and you move it from left to right, that lead generation, in general, you're getting a 50-50 hit rate from lead generation into pipeline. From pipeline, which I would call active proposals and letters of intent, firm commitments, that's about a 30% hit rate, and then you have booked orders. So when you think about where the company is, and how we've positioned it for future growth. The company is well positioned to continue to grow its backlog and to continue to expand. And we like what we see from the customers that we've been working with. In that LOI firm commitment bucket is a 240 megawatt hour project with BridgeLink in West Texas, which is an ERCOT project, which we feel really good about what BridgeLink wants to do. And we're working with them on the same side of the table to close that out and turn that into an order here relatively quickly. So we're pretty excited about what the team has done to position ourselves for future growth, and we'll continue to keep everyone updated as we think about this. Now, although on the booked order side, when you look and it says no change versus the last time we were together for earnings, we did book over $51 million of orders with blue chip customers like Amoresco, Duke, and Blue Ridge, and Pine Gate Power. So we're pretty excited about those booked orders for the year and where the backlog stands. If you go to the next page and just think about the backlog, there's 28 projects with 14 customers, so we do have customers coming back for multiple projects, which is a testament to what the team has done is establishing us in the marketplace. When you think about the backlog in and of itself, it's important to note that $114 million of this is the capital equipment shipping the product out into the field, but we've already started to create a recurring revenue stream with long-term service agreements, which are $34 million of the opportunities that you have in the backlog. And then there are some asset leasing projects that we go through. When you think about that and you look at why that number has gone down versus the third quarter, That's basically because we had one project where the customer found their own financing and is in the process of closing that, and EOS is no longer going to finance that project, but we're working now in the factory to be able to manufacture that product and get it out in the field, and that's another project down in Texas in the ERCOT operating region. So we're very excited about where we are from a backlog standpoint, how the commercial model has evolved over the past 12 months and will continue to drive growth and backlog for the company to start delivering higher revenue numbers as we look to the rest of 2022. If we now shift into and talk about manufacturing and our ability to deliver product, again, I just would start off and say, signing the lease and expanding our manufacturing capacity in Turtle Creek is very important for us to be able to continue to grow the company. At the same time, being approved by the Department of Energy through its phase one loan program and now starting off on phase two also offers us a way to be able to finance the future capacity growth of the company as we look to the future. You know, I'm really proud of what the team has done out in Turtle Creek. If you focus on the left-hand side of the page, we've seen continuous yield improvement in the factory. You know, I talked earlier about how we're getting more output out of the same asset base. We've expanded our manufacturing workforce. You know, we're really proud of the team that we have there. You know, one thing I would say is like, not only does our company do good things for the energy value change, we're doing good things for the community that we operate in. When you look at our supervisors on the shop floor today, we're the first employees that came into the factory 18 months ago, and our workforce is an impressive workforce. We've got nearly 15% are veterans and 40% minority, and people can come in and we've got a really good growth trajectory, career trajectory for people to really work in the green tech sector in what used to be coal country of the United States. And we've also started to optimize our processes and our cycle time. And this is something that never stops. You've got to be relentless about this. You've got to bring lean. We have a new supply chain leader who's joined the company who comes with a very extensive background both in technology and and in manufacturing is only going to help us get that better. And when you look at the right-hand side of this page, you can see the first shots of our new facility in Turtle Creek. We've gone through, signed the lease, as I talked about earlier. And what you can see on that far right picture is we've started to lay out mock manufacturing flow on the shop floor so that we can start looking at how the the product and the raw material is going to flow through the factory to optimize that and get more and more output off of the same asset base. And this is critical because when you look at the investment in this facility, it's $50 million to get one gigawatt hour of capacity, which is 60% less than what it would cost if you were doing a comparable lithium-ion facility. So we've designed... the entire business to be modular in the product and how you configure and ship in the field, but also be modular in our CapEx program so that we can either accelerate or slow down our capital spend depending on what we see happening in the marketplace. So the team in Turtle Creek is something that we're really proud of and all investors should be proud of what that team has built. in such a short period of time, and better days are even coming now. As I said, the initial results of 2022 are better than what we saw in fourth quarter, and we're excited about where we're going to be as we move forward. So with that, I'll turn over to our new CFO, Randy Gonzalez, to welcome him formally and publicly to the team, and then let Randy take it from here.

