Good morning, and welcome to Eos Energy Enterprises Fourth Quarter and Full Year 2022 Conference Call. As a reminder, today’s call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. With that, I would like to turn the call over to Joe Crinkley, Communications Manager. Sir, you may begin.

Thank you. Good morning everyone and thank you for joining us for Eos financial results and conference call for the fourth quarter and full year 2022. On the call today, we have Eos' CEO, Joe Mastrangelo; and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements, including 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 SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. Today's remarks may also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to U.S. GAAP financial information, is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies. This conference call will be available for replay via webcast through Eos Investor Relations Web site at investors.eose.com. Joe and Nathan will now walk you through the company highlights, financial results and business priorities before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Thanks, Joe. Thanks everyone for joining this morning as we deliver our 2022 financial results. I'd like to move right into Page 3 and go through our operating highlights, the classic format we use every quarter. When you look at how we see the market growing, and we'll go through it in a little bit more details as we go through the presentation, but our opportunity pipeline stands at $7.5 billion, representing 29 gigawatt hours of potential orders. We've seen a significant strengthening in growth in this number since the passage of the IRA, and I'll talk later on the presentation about how we see that evolving here over the next 12 months. Booked orders, we booked almost $340 million of orders, about a gigawatt -- 1.4 gigawatt hours, that when you think about where we were at the end of last year, tremendous performance by the team. Had a lot of momentum going into 4Q that made us feel good about increasing our orders commitment for the year. But with the passage of the IRA, we saw a lot of growth on the opportunity pipeline side. The slowdown on the order side is everybody's kind of waiting to see how treasury rules on the investment tax credit and the production tax credit. So I think more to come, but I feel really good about what we're seeing in the opportunity pipeline. On discharge energy, we're above 800 megawatt hours of energy discharge. It continues to grow quarter-over-quarter. Today, as we get later into the presentation, I'll walk through and talk a little bit about the containers that we built, where they are in their fields of operation and how we're moving that forward with our team out in the field. Revenue, we came in at 17.9 million, 290% increase…

Thanks, Joe. It's great to be part of the team. Good morning, everyone. By way of quick introduction, I took over for Randy earlier this year and I'm happy to report the transition is going smoothly. I'm a CPA with a background in public accounting and M&A, been nearly 20 years in power generation, renewable, risk management, and electricity and natural gas trading and marketing. I've been explaining to investors for years that we need an efficient long duration storage solution in order to support the growing concentration of renewable generation on our electricity grids. When I realized that Eos has a proven technology that I believe is ready to scale, I got very excited about being part of this storage solution. Now, turning to the next few slides, I'll walk us through the fourth quarter and full year financial performance along with our outlook for full year 2023. Fourth quarter results were directly impacted by the passage of the IRA and our strategic decision to defer company production from the fourth quarter into 2023. We have worked proactively and in partnership with our customers to defer certain orders so that both we and our customers can better realize the benefits offered by the ITC and the PTC. The resulting decrease in production volume correlates to the reduction in revenue and cost of goods sold seen in the fourth quarter. We completed delivery of the 80 megawatt hour Pine Gate renewables Eastover project and revenue for the quarter was $2.7 million, in line with revised guidance. Cost of goods sold for Q4 was $30.8 million, a decrease of 19.2 million versus last quarter, primarily attributable to a 45% decrease in unit volume. COGS are down 38% quarter-over-quarter as we also produced commissioning spares to support the Eastover project. SG&A for…

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

Hi, guys. Thanks for taking my question here. Nice to see the cost of goods sold reduction, about 30 million a quarter, a good run rate for the first half. Should that continue to decline as shipments go down in the first half as we're transitioning away from Gen 2.3, and really before the Z3 kind of launches and ramps? Really starting to get a sense of how much that 27 million in Slide 19 where that goes in the near term, and then whether you can kind of confirm that Z3 is still going to be positive gross margins out of the gate? Thanks.

