Eos Energy Enterprises, Inc.

Greetings and welcome to the EOS Enterprises second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. A 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Joe Crinkley, at EOS Energy. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining us for EOS Financial Results Conference Call for the second 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 including current expectations with respect to the future results of our company, which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our 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 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 via replay on EOS's 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. And with that, I'll turn the call over to EO CEO, Joe Mastrangelo.

Welcome everyone. Thanks for joining us today for our second quarter earnings call. We're really excited about the performance of the company here in the second quarter. You know, when you start off on our classic page here on page three and just talk about the top part of this, which is around commercial commercial growth, you know, our pipeline, is now above $7 billion. We have 27 gigawatt hours that we are actively pursuing with customers. Our booked orders so far this year are close to $325 million with a backlog of now approaching 2 gigawatt hours with $457 million of total orders and backlog. It's pretty exciting when we see the market evolving and moving more towards long duration energy storage and as we establish ourselves As an operating company, we're starting to see more and more opportunities come in. And you see that operating company metric coming out on the bottom left-hand side of the page, which is around discharge energy from our technology, which now stands at 541 megawatt hours, with almost 50% of that coming from field operations out in the field at customer locations. Continue to prove the robustness of the technology we've been operating in. in extremely harsh environments that have been approaching 50 degree Celsius ambient temperatures with the systems continuing to operate per plan. At the same time, we were able to deliver $5.9 million of revenue in the quarter. We hit 91% battery yield in the factory, now approaching Six Sigma level performance. I'm really proud of what the team's been able to do. And as far as our capacity expansion plan goes, We're now at 536 megawatt hours of annualized capacity, and you see that growth in revenue being driven by that capacity investment that we've made. Randy will walk through the cash balances. We ended with $16.3 million in the bank with closing on the end of July, an $85 million senior secured term loan. and I'll let Randy go through more of the details there, but really strong operating performance, strong allocation of capital and control of our cash to deliver our strongest operating quarter to date since we've been a public company. If we move to the next page on page four, I just want to spend a few moments here on the market itself, starting off on the left-hand side. The announcement of the Inflation Reduction Act can be a big catalyst for energy storage and also a big catalyst for Made in America. One of the key tenants of the bill is that there's a 30% investment tax credit for energy storage plus a 10% bonus for domestic producers, of which EOS is one. So we feel that that pipeline that we've been talking about as this bill moves its way through approval will help us accelerate the growth prospects of the company. At the same time, I also want to talk about something that happened in California in the quarter where there was 106 $140 million grant put in for long duration energy storage. We feel like we fit perfectly on this opportunity and we've been partnering with the CEC almost since the inception of the company going from testing cells to testing batteries to running pilot systems to now being able to use this $140 million to get utility scale projects out into the field installed in California. The same time, two critical international markets that we've been working on are accelerating. When you look at India, where we have a lot of our harsh operating hours out in the field, they just approved a renewables plus storage mandate for their industry, which could equate to 180 gigawatt hours of demand over the next eight years. We've got a presence and we have a lot of experience operating there. We look forward to being able to participate in that market. And then at the same time, we also have been focused on Europe. With what's been happening in the Ukraine, you see many countries now moving to get off of natural gas, going with a renewable plus storage mandate. And we've been working there and we're starting to see acceleration in demand in places like Spain, Germany, Italy, and France. So we'll continue to work that as we move forward. Now, on the demand side, that's great, but then you also have to think about the right-hand side of this page, which is being able to deliver to that demand. We continue to see a very challenging global supply chain, but the fact that we are now at nearly 85% domestic supply chain takes out a lot of the uncertainty in our supply chain and how we're able to deliver and reduce volatility and risk about what we can do, and our product being an inherently earth-abundant bill of materials and being able to get the raw materials and develop long-term relationships, we're able to deliver on a short notice. And in fact, if you look at one of the projects that we closed in the quarter with Bridgelink was for delivery as we get into the end of this year, and that's