Thanks. Thanks, Joe, and good morning, everyone. Let me start by saying how excited I am to be part of the EOS team. and I wanted to take this opportunity to explain why I chose EOS. First and foremost, the positive impact that EOS has in making the world a better place through accelerating decarbonization. I can't think of a better cause. Mid and long duration energy storage technologies like ours are a key catalyst for the continued adoption and higher capacity utilization of renewable energy solutions. Second, EOS has a technology that works, which now requires industrial scale, and I'm energized to apply my decades of experience in managing rapid growth, driving operational excellence, instilling discipline through performance management, and executing strategy. Finally, I was excited to partner with Joe and the rest of the leadership team to continue to build on the platform of this critical technology, which has been developed in the U.S. and which is produced in the U.S. with a primarily domestic supply chain. Now, turning to slide 13, I'll walk through the fourth quarter and then full year financial performance and outlook for the full year 2022. The fourth quarter is a validation of the rapid operational scale the company expected and is a good baseline for what to expect going forward as we produce against our backlog, especially as we bring the additional manufacturing capacity online in the second half of the year. In the quarter, we achieved significant operating leverage, with revenue increasing 332% versus third quarter to $3.1 million, while cost of goods sold only increased 64%. This is greater than 5x operating leverage on volume. We continue to see substantial improvements in productivity and efficiency in our operations through reductions in scrap rates and increasing first-half yields, And we have the right plan with the right resources to deliver a significant reduction in cost of goods sold over the course of 2022. On the expense side, we continue to invest in research and development to improve the technology we deliver to customers. We invested $5.4 million in the fourth quarter in R&D. As Joe mentioned earlier, we've made great progress on our next generation battery development and will continue the intense focus on R&D efforts in 2022 to improve battery performance and to reduce both the cost of the product and lifetime operating costs of our battery system. This includes developing manufacturing and process technologies that will improve throughput and yield, which will lead to additional operating leverage. SG&A for the quarter was $14 million as we continue to invest in the platform for growth. $5 million of this total is structural. $4.1 million is non-cash related to stock comp expense. There is another approximately $1.3 million of one-time items, and the remainder is discretionary spend associated with scaling the business. Overall, our fourth quarter operating loss was $37.6 million. Turning to slide 14, full-year revenue was $4.6 million, which was in line with company estimates. Full-year operating loss was $135 million, which includes $30 million to terminate the high-power JV agreement. Turning now to slide 15, we had $105 million of cash on hand at December 31st, 2021. In the current global supply chain environment, We've been actively working to lock in raw material delivery to match our sales plan, and as a result, fourth quarter cash outflows include $5 million of advance payments to suppliers to secure volume commitments. In addition, there's another $2 million of advance payments to capital equipment OEMs for CapEx in conjunction with the Turtle Creek capacity expansions. Now turning to slide 16, I'll cover our outlook for 2022. As Joe highlighted in his remarks, our differentiated technology serves a large and growing market opportunity with strong secular tailwinds. Our product is resonating in the marketplace as evidenced by the significant positive momentum in our sales pipeline, including a growing number of large utility-scale projects with blue-chip customers in our backlog, which currently stands at close to $150 million. These tailwinds support our commitment to deliver on $50 million of revenue and $400 million in net new booked orders in 2022. To support our growth, we expect CapEx investment in the range of $25 million to $35 million this year as we scale up our manufacturing capacity to 800 megawatt hours with our recently announced expansion in Turtle Creek. We'll continue our focus on improving our operating performance to deliver on our customer commitments with a goal of maintaining over a 90% first pass manufacturing yield. The hard work that our team is doing in our existing Turtle Creek facility has enabled the significant progress we've made to date and strengthened our confidence in our plans to scale capacity in 2022. Our technology continues to fulfill a core need in today's and tomorrow's energy landscape, and we are positioning the company to deliver in 2022 and beyond. When we look at the way the market is accelerating and the need for our technology, we are now poised to operationally scale the company to actively capture that opportunity. The plan that we just outlined will require the company to raise additional capital to fully reach its potential. As you saw with our announcement yesterday regarding the Department of Energy Part 1 loan approval, we are actively seeking different funding options to achieve the company's full potential. This will allow us to not only grow top line, but also achieve profitability in the midterm. With that, I want to thank everybody for their time and listening in today. I would now like to turn it over to the operator for questions. Operator, will you please open the line for Q&A?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. First question, Chris Souther with B. Riley.