Yes, Chris, I'd say the run rate going in the first quarter, we're running the last Gen 2.3 new shipments in 1Q and then transitioning into Z3 in April of this year. I'd say on the margin on Z3, the goal is to have a run rate by the end of the year being gross margin positive. And that's still the plan as we go through this and ramp up. We're pretty encouraged by what we're seeing coming off the manufacturing line that we have right now for Z3, both from the yield and then cycle time. We've got to continue to work that and continue to work on cost. As Nathan said, one of our top three goals we always have to remember, the Z3 at launch is 50% lower than Gen 2.3 was at its launch. And the goal is to take that cost down another 15% as we go through the year. And that's going to be a combination of volume leverage as we ramp and then also continue to work on the system configuration to take cost down.

Got it. Okay. And nice to see the initial Z3 station cruise and battery tier. Can you walk through how we should think about the CapEx needs to get to production ramp in the -- beginning in April I guess? In the update a month ago, you called out the DoE loan for as much as 250 million. So curious as to how we should think about the capital needs as we wait for a commitment there, and whether the timing there keeps getting pushed that would impact the 2023 revenue guidance?

Yes, so let me start with the guidance number. Look, I think we gave a range on guidance just because of the timing -- the uncertainty in the timing of the DoE loan of not knowing exactly when it's going to happen. So when you think about it, the low end of the range is a late or no DoE loan and you execute with a partially automated manufacturing line, continue to find other avenues to raise capital to grow the company. That being said, nothing is guaranteed but we are having good discussions with the DoE and working through and negotiating to get to a term sheet. We feel good about it. But nothing is done until the ink is on paper. So what we would do is, and where we're going to start is, we will start manufacturing with what we have on the floor right now. That's a full production line. So I think it's important, Chris, just to give a little color around your question of the strategy of how we are at. So what we've done so far with Z3 is put in individual manufacturing stations to learn how to actually build a good product. So you -- the core manufacturing processes with a minimal investment, we're producing batteries off that line, those batteries are performing. You then take that single manufacturing station and build out additional equipment to increase your throughput, still using partial automation. So basically you're feeding into the machines automation, but you are not moving between station to station automation. And then from there, the plan has always been in the fourth quarter of this year to get an automated Z3 line in, which would give us an annual capacity ramp rate of -- timing of the DoE loan, timing of other financing, the goal would be automated line in 4Q gets you to the top end of the revenue range.

Got it. You cut out for just a second. I think it might have been on my end, but on the rate that you'd get with that automation, the annual run rate?

1.2 gigawatt hours.

Okay. Thanks. I’ll hop back in the queue. I appreciate it.

Thanks, Chris.

Thank you. Please stand by for our next question. Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open.

Good morning. Thank you for all the details about the manufacturing process and how you've been ramping it up. I want to ask about your comment about reaching gross profit margin positive by the end of the year. What kind of dollar per KWh does that imply?

So, Martin, we don't give guidance on that number, as far as the implication of that. Just again, from a strategic standpoint, I don't know that we want a specific number out there.

Okay. And I'm sorry if I missed it, the dollar cost of getting that automated line will get to the 1.2 gigawatt hours. What approximately would be the CapEx involved?

So the CapEx, if you go back to the Z3 page of fully automated line is between 30 to 35. The first line, you probably have $10 million of automation development work we have to do. So you're talking about under $50 million to get the first line up and running. And then subsequent lines for 30 million to 35 million.

Okay, great. I'll hop back in the queue. Thank you.

All right. Thanks, Martin.

Thank you. Please stand by for our next question. Our next question comes from the line of Joseph Osha with Guggenheim. Your line is open.

Thanks. Good morning, Joe. I'm just wondering if we can return to the DoE for a minute, understanding that your ability to comment maybe limited. Just brief us on where we are. As I recall, we had completed technical due diligence. And you were in the middle of an approval process. I think I heard two things, a term sheet being negotiated and then I think I also heard the words later in 2023. So can you update us on where exactly you stand in that process? And I guess to the extent possible, what that means in terms of timing?