basically because of the investment in our capital, the investment in the domestic supply chain, and having a bill of material where you'll be able to deliver. So as we take the left-hand side of the page and look at the growth accelerating, and then look at our global supply chain operational strategy, we feel really good about being able to deliver this growth over time, and we're starting to show as a company our ability to be able to execute and deliver to customer requirements, which is very exciting. Now, continuing that talk about growth, I want to move to page six and go to our classic pipeline page where we talk about the opportunities that we're working on as a company. We always start off with what we call lead generation, and lead generation early stage opportunities where customers are coming with ideas and doing feasibility studies you know that lead generation increased close to nine hundred million dollars in the quarter it now stands at six point two billion we're getting a lot of incoming from different ideas of how to generate and come up with operating opportunities for our technology and that is translating into our pipeline growth and remember Pipeline growth, our current pipeline, is made up of three buckets. Technical proposals where we get a use case from the customer and we provide them with a technical use case and the ability to use our technology to generate revenue. A non-binding quote where we're giving a technical and financial use case. And then a letter of intent, firm commitment from customers where they have selected EOS as their technology and have yet to close out all the... requirements to have a project. Those three buckets now stand at $7 billion, which is up nearly $800 million during the quarter. And obviously, our first half booked order is standing at $324.7 million, 1.3 gigawatt, up $258 million versus our Q1 earnings. It's very exciting when you start to look at the projects that we've been talking about moving through the pipeline in that middle section of this page are now turning into booked orders. And we continue to work that process as we go forward and feel really good about how the commercial team has positioned the company for growth. If we move to page seven, I want to spend a moment on our current orders backlog. As we said, we booked $258 million worth of orders. Our backlog stands at $457.3 million. It's very exciting for me to sit here and think about at the end of the quarter, or at the end of July, I hit my four-year anniversary with EOS, and to sit here and think about the fact that we now have nearly two gigawatt hours of backlog is very exciting for me and for the team that has been working to bring this technology to market. On our deliveries, the majority of that backlog is on equipment deliveries, $424 million. We've got 33 million in long-term service revenue. On a percent basis, that's lower than the percentage that we're targeting. But because we have multi-year agreements with people, those service orders will come as we start executing on specific projects. So we expect that number to increase as we move forward. But again, really good progress. in building up a backlog and building up a revenue stream for the company. And as you'll see, we're starting to see customer cash flow through into our numbers when Randy walks through the cash numbers later on in the presentation. Now moving on to page nine, talking about some second quarter operational milestones. We have seen really what I would say five big milestones for us. This passing the 500 megawatt hour of cumulative lifetime energy discharge was a big one for us. You can see that first picture to the left was the 100th energy block being shipped back in April. The center picture is the team that produced the 20,000th battery in our Turtle Creek facility that was built and shipped in June. Very proud of the work that they're being able to do, and they're standing in our new building where that battery was produced. So where they're standing was empty in January and is now producing in June. And that picture to the right is our new fill-in test line, which gets us up to the 536 megawatt hours of annualized capacity. We've increased that capacity by 70% from Q1 in 2022. Really an amazing performance when you look at the amount of volume that we're able to ship and product out the door while moving into a new facility. In my 30 years in the industry, I've never seen a supply chain operations team be able to execute simultaneously a production plan while doing a construction plan to bring a new factory online. We also continued our path to cost out. We took 24% product cost out on an input basis. So the team continues to increase throughput, improve yield while taking costs out of the product truly an exceptional performance by the operational team the same time we move to page 10 we're building upon this operating excellence the lower left-hand side of the page you know we increased our infrared welding capacity by 2x in the quarter you can see those welders there on the left-hand picture the upper left-hand picture and We increased our quarter-over-quarter energy block output by 66%. A lot of that having to do with delivering on the expansion plans. And we're improving our operating performance. We've taken 17% cycle time reduction out of the battery welds and, while I said earlier, taking 24% of cost out. Now, what's important for everyone to realize here as we move forward, we've always talked about building discrete processes that can deliver a quality product, and then automating and improving performance. So some