Hey, guys. Thanks for taking my question here. Maybe you could walk us through the cadence for the $50 million in revenue expected for 2022. Obviously, it started last year, same target, you know, customer timing and ramp execution challenges throughout the year. So just wanted to get some color on why confidence is high that we can achieve it this year. You know, I think entering last year a lot more of the, opportunities you were targeting for the year were, you know, LOIs versus, you know, order backlog. So any kind of way you can frame the cadence of, you know, the current booked orders, you know, and how you have the confidence in hitting the numbers here would be great.

Hey, Chris, how you doing? Look, first I'd start off with, you know, we're executing from a backlog of orders. So, you know, the orders are in hand. There is always... timing risk in the market like we saw last year, but we've created, I think, a clear roadmap with the customers that tie out to the $50 million around delivery and startup of the systems. And then from a production standpoint, as we highlighted, a lot of the work that we've been doing with the team is locking in the supply base to be able to have the materials that ramp up as we go through the year, the expansion of the Turtle Creek facility, and quite honestly, the yields that we saw at the end of last year, beginning of this year, which are extremely promising as we dial in the manufacturing process and really, you know, when you're running a factory like we're running a factory, it's every day making that factory better and bringing, you know, lean principles and operation excellence. And we just see improvement every day in what we're doing and how the team is executing. And, you know, it all starts, you know, again, execute from the backlog, lock in the supply chain, which is a challenge right now, but we just battle that day by day and continue to make the factory better as we expand the capacity.

Got it. So could you kind of frame first half, second half of the year on cadence or by quarter based on the order backlog, what we should expect as far as that cadence?

I think, Chris, you'll see a ramp within the year. Similar, we're always ramping year over year and ramping quarter over quarter. We've got to work through that, and really when you look at where we are from an evolutionary standpoint, the 50 for the year is solidified. We've got to work the quarter by quarter, but we don't really give quarterly guidance on revenue.

Okay, understood. And then on the gross margin picture, nice to see the strong leverage quarter over quarter. Can you talk a bit about how we should expect that to continue, where the breakeven points look from quarterly revenue run rate as we start to scale up here as far as getting to positive gross margin?

Yeah, Chris, good morning. This is Randy. You know, what I would tell you is that we know what our cost entitlement is for both the current generation product and the future generation product. And so in the near term, you know, we talked about we will continue to see a significant reduction in the cost of our product. And that comes in many different areas. It comes from scale. So we're spreading our fixed cost over higher volumes. It comes from the increased improvement, significant improvement in the first-class yield and the productivity of the plant, reduced scrap rates. But it primarily comes from the fact that we have a plan, a clear plan, on pulling levers from a procurement perspective, especially around commercial negotiations material substitution. And it's a finite number of projects that get us to a very good place here in the near term. It's less than 20 projects. And so what I would tell you is that the path to gross margin positive is an 18-month path. And so we're very excited about that because as we continue development efforts and become a full-scale industrial manufacturer, that is becoming clearer and clearer every day with a clear plan.

Okay. And then maybe just the last one. Great to see the progress on the DOE loan program there. Do you have a sense on the timing when we could, I guess, get a decision on that final decision on the loan approval process? and ballpark kind of numbers that we could be looking at as far as that program, as far as cash in.

