Eos Energy Enterprises, Inc.

Good morning, and welcome to EOS Energy's first quarter 2022 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Joe Crinkley, EOS's Communications Manager. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for EOS Financial Results Conference Call for the first quarter of 2022. 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 The 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 Randy will now walk you through the company highlights, financial results, and business priorities before we proceed to Q&A. With that, I'll turn the call over to Joe.

Thanks, Joe. Welcome, everybody, to the 1Q earnings call for EOS Energy Storage. Proud to be here with everyone, and I just want to start off on page three, walking through some recent milestones that have occurred since the end of quarter close. First, we recently signed a large letter of intent with a Northeast solar developer for 300 megawatt hours of future business to be delivered over the course of 2023. We're going to be working with that customer, as we've always talked about with our commercial model, get the LOI signed, get on the same side of the table, close out the overall deal. So we'll be working here over the next 30, 60 days to bring that one to a bookable order. At the same time, we talked about the last call expanding capacity for in a new addition to our facility in Turtle Creek. We've added 65 megawatt hours of that capacity in the first two months that we've been in the facility and are producing product out of that facility in just over 60 days. Really proud of what the operating team has been able to do. And on the picture to the right, you see we shipped our 100th energy block About a week ago, you know, this is a tremendous milestone by the team. Really great accomplishment that that energy block there. Number 100 is going to be headed to Blue Ridge and Pine Gate renewables for the East over project that we've been executing on here over the past. 30, 60 days. At the same time, we also announced a financing commitment for up to $200 million with Yorkville Advisors. We're proud to be partnering with Yorkville. Randy will walk through a little bit more of the details around this agreement that we've come to, but we talked about finding the most effective means to raise additional capital to achieve our growth plans. I think this is one of the first moves that we'll be making here to shore up and be able to deliver on the plan that we laid out in our last call. If we go to page four, you see in the operating highlights, I really want to focus in here on the growth side of the business. $67 million of orders, 241 megawatt hours. Our total order backlog now stands above 200 million and is rapidly approaching a gigawatt hour. And I'll walk through the opportunity pipeline, which now stands at 6.2 billion and is up over a gigawatt hour of opportunities since the last time we were together. Randy will give you the bridge and the walkthrough on the revenue that we delivered today. in the first quarter, and cash on hand right now stands at $55 million, exclusive of the financing arrangement that I previously talked about from Yorkville. We're proud of where the company is heading and how the team is executing. You can see quarter over quarter, sequentially, you continue to see progress across these core metrics as the team continues to get out in the market. We're seeing an uptick in demand for energy storage, and we're also seeing a shortage of available product And that gives us an opportunity as we bring our capacity expansion online to continue to grow the company. And I'll walk through a little bit more of the details on that in the next section. Let's focus now on our commercial pipeline orders backlogs. If we go to page six, this is our traditional commercial activity, our pipeline page. Always want to start off on the left-hand side of this page and talk about lead generation. Lead generation are projects where Customers are asking us for feasibility studies. They're coming with ideas. They want to develop a project plan. They're looking at different regulations and revenue stacks to come up with ideas. When we look at this now, that stands at 5.4 billion or 28 gigawatt hours, up 1.3 billion versus the last time we spoke, and we're starting to see more and more activity and more and more customers approach us to see how our technology can fit their use cases. When you think about this, This has about a 30% hit rate where you go from a lead generation that becomes current pipeline. When you look at the current pipeline, current pipeline today, which is active proposals and LOI firm commitment, stands at $6.2 billion. That's up almost 50% from the last time that we were together. You're seeing a couple of things happening in there. There's normal churn in and out of projects, but overall the core projects, are up around $700 million. And at the same time, as we've been looking and analyzing our cost position and also looking at the demand in the marketplace, there's been an increase in the price that we're bringing to the market, which is also driving up the dollar value of the current pipeline. We now stand about $100 a kilowatt hour higher on price versus where we were at the end of last year. We continue to see that momentum carry forward, and you see the booked orders, which we talked about on the earlier page, the $67 million that we closed that feel really good about that center part of the page and us being able to continue to convert and drive towards our $400 million order target for 2022. And the uptick in lead generation is also important because we have more and more people calling us earlier in the deal cycle, which allows us to tailor their project specs and help them deliver more value to their end user by using EOS technology. So overall, we see the commercial pipeline strengthening, and that's growing rapidly. the current orders backlog. So if you go to page seven and you look at the breakout that we always give you, we booked $62 million, almost $63 million of booked orders. Inside our order increase, we also had change orders. When you start looking at what's happening on the execution of projects, cost inflation that we see principally around transportation and change in scope to be able to deliver on our projects. Our project team is creating value as they go through and execute on the projects. And then you've got customer shipments coming out of that number where we stand now at $212 million in backlog. Really proud of that 827 megawatt hour of backlog. It's 28 projects with 15 different customers, so we are seeing customers purchase more than one project from us, and we're seeing that pipeline of projects for individual customers increase. Backlog deliveries, when you look at where we are in backlog, 177 million of that is for new equipment deliveries, and 35 million of that is for long-term service revenue. Now, when you think about what we've always wanted to target as a company, is a 20 percent ratio and right now we stand around 17 of long-term service revenue of our total backlog that's the number that we're going to keep driving as we move as we move forward you know what we're trying to do is get customers to commit on the long-term service agreement at the time of the new equipment order but in some instances they want to wait until they go through just in the normal cycle and if something that I've always seen as I've been in this industry for 30 years, that that's how the market will behave. But we're really seeing great activity here on the commercial side. And as it relates to asset leasing and things we talked about in the past, there's