of the cycle time performance that you're seeing, it's just the beginning of what the team will be able to deliver. But the thing that I'm really proudest of is that lower right-hand graph here on page 10 where we hit this 91% battery yield over the course of the quarter, which is a big milestone if you think about where we were at last year this time. So kudos to the team. in Turtle Creek for the delivery. As we look at our progress here on cost out and expansion, we've talked about that left-hand chart. What I would say is on cost, we were targeting 25% cost out. We're off by a point here at the end of the quarter, a lot of that having to do with some final shipments that were scheduled to go out but went out in early July. And on the capacity side, we actually exceeded our capacity target by 21 megawatt hours. We continue to lock in our material requirements. If you see from, you know, this was a chart we showed in the first quarter, you know, we have more inventory on hand. So 25% of what we need to deliver the plan in 2022 has been delivered. We have 65% under PO and we have 10% that we're still out working on volume discounts and tier pricing plans. supplier delivery to be able to deliver on this, but I feel really comfortable about the work here that's being done by our sourcing team to be able to have the material there when we need to build the product. Then on the right hand side, I just want to talk about one of our biggest shifts in supply. That is our first non-ISO North American built enclosure. You know, we've talked about this a few times and we're targeting more than 50% cost out with this product. It's 8% of our total baseline cost. This will take us almost to nearly 90% of our bill of material being North American, American made. It's critical to us here because we will be ramping up the production and delivery of that product you see right there in the month of August. So it's a very exciting time for us as you start to think about going from that 76% cost out down to the 57% that we're targeting on the graph on the left-hand side. So great work, great partnership. The partners that we did to deliver that product, we're also working with to deliver our Z3 enclosure. So it's a pretty exciting time here as we start to look at new ways to deliver and come up with the most cost-effective product in the marketplace. Page 12, just quickly, you know, we were a... R&D company a few years ago. And if you would have looked at when we talked about delivering or using our energy block, that lab portion of the green there, that 136.6 megawatt hours discharged out of our test facility in Edison, New Jersey, that would have been the biggest number. That's been more than surpassed by the energy that we're delivering out in the field to customers. So we're going to continue to see that field number increase. FAT is our factory acceptance test, so when we ship, we cycle all of our batteries before we ship, and that's why that 91% yield that we're talking about is a tested product in the factory that's integrated and shipped out into the field, which is an advantage for customers because there's a lot less installation and commissioning work you need to do with an EOS product with respect to what you'd need to do with a lithium ion or other products when they're shipped out into the fields. Moving to page 13, I want to spend a couple moments on Z3. Z3, when you see this, you see on the left-hand side the battery design that we're going with to be able to deliver. It'll be one battery, 20 cells. When you think about this, a battery that we have today is 40 cells. This battery will be 20 cells and deliver more than 2 and 1 half times the output coming out of that as we've done material and science work with our R&D team to be able to improve product performance. The middle is the new enclosure, which will have 576 batteries inside of this. What we'll do when we get out in the field is put five of those enclosures, we'll string those together using one battery management system, and that will then get us to about the equivalent size of a 40-foot container. And we are targeting significant improvement in performance and footprint power density with this product as we move forward. And if you look at this product on page 14, I just want to give a quick update on where we are on the development of the product in and of itself. Again, another great performance mix of our operations team and the R&D team where you can see the prototype testing tools on the two pictures on the left-hand side. We're very excited about the product that came off the line for the first time in my career. first piece that came off the line met the quality requirements, and we are now getting ready to start to think about design for manufacturability. That electrode that you see in the middle, we've come up with a process that will speed our manufacturing and enable us to get more throughput in our factory over the same asset base. And if you see on the right-hand side, that picture to the right, that is the module that we'll be putting in those enclosures I saw in the previous pages. Great progress here on track, both on a performance, being able to introduce the product out into the marketplace, and the cost targets that we have. So it's a pretty exciting time when you think about the growth of the company, the ability to deliver improvement in operations, and the development of the technology and the next generation product out into the field. With that, I'll turn it over to Randy who will walk us through the financial results and wrap up the discussion today. Thanks.