Yeah, so Chris, what I would say is that we got through the part one to move into part two very quickly. We want to continue that pace and we are on a regular rhythm with the DOE working through that, but we've now got to work through the due diligence process and reviewing where we are and get them out to now start looking at the facility in Turtle Creek. So we've got some work to do. I wouldn't want to put a timeline on it, either too long or too short. I just say that we just got to keep working on it with the same intensity that we have been working on. What we're doing now is the way that we've thought about how we wanna structure the program is this part two that we're working with them on now is to support the expansion in Turtle Creek and bringing that facility up to full scale and that'll be where we're working on and then as we look for future capacity expansion from there, there could be additional tranches of funding as we go forward but that's more to come as we go forward. I think we're just excited that when you look at the amount of time it took us from when we started to where we are, it's a phenomenal running start. And J.R. Shaw and the entire team in the loan office, Robert Edwards, these guys have been phenomenal with the support that they've given us as we work through this and really get to this point where a product, a technology invented in the United States, developed in the United States with a U.S. supply chain We've already created 150 green tech jobs in what was coal country, and we're going to add another probably 100 to 150 as we look forward to scaling the factory. So we fit perfectly what they want to do, and they help companies like ours bridge to scale. So it's a perfect fit between the both of us. We just got to keep working through it to get to closure.

Okay. It makes sense. Thanks, guys. Yep. Thanks, Chris.

Next question, Tom Curran with Seaport Research Partners.

Good morning. Hey, Tom. Good morning, Tom. I'm curious, given the visibility you have underpinning the expected 400 million in orders you're guiding to for 2022, if and as it seems like you're on track to book those, could we see upside to $50 million in revenue, would it be possible for some of those orders to turn quickly enough for you to actually exceed that revenue target?

So, Tom, look, we feel really comfortable with the pipeline that we have and where we stand to get to that $400 million. I mean, that's a 4x growth rate. Now, in this market, with where we are and the capabilities of us to scale, yeah, I mean, we're going to keep working and try to get, you know, we'll maximize the value that will tie to the capacity that we have in the factory, but we feel really comfortable on the 400. Here, you know, we sit at the end of February. We've got 10 months to go. We'll keep everybody updated on where we are, but, like, when you look at the opportunities that are teed up, the LOIs that we just signed, you know, if you look at our model, you know, we've shown and proven that LOIs become orders, and we're happy with the ones that we just closed out, we've got to work through to get those closed and be on pace to do the 400 million for the year.

And Joe, what do you expect the mix to be for that 50 million you'll ship in 2022 in terms of zinc models?

So 2022 will principally be the Gen 2.3 with initial Z3 We've talked about initial Z3 getting into production by the end of the year. We just got to keep working to that. But the majority of the sales for this year will be the Gen 2.3 as planned.

Got it. And then, Randy, welcome to your first call. Thanks, Tom. I'm curious, for 2022, what specific cost targets do you have? And upon exiting the year, Where would you like the cash balance on the balance sheet to be?

So with regards to the cost targets, I mean, we have those internally, Tom. So, you know, like I said, the visibility to gross margin positive within 18 months, is real and we have a plan for that. So just kind of extrapolate based off of that. In terms of cash balance, I don't know if we have a target for the end of the year. So we talked about the DOE loan. We've talked about we are actively in the market looking for other funding sources. And so we'll keep the market updated as we progress on that.

And I think, Tom, I just would add on, you know, just to piggyback on Randy's comments, we've always said that we built this company to be modular in everything that it does from the way the product is installed out in the field to the way we add manufacturing capacity. So I think a lot of where we'll, as we look and think about the trajectory of the company, a lot of that is going to depend on where your first question started as to where are we on backlog and delivery issues to customers. The good news is as we look at funding, we can either accelerate or conserve depending on where we are in that growth trajectory. So we want to just keep optionality and see where we are. But we're at this unique moment in time where I think as a leadership team, we're sitting here thinking about, all right, how do we position this company to capture the growth, the secular change in the industry and allow it to establish itself as the preeminent supplier for flexible energy storage?

Understood. I appreciate the additional color. Thanks.

Next question, Subash Chandra with the Benchmark Company.

Thanks. Hi, Joe. Welcome, Randy. Thanks, Subash. Maybe a question for Randy here following up on the last couple, I think. So if one was to sort of look at these numbers, could you kind of guide us on or off these assumptions say yes, 50 million of booked revenues. And then we annualize cost of goods sold in 4Q, you know, somewhere 80, 85 million, and then 35 million of CapEx, which would be the implied drawdown on your cash balances plus whatever the DOE loans are. Can you take those, you know, various pieces and sort of, You know, tell us where that construct might be flawed.