been no change in the portfolio here as we go more and more with just straight product sales out into the market with a follow-on service agreement. So we're looking to continue to drive this number up. We're proud to have a number above $200 million here. When you think about where we started when we went public being around $5 million. Just great progress by the commercial team in getting the product out into the marketplace. Shifting gears now to talk about operational excellence. We've really seen a lot of progress in the business here and the team that is running the facility in Turtle Creek has really done a fantastic job at improving our performance. If you go to page nine and we talk about building operation excellence, You can see the factory for the people who have come and visited us, every time you come, if you wait about two weeks, you come back in and it looks like a totally different facility than the last time you were there. We're increasing our operational scale. We had 69% increase in the number of energy blocks that we got out of the factory in the first quarter. We took a 50% increase in test fill line output. And the picture on the upper right-hand side of the page shows our new fill line layout. What the team has done is really been taking both lean and Six Sigma and improving performance and output. They've taken, you know, when we were filling batteries before, we were touching the battery 27 times to go from a welded battery to a filled battery, and we're now down to four with a target to get that down to three, which allows us to drive tremendous productivity over the existing asset base. The same time, the picture on the upper left shows our current battery welding room in the existing facility. And the picture on the right is a new machine that we brought into our new facility. As we expand that facility, this machine gives us the ability to use artificial learning to be able to improve the performance of our welders and the throughput of the machines. Now, the key thing on that picture on the upper left-hand side and the big change that was made by the team is that we now have one operator running two welders, which is a tremendous amount of productivity for us across the existing asset base and also reduces the need for labor input on the product that we put out of the factory. Taking that all into account, At the same time, we're also reducing the test cycle time. As we've improved and dialed in our manufacturing processes, we're getting more and more consistent batteries off the line, which is taking us less time to form those batteries and prove that they work and get them out to our customers in the field. And what you've seen is a lot of work being done by the team in taking product cost out. So the work that we've been doing here over the last year 20 weeks is now translated into a 14% cost out on an input basis. This you'll see as we go through and we talk about the financial performance in the quarter. You're not going to see that 14% on a quarter by quarter output basis, but we are starting to see core product cost out as we scale up manufacturing. You can see the battery volume in what we shipped in the first quarter is up 56%, and at the same time, we increased our battery yield to 4%. If you remember, our target is to get to 90%, and at the end of the quarter, we ran on a weighted average of 88%, which has again been great performance by the overall team. What I want to do now is shift to the next page and really talk about the operating environment that we're running the business in today. This is one of the most challenging supply chain environments that I've seen in my 30-year career. We start off on the left-hand side of the page. We see, like everyone else, tremendous inflationary pressure on our overall product. When you look at the battery or core materials, there's been a 10% to 20% increase inflationary pressure on those materials, but what we've been able to do is go out and get multiple suppliers, sign long-term agreements, and look for lower spec and alternate materials to take down cost. On the energy block or the containerization and battery management system, we've been able to increase our U.S. supply chain content, and we've gone for a non-ISO container design, which will take cost out of the overall landed product in the second half of this year. And then finally, one of the biggest cost drivers, I think, across the globe right now is just freight costs. And what we've done to be able to start managing that is that our product now has a non-hazardous rating, which gets us into a lower cost shipping when we're shipping final product. We've increased the U.S. content, which reduces the shipping costs that we have. And then on the customer side, we're working with customers on the transportation where we're holding the costs on battery material and the energy block as we bid out into the market, but then telling the customer that as we bid freight, we're going to have to do that on a cost-plus basis, just because of the uncertainty around that design. Now, while that's happening out in the marketplace, we are taking costs out with production scale, design, and sourcing activities. So if you look at these two lines, the line that starts off at 100% is the index bill of material costs on an input basis for our energy block. If you think about this, we took 14% cost out, and you can see the cost curve coming down to where we are targeting taking nearly 50% of cost out of our product by the end of the year, while at the same time, we ramp up production in the new facility from up to adding the 550 megawatt hours to get to 800 megawatt hours of total cost. Below that graph, when you look at that, you see the timing of the interaction of taking cost out while ramping production, there'll be a lag where we'll start to see savings on an output basis in the second half of the year as we ramp up production. So we're going through this process of driving down costs while ramping up capacity. And as you get into the second half of the year, we're going to start to see costs come down on an output basis. And we feel good about that because if you look at the right-hand side of this page, We're locking in our material pricing and capacity with suppliers. 76% of our 2022 material requirements are under PO. 7% have already been delivered to us and either have been shipped to customers or in inventory. And we've got 17% still to go, which ties to some of the actions that I talked about earlier. on the left-hand side of the page. We're getting good tiered pricing and volume discounts from our suppliers. We're signing up long-term agreements. You saw that with the Tetra agreement that we announced at the beginning of this year. At the same time, this comes with a cost on cash. We've put out $11 million in advance payments to suppliers to lock in capacity, and now it's up to us as a supply chain and operations team to manage the delivery risk of that material coming into the factory, converting that into finished product, and getting that out into the market. I feel really good about the team that we have in place, how they're managing and mitigating the risks, and this is something that we work on on a daily basis to really keep in front of this, and new things pop up every day, but the team has shown tremendous grit and flexibility in being able to manage through these and continue quarter over quarter to deliver more output with a higher yield at a lower cost. So really proud of the work that's being done there. With that, let me turn it over to Randy, who will walk through the financial results and then wrap up and get us into Q&A. Thanks.