Yes. Joe, so again think about the overall process where we were. As you said, we went through the Phase 1, which was prove you have a commercial product. We then went through Phase 2, which was pre-due diligence to are you viable? You then go into full due diligence. We've been in full due diligence. We're in the process of going through business model assumptions. I think the really good news for us is, as we're going through and talking about our manufacturing process, we can bring the team from the DoE here to Turtle Creek and go up on the shop floor with our automation supplier and walk them through the plan to get everybody comfortable for the ramp that we're going through. From there, you go and it's a normal negotiation where you're doing the CPEs [ph], term sheet and then conditional approval and closing and funding, so no guarantees on timing, no guarantees if we're going to be successful, but we're in that process now of term sheet CPEs, get that finalized, submit for conditional approval. Hopefully have conditional approval here in early second quarter, I would say. And then from there, you've got timing to get to the CPEs for funding. So when we say second half of the year, hedging on the timing and how we're moving but feel good about the collaboration, we have a DoE and I think it's also important to remember, the LPO program has two loan programs; the automotive program, which is when you look at the loans that have been announced to date, even the one that was announced this week, was under the automotive program. I think the LPO has done a great job of establishing a value chain for lithium-ion manufacturing from raw materials through the [indiscernible]. Our loan is under Title 17, which is a different loan program with a different risk -- with a different screening process what I would say, and that process is different than automotive. And I think that's why we're kind of working through this as an innovative technology to get through the process.

Okay. Not to be pedantic though, I guess I was under the impression that you guys were through the process of technical due diligence, but I'm hearing things like people being in the factory. Are you still at the point where you're trying to get through this technical due diligence process or not?

No, this is more a modeling exercise and going through assumptions to the model, how we derive those assumptions, how those assumptions equate to the -- I think the understanding that we have a product that works, when you get through UL 9540A and you’re cycling on it, that's kind of show me time. We show with actual physical things. Now you're going through and saying, okay, assuming all this, how fast can you ramp? What will the cost be to ramp? What's the market? And what's the model that you come up with to base the loan upon?

Okay. And I’ll step back in queue in a minute. But is it perhaps fair to say that this pivot to Gen 2.3 and some of the economics around that and how you're trying to pivot your business has perhaps impacted the timing of this loan process?

Joe, what I would say is going through and when we started on the Z3, it was drawing board -- we were in drawing board phase end of the summer building prototypes in the lab at Edison. As we've gone through, and I think part of this was by December we'll have a single station lines up and running that we kind of got there, and then you're kind of going through, okay, how do you ramp that? How do you understand that? How do you understand the shakedown cost of a new line? How do you then ramp up? What's your scrap rates going to be? So a lot of this, it's very detailed. I have to say, like, it's very thorough. Part of that was because of the fact that we're saying here's what we did with Gen 2.3, we've proven that we can ramp, here's the benefits of Z3. Obviously any switch like that, there's questions but there's enough supporting documentation and everybody feel comfortable that we have a product that works and can be produced with a plan and a design and a partner that will build an automated line. And what I talked about in the earnings this morning where we talk about a third of the parts, a third of the stations, a third of the move, and 1/20th of the PLC automation, that's from our automation supplier who has themselves built a lithium-ion battery line. So they know the two lines, and they've given us the benchmark about the simplicity of what we're doing. And I think that helps everybody understand that this can be done and can be done quickly, as we've been saying, since we've gone public.

Okay. Thank you very much.

Thanks, Joe.

Thank you. Please stand by for our next question. Our next question comes from the line of Vincent Anderson with Stifel. Your line is open.

Thanks. Good morning. I was hoping you could give us just like a real-time update on new orders as the market continues to work through the details of the IRA. And then how much of the 600 million to 800 million of expected booked orders this year would you hope to come with a deposit? And then just last point on that one is are those deposits part of your mid 2024 positive operating cash flow target or is that not part of that equation?