So, I mean, I guess what I would tell you, Subhash, is, like, you know, take the assumption of being gross margin positive, you know, within 18 months. take the assumption of $50 million of revenue and the understanding that we're going to need to raise capital. The DOE loan process is not the only thing that's being worked. We have a lot of confidence that where we are in the market, what's going on both on you know, the commercial side, you know, from pipeline perspective and from a pricing perspective, you know, there's a lot to be excited about here, right? So, you know, if you're building a model, you know, what I would tell you is that, you know, for both 2022 and 2023, we expect the pricing part of the equation to continue to increase, and we expect our costs to significantly decrease, continue that trajectory. The range of the CapEx model of $25 to $35 million, Like Joe said, we have the ability in terms of being modular to flex up and down as the situation dictates. I hope that gives you a little bit more context.

What might also help is if I look at the cost of goods number, How would you bucket that, you know, in terms of raw materials, labor, things like that? So, you know, some sense of what is scalable in that number and discretionary and what may not be?

Yeah, so good question. So keep in mind that, you know, we have a fixed cost base in the facility now. It's very low volume from, you know, 2021, it started to ramp up like we expected in the fourth quarter. It will continue to ramp. So on a per unit basis, you know, we're going to be getting that scale, right? So a big, a big, a large percentage more so than a full scale manufacturer is comprised of that fixed, the fixed cost from having a facility with low volume. There is also a lot of other kind of suboptimal costs which is related to being at the early stage of the learning curve from a process perspective, which every quarter you see the progress that we make. And so Joe mentioned about the increased productivity and first pass yield. So you're going to see a lot of costs come out there. And you're going to see the majority of the costs, though, come out from from the raw material piece of it, which is, again, we know what our cost entitlement is. We have a very simple product in terms of the raw material components. We are continually looking at alternative suppliers, continually looking at material substitution. Those are the near-term levers, which we've got a lot of confidence around. The more, I would call it mid-term levers, is design, but that's naturally happening with the next generation product because we're designing for cost. and we're designing for manufacturability. So we're at this incredible place in time where we have clear visibility to not only what can be done, but what's being done, and that'll naturally happen. So instead of giving you raw materials as X percent You know, direct labor is X percent. I think it's irrelevant where we are now because, you know, all those percentages will rapidly change as we continue to progress. But, you know, I think what you should be modeling is, you know, the trajectory to gross margin positive in 18 months from now.

And Subhash, the only thing I would add is like you've been out to the facility, right? we've engaged the workforce. They're going through in December. We took a piece of equipment and we talked about this at the midpoint where our yields were in the high 70s, low 80s. The team themselves, the shop floor, the people on the floor building the batteries and assembling the systems, they came up with something and increased the throughput by 40%. and improve the yield by 15 points. So we just have to keep working each one of these one by one. So I take your three buckets and I look at them and say, multiple suppliers on the raw materials continue to increase the domestic content of what we buy to get it as close as we can to 100% to reduce logistics costs and also to reduce the uncertainty of delivery, quite frankly, from international suppliers. On what I would call processing costs of taking raw material and turning that into finished product, we have a lot of work that we continue to look at from a manufacturing standpoint, putting technology into the shop floor that's part of the expansion. And then on the leverage piece of this, the overhead piece, The facility today, and that's why you see in 4Q, sales up over 300% yet cost of goods sold up under 100, around 70. That's that leverage of having the facility that's sized to deliver more volume and unlocking that by just getting better and better every day. And that's why it's so important in the model of always remembering that last bucket, the driver on that, is the $50 million CapEx spend that we have to get to a gigawatt hour. As we optimize that, the guys on the shop floor come up with ways to unlock more productivity out of the model. That becomes more efficient, and that's why we feel so comfortable about saying gross margin positive within 18 months.

Okay, got it. I guess on the top line, there's been local news reports and so on anticipating sizable deliveries from you guys. And Joe, I appreciate you don't give quarterly guidance, but how would you characterize the cycle times now? Because I think you have some pretty big projects teed up, maybe even second quarter and certainly in the second half of this year for delivery and revenue recognition. So, yeah, any further color without giving us the firm numbers?