Thanks, Joe, and good morning, everyone. We appreciate you joining us this morning. First of all, I wanted to say that what this EOS team has accomplished and continues to accomplish on a daily basis is nothing short of inspirational. This collective team is working cross-functionally to navigate the inevitable daily challenges and to overcome hurdles, including those presented by supply chain disruptions, the best that I've seen in my career. We still have a lot of work to do, but we have a plan, and this is the right team to execute that plan. This team just gets it done. Before we jump into the financial results, I wanted to mention that, as many of you know, We encourage in-person visits to our facilities. Because of what we do as a domestic supplier of energy storage systems and the role we play in the world's energy transition, especially in a world where energy security is top of mind, we naturally get a lot of attention and visits from local, state, and federal officials. But we've also seen an acceleration of visits to Turtle Creek by customers and potential customers, and the reaction has been overwhelmingly positive when they see batteries coming off the line, energy blocks being assembled, and our capacity expansion in flight, especially in a time when energy storage is severely supply constrained. Turning to slide 12, I'll walk through the first quarter performance. Compared to last quarter, revenue increased from $3.1 million to $3.3 million. First quarter revenue includes energy block deliveries to four customers and included some of the first for the 80 megawatt hour Pine Gate Renewables Eastover project. We saw a sequential increase in energy block volume of 69% on a revenue recognition basis from fourth quarter 2021, which was largely on plan. There are several reasons why revenue didn't increase at the same rate as volume. Customer mix is one of the drivers. The revenue per DC energy block is lower in the first quarter than the fourth quarter of 2021 as we deliver against different orders. Please keep in mind that we are currently fulfilling orders against a backlog that had lower pricing dynamics when they were booked last year and prior. Since then, We've seen a rapid and dramatic increase in the pricing landscape due to a variety of factors, including scarcity of supply of energy storage, particularly for the stationary storage market. This increase in pricing is reflected in current quotes, and we anticipate this price realization to take hold starting in the second half of next year as we start delivering on new orders. There is DC versus AC scope mix, which is unfavorable quarter over quarter. In the fourth quarter, we had more projects where we recognized AC scope revenue. We are just starting to ship on the Pine Gate Eastover project, and so AC scope is not required on that until later in the year. In a projects-based business like ours, revenue can be volatile on a quarter-to-quarter basis, as there are multiple performance obligations embedded in our customer agreements. We only recognize revenue as contractual performance obligations are met, consistent with the revenue recognition standard of ASC 606. Various performance obligations in our agreements can include, among other items, delivery of the standalone VC energy block, installation, commissioning, and or training, and there can and will be incremental revenue recognized for energy blocks that have already been shipped and delivered where a portion of the revenue has been recognized in a previous quarter. Cost of goods sold in the first quarter was $35.6 million, which includes a $1.7 million lower of cost or market incremental adjustment versus the fourth quarter. This adjustment is attributable to the increase in work and process inventory from last quarter with the associated increase in overall production of batteries and energy blocks. Quarter over quarter, cost of goods sold, excluding the lower of cost or market adjustment, increased 60% compared to the 69% sequential increase in energy block volume. In short, cost of goods sold is increasing at a decreasing rate, and we expect that trend to continue as we execute on the strategic priority of taking costs out of the entire energy storage system. As Joe discussed on slide 10, we reduced the overall energy block bill of material cost by approximately 14% in the quarter. This is calculated by comparing the bill of material base cost at the beginning of the first quarter to the bill of material cost at the end of the first quarter. There is temporary lag to this cost reduction benefit since the