Yes, Vincent, good morning. So yes -- on the last part of the question, yes. Deposits are part of that. I think the range I would say as far as the target is between 10% to 20% depending on size and timing of delivery that we have. What I'd say from real-time update on the market, look, the market continues to move as our commercial pipeline page shows where we're getting a lot of current pipeline deals coming in. I think there is this time period that we're in where people are waiting for guidance from treasury on how the ITC will be implemented under the IRA. So there's a period of, okay, we like your technology, this is what we need, we're going for longer duration storage, we're looking for lithium-ion alternatives. Let's see how the IRA actually gets implemented. And that's kind of where we are right now. But the good news is, is that the pipeline continues to grow with real projects and blue chip names. And we feel really good about the conversations we're having with customers continue to build backlog.

All right, excellent. And then you gave us a lot of really good detail on the Z3 expansion. But if you could just hit reset in terms of how many lines do you have to convert versus build new? It sounded like you said 9x the output per line, but maybe I misheard you. And then just framing that in the context of the current changeover this year, and then what you'll need to start converting more of the backlog as we move into 2024?

Yes, so simple terms, a Gen 2.3 battery from raw materials to put in a container, that manufacturing cycle time by the time it takes about an hour to weld it. And then your applied time to get it filled and closed and wired gets you up to about 90 minutes, 80 to 90 minutes of cycle time. The Z3 battery automation line at scale, that cycle time comes down to around 90 seconds. So that's where the 9x throughput comes from. And again, part of that is just half the parts go into a battery than what you have. It's smaller. And that was the design flow manufacturing. So if you think about the way we were building the Gen 2.3 battery was using infrared welding. You have 41 infrared welds to build a battery. With a Z3, you're inserting bipolars into a casing, and then there's one vibration weld close to it. So the ability -- this product was designed to be able to be high flow manufacturing, low cycle time, high yield product, and it's proving out to be so on the manual manufacturing line right now. When you think about where we are right now, we're basically, again, a lot of manual operator working on the product. It takes approximately 10 minutes right now to build the battery. We're in our seventh week of production.

Okay, that's excellent context. Thank you. And then just to sneak one more in really quick. Can you just remind me where the pipeline and more specifically the backlog stands in terms of their, I guess for lack of a better word their indifference to being supplied the Z3 versus the 2.3 that they probably signed the new order on, if there's any kind of requalification any of them are asking for?

No. So when we sold the backlog, as we sold, we were very upfront about moving to the Z3. So everybody knew this was coming. Part of what we did in 4Q was switching over early backlog on the 2.3 to the Z3. Customers obviously love the Z3, because it's fewer containers for higher output, so lower civil [ph] costs, better performance. So that's the whole process that we worked through here in 4Q to set us up going into this year. But everybody likes what they see from the Z3 and how it performs. And as we talk to customers that are in the backlog that are going to be getting this product, they look at this as really a step function change in the evolution of the company, which is great.

Excellent. All right. Thanks, again.

Great, thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Chip More with EF Hutton. Your line is open.

Good morning. Thanks for taking the questions. I wanted to ask a follow up on your commentary around working with customers on timing of IRA and that implementation. Any implications I guess on how to think about quarterly revenues with a more limited automation year for now?

Chip, the quarterly guidance as we go through what I would assume is the 50 million as the automated line comes online, that's where a lot of the volume will come in, when you think about the gap between the 30 and 50 I talked about earlier.

Got it. Okay. Yes, I would just trying to get an understanding of maybe first half would be necessarily lighter with waiting for details on IRA.

Well, absolutely. And when you think about what we said earlier on Chris' question was the revenue guidance is 30 to 50, 50 with the automated line comes online in October. You can kind of figure out where that 20 million is going to fall.

Got it. Okay. One more, Joe. I think you talked about seeing customers increasingly look at sort of these master multiyear agreements. Maybe expand on that as you referenced tighter lithium-ion capacity [indiscernible]?