Look, we announced in the 3-2 call the contract with Blue Ridge Pine Gate. And we start to deliver the first project to Blue Ridge here in the first half of 2022. Then we have a mix of we've got the NO project coming in the year where we're working on them as far as timing and site readiness of what month that falls into. And then at the same time, there's the ERCOP project with IEP where I talked about shifting away from where we were going to finance that to where they're self-financing. And that project is also accelerating. So we're working through the mix of how these things flow through 2Q into 4Q, but yeah, I think the more important thing to me, Subhash, within your question is that the company will have the large installations out in the field that show how the product operates in a scalable system, which enables us to deliver that $400 million of order growth because customers will see the proof point. That's the proof point that people are working on and that's what we're, you know, we're focused on, you know, honestly, like for us and where we are in our development, the total year to me is more important than a quarterly point. And we've got to get these proof points on the board that allow us to grow the revenue, grow the orders, take the cost out to deliver on profitability. And even though my heritage is from GE, I look at this and say, look, do the investors really want this team managing to March 31st or managing to December 31st? And I think it's December 31st, and that's how we plan around it, and that's why I hesitate giving a quarterly number, Subhash, because I just don't want to put something out there and then spend a lot of energy of talking about something that's, quite honestly, somewhat artificial when you think about what we're trying to do as we grow the company. Understood.

Thanks, guys. Thanks, Subhash.

Your next question comes from James West with Evercore.

Hey, good morning, Joe and Randy. Hey, James, how are you?

Hey, James.

Hey, good. So you're at this interesting point in time, Joe, in a critical point in time where, as you said, going from R&D to executing on the plan here and rapid growth. And so I recognize you had some good wins on yield improvement, you're expanding manufacturing. You feel good about... you know, the way things are flowing right now. But as we go through this year and recognizing, again, as you just, I think, put it, we shouldn't care about March 31st. We should care about December 31st. But what are the kind of one, two, three buckets of concerns that you might have? What's top of mind that could derail what is, you know, what is really a compelling story right now?

Yeah, look, again, you know, Jane, we're operating a little bit in the in the unknown on the supply chain. We've talked about this before where this is a daily grind of staying on top of things and making sure you're assuring delivery, remaining flexible and agile in how you run your supply chain. So it's a new muscle. Normally, when you run a supply chain, you want these things to be like marching bands where they're just going down and they know the choreography and they deliver what you need. The way the supply chain, the analogy I would say is like supply chains become like jazz where you're, everybody's kind of doing their own thing and you want to put it all together and make it sound good. So I think that's challenge number one for us as you think about, you know, how we want to deliver, you know, again, I feel good about the 50 million coming from, you know, delivering out of the backlog and it's the timing piece of it of, of, you know, site readiness, you know, installation, get up commissioning and on the grid. You know, we work through, that's another thing you got to work through on a daily basis with your customers to be able to deliver. You know, those to me are the two biggest ones. And then inside of that, you know, we've got the capacity expansion coming online. You know, the new facility, you know, we're starting to install equipment into the new facility. We're looking to be able to scale the capacity. That's a key lever. I feel good about it because, you know, The way that we've learned and the way we operated in the fourth quarter makes me feel really good about being able to transition in the new facility and really get output out of the footprint. But to me, those are the three things from delivering on the $50 million revenue side. On the cost piece of it, I feel really good. Again, to deliver on what we're talking about on cost of goods sold, it's 20 items. It's going out and just executing on a plan that Randy and the team have put in place here over the last seven weeks that really make me feel good about what we have to do on that front here over the next 18 months. And then on the order book side, again, it's continuing to show that capability to be able to deliver and the power of how the technology operates. the opportunity pipeline, the opportunities are growing, and I think people see the need for the technology. From a transitioning from opportunity to order, we're managing through. I think people are looking and saying the ITC being delayed is something that people just come and say, look, I want to do the project with you. That's why you see such big LOIs, but let's also keep an eye on this of when we need to install and how we get our PPA and how we get our financing. So we just got to work through

all those all those risk factors that we always talk about but that's what we have to do and i feel good about the operating team we now have out on the field that we'll be able to manage through that okay okay that's fair enough um maybe a follow-up for me and i i think it's it's important um that you you're in phase two with the doe as you know we've we spent a lot of time with jigger and his team and they're not taking technology risk they're taking payback risk, which tells you that they believe in your technology and clearly the market is believing in that. And so the, the, as we look at the commercial activity and the leads and the huge increase in leads sequentially, what do you think it takes outside of the ITC? What do you think it takes to get to transition those into backlog and to get your, your win rate, your win percentage up?