Thanks, Joe, and good morning, everyone. As we've discussed over the last couple of quarters, the plan we are executing requires the company to raise additional capital. We are happy to report the $85 million senior secured term loan with Atlas Credit Partners that we announced yesterday. It's a four-year non-amortizing loan that bears interest at SOFR plus 8.5%. In addition, on May 12th, we officially submitted the Part 2 application to the Department of Energy's Loan Program Office and that process continues to progress. We will talk more about liquidity, capital resources, and other funding opportunities in a subsequent slide. Turning to slide 16, revenue for the quarter was $5.9 million, an increase of 79% versus first quarter, and 28% higher compared to our full year 2021 revenue. The revenue increase quarter over quarter mirrors capacity expansion increase. The majority of the revenue in second quarter was related to deliveries for the 80 megawatt hour Pine Gate Eastover project, and we expect deliveries on this project to be complete in the third quarter. We are beginning to see revenue from services, including commissioning and training revenue streams. We anticipate that we will continue to realize incremental service revenue for energy blocks that have already shipped and been delivered to customers where a portion of revenue has been recognized in previous quarters. Cost of goods sold was $36.9 million, essentially flat versus last quarter, excluding a $1.2 million reserve for contract losses. We continue to progress according to plan on our product cost reduction efforts and have reduced the per unit energy block bill of material cost by 24% on an input basis since the beginning of the year. If you compare our revenue and cost of goods sold to the second quarter of last year, we are seeing greater than four times operating leverage. R&D expense for the quarter was $5.5 million, slightly higher versus last quarter, and includes $400,000 of non-cash items, including stock comp expense, depreciation, and amortization. This increase is due to ramped up design and development efforts on our next generation product, Z3, which is scheduled to launch next year. SG&A was $19.1 million, which includes $3.2 million of non-cash expense. The biggest driver of the increase versus last quarter is associated with the accelerated cost reduction of our current generation product. We engaged a top-tier third-party firm with a performance fee-based structure to help in this effort. Most of the cost reduction initiatives we are working on now translate to the next generation product and give us higher confidence that we can reach the targeted cost entitlement of the Z3 product at launch. In addition, we had higher legal expenses associated with several finite matters, including financing activities. We incurred a $2 million non-cash loss from the write-down of PP&E as part of a company review of assets. Operating loss was $57.4 million, and net loss was $56.7 million. Turning to slide 17, we had $16.3 million of cash on hand as of the end of second quarter. We received $5 million of inflows from customers as we executed on project milestones. We raised $12.5 million in cash against the SEPA arrangement with Yorkville Advisors. Next, we paid $5 million on a note related to the 2021 buyout of our manufacturing joint venture partner. Remaining cash outflows were $51 million, with the detail on the right-hand side of the slide. Turning to slide 18, although capital markets have been challenging, we've been working hard to provide the funding optionality to best position EOS for further growth, especially as the market is accelerating and demand for long-duration energy storage increases. We've added $85 million of debt to our capital structure with the Atlas loan, which has the potential to be upsized to $100 million as the company is permitted to make a one-time request of up to an additional $15 million subject to lender consent. Under the SEPA, we still have access to $187.5 million as we utilize $12.5 million in the second quarter. As a reminder, EOS has an effective S3 shelf registration filed with the SEC for up to $300 million of common stock, preferred stock, and or debt securities, $200 million of which was a takedown for the SEPA. We will continue to evaluate additional opportunities for raising capital to fund the company's growth. In addition, there are other funding opportunities that we are currently pursuing, including the DOE loan and a federal R&D grant. We formed a partnership, which includes a university and supply chain consortium to pursue the grant, which we expect to apply for in late fourth quarter of 2022 or early first quarter 2023. Now turning to slide 19, we wanted to give an update on our progress against the 2022 full-year company commitments. The facility expansion continues to be on track to increase our capacity to a total of 800 megawatt hours. During the quarter, we executed on capital deployment to increase manufacturing capacity to 536 megawatt hours on an annualized basis while improving manufacturing processes. We continue to manage capital equipment deliveries and the phasing of commissioning on these assets. We're still on plan for full-year CapEx investment of between $25 to $35 million and see a path to even further expansion to support the accelerating 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. Regarding our backlog growth, we booked $257 million of orders in the second quarter, bringing the total year to date booked orders to $325 million. Given the progress against our initial orders target and the improved market conditions, we have increased the new orders commitment by $100 million to $500 million. With that, I want to thank everybody for their time and for 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?

