Eos Energy Enterprises, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Eos designs and manufactures zinc-based battery energy storage systems for utility, microgrid, and commercial and industrial markets. Results reflect continued commercialization and production ramp-up.
Financial results and liquidity
- Revenue: $3.3 million, up from $0.2 million in Q1 2021. Three customers represented 43.6%, 31.5%, and 15.1% of quarterly revenue.
- Gross result: Cost of goods sold was $35.6 million, producing a gross loss of approximately $32.3 million. Management attributed high costs to production below optimal scale; it cited improving yield, lower scrap, and throughput, and expects margins to improve with volume and process efficiencies.
- Operating loss and net loss: Operating loss was $51.7 million versus $21.7 million a year earlier. Net loss was $45.8 million, compared with $21.5 million; loss per share was $0.85 versus $0.42.
- Cash flow: Operating cash outflow was $42.7 million, compared with $9.7 million in Q1 2021. Investing cash outflow was $5.1 million, primarily for property and equipment. Cash, cash equivalents, and restricted cash declined $49.1 million during the quarter to $56.6 million.
- Balance sheet: Cash and cash equivalents were $55.4 million; current assets were $96.2 million and current liabilities $33.8 million. Total liabilities were $137.1 million, against total assets of $126.9 million; shareholders’ deficit was $10.2 million. Reported carrying values included $77.1 million of related-party convertible notes, $18.9 million of notes payable, and $6.0 million of long-term debt.
- Spending and obligations: Management estimated 2022 capital expenditures of $25–$35 million, mainly for equipment, automation, and capacity. Contractual obligations and commitments totaled $164.7 million, including convertible-note payments, debt, leases, and purchase commitments.
Changes, outlook, and material matters
- Revenue increased substantially year over year, but manufacturing costs rose far faster, and operating and net losses more than doubled. SG&A increased 62% to $14.3 million, while R&D was broadly unchanged at $5.0 million.
- A $7.7 million gain from remeasuring the embedded derivative in the Koch-related convertible note reduced the reported loss; it was a non-cash fair-value item. The note generated $2.2 million of related-party interest expense. The note’s carrying value was $77.1 million at quarter-end.
- Going concern: Management concluded that available capital was insufficient to support the current cost structure for one year after issuance of the financial statements. It said Eos would need to obtain additional capital, increase revenue, or defer or reduce spending in Q2 2022 to continue operations. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- After quarter-end, Eos entered into a standby equity purchase agreement allowing it, subject to conditions, to sell up to $200 million of common stock to Yorkville over two years. Shares are priced at 97% of a specified three-day VWAP; ownership and exchange-cap limits apply, with stated exceptions. Use of the facility is not assured. Eos also anticipated submitting a Part II application to the Department of Energy loan program in Q2; approval or funding was not assured.
- Management expected continued operating losses and cash outflows while scaling production. It announced a factory expansion intended to increase annual capacity to 800 MWh by year-end 2022. A March master supply agreement included a 240 MWh customer commitment and an option to expand to 500 MWh over three years, with total potential order value of up to $150 million.
- Management cited supply-chain disruption, inflation, commodity and labor costs, COVID-19, permitting and grid-connection delays, and geopolitical uncertainty as potential pressures on delivery timing and costs. It noted that these conditions had not materially affected the business as of the filing date, but future effects were uncertain.
- Investigations and controls: The Department of Justice continued investigating possible historical customs-duty underpayments; Eos accrued $0.9 million for a probable loss, and no complaint had been filed as of the report. In April, Eos received an SEC subpoena concerning, among other matters, customer negotiations and agreements and investor disclosures; the company said it was cooperating. Management reported disclosure controls were ineffective because of material weaknesses in the control framework, segregation of duties, journal-entry review, and management review controls.
Investor verification priorities
- Track cash burn, funding needs, and whether the company actually draws on the Yorkville facility or secures DOE or other financing.
- Verify production yields, unit economics, delivery performance, and whether gross margins improve as manufacturing scales.
- Assess the conversion, interest, repayment, and potential dilution terms of the related-party convertible notes and other debt.
- Monitor customer concentration, execution and cash conversion for the Bridgelink commitment, and any realized value from its expansion option.
- Follow developments in the DOJ and SEC matters, the $0.9 million customs-duty accrual, and remediation of reported material weaknesses.
- Check progress, cost, and timing of the 800 MWh capacity expansion and planned $25–$35 million of 2022 capital expenditures.