Yeah, look, you know, James, the, the, The number one selling tool for this company, whether it's an investor looking at why EOS is a good investor or a customer looking at EOS as to why it's a good partner for a project, is come and walk the shop floor. It's something that a lot of the companies that are talking about entering the space don't have. And it's been a journey to get where we are. But the biggest proof point for everybody is that 400 megawatt hours of discharge energy and walking the shop floor and watching containers being loaded on trucks, batteries being built and tested. I mean, we just got to keep showing those proof points of this is a company that's not doing technology development that might work. This is a company that's taking technology, like you said, it's not technology risk that you're investing in or buying. It's operational risk, and we've got a very experienced team here that can deliver on this. Right. Okay. Got it. Thanks, Joe. Thanks, Rene. Thanks.

Thanks, James.

Next question, Martin Malloy with Johnson Race.

Good morning. Thank you for taking my question. Hi. First question was just I wanted to maybe get – see if you could –

provide some more commentary on the the reoccurring service and software revenue and maybe the margins associated with that and how that might layer in from a timing perspective yeah so so Martin I mean in conjunction with the orders that we have part of that is your long-term service agreement That kicks in after the expiration of the warranty period, which is typically two years, can be three years in some cases. The profile of that is there's a long tail. That's probably between the second, third year and the 15th year of the asset being in service. And, you know, it's kind of typical, you know, it's kind of typical recurring revenue, you know, high margin stuff. So, you know, I don't want to scope it, but it's going to be, you know, probably, you know, greater than 50% gross margin.

Okay. Thank you. And then it's very encouraging to see a repeat order from a company like Duke that had been pilot testing your equipment. When you look at the 400 million or the orders that you're talking about for 2022, could you maybe help us with, should we be looking for reoccurring or repeat customer orders in that, customers that have been pilot testing the product?

Absolutely, and also new customers. I think we continue to expand into the big blue-chip energy, either IPP utility, behind-the-meter operators. As we continue to show and put proof points on, we get more and more of that. But what I would say is look at the current backlog. It's 28 projects, 14 customers. So we're getting multiple projects for the same customer. So I think you'll continue to see that grow and what we're trying to do you know like you know we sit in the middle you know of like with our suppliers and our customers we want partnerships in both directions where we're making each other successful and that's how we approach with customers and when they see the collaboration they look for other opportunities and that's how we'll continue to grow the backlog but I'm also very encouraged in that growth of pipelines above 4 billion there's a lot of new people coming and saying I'd like to talk to you about this project that has six to eight hour discharge duration. Let's talk about the technology and we go in and show them and make a lot of progress.

Great. Thank you very much. That's helpful. Thanks.

Next question, Joseph Asha with Guggenheim Partners.

Good morning, gentlemen. A couple questions to go back to this question of how you said about locking in materials. Obviously, it's an inflationary environment. And so the further out you go, the harder it gets. So I'm just wondering, you know, in practical terms, how far out have you been able to lock in key input? Is it six months, a whole year?

Depends on the commodity, Joe, but yeah, that's how we've done it. You've seen, we announced in the fourth quarter the strategic agreement with Tetra to supply a core component around our electrolyte. There's other agreements that we've done for the other raw materials that we have, and we continue to look to be able to find new sources here to get suppliers and diversify the supply base. But when we look at this It's out beyond mid-year, but like you said, it's tougher to do that. I think the thing that we want to be very careful about, and I think this is like when we were talking on Subhash's earlier question, for us, our focus needs to be in locking the raw material supply in. and then work on reducing the processing cost and optimizing the overhead base that you have to be able to deliver a gross margin positive product.