Thank you very much, Seth. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star and two 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. We have a first question from the line of Martin Malloy with Jason Rice. Please go ahead.

Good morning. Martin Malloy with Johnson Rice. My first question is around the DOE funding. Can you maybe give us an update in terms of your discussions with the DOE, and has there been any delay in the timetable for when you might hear back from them?

Hey, Marty. Good morning. This is Randy Gonzalez. So like we said in the remarks, discussions with the DOE continues. I think what we mentioned last quarter was our expectation is that we would we would get conditional approval kind of late Q3, maybe early Q4, and then funding 60 to 90 days subsequent to that. So I think that's still our expectation. So I don't think anything's changed there from a timeline perspective.

Okay, great. And in light of the term loan facility, that you recently announced. Can you maybe talk about your outlook for manufacturing capacity expansion beyond this year, beyond 800 megawatt hours?

So our outlook, and I'll let Joe expand, but our outlook is that when capital is available, the market is certainly there. We have the backlog for it. And so You know, we have every intention to expand, you know, well beyond the 800 megawatt hours of capacity, most likely in one gigawatt hour increments in terms of expansion.

Yeah, and Martin, it's Joe. The only thing I would add to Randy's comments is that with the Z3 coming for introduction in the second half of, of next year, we will probably expand again as we get into 2023. And if you remember, given the cycle time of our ability to expand capacity, we don't really need to pull that switch until end of this year at the earliest, probably beginning of the following year. So we're timing that against where the product will be and where the backlog will be, but the goal is to, per the model, come out of the end of 2023 with multiple gigawatt hours of manufacturing capacity.

Great. Thank you. Congratulations on the strong order quarter. Thanks. Thanks, Martin.

Thank you. We have next question from the line of Chris Sauter with B. Reilly. Please go ahead.

Hey, guys. Congrats on the backlog progress. Maybe if you could just talk through the cadence of the revenue ramp between third quarter and fourth quarter based on customer timing. And, you know, what are customers saying about supply chains for other components that may impact the timing of delivery and recognition? I get a sense of confidence now standing here today on the $50 million. And then, you know, if you were to place out the implied, you know, $40-ish million, for the second half of the year. Um, could you give us a sense of how much of the rest of the backlog is for 2023? Um, you know, it seems like Bridge Lake and the other, you know, large developer that you recently orders with were kind of longer term supply agreements, but it's not really clear whether some of those orders are still alive that, you know, how front, uh, you know, the orders of those deals were. Thanks.

