Eos Energy Enterprises, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless noted otherwise, amounts below are in U.S. dollars and millions. The filing is unaudited.
Business context and results
Eos designs and manufactures aqueous zinc battery energy-storage systems for utility, microgrid, and commercial and industrial customers. It is scaling production at its Turtle Creek, Pennsylvania facility while investing in manufacturing capacity and its next-generation Eos Z3 product.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $6.1 | $0.7 | $15.3 | $1.5 |
| Cost of goods sold | $50.0 | $12.9 | $122.5 | $25.4 |
| Gross profit (loss) | $(44.0) | $(12.2) | $(107.2) | $(23.9) |
| Operating loss | $(63.6) | $(26.3) | $(172.6) | $(97.1) |
| Net loss | $(70.7) | $(18.1) | $(173.2) | $(93.6) |
| Basic and diluted loss per share | $(1.12) | $(0.34) | $(3.00) | $(1.79) |
Revenue rose 745% in Q3 and 921% for the nine-month period, primarily from increased product production and deliveries. Gross margins remained sharply negative: cost of goods sold substantially exceeded revenue. Management attributed elevated costs to production ramp-up, inflation and freight, scrap and rework, inefficiencies, and engineering, procurement, construction and commissioning expenses.
Cash flow, liquidity and debt
- At September 30, cash and cash equivalents were $38.4 million; restricted cash was $12.6 million, including $10.7 million escrowed for future Term Loan interest. Total cash, cash equivalents and restricted cash were $51.0 million.
- For the first nine months, operating cash use was $159.1 million, investing cash use was $19.0 million, and financing provided $123.5 million. Cash, cash equivalents and restricted cash decreased $54.6 million from year-end 2021.
- Total liabilities were $226.8 million, compared with assets of $138.5 million; shareholders’ equity was negative $88.3 million. Accumulated deficit was $589.7 million.
- Carrying value of related-party convertible notes was $78.7 million. Long-term debt carrying value was $84.8 million, comprising a $75.5 million Term Loan and $9.3 million equipment financing. The Term Loan’s principal was $94.7 million; its stated rate was variable and was 11.3% for the Q3 interest payment. The filing reports a 19.2% effective annual interest rate. Equipment financing had a 16.2% effective rate on the Q3 draw.
- Management concluded that available capital was insufficient to support the company’s current cost structure for 12 months after the financial statements’ issuance date, and that substantial doubt existed about its ability to continue as a going concern. Additional financing is needed.
Material changes and management outlook
- Q3 operating loss widened to $63.6 million from $26.3 million a year earlier; nine-month net loss increased to $173.2 million from $93.6 million. The prior-year nine-month comparison included a $30.4 million loss on a pre-existing Holtec agreement and a $7.5 million investment remeasurement loss; 2022 included a $0.9 million loss on extinguishing the Holtec note.
- Q3 financing included $94.7 million borrowed under a senior secured Term Loan, an additional $4.2 million equipment-facility draw, and $29.1 million net proceeds from an at-the-market stock offering. The ATM sale issued 12.1 million shares at an average $2.49 per share. The company also had a $200 million Yorkville standby equity purchase agreement; it reported $12.5 million raised under the agreement through the filing date.
- The Term Loan is secured by substantially all company and subsidiary assets other than Hi-Power’s assets and the company’s equity interest in Hi-Power. It includes covenants, a minimum-liquidity requirement, and restrictions on additional debt and other actions. The company reported covenant compliance at September 30, 2022.
- Management anticipated fiscal 2022 capital expenditures of approximately $20–$25 million, primarily for equipment, automation and infrastructure. It expected significant losses and operating cash outflows to continue for the foreseeable future. No specific revenue or profitability guidance was provided.
- The company was invited to due diligence in the Department of Energy loan program to support a proposed manufacturing expansion. This is not an assurance of a conditional commitment or loan. Management said it could not assure access to the full ATM or Yorkville facilities, DOE financing, or other acceptable funding; failure to raise capital could force it to delay, reduce or discontinue development or commercialization, or consider strategic alternatives.
- Management reported customer project deferrals from 2022 into 2023 and beyond, in part because customers may benefit from Inflation Reduction Act incentives for projects placed in service after 2022. Eos expected the Act to benefit the business but said the provisions’ applicability and impact were still being assessed. The Eos Z3 product was in testing and was expected to launch in 2023.
- Cost and execution risks include inflation, supply-chain and part shortages, longer lead times, labor constraints, customer site and permitting delays, and production inefficiencies. Management said supply-chain impacts could persist through 2023 or longer. Q3 revenue was highly concentrated: two customers accounted for approximately 86.5% and 13.4%.
- Disclosure controls were deemed ineffective due to material weaknesses involving the absence of a formal COSO-based framework, inadequate segregation of duties, insufficient journal-entry review, and lack of management review controls. Management said additional procedures supported fair presentation of the financial statements.
- The company settled a DOJ customs-duty matter for $1.087 million, paid by September 30, 2022. The SEC informed the company in August that its investigation had concluded without a recommendation for enforcement action against it.
Most important facts for investors to verify
- Cash runway, upcoming cash needs, and actual access to ATM, Yorkville, DOE, or other financing; distinguish unrestricted cash from escrowed restricted cash.
- Term Loan terms and covenants, including the minimum-liquidity test, collateral, variable interest costs, and future insurance premiums.
- Whether revenue growth converts into deliverable orders and improved unit economics; track production yield, commissioning costs, and gross margin.
- Timing and financial effects of customer project deferrals, customer concentration, and conversion of backlog to revenue.
- Progress on Z3 testing and launch, manufacturing expansion, and remediation of the disclosed control weaknesses.