Eos Energy Enterprises, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited financial statements; dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
Eos designs and manufactures zinc-based battery energy storage systems and related services for utility, microgrid, and commercial and industrial customers. The company is in an early commercialization and manufacturing scale-up phase. Its transition to the next-generation Eos Z3 battery reduced production and deliveries during the period; the first semi-automated line began commercial production, and the company reported delivering its first customer orders from that line in Q3.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $0.7 | $6.1 | $9.8 | $15.3 |
| Cost of goods sold | $21.3 | $50.0 | $59.4 | $122.5 |
| Gross loss | $20.6 | $44.0 | $49.7 | $107.2 |
| Operating loss | $37.8 | $63.6 | $110.7 | $172.6 |
| Net income (loss) | $14.9 | $(70.7) | $(188.3) | $(173.2) |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $107.6 | $159.1 |
Q3 2023 basic EPS was $0.11, but diluted EPS was a loss of $0.05, reflecting the impact of potentially dilutive securities and fair-value adjustments. The Q3 net profit was not driven by operating performance: it included a $61.8 million gain on changes in fair value of related-party derivatives. Nine-month interest expense was $14.7 million and related-party interest expense was $33.0 million.
At September 30, cash and cash equivalents were $58.0 million; cash, cash equivalents, and restricted cash totaled $73.1 million, including $11.7 million restricted for future term-loan interest payments. Working capital was $61.7 million. Total liabilities were $282.4 million, against total assets of $154.1 million, and shareholders’ deficit was $128.3 million. Borrowings had a carrying value of $207.3 million and outstanding principal of $234.3 million; the company reported $3.2 million of current debt.
Material changes versus the prior comparable period
- Revenue fell 89% in Q3 and 36% for the first nine months, primarily due to reduced production and deliveries during the Eos Z3 transition.
- Cost of goods sold decreased, largely with lower shipments, but remained substantially above revenue. Management cited commissioning and idle-factory costs.
- Nine-month operating cash use improved by $51.6 million year over year, while capital expenditures increased to $21.2 million from $18.8 million.
- Funding activity included $81.9 million of net ATM proceeds, $48.1 million from convertible notes, and registered direct offerings. Shares outstanding increased to 156.4 million from 82.7 million at December 31, 2022. The Yorkville SEPA was terminated in August; the ATM program’s maximum offering amount had been increased to $200 million.
Outlook, risks, contingencies, and unusual items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It said that without additional outside capital in the near term, the company may be unable to meet obligations over the next 12 months and may not remain compliant with its minimum-liquidity covenant beginning March 31, 2024. The statements assume continued operation and do not reflect adjustments that could result from these uncertainties.
- DOE financing: In August 2023, the Department of Energy issued a conditional commitment for a loan of up to $398.6 million, expected to fund 80% of eligible costs for planned manufacturing expansion. Definitive documents and funding remain subject to conditions, due diligence, and final approval; the filing gives no assurance the loan will be completed.
- Operating outlook: Management expects revenue to increase as production scales, but says cost of goods sold is expected to exceed revenue in the near term. Capital expenditure and working-capital needs are expected to increase as the company expands manufacturing. No specific revenue or earnings guidance is provided.
- Incentives: The company recognized $1.0 million of Inflation Reduction Act production tax credits for the first nine months of 2023. Management views these credits and customer incentives as potential advantages, while noting that customer qualification and final regulatory conditions matter.
- Debt and dilution: The senior secured term loan carried a 14.00% interest rate for Q3 and is secured by substantially all company and subsidiary assets, with stated exceptions. The AFG convertible notes carry 26.5% annual paid-in-kind interest and an initial conversion price of approximately $1.67 per share. Additional capital raising could dilute shareholders.
- Legal and accounting matters: A federal securities class action filed in August alleges violations relating to statements and omissions about the company’s business, prospects, and reported backlog; the company disputes the claims. It accrued $0.7 million for a probable loss related to a separate directors’ lawsuit. The warranty reserve was $4.9 million, including $1.1 million of nine-month estimate changes. Management reported ineffective disclosure controls due to material weaknesses in the control framework, segregation of duties, journal-entry review, and management review controls.
Important facts for investors to verify
- Whether the DOE conditional commitment advances to definitive financing and when any funds become available.
- Available liquidity, cash burn, covenant compliance, and the company’s ability to raise capital on acceptable terms.
- Whether Eos Z3 production scales as planned, improves unit economics, and supports conversion of orders and backlog into revenue.
- The drivers and cash impact of large fair-value gains and losses, related-party financing costs, and potential share dilution.
- Developments in the securities litigation, warranty estimates, and remediation of the disclosed material weaknesses in financial controls.