Yes. So the multiyear agreements are customers really coming and saying, look, we've got projects over a period of time, three years -- most of the ones are three years. And they come in and say, look, we want to have access to capacity, we'll have a notification date to lock in your capacity, because there is a shortage of lithium in the market here. Depending on how you look at this, probably the next 12 to 24 months depending on how much of an optimist or not so fast [ph] the supply chain can ramp and what happens with EV demand. So you've got people coming in and saying I want to lock in a multilevel agreement, because I have this pipeline of projects. When you look at the agreement that we signed in January, that's a pretty exciting one, because that's a six-year agreement, we're creating projects with that customer to hopefully be able to secure volume under that agreement. But it gives both of us the certainty of the capacity will be there. And then we're on the same side as the customer working these projects through their deal process and how they can win and succeed in projects for both of us.

Okay. Thanks.

Thanks, Chip.

Thank you. Please stand by for our next question. Our next question comes from the line of James West with Evercore. Your line is open.

Hi. Good morning, guys.

Hi, James.

Joe, as you await -- I guess two things here, treasury guidelines kind of when are you expecting those to be finalized that recognize U.S. government and you can't make a direct call on that? But then secondarily, with the customers that are kind of waiting to order or even take delivery of product before those -- when those guidelines come out, how quickly do you move from okay the guidelines is there, now we know to start delivery and recognize revenue?

Yes. So James, what I would say is, it's a 2024 -- there's projects for 2024 and then there's volume that starts ramping up in earnest in 2025. When you really think about what's in the opportunity pipeline and kind of segment out of where people are thinking they want deliveries, it starts to ramp in 2024 and then really ramps up in '25 Now when you look at the forecast, by '25 we’re forecasted to have a global 100 gigawatt hour market with half of that coming from non-lithium-ion. So '25 is the year the industry ramps in earnest.

Right. Okay, understood. And then in thinking about the LPO office and kind of their diligence process and your process with them, do you need to access capital between now and when that term sheet may be finalized?

It's good to meet you, James. Nathan here. Yes, we may have to. It just depends on the timing. And if we do, obviously we have a couple of [indiscernible] recommends us the SEPA and ATM. And again, it's all about the timing of when we finalize the process with the DoE.

James, I would just say the strategy that we've always taken on capital raises is to raise what we need to keep moving forward to the goal. We're always out in the market, given our situation where we are. So Nathan said we've got our two programs in place that we use judiciously when we need to. And then as we start to get better understanding of where we're going to land on that, we'll raise capital as required, but always mindful of keeping the company on the growth trajectory and then managing the capital that we bring in and how that impacts the capital stack of the debt of the company.

Sure. Okay, fair enough. And then just to be clear, the two programs that you have do have enough funding capability in there to get you to that, even a delayed timeline?

Yes. I think our availability under the two programs combined is north of 100 million.

Right. Okay. Just want to make sure. Okay, great. Thanks, guys.

The remaining availability, yes. Thanks, James.

Got it. Thanks, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of Tim Curran [ph] with Seaport Research. Your line is open.

Good morning, guys. Tom Curran here from Seaport. Joe or Nathan, just trying to evermore fine tune this. So if you were to achieve the high end of guidance, 50 million in revenue, Z3 fully automated line of 1.2 gigawatt hours of capacity, 15% unit cost reduction, and exiting at a positive gross margin, what would be the next milestones you'd be focusing on? Or that you would think of as vital to be able to achieve that first quarter of breakeven in EBITDA? Would it just be about ramping to that required threshold of quarterly revenue run rate, would there still be more work to do on the cost side and a specific gross margin level you'd need to hit? Could you just help us plot out a little better what would have to come next to get to that first quarter of breakeven?

