Eos Energy Enterprises, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context
Eos designs and manufactures zinc-based battery energy storage systems for utility, microgrid, and commercial and industrial customers. It is an early-commercialization-stage company with one reportable segment. The quarter’s results reflect reduced production and deliveries during the transition to its next-generation Eos Z3 battery.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $0.25 million, versus $5.90 million in 2022 (down 96%) | $9.08 million, versus $9.19 million in 2022 (down 1%) |
| Cost of goods sold | $11.25 million, versus $36.87 million | $38.19 million, versus $72.44 million |
| Operating loss | $34.60 million, versus $57.38 million | $72.86 million, versus $109.08 million |
| Net loss | $131.63 million, versus $56.69 million | $203.23 million, versus $102.48 million |
| Operating cash flow | Not separately reported for the quarter | Cash used: $75.58 million, versus $86.99 million |
| Capital expenditures | Not separately reported for the quarter | $10.10 million, versus $11.50 million |
Cost of goods sold exceeded revenue in both periods. The company attributed the steep Q2 revenue decline to lower production and deliveries during the Eos Z3 transition. Lower shipments reduced cost of goods sold, but commissioning and idle-factory costs partly offset that reduction. Six-month operating cash outflow improved year over year, while the net loss increased substantially, primarily reflecting higher interest and fair-value-related expenses.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $23.24 million; restricted cash was $14.91 million, including $11.55 million escrowed for term-loan interest. Working capital was $20.93 million.
- Cash, cash equivalents and restricted cash totaled $38.16 million, up from $31.22 million at year-end 2022. Six-month financing cash flow provided $92.61 million, largely from convertible-note and equity/warrant issuances.
- Total borrowings had a carrying value of $232.61 million; reported principal outstanding was $235.03 million. The company also reported a $57.36 million warrant liability and $42.77 million of embedded derivative liabilities.
- Six-month financing included $13.75 million of AFG convertible notes, $48.0 million gross proceeds from April and May equity offerings with warrants, and $35.55 million raised under the SEPA, inclusive of Yorkville promissory-note proceeds. Common shares outstanding rose to 127.31 million from 82.65 million at December 31, 2022.
- The company reported substantial doubt about its ability to continue as a going concern. It stated that, absent additional outside capital, it may be unable to meet obligations over the next 12 months and may not meet its minimum-liquidity covenant beginning December 31, 2023. It had no additional borrowing availability under pre-existing financing arrangements for operations, and DOE loan conditional approval was still pending.
Outlook, risks and unusual items
- Management said the first semi-automated Eos Z3 manufacturing line was installed and had begun commercial production; the company expected to deliver its first customer orders from the line in Q3 2023. It expects Z3 to improve cost, manufacturability and energy density, but the filing provides no numerical revenue or earnings guidance.
- The company recognized $0.84 million of Inflation Reduction Act production tax credits for the first six months of 2023. Management described these credits as a potential future source of cash flow; amounts depend on eligible U.S.-manufactured components being produced and sold.
- The $203.23 million six-month net loss included an $87.72 million loss on changes in fair value of related-party derivatives, $28.51 million related-party interest expense, and $3.51 million loss on debt extinguishment. These items include noncash and valuation-sensitive effects.
- A $6.20 million six-month write-down of property and equipment primarily reflected Gen 2.3 manufacturing equipment and tooling that could not be repurposed for Eos Z3 production.
- Revenue was highly concentrated: one customer generated 100% of Q2 revenue and 97.8% of first-half revenue. The company also cited risks relating to customer project financing, backlog conversion, manufacturing scale-up, access to capital, DOE loan approval, supply chains and covenant compliance.
- An August 1, 2023 securities class action alleged violations relating to statements and omissions about the company’s business, prospects and reported backlog. The company said it believes the action is without merit and intends to defend it. Management also disclosed ineffective disclosure controls due to material weaknesses in its internal control framework and financial reporting controls.
- The company disclosed that its cash was held at a single financial institution in amounts exceeding FDIC insurance limits, creating potential exposure if that institution fails.
Most important facts for investors to verify
- Whether Eos secured additional capital or DOE financing, and whether it maintained liquidity covenant compliance after June 30, 2023.
- Whether Eos Z3 production ramped as planned and first customer deliveries occurred in Q3 2023, including resulting shipment volumes and unit economics.
- How quickly cash is being consumed, what funding remains available under the SEPA and ATM program, and the associated dilution and financing costs.
- Whether revenue concentration, reported backlog conversion and customer project financing changed materially after the reporting period.
- Developments in the securities litigation and remediation of the disclosed material weaknesses in disclosure controls.