reductions happen over the course of a period, and the on-hand inventory, which has a higher cost basis, has to work its way through the system. As a result, we saw the average energy block cost, net of the lower of cost for market adjustment, decrease 7.4% in a quarter. These cost reductions are a result of a multitude of factors, including manufacturing scale and higher efficiency, continuous improvement initiatives on the factory floor, improved product and system design, and various strategic sourcing initiatives. We invested $5 million in research and development in the quarter to improve battery performance, to reduce both the cost of the product and lifetime operating cost of our battery system, and to develop future generation technologies. SG&A for the quarter was $14.3 million. $5 million of this total is structural. $3 million is non-cash related to stock comp expense. There is another approximately $3 million of one-time items. and the remainder is discretionary spend associated with scaling the business. Overall, our first quarter operating loss was $51.7 million. Going forward, sales volume is expected to substantially increase as capacity expands and product cost is projected to decrease by almost 50% by year end. At the same time, we see positive pricing on 2023 shipments, and we will continue to manage our SG&A spend. Turning now to slide 13, we had $55 million of cash on hand at March 31st, 2021. As we've discussed before, we have been actively working to lock in raw material delivery to match our sales plan, and as a result, first quarter cash outflows include about $11 million of advance payments to suppliers to secure volume commitments. This was an increase of approximately $6 million from last quarter due to our rapid scale, and we expect the level of advance payments to decrease going forward. In addition, there is another $2 million of advance payments to capital equipment OEMs for CapEx in conjunction with the Turtle Creek capacity expansion, which is consistent with last quarter. As we discussed last quarter, the plan we are executing requires the company to raise additional capital. On April 28th, we announced that we secured a financing commitment of up to $200 million through a standby equity purchase agreement, or SEPA. Since the facility gives EOS the right, but not the obligation, to sell up to $200 million of equity to the investor, we believe this gives EOS the greatest flexibility to access capital as required while continuing to pursue additional funding options. For example, As previously announced, we continue to actively pursue a loan from the U.S. Department of Energy and currently anticipate submitting an application under part two of the loan program this quarter. Now turning to slide 14, we wanted to give an update on our progress against the 2022 full-year company commitments. The facility expansion is currently underway and on track to increase our capacity to a total of 800 megawatt hours. In the quarter, we achieved 65 megawatt hours of a 550 megawatt hour annualized battery manufacturing capacity expansion plan in two months. We are managing capital equipment deliveries and phasing commissioning of assets. We're on plan to the full year CapEx investment of $25 to $30 million and see a path to even further expansion to support the accelerated commercial pipeline if additional capital is available. The backlog is secure to achieve $50 million of revenue in 2022, and our production volume is expected to significantly ramp in the second half of the year as the facility expansion continues to come online. Although the team has successfully managed through supply chain issues to date, the current supply chain environment is volatile for everyone and has the potential to disrupt production going forward. We continue to make progress on our 90 plus percent first pass manufacturing yields. In the first quarter, we achieved 88% in improvement of four percentage points from the fourth quarter. Regarding our backlog growth, we booked $67 million of orders in the first quarter, which is already about half of the total amount we booked in the entire year of 2021. Our strategy is to have 20% of our orders backlog in long-term service commitments. Currently, we're tracking at 17%, which is mainly driven by timing of new order booking of battery energy storage systems and signing of service contracts. 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 up the line for Q&A?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Subhash Chandra with The Benchmark Company. Please go ahead. Hi, Joe, I guess.

