Eos Energy Enterprises, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. Balance-sheet comparisons are with December 31, 2022. Amounts below are in millions of dollars unless noted.
Business context
Eos designs and manufactures zinc-based battery energy storage systems and related services for utility, microgrid, and commercial and industrial customers. It is in an early commercialization and manufacturing scale-up phase and reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $8.8 | $3.3 |
| Cost of goods sold | $26.9 | $35.6 |
| Gross loss / gross margin | $18.1 / (205%) | $32.3 / (979%) |
| Operating loss | $38.3 | $51.7 |
| Net loss | $71.6 | $45.8 |
| Loss per share, basic and diluted | $0.82 | $0.85 |
| Operating cash used | $30.5 | $42.7 |
| Capital expenditures | $2.9 | $5.1 |
Revenue grew 168%, mainly from increased production and deliveries and higher unit pricing. Cost of goods sold fell 24%, attributed primarily to lower labor, material, and freight costs; however, it remained substantially above revenue. Operating loss narrowed, while net loss increased mainly because of higher interest expense and losses from remeasuring embedded derivatives.
At March 31, cash and cash equivalents were $16.1; restricted cash was $14.2, including $11.5 held in escrow for term-loan interest payments. Current assets were $50.0 against current liabilities of $65.7, and management reported negative working capital of $15.7. Total liabilities were $275.3, versus assets of $99.7, resulting in a shareholders’ deficit of $175.6.
Debt carrying value was $209.8; disclosed principal outstanding was $236.8. Borrowings included a $100.0 senior secured term loan, related-party convertible notes, Yorkville notes, and equipment financing. The senior loan’s stated interest rate for the first-quarter payment was 13.66%. Quarterly cash flow from financing was $32.5, primarily from convertible-note proceeds and equity issuance.
Material changes, outlook, and risks
- Financing and dilution: During Q1, the company raised funds through Yorkville financing and issued 11.2 million shares upon note conversions, as well as 0.7 million shares under its equity purchase agreement. Outstanding common shares increased from 82.7 million at year-end to 95.2 million at March 31.
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It said additional outside capital is needed to meet obligations over the next 12 months; without it, the company may be unable to meet obligations as due. Management expected covenant compliance through June 30, 2023, but warned that absent additional capital it might not comply beginning September 30, 2023.
- Subsequent financing: In April, Eos issued a further $15.0 million Yorkville convertible note and completed a registered direct offering of 16.0 million shares at $2.50 per share for $40.0 million gross proceeds, before fees. It also agreed to issue warrants for up to 16.0 million shares, exercisable at $3.14 per share. These events occurred after quarter-end.
- Operating outlook: The company expected to launch its next-generation Eos Z3 battery in the second half of 2023. It said cost of goods sold would likely exceed revenue in the near term as it scales production and prepares systems for customer operation; R&D costs were expected to rise as it develops Z3. No quantified revenue or earnings guidance is provided in the filing text.
- IRA credits: Eos recognized $0.8 million of U.S. production tax credits as a reduction of cost of goods sold in Q1. The filing describes future credits as a potential source of cash flow, subject to eligibility and applicable conditions.
- Customer concentration: One customer generated approximately 97% of Q1 revenue, compared with three customers accounting for the majority of Q1 2022 revenue.
- Controls and legal matters: Management concluded disclosure controls were ineffective due to material weaknesses in the control framework, segregation of duties, journal-entry review, and management review. The filing also reports a Delaware class action naming former directors; the company was not named as a defendant but has certain indemnification obligations. A previously disclosed DOJ matter was fully settled.
- Other risks: The company held cash at a single financial institution in amounts exceeding FDIC insurance limits. It also identified dependence on external financing, manufacturing scale-up, backlog conversion, supply chains, and DOE loan approval as risks.
Most important facts for investors to verify
- Current unrestricted cash, cash burn, near-term obligations, and progress toward maintaining minimum-liquidity covenant compliance.
- Whether the April offering proceeds and further financing are sufficient, and the resulting dilution from shares issued and warrants outstanding.
- Revenue conversion and customer diversification, given the 97% concentration in one customer during Q1.
- Manufacturing costs, gross-margin improvement, and whether the Eos Z3 launch and expected production economics are achieved.
- Eligibility, realization, and timing of production tax credits and any DOE financing; neither future credit cash flows nor DOE loan approval is assured.
- Remediation of material weaknesses in disclosure controls and internal control over financial reporting.