Eos Energy Enterprises, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report; the filing does not provide a clear standalone fourth-quarter income statement or cash-flow summary. Eos designs and manufactures zinc-based battery energy storage systems for utility, microgrid, and commercial and industrial customers.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $17.9 million | $4.6 million |
| Cost of goods sold | $153.3 million | $46.5 million |
| Gross loss | $135.3 million | $41.9 million |
| Operating loss | $221.3 million | $134.7 million |
| Net loss | $229.8 million | $124.2 million |
| Net loss per share, basic and diluted | $3.68 | $2.36 |
| Cash used in operating activities | $196.9 million | $116.1 million |
| Cash used in investing activities | $17.2 million | $23.3 million |
| Cash provided by financing activities | $139.5 million | $123.3 million |
- Revenue grew 290%, primarily from increased production and deliveries. Cost of goods sold substantially exceeded revenue; the implied gross margin was approximately negative 755% in 2022.
- Manufacturing costs included start-up and commissioning expense, freight and material inflation, scrap and rework, production inefficiencies, and EPC and commissioning costs. Management expects cost of goods sold to exceed revenue in the near term while production scales.
- At year-end, cash and cash equivalents were $17.1 million; cash, cash equivalents, and restricted cash totaled $31.2 million, including $11.4 million held in a loan interest escrow. Working capital was negative $5.4 million.
- Total liabilities were $239.5 million and shareholders’ equity was negative $132.7 million. Borrowings had $219.7 million of principal outstanding and $175.8 million of carrying value. Contractual future debt payments, including interest, were reported at $295.3 million.
- Capital expenditures were $20.1 million. Inventory increased to $23.3 million from $13.0 million; accounts payable increased to $34.7 million from $12.5 million.
Material changes and financing
- Revenue rose from $4.6 million to $17.9 million, while net loss widened from $124.2 million to $229.8 million and operating cash use increased by $80.7 million.
- SG&A increased 41% to $60.6 million, while research and development expense declined 4% to $18.5 million. Eos recorded a $6.8 million write-down of property, plant, and equipment, mainly related to equipment replacement, outsourcing, and transition from Gen 2.3 to Z3 production.
- Eos borrowed $100 million under a senior secured term loan, raised $38.6 million net through its at-the-market equity program and $14.5 million through the Yorkville standby equity purchase arrangements, and drew $4.2 million under equipment financing. The loan is secured by substantially all company and subsidiary assets, subject to stated exclusions, and has a quarterly minimum-liquidity covenant.
- Shares outstanding increased to 82.7 million at year-end from 53.8 million. The ATM program issued 20.5 million shares in 2022; further equity issuance could dilute shareholders.
- One customer accounted for 80.8% of 2022 revenue, compared with two customers representing 36.8% and 21.4% in 2021.
Outlook, risks, and unusual items
- Going concern: Management and the independent auditor disclosed substantial doubt about Eos’s ability to continue as a going concern. Eos reported $17.1 million of unrestricted cash, no additional borrowings available under existing financing arrangements, continuing operating losses, and reliance on further capital. Management said that without near-term additional capital, it would be unable to meet obligations as they come due over the following 12 months.
- Covenant and funding risk: Eos was compliant with the senior loan’s minimum-liquidity covenant at December 31, 2022 and expected compliance through March 31, 2023, but warned it might not comply beginning June 30, 2023 without additional capital. DOE loan discussions were in due diligence; no loan approval or final terms were assured.
- Product and capacity plans: Management expected to launch the Z3 battery in the second half of 2023. It described Z3 as designed to lower cost and weight and improve manufacturability, with two times the energy density per square foot versus the prior design. Manufacturing capacity increased from approximately 260 MWh to 800+ MWh during 2022; the company said the Turtle Creek facility could potentially expand to 1.2 GWh. These are plans and expectations, not guaranteed results.
- Policy support: Eos anticipated potential customer investment tax credits and manufacturer production tax credits under the Inflation Reduction Act, including direct-pay credits. Eligibility, implementing rules, timing, and realized cash benefits remained uncertain.
- Execution and market risks: Key risks include scaling manufacturing at lower cost and consistent quality, obtaining certifications for future products, supply-chain and inflation pressures, competition from lithium-ion and other storage technologies, delivery delays, and converting orders and pipeline into revenue. A single manufacturing site and concentrated revenue add exposure.
- Controls: Management concluded that internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses, including lack of a formalized COSO control framework, inadequate segregation of duties, and insufficient journal-entry and management review controls. Remediation was ongoing. The auditor did not provide an opinion on internal controls.
- Legal and subsequent events: Eos settled a DOJ customs-duty investigation for approximately $1.1 million, paid by year-end; the SEC informed the company its investigation concluded without an enforcement recommendation. After year-end, Eos issued additional Yorkville shares and closed a $13.75 million convertible note financing carrying a 26.5% PIK rate. A Delaware court order on February 27, 2023 validated the company’s charter and related securities retroactively.
Most important facts for investors to verify
- Current unrestricted cash, cash runway, subsequent financing, and the company’s ability to meet obligations and maintain the loan liquidity covenant.
- Status, terms, timing, and likelihood of DOE financing and any further equity or debt issuance, including resulting dilution and financing costs.
- Z3 launch, required certifications, manufacturing yields and unit costs, and whether planned capacity can be reached and utilized.
- Conversion of announced orders and backlog into deliveries, recognized revenue, collections, and less-negative gross margins; assess the effect of customer concentration.
- Progress in remediating material weaknesses and the reliability of warranty estimates, given limited operating history and the year-end warranty reserve of $3.8 million.