So I guess on the, you know, the $55 million revenue target, and if this was in the, you know, the preamble, I missed it. I think it was a lot of numbers there, so I apologize. So with, I guess, a good chunk of that in the back half, the run rate would have to be a lot, you know, higher than it is. Do you have any color on the second quarter with, you know, second quarter kind of halfway done at this point?

So, Subhash, if you look at page 10, you know, we'll have increased capacity coming online here as we go through the quarter. So I think you'll see the second quarter come in from a revenue standpoint. north of where we are in the first quarter with the majority of the revenue coming in in the second half because that's when the capacity will come online. I don't know, Randy, if you want to add anything. No, I think that's exactly right. Yeah.

And then on, you know, cost of goods sold, I guess, what's the direction there with some of that being sort of, you know, pre-funding of raw materials and pre-funding of the capacity expansion?

Yeah, so Subhas referenced it back to slide 10. So, you know, the trajectory is it's that line that starts with an index of 100, which represents the bill of material cost at the beginning of the year. And then the 86 represents the 14% of cost reduction on a bill of material basis at the end of Q1. And then you can see we've given what our estimates are as we continue through the year on a quarter-by-quarter basis, getting the cost down to what we believe to be the cost entitlement by the end of the year.

Our next question comes from Chris Salzer with B. Reilly. Please go ahead.

Hey, Bryce. Thanks for taking my questions here. So would you be able to frame the price increases for the pipeline versus the uptake we've seen in lithium-ion competition? Is there kind of a target benchmark to that competition you're going out with on a nameplate capacity price per kilowatt hour? How are we thinking about kind of pricing strategy matching your costs versus your cost increases versus, you know, kind of the market overall?

Yeah, Chris. So there's a couple things in there I'd like to talk through, if you don't mind. So first thing, you know, when you look at the market right now, there's a shortage of lithium ion availability for shipment over the next 12 to 18 months. And when you look at where the pricing of that lithium ion is when there's availability, it's higher than where we were a year ago. And in fact, what we said is on our pipeline for us, we're seeing increases in pricing of $100 a kilowatt hour, which are kind of in line with the inflationary pressure that we've seen on our raw material's as we've gone through the last eight to 12 months. And then going back then on page 10, we being an early cycle technology versus lithium being a mature technology, there's a lot of work that we can do on ramping up volume tiers with our suppliers, on finding alternate materials and driving cost out of the product to make the cost more competitive in the marketplace. But from where we were a year ago to where we are today, you know, I think we're in a range on bid price, you know, in the high 200s, low 300s kilowatt hour.

Okay, got it. And then, you know, just on the cost visibility, can you walk through what the 17% that still is remaining here, you know, and if you could provide any update on where we see you know, gross margin inflection points, you know, from either a timeline or volume revenue run rate, you know, given kind of the costs, inflations, the cost down efforts and, you know, the price changes and, you know, where do we think costs are going to shape out from, you know, dollars per kilowatt hour basis versus, you know, when we're running at that, you know, 800 megawatt hour, you know, target at the end of the year here?

Yeah, so you had a couple things in the question, Chris. So the 800 megawatt hours, that'll be capacity in the factory, the annualized capacity in the factory. And we're on track to be able to deliver that right now. I think the team has done a great job producing out of the building in two months. We are producing batteries out of the building. We'll start filling batteries in the new building here in the next four to six weeks and then ramping up production over the second half of the year to get to the 800 megawatt hours. When you think about what the team has been able to do on driving cost down from an index starting point of product cost, we've already taken cost out here in the first quarter and we see line of sight to taking almost 50% cost out of the existing product as we get into the back half of this year. We feel good about that cost curve because that pie chart on the far left of page 10, a lot of the volume agreements have been locked in on tiered pricing with suppliers. And when we look at where the $50 million revenue target is for the year, we feel comfortable shipping out of the backlog and then having the tiered pricing with suppliers and then continuing to do material substitution and and value engineering to drive the cost down to position the company. As we talked about last time, we said at the end of last quarter, be an 18-month journey to get to gross margin positive, and I think we're still on that trajectory where we stand today. I don't know, Randy, if you want to add anything to that.