Hey, Chris. Good morning. So on the first part of the question on how does the second half of the year look for the remaining revenue, I think all projects are moving forward, and obviously in the environment that you're in, you're dealing with choppy waters, not only from, and I think we've done a pretty good job of securing components to be able to deliver as we ramp up, but then there's also the civil works and permitting side of this on the customer and I think the projects that we have in the second half backlog have a requirement to be, the customer has to be online by the end of this year. So we're lined up to be able to do that and just working with the customer on a day by day basis to time deliveries to the site and installation and commissioning to their readiness. So not so concerned about the revenue plan as we look at the $50 million being locked in. Now, the second part of your question on 2023 revenue, look, we haven't given guidance yet on the number for 2023, but remember, you're right, BridgeLink is a multi-year agreement that we have, but there will be volume in 2023 that we're working with BridgeLink on to determine what the deliveries will be for that, plus other backlogs that we have, but you got to give us here a few more months to see where we settle out on 3Q orders to come back on where we think revenue will be for 2023. Got it. Okay. Makes sense.

Maybe just talk a little bit more about leverage within COGS. Could you give a bit more color on what's the fixed component within that $37 million in cost of goods sold that you think is pretty flat or even decline with the Z3 ramp and, you know, versus kind of the portion that is that variable material component that, you know, should continue to decline as we've seen over the last couple quarters here with, you know, volume pricing and, you know, optimization continuing and then just, you know, an update where we think that, you know, even revenue run rate would be for gross margins either, you know, with, you know, the existing product versus, you know, the Z3 launch next year.

Yeah, Chris, so let me take the first part. So the fixed portion in second quarter has increased some. Remember, we're expanding into another building on the same campus in Turtle Creek. So naturally, we're adding capital, capital assets. We have a new building, so fixed cost has increased somewhat. And so you'll continue to see the fixed cost leverage As we continue to add capacity, come online, the line is purpose-built. It's a single-line flow. We're seeing much lower tax times, improved yield, and so you're naturally going to see more fixed-cost leverage there. The other thing I'll say just in general around cost of goods sold is we talked about the you know, the per unit cost reduction efforts being in line with our expectations. And that will continue. It's a big strategic priority of the company. But in terms of, you know, in terms of going gross margin positive, that will happen at Z launch timing, Z3 launch timing.

Chris, I would just add on the fixed cost side of your question. Remember, we've always said like a gigawatt hour, depending on where you start, is between 50 to 60 million of fixed assets. That number is what we're tracking to to get to the capacity that we're targeting by the end of the year. And then you just got to model that out as far as like your depreciation schedule. So what you're seeing also when Randy talks about operating leverage on the sales, it's just that we are flowing more volume over that same asset base. So the asset base is not growing as fast as the sales growing and that's been the model that we built our supply chain around from the start.

Okay, that makes sense. Just maybe the last one, kind of cash flow throughout the rest of the year, you know, CapEx looks like it's going to ramp up a bit more based on the guidance. So, you know, the $50 billion we saw in this corner probably, you know, would increase to reflect that. You know, can you just kind of walk through that and, you know, the kind of order of operations here, you know, between the different, you know, other levers you talked about, you know, maybe specifically touching on Customer is kind of one that you had mentioned previously. I'm curious. Where are we with some of those other diluted financing outside of the DOE?

Yeah, so you're right, Chris. So we did see $5 million of customer inflows. Our revenue model is such that and where we are in the market and with with the availability of our product and maybe the lack of availability of other products in the market. Revenue model is such that we are getting deposits when we sign either master supply agreements or purchase orders with customers. So that will certainly be a source of cash as we continue to ramp up revenue delivered to customers, deliver on milestone payments, that will also be a source of cash. So I think it's important to note that the revenue model is not just a down payment, it's also milestone payments throughout the manufacturing process. So three to four months before delivery, we'll typically get a milestone payment. And then when the product is ready to ship, we'll get a milestone ship payment. And so the majority of cash on an order is received before it is even shipped. And then the remainder is received when the system is commissioned. So we talked about the federal grant, the federal R&D grant that is out there. We've talked about just optionality in terms of our access to capital, including the SEPA. And so we feel really good about where we are and given the company optionality and flexibility in order to raise capital as the company needs it.