So I think a big piece of this is as you mentioned is just scale, right? Spreading our fixed cost base, whether it's public company costs or other overheads, spreading that across a greater number of units. But the other side of this is just continuing to drive additional costs out of our product. We're given guidance today on where we expect to end the year in terms of product costs. But that doesn't mean we're finished with that. That means we'll continue to work on driving product costs out in 2024 and beyond. And again, some of that comes with managing our supply chain, some of that just comes with the automated line and scaling up on production volumes.

But just to be clear, if you were to achieve the high end of guidance, you would still expect to be on track for that midyear breakeven accomplishment?

Yes.

Great. I know that last year, Blue Ridge Power and Pine Gate Renewables accounted for 81% of revenue through that Eastover project. For 2023, what's your biggest customer or maybe single largest project, if that's a better way to frame it, contribute to the top line? And what range do you expect for that percentage along with a revenue guidance band of 30 million to 50 million?

So it's a lot more balanced as we go through the year and you look at what's happening. So you've got deliveries across what I would say deliveries balanced across five core customers, so it's not as concentrated as it was doing Pine Gate, which was the biggest project we've ever done.

Got it. And the last one for me, higher level sort of intra zinc battery competition related, but I read a recent report by Mercom Capital and it turns out the ninth most popular energy sector subcategory for venture capital last year was zinc-based batteries. So I thought that was really interesting, very encouraging in terms of technology concepts. There were five zinc-based battery deals last year and those five collectively attracted 123 million of funding from VC firms. Could you update us on what you think of as a major competitive advantages of Eos in the zinc relative to some of the other players within your chemistry niche, acknowledging look this is commercially early for zinc-based storage solutions but just wondering if you can give us a sense based on how much of an early mover advantage you have with the capacity you have in place, it's already producing a sense of how much share you've captured, how big of a lead you had relative to those other zinc players?

Yes. So the way I always think about this is Eos is 15 years old. There's three five-year development periods in the company. There was the first five years which was, get your chemistry and configure. Second five years was, okay, let's start coming up with the product doing prototype and pilots. The last five years since I've been here is really about scaling manufacturing. I think the next phase, which we are going into this year for our company, is producing at scale and getting to profitability. So I don't know where the companies that got funding are in that development phase. What I can tell you is like getting venture capital funding, they're probably in, if not the first, probably that second phase. They’re twice as good as us. They're probably five to seven and a half years behind where we are. Because what you don't know, and I'll tell you what I've learned in my five years coming in here is that you really don't know what you don't know until you try to produce this thing at any kind of scale. And then when you start producing, you are going to get humbled and taught a lot of lessons as you go through. And as you go through that, you can come out the other side, but you got to make sure when you go in, you've got a cost effective manufacturing line that you're not spending a lot of capital to be able to build the battery, and that you have a reasonable build of materials that you can work on to come up with something. And whatever they have right now will look differently when they're at commercial scale. And by the way, we need more than just Eos in this space. So I…

Great answer, very thoughtful. Thanks.

Thanks.

Thank you. I'm showing no further questions in the queue. I will now turn the call back over to Joe for closing remarks.

Thank you. Now, look, thanks everybody for listening in this morning. We are going to keep our heads down working on what we can control and building a great company. Thanks to all of our shareholders for the support that they give us and the customers for the trust that they've put in us to deliver projects we think and believe as the days go on, we're building a company that has a lot of intrinsic value that gives the world a product that needs to power its future is something that's never been done before. And that's a great challenge that we all love, putting our minds and hands to work every day to make that happen. And the last thing that I just want to end on is like the team that we have in this company and what we're really doing. I want to apologize for some of the background noise here this morning coming from our microphone because Nathan and I are sitting literally on the edge of the shop floor and the people on our shop floor, when I look at this, we always talk about creating green jobs and green high tech jobs. We're not creating green high tech jobs. We're creating green careers for people in what usually either called the Mon Valley or the Electric Valley here outside of Pittsburgh, Pennsylvania, and giving these people an opportunity to do what they're doing. It's motivating to me to watch what they do every day and how they're delivering for our customers. So thank you for the time and look forward to continuing to update everyone as we go through the year.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.