Yeah, no, totally agree. Chris, I mean, the representation again to reference on slide 10 in the middle, there has been a lot of work done here at EOS over the last six months with regards to the plan on cost reduction and specific actions thereof. So, you know, that's why That's why we have so much confidence around it. That's why we laid it out this way is because, as I mentioned in the prepared remarks, it is a strategic priority item for the company.

Okay, so the 17% to go, is there any specific components in there?

Oh, on the seal to be purchased? So I got it now. So on that 17%, look... There's some things that we're working on on the container side is really one of the biggest items where we haven't locked in the volume for the year because we're designing a made in America product and we're waiting to place orders to see how the prototypes come from the local suppliers versus buying internationally. That's probably the biggest item that we still have to go. There's some other you know, volume pieces that we'll look at as we get closer into the third quarter just on our ordering points that we haven't placed the orders yet because it's a little bit early as far as pulling the, you know, pulling the volume trigger on that until we get further into the year.

Okay, maybe just last one from me. Do you have a target for kind of the cash burn rates for second quarter, third quarter, given, you know, kind of the The high needs in the near term. And are there any other advanced payments, we should take into the next quarter to or is, you know, the 40 million ish. You know that we would see this past quarter X kind of prepayment type stuff. Kind of more comparable to what we should expect in the near term.

So, I mean, a lot of work, as you can imagine, Chris, in terms of cash forecasting and funding requirements. So what I will tell you is, you know, the one thing that you do have to remember is that on these bigger LOIs and bigger projects, LOIs, MSAs, etc., Part of the agreements on the MSAs are down payments required from customers when it gets to especially the purchase order point. Customers really understand that we have the requirement when we get a purchase order and we start ordering material that we need the cash in order to do that. So I just wanted to make sure that you understood the fact that we do get customer down payments. Those will grow as we get these bigger orders, which we're seeing. But specifically, a number... I don't think we're prepared to give kind of a target.

The only thing I would say, Chris, as we go through second quarter into third and fourth quarter, so second quarter we'll continue to see a mix between the P&E coming into the company to be able to scale manufacturing and then the ramp on the raw materials. I think advances to suppliers, given the environment that we're in, and wanting to lock in volume, we're going to continue to do that to secure the relationship with the supplier and get the raw materials where we get surety of supply. I think you'll see a little bit of shift from a P&E and a raw material split on cash to much more on a raw material basis as we ramp up production in the second half of the year. And then that'll be muted a little bit by the cost out that we're going to deliver here as we go through the year. So it's a mixed equation that we have to continue to manage through. I think from an outflow perspective, we'll continue to manage that tightly. And you see that in our SG&A. And we'll be consistent with where we are. But as Randy said, as as customer projects start to close in the firm orders, we'll see deposits come in to offset the outflows that we're doing to lock in the volume and be able to deliver.

Okay, thanks. I'll open the queue.

Yep, thanks. Thanks, Chris. Our next question comes from Joseph Osha with Guggenheim Securities. Please go ahead.

Good morning, folks. Thanks, and my congratulations on the progress. I'm wondering if you can talk us through a little bit what the prospective timing and process looks like on the DOE LPO line.

Yeah, hey, Joe. So we're in the process of finalizing the Part 2 application, and then we'll go into full due diligence with the DOE here as we go through The summer, you know, we've been working through with them on our Part 2 application. You know, we feel like we want to get the application right as it goes in because that will help us as we go through the due diligence process here, which will probably, I think, realistically will last through the summer into the early fall.

Okay, and what would happen then at that point? Is that a go, no go? What happens next?

Yeah, the next phase in this, Joe, is conditional funding on the loan, and then from there you'd get into executing on the investment program to then draw down on the loan as we move forward.

Okay, so wrapping that all up then, if this works, which I'm sure it will, when might we possibly see funding, you know, hit EOS from that LPL?

Yeah, look, I think realistically we're looking at, you know, end of third quarter and beginning of the fourth quarter, depending on how the due diligence goes here as we move forward through the part two. Okay, thank you.

And then just to shift gears, I'm wondering, and I've got Amoresco in mind, I'm wondering if you're seeing anyone out there actually decommit at this point from lithium ion and toggle over to your technology. Is that something that you have seen happen?