Okay, thanks, guys. I'll hop in the queue here.

Thanks, Chris.

Thank you. We have next question from the line of Joseph Osher with Guggenheim. Please go ahead.

Thank you. Good morning, folks. My compliments on the progress. I'm wondering, looking at the order book and the transition to Z3, are you able to share with us how much of your book is Z3 at this point or is there any differentiation in the orders between 2.3 and 3?

No, hey Joe, good morning. There's no differentiation. I think what we're managing to is the transition time between the two products as we ramp up the manufacturing and introduction of the Z3 next year. And we need a little bit more time here to continue on that modeling and timing of equipment arrivals to come back and talk about where shipments of the current product will start to come down and will ramp up the Z3 into full production as we get into the second half of next year.

Okay, would it be fair to say then that you think you can exit 2023 perhaps, all Z3, or should I perhaps think about that as the first part of 2024?

I would say towards the latter half of next year, it would be 100%. Z3 production for new shipments with the current product just being production for service requirements on what's installed out in the field.

Okay. And just to return to this funding question, you've got the 85 that you can upsize to 100. You've put some kind of expectations around DOE timing. It's fair to say, though, that in addition to the 85 and if you upsize it, there does still need to be some other funding in terms of accessing capital markets or customer deposits or what have you. Is that correct?

Yeah, Joe. And I think that was the purpose of the second to last page that Randy laid out is we've got multiple avenues here to bridge the company through into the latter half of next year. I mean, we'll continue to use the SEPA facility where that makes sense. And then we have the other $100 million of capacity that we're trying to determine what the best path is there. I think one of the things that we're doing on the DOE grant side, which would be great for us on a product development, our grant application is in consortium with a potential technology partner for part development along with three universities to be able to get us to 100%. it's a dual thing where it'll help us fund the R&D program, but then also get us to the 100% North America scope of supply. So there's multiple ways that we'll continue to do this, but I think the most important thing, and I think the thing that we've always said is that we only spend what we need, and we try to be very good stewards of capital and minimize the cash outflows, and we'll continue to do that because that's the first I think, order a business, and then behind that, we have these other levers that we can pull to be able to keep the company growing and moving along its strategic path.

Okay, thanks. And then my final question, you mentioned in your prepared comments, obviously, the Inflation Protection Act and the ITC and the domestic competition and so forth, but there's another part of it, which are the manufacturing tax credits. I'm just wondering if you've reviewed that part of the legislation and thought about how that might apply to you.

Yeah, it's a great question, Joe. You're right. Yes, we are looking into that and how that applies to us. Obviously, with our manufacturing footprint that we have and the fact that our factory is in Pennsylvania, you know, 11 key suppliers in Pennsylvania. There's, you know, there's some things that we can be able, that we can look at that I think play into this, but we need some time just to work through that given the timing of when everything happened. And obviously, you know, we had this confluence of that happening as a kind of an accelerated time basis, closing the secured loan and then closing the quarter. So we need a little bit of time to work through that.

Certainly. Okay.

Thank you. Great. Thanks, Joe.

Thank you. We have next question from the line of Subash Chandra with Benchmark. Please go ahead.

Hey, Joe, Randy. Just a question, I guess, on the vendor deposits, not the vendor deposits, but the customer deposits. If I was looking at the queue from last night, what line would that be in? The vendor deposits, I assume, is your deposits with, you know, supply chain. But what about customer deposits?

Yeah, so, Subhash, I think the point is that, you know, with some of the big agreements we just announced, there is a requirement for investor deposits. So, you know, you'll see that when we actually get the vendor deposits. So we'll receive them... after a certain period of time after the agreement has been signed. So there's a time lag. So I don't think you're going to see those in the Q2 balance sheet.

Okay, got it. So Randy, is there any customer deposits in the Q2?

Specifically in Q2, I don't think there's any customer deposits.

Gotcha.

Okay, good.

