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 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 Gonzales. 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, the US 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' 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 Eos 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. We're going to start off on our classic page here on Page 3 and just talk about the top part of this, which is around commercial growth. 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 the backlog of now approaching 2 gigawatt hours with $457 million of total orders in 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 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 has been able to do. And as far as our capacity expansion plan, 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. And Randy will walk through the cash…

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 4-year non-amortizing loan that bears interest at SOFR plus 8.5%. In addition, on May 12, we officially submitted the Part II 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 East over 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 4x…

Thank you very much, sir. At this time, we will be conducting a question-and-answer session. We have a first question from the line of Martin Malloy with Johnson Rice. Please go ahead.

Good morning, Martin Malloy, 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 Martin, good morning, this is Randall Gonzales. 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 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 has changed there from a time line 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 the 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 we have every intention to expand well beyond the 800 megawatt hours of capacity most likely in 1 gigawatt hour increments in terms of expansion.

Yes. Martin, it's Joe. The only thing I would add to Ran's comments is with the Z3 coming for introduction in the second half of next year, we will probably expand again as we get into 2023. And if you remember, like we -- 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 and multiple gigawatt hours of manufacturing capacity.

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

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 what are customers saying about supply chain growth components that may impact the timing of delivery and recognition to get a sense of the confidence now standing here today on the $50 million. And then if you bake out the implied $40-ish million for the second half of the year, could you give us a sense of how much of the rest of the backlog is for 2023? It seems like Bridgelink and the other large developer that reorders which were kind of longer-term supply agreements, but I'm not really clear whether some of those orders or delta how front the orders of those deals were, thanks.

Yes 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, Bridgelink is a multi -- you're right, Bridgelink is a multiyear 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 backlog that we have. But you've got to give us here a few more months to see where we settle out on third 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 where -- what's the fixed component within that $37 million in cost of goods sold that you pretty flat or even decline with the Z3 ramp and versus kind of the portion that is that variable material component that should continue to climb as we've seen over the last couple of quarters here with volume pricing and amortization continuing? And then just an update where we think that even revenue run rate would be for gross margins either with the existing product versus Vascepa next year?

Yes, 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 internal Creek. So naturally, we're adding 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 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 going gross margin positive, that will happen at the launch timing, Z3 launch timing.

And Chris, I would just add on the fixed cost side, your question. Remember, we've always said like a gigawatt hour, depending on where you start is between $50 million 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 sale is growing, and that's been the model that we built our supply chain around from the start.

Okay. That all makes sense. And then just maybe the last one, kind of cash flow throughout the rest of the year. Capex is going to ramp up a bit on the guidance. So the $50 million we saw in this quarter probably would increase to reflect that. Can you just kind of walk through that and the kind of order of operations here between the different other levers you talked about, maybe specifically touching on customer deposits as kind of one that you had mentioned previously. I'm curious where are we with some of those other dilutive financing outside of the DOE?

Yes. 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 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 be -- certainly be a source of cash. As we continue to ramp up revenue deliver 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 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 Vascepa. 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.

Thank you. We have next question from the line of Joseph Osha with Guggenheim, please go ahead.

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?

There's no differentiation. I think what we're managing to is the transition time between the 2 products as we ramp up the manufacturing and introduction of the Z3 next year. And we'll -- 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 we'll 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 first part of 2024?

No, I would say that towards the latter half of next year will 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?

Yes, Joe. And I think that was the purpose of the second 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 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 will 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, quarter of 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 impact and the ITC and the comps and so forth. But there's another part of it, which are the manufacturing tax credits. And just wondering if you've reviewed that legislation and thought about how that might apply to you.

Yes. So yes, it's a great question, Joe. You're right. Yes, we are looking into that and how that applies to us. And obviously, with our manufacturing footprint that we have and the fact that our factories is in Pennsylvania, 11 key suppliers in Pennsylvania. There are some things that we can be able to -- 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, we had this confluence of that happening as a kind of on 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.

We have next question from the line of Subhasish Chandra with Benchmark, please go ahead.

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

Yes. So Subhasish, I think the point is, is that with some of the big agreements we just announced -- there is a requirement for investor deposits. So you'll see that when we actually get the vendor deposits. So it's -- 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, are there -- is there any customer deposits in the Q2?

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

Got you. Okay.

And given the timing of when we signed 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 closed orders in the quarter. So it's a timing given that the orders closed at the end of the quarter.

Okay. You might have mentioned this, but what are the sizes 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 million or $100 million increments.

Okay. Got you. Okay. Yes, I guess, and 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 cost, of course, materials, et cetera. 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 facility built out... And the people...

Yes. So Subhasish, let me break down that question. There's multiple parts in there, right? So what I would say in this environment, you're 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 on to Page 11, we've locked in 90% of our material there being delivered 25% or under PO 65%, 10% to go. As we turn on the new container supplier, which is happening as we speak, we'll 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, like 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. But 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. So 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 have -- and every manufacturing company goes through this, where they have -- 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'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 Six Sigma level from a first pass yield in the factory.

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. I'm proud of what our operations team 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 and 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 in cash from customers as we as we grow the backlog and deliver out into the market. So we're excited on where we are. Again, yesterday was my 4-year anniversary with Eos, and it's been quite a ride coming from an R&D company to one with an almost 2 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. Thank you for your participation.