So what we've seen happen, Joe, is many people come back with tight delivery timelines and saying, look, where we thought we were going to get delivery is now being challenged. Would you guys be able to deliver in late 2023, early 2024? And we're working on a lot of projects now where people are coming and saying, let's sit down and go through the project specifications, work through on your technology. And that's why you see the big uptick in the pipeline this quarter. As far as them having firm commitments and saying we've walked away from lithium-ion, I haven't heard them come and tell us that, but I can say that there have been projects where we were told previously that customers are going in a different direction who are now coming back and saying we'd like to come and visit Turtle Creek and walk through where you are on your manufacturing scale-up, and then see if you can deliver the project in our project timeline. And there's a lot of those discussions going on right now.

So it's really more kind of people hearing that they're going to get sales at the end of 2023 at the best and saying, hey, I want to come back and perhaps bring EOS into that conversation. Right. Right. Exactly. Okay. Thanks very much. Thanks, Joe.

Our next question comes from Tom Curran with Seaport. Please go ahead. Good morning. Hey, Tom. Hey, Tom.

Randy, in your model that projects EOS can achieve its first positive gross margin by the second half of next year, what annualized sales or shipments run rate do you assume at that crossover point into positive territory? You know, what annualized revenue level does it require?

So, I mean, let me answer it a different way because I'm not going to give you a direct answer to the question. So we're in the current generation product. We know what our cost entitlement is with regards to the current generation product. We're on path to getting to that cost entitlement. The gross margin positive is... is getting to our next generation product, which is currently under development and design. And the design approach is all around design to cost, design to manufacturability. So yes, as part of that, there is volume assumptions, but I wouldn't really be so worried about those volume assumptions since we have the backlog It's all about, you know, particularly designing the product to begin with to be, you know, a lot less than the current generation product, but also designing for, you know, the process manufacturing in general so we can output more product in less time.

Got it. Maybe ask... from a different angle, just directionally at the point you do break through to positive gross margin territory, would you expect the average revenue per zenith system to be higher or lower? Because we kind of have these two conflicting trends, right? On one hand, you've increased pricing recently, but on the other hand, you're pursuing this as longer term secular objective of bringing you know, the price you need down to be as competitive as possible with with the cost curve for lithium ion batteries. So I'm just wondering what how we should expect those cross currents to shake out for, you know, where pricing will be at that point.

Yeah, so so I mean, good question. I mean, the pricing dynamics that we talked about and, you know, what we're quoting and the expectation of those current quotes to convert to orders, that'll be largely in line with the same timing as the new generation product comes online. Every day that passes, given the pricing dynamic, we're more and more confident that we're going to have a solid gross margin on the product, not only because of the design work that we're doing, but because of the pricing dynamics that we expect to last well into the future here.

And Tom, the one thing I would add on the cost side of the equation, even in this high inflationary environment where depending on how you look at where lithium pricing is from a raw material standpoint and the inflation they're experiencing. When you look at our page 10, the inflationary pressures that we see are much lower than I think other technologies are seeing in the space. And we need to manage that number down and continue to take cost out of the product. And that's part of what we're doing in the next generation products. So yes, pricing is a tailwind For us here in the short term, and I think that will carry through. I don't think this is a month phenomenon. This is probably a reset of a baseline that will carry forward. And then from there, we've just got to continue to drive our cost curve down in the environment that we operate in. I think we've got a core bill of materials with earth abundant raw materials that don't see the same inflationary pressures that you see with other technologies.

So, Joe, then you've given me the perfect segue to my final question on this crossover timeframe into positive gross margin territory. At that point, what should your operating cost structure look like? Randy, how should COGS break down by major component? And just looking for an idea of what the rough percentages should look like. I mean,

So the basics of the product itself are not going to change in terms of there's going to be the electrolyte component, right? I mean, we're taking a lot of cost out of the product in terms of the way it's assembled. So it's really simplified. So you'll see a dramatic reduction in the battery material cost. component with the way it's actually manufactured. There's a lot of work being done in terms of alternative material from some of the material that we're using in the current battery generation.