Given the timing of when we sign the deals, you'll see the receivable from customers has gone up, and we should be getting paid here in the next 60 to 90 days from the customers that close the orders in the quarter. So it's a timing given that the orders close at the end of the quarter.

Okay. You might have mentioned this, but what are the sizes of of the DOE funding and the grant that you're pursuing?

So we haven't specified anything with regards to the loan. The federal R&D grants are available in $50 or $100 million increments. Okay, gotcha. Okay.

Yeah, I guess then finally trying to sort of understand the pace of the expansion and some of the stuff we talked about, previous quarters, supply chain issues, which of those has sort of been relieved and which are still there? I think we've talked about containers, availability and costs, of course, materials, etc., But would you say those are still lingering in a substantial fashion, or do you think the real gating variable towards accelerating shipments is just getting your facilities built out and the people hired?

Yeah, so Subha, just let me break down that question because there's multiple parts in there, right? So what I would say in this environment, you are always going to have the risk of winding up with material shortages just because of the world that we live in. But we have locked in, and if you go back into the earnings deck onto page 11, we've locked in 90% of our material either being delivered, 25%, or under PO, 65%, 10% to go. As we turn on The new container supplier, which is happening as we speak, will now be sourcing our enclosures from New York and not from Asia. So that takes out a lot of risk in the supply chain. From the capacity buildup, the capacity expansion is on plan. We went from an empty building to fully producing batteries in our new facility, and that will continue to ramp as we go through the year. We are just in the timing of ramping up production per the plan. If you look at the left-hand side of page 11, we're ahead of the capacity plan that we laid out at the beginning of the year and we need to keep executing on that. Our growth in revenue is in line with the increased capacity that we have in the factory and we just have to keep working that. I look at those two factors as daily management of your total supply chain, internal, external. As much as we're managing to produce in an environment with COVID, we still have COVID cases and every manufacturing company goes through this where you have to manage around, have a flexible workforce to be able to manage around that. And then when you talk about on your other question around quality, look, we're at 91% yield. That's over the quarter. When you look at that, that's the quarterly average of what's come off of the manufacturing line. That's up significantly from where we were last year at this time. And when you look at this, that number will continue to go up. And what I would say is that we're on track, and I won't declare victory on this until we get a significant amount of time under our belt of performing at a Six Sigma level, but we're tracking to be at a Six Sigma level from a first pass yield in the factory.

Okay. Good call there. Thanks, Joe.

Yep. Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to Joe Mastrangelo for closing remarks. Over to you, sir.

Thank you. Thanks, everybody, for listening in today. Look, again, I believe we've made tremendous progress here as we look at the growth of the company, the positioning of the pipeline to continue to grow our orders backlog. We are an operating company that is producing and shipping product every day. Proud of what our operations team does. continues to do to position the factory to deliver for customers a quality product that performs. We'll continue to work our cost equation both on the fixed and the variable side to position the company to become margin positive as we get into the end of next year and into 2024. That's our goal and that's what we'll continue to do and Randy and I are committed here to continue to work the liquidity and capital requirements of the company and find ways to fund the company to grow. But the whole model of this company was built around being able to ramp it in a capital light model. So that gigawatt hour of production requires $50 million of capital. We don't need that capital sitting in the bank account. We need that capital when we actually invest it. And that's how we're positioning the capital to bring into the company. And we'll continue to find those sources and continue to work the equation of bringing cash from customers as we grow the backlog and deliver out into the market. So we're excited on where we are. Again, yesterday was my four-year anniversary with EOS and it's been quite a ride coming from an R&D company to one with an almost two gigawatt hour backlog that is delivering to customers every day. And when I get up in the morning, I get very excited about where the company is positioned to grow for the future. We have a lot of work left to do, but we have the team on the field that will be able to deliver on the strategic plan that the company has laid out, and I look forward to continuing to do that with the team here at EOS. So thanks for listening today.

Thank you very much, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time.