Okay, so it's fair to say that in general you can manage about six months out, but after that at this point it's still kind of a work in progress. Is that a good broad characterization?

Again, I think that's a broad brush across what we're doing. I think on the strategic things that we have, it's longer than that, and there's some of them I'd rather not talk about here on the call, but we've locked in some things on a longer period than that, and then there's other things where it just makes more sense to do it on short term, but we feel good about the material supply capabilities that we have to get and deliver the $50 million.

Okay, thanks. Looking at the capital raise, and I share James's enthusiasm and Jigger and his team, they're great guys. But I'm just curious, right? Do you guys have a sort of plan B that would involve maybe slowing things a bit and conserving capital if it were not to turn out that you can't necessarily raise as much as you want?

Yeah, Joe, this is Randy. I mean, great question. So, I mean, just to expand a little bit on what Joe said earlier, right? The beauty of this business model is that we can you know, dial up and dial down in a very agile and flexible fashion. So, you know, absolutely. So, you know, just as an example, right, I mean, the business model from a manufacturing capacity perspective is not, you know, build it and they will come. We have the backlog and we're expanding the capacity in association with the backlog. So in the comments around SG&A and kind of what's structural and what's discretionary that we can dial up and dial down as we need to, that's the entire business model that the company has been built on. So it's an emphatic yes.

Okay. So there is an obviously you'd always rather grow the business faster, everybody would, but Should it happen, and I'm sure it won't, that it proves more difficult to raise capital, there is a path to scale this business more slowly with the resources you have on hand?

Yeah, Joe, that's exactly the model that we've always talked about. My goal in my four years since I've been here and the funding that we have now is better than what we had at any point in time in the first year. three years of working at the company. We've designed this thing so that philosophically, you never want to be chasing capacity. You want to have orders fulfilling capacity. So we can slower or accelerate that as we see funding in the market move. And that's the way we've got to run this to kind of navigate this bridge into full-fledged operating status. That's exactly what we're going to do as a leadership team.

Okay, thanks. And then just one final quick one. Can you maybe give us some visibility into the run rates for the key elements of operating costs as you look at how much you're going to spend in R&D and selling? Obviously, those are moving targets as well, but is there some number that it's good to think about now?

So, I mean, specifically on R&D... I mean, that's the, you know, that's, you know, if anything, that's going to accelerate with the next generation of products. So, you know, I think we talked a lot about, you know, the revenue piece. We talked a lot about the cost of sales piece. You know, we talked about on the GNA and, you know, kind of, you know, what's structural and, you know, what's discretionary. But, you know, I would not anticipate that, you know, R&D from where we sit now is going to decrease.

Yeah, I think what you'll see, Joe, I think what you'll see on R&D is, you know, we've got different things that we want to develop here and, you know, the value prop So just talk a little bit about, let me just break down kind of, let me talk R&D moment on sales and then talk G&A, right? So on the R&D side, we've got the Z3 coming. Continue to invest in that. I think there's some great work that we're developing around how we package and deliver the product for both cost and performance. And then there's the whole software side of this, that we've been working on our BMS and how do we expand the value proposition. So I think you'll see over time levelized spending, but spending to really build out full capability to meet a wide range of operating conditions in the market. On the selling side, we need to continue to grow our sales team to get more people out into the, you know, more feet on the street to be selling the product as meetings and rhythms start to come back to normal. We're going to need to have people out selling. So you'll see us continue to invest there. And on the G&A side, I've always wanted to keep this as light as possible. And that's what we'll continue to do as we go forward, because that's what ultimately also, like we talked about, slowing down the CapEx spend. That's the other lever here that you really got to keep your eye on as you're thinking about how you navigate the capital markets and how you want to grow.

Okay, thanks very much, guys. Yep. Thanks, Joe. Thanks, Joe.

I will now turn the floor over to Joe for closing remarks.

Thanks, and thanks, everyone, for joining today. Really excited about the results and what the team delivered in 4Q and excited here as we start the journey on the operating targets that we laid out, and we'll keep everybody updated on our progress and just exciting and proud to be part of this team and and really shape the future of the energy mix as we power people's daily lives. So thank you.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.