Tom, what I would say is here's how I think about it. If you take those three buckets to the left-hand side of page 10, The battery is always going to be, the battery component of the system that you're selling is always going to be 60-something percent of the total, right? Then you've got another 20, 25 percent that's kind of the raw materials that go into the system. You've got conversion costs, which as Randy is pointing out, as we move to the next generation technology era, the throughput goes up, the ease of manufacturing goes up, that will come down. And then there's a big bucket, which is just the freight and transport of getting things where you need to be, which the approach we've taken, which is a little bit different than what everyone else is doing in the market, is we've said, look, we've got to manage those first two buckets of how we handle the raw material and the processing cost of getting that out in the field. And then on the freight side, what we're telling everybody is like, let's get on the same side of the table and And we will bid that out and put a handling charge on top of that but not make a forward commitment on that because that's one thing that we really don't control and there's very little that we can do about that. So as you look at this bridge, the battery in and of itself is always going to be the higher component. We're using lower cost raw materials into that battery now as we move forward. On the systems side, we're moving and making two moves to take cost out as we move forward. One is going away from an imported ISO shipping container to a locally manufactured containerized product that takes cost out and takes out the freight that you have to deal with and the uncertainty of getting deliveries of those units, and then moving to standardized, readily available...

electronic electronics to be able to take the cost down and expand your supply chain on the battery management system great that that was helpful and helps us better understand the evolution of the economics you're expecting as you know you scale up ascend the manufacturing efficiency curve and optimize your cost components so that that's what i was looking for thanks yeah right and tom the way the way that i always think about this and i think this is this is important if you don't mind

just adding one other thing on clarification is like the technology that we bring to market has not fundamentally changed. The battery in and of itself of how it operates chemically has remained the same for more than a decade. What we've been working on as a company, and I think what every battery company goes through as they try to scale is we went from mechanically bolting together cells in the battery to cycle time too long, cost too high, quality issues. Gluing the battery together, high variation in manufacturing throughput was extremely hard to center and get a Six Sigma process around that manufacturing. Went to infrared welding, which gets us a perfect battery that we're now approaching, yields that are in the Six Sigma range, but cycle times long and add complexity to the next generation of the product, being assembling the product, which allows a higher throughput at a lower cost point for your processing costs. And that's really what we've been focused on here to drive down costs and improve the performance of the product.

Got it. Very clear. Thanks.

Thanks, Tom. Our next question will come from Martin Malloy with Johnson Rice. Please go ahead.

Good morning. I wanted to ask about this cash burn again. So at the current cash burn rate, $40, $50 million, depending on the advance payments that you're making, it looks like maybe you've got enough cash for another three to five months. Can you give us any help in terms of the capital that will be required to reach free cash flow positive? I'm just trying to get an idea of the potential dilution here with this SEPA arrangement and where your stock price is.

Yeah, Martin. Good morning. Good question. So, I mean, we're not going to be free cash flow positive this year. So, you know, in terms of the cash burn rate and the requirement for additional funding, so we have the SEPA facility. You know, we mentioned the DOE loan and kind of expected potential timing for that. And so, you know, we are, you know, SEPA, you know, gives us flexibility. Think of it as an elegant, you know, at the money transaction, but, you know, with a partner on the same side of the table as us that we can, you know, draw down as necessary to bridge that gap. and other options that we're pursuing, you know, not just potential equity options. So, you know, I wouldn't assume that whatever you're modeling in terms of requirement for additional funding is going to be all equity.

Okay. Thank you. That's helpful. That was my only question. The rest have been asked.

Sure. Thanks, Martin. This will conclude our question and answer session. I would now like to turn the conference back over to Joe Mastrangelo for any closing remarks.

Thanks, and again, thanks everybody for the Q&A this morning and for listening in on the call. Again, we continue to progress in the journey of becoming a profitable operating company. I feel really good about where the market is, and you heard some of the dialogue that we had here this morning around lithium availability versus us expanding capacity and having readily available cost-effective raw materials. We'll continue to navigate as we've always navigated and navigated my four years here with the company of conserving cash, finding the right formula for growing the company, which will be a mix of the SEPA, which allows us to feather in versus make big chunks of equity to manage through to when we bridge to the DOE loan, which will help us expand the capacity to truly grow the company as we move forward. And we'll continue to look at other opportunities here to be able to fund the company in the most cost-effective way for our shareholders and to achieve the growth that's out there for the company. You know, as we know, we're experiencing a tough moment in the capital markets, but at the same time, I would say in our operating market, Every day it becomes stronger and stronger. The tailwinds blow harder and harder pushing us forward here as you look at the world needing cost-effective, more than four-hour energy storage and us being able to deliver that and having a factory out in Turtle Creek that continues to set production and yield output milestones as we continue to operate and bring volume into the factory. From an operating standpoint, it's an exciting time to be inside of EOS and watch the company grow. We'll continue to do that in the most effective means possible from a capital allocation standpoint, but we're very excited about how the market is progressing and how the company's positioned to grow and look forward to sharing that progress with you here in the future. Thanks for listening this morning. Talk to everyone soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.