Eos Energy Enterprises, Inc. (NASDAQ:EOSE) Q3 2023 Earnings Call Transcript

Eos Energy Enterprises, Inc. (NASDAQ:EOSE) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Good day and thank you for standing by. Welcome to Eos Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Liz Higley, Director of Investor Relations. Please go ahead.

Liz Higley: Thank you. Good morning, everyone, and thank you for joining us for Eos’s financial results and conference call for the third quarter 2023. On the call today, we have Eos CEO, Joe Mastrangelo, and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call may include forward-looking statements, including but not limited to current expectations with respect to future results for our Company, as well as statements regarding our ability to secure final approval of a loan from the DOE or our anticipated use of proceeds from any such loan, all of which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our expectation or those implied by these forward-looking statements.

The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law. This conference call will be available for replay via webcast through Eos’s Investor Relations website at investors.eose.com. Joe and Nathan will walk you through the Company highlights, financial results and business priorities, before we proceed to Q&A. With that, I’ll now turn the call over to Eos CEO, Joe Mastrangelo.

Joseph Mastrangelo: Thanks, Liz, and welcome, everyone, to our 3Q earnings call. It’s great to be back here with everybody. Let’s just move to our first page, which is really a milestone page of our first Z3 cubes being shipped out to the customers. We announced this when it happened back in September, but this, to me, really is the culmination of a lot of hard work, not just internally to EOS, but also externally with our customers and our supply base. There’s so much work that goes into this picture of being able to get parts qualified, suppliers qualified parts in the factory, product off the lines this is just a tremendous achievement when you really think about the timeline that we’ve been operating on. And we’ve been very deliberate about the speed at which we do this because the speed at which you’re manufacturing determines the speed at which you’re spending capital.

And we’re doing that per customer requirements and then also doing that in our learning curve to optimize the capital that we have on hand. What we’ve seen when you go through and look at this and move to the next page is our pipeline continues to strengthen, and we’re building a credible path to strong orders growth that Nathan will walk through here in a moment. But really, what I’d like that the team has been doing is we’re seeing more and more customers come with use cases that fit in with the technology. When the Company was founded 15 years ago, it was founded a four-hour storage, and what we’re going to talk about today is how use cases are moving to longer duration. As they become longer duration, you’re going to continue to see this pipeline grow.

The booked orders grow and the backlog grow over time. Down to the bottom, we continue to discharge energy. We’re at 1.6 gigawatts. This really shows that the technology performs. There’s a lot of hard work going into being able to do that and a lot of lessons learned, both internally and with third parties, including energy management system, SCADA system suppliers, AC scope suppliers and the customers themselves. At the same time, when you look at our cash on hand, we ended the quarter with $58 million of cash on hand. Again, what I would say here is a capital strategy is not just the capital we raise, but also the capital that you spend and we’re going to talk about both sides of that building into when we come into December and talking about the strategic outlook and ultimately, what is the Company’s path to profitability over time.

So if we go to the following page, as I said, on the first page, one of the key aspects of how you grow any Company is the partnerships and the people that you work with. We are building strong government support, the Department of Energy with the LPO initial commitment that we announced in the beginning of September. We were the first title 17 non-lithium ion battery Company. I think that’s a testament to the hard work that’s been done in the labs, at suppliers, in the factories, out in the field to really get a technology that the government saw as being eligible for a potential loan as we work through the closing conditions. At the same time, we’ve been working in one of our core markets in California with the California Energy Commission that goes all the way back to 2014 and is now accelerating into many use cases where that region of the country is looking for longer duration, flexible and safe energy storage technologies.

These things don’t happen overnight when you really think about it. This has been a nine-year journey to prove out the technology and grow into commercial scale, but we feel like we’ve got a technology that provides for the use cases that the markets demand. And Nathan will also go through in a moment what we’re also doing seeing in ERCOT as that grows. At the same time, our customer base is shifting and continues to grow as we get into more and more U.S. utility customers. That picture that we had earlier is the first unit is going to Duke. Duke is a customer that we again, we’ve been working with Duke since the 2015, 2016 time frame and are now getting where we’re putting the Z3 product out into a small commercial project, which I think we’re all proud of, and we’ll be able to prove out the flexibility and operability of the Z3 technology.

We also have a project that we’ve talked about with a large U.S. utility. That project will start shipping 47 megawatt hours to start shipping in next year in the latter part of the first half of next year. Also have applied — that customers also applied for DOE grants and underlying these projects that we’re executing with them is a very large conditional frame agreement or offtake agreement, which will help us drive future growth as they look at longer duration energy storage. And we’ve announced an order in last quarter with Dominion Energy. Again, Dominion announcing when you look at this, you would say, 60 megawatt hours and the size of the market that we’re in, seems relatively small, but Dominion was again, another journey. Nathan will talk about what that journey looks like and to be able to get 60 megawatt hours out in commercial operation on a commercial product project then lead you to be able to develop and execute on larger projects with these customers as we move forward.

So, really starting to put together pipeline growing, building, and proving out the technology over time out in the field and then working with robust customers and at the same time, you’re not going to scale into this growth without great suppliers and great partners to be able to bring the raw materials and the parts into the manufacturing process. We’re really happy, and I’ll give a quick update on the work that we’re doing with ACRO on our automated line and how we’re moving forward on our first state-of-the-art manufacturing line, how that implementation is going. But at the same time, we’re really scaling up the supply chain of the Company. When you really think about what we’ve been doing over the past couple of years is truly moving from what is an R&D supply chain on proof of concept to a supply chain with multiple suppliers in global scale at a cost position that allows us to develop and communicate in December our path to profitability.

We’re working on three core components: resin supply and to make that resin supply U.S.-based, U.S.-sourced product; Electrolytes. So electrolyte is around the R&D team simplifying our formula and then finding a large-scale mixer to be able to mix that electrolyte in a cost position that allows us to scale and then grapidite-felt, which is a very complex supply chain, and we’re working this at multiple angles to be able to take this part, which is one of our last parts in the battery that’s not U.S. sourced and over time, develop a U.S. supply chain for this critical component to both increase our ability to grow and scale the Company, do that with U.S. manufactured material at a cost point that will remain — will keep us competitive in the marketplace.

So, if we then go through and talk about where we are and how we’re positioning the Company for the long term, really, we’re at the stage where we’re balancing multiple priorities while continuing to meet key customer commitments. First priority is always deliver for the customers and balance your priorities around how you do that. When you think about where we are from a financing standpoint, where we are in order — on orders growth and orders timing has been a little bit slower than what we forecasted. Therefore, from a financing standpoint, we haven’t seen deposits come in at the same rate that we originally forecasted. But we’ve gotten through the DOE process and and are now working on the closing requirements from the DOE loan, which will allow us to scale the Company.

At the same time that you’re balancing these factors, you’re then balancing the amount of working capital that you’re bringing into the Company, therefore, the amount of product that goes out the door. So as we’re launching the Z3 product, we’re looking at where the customer is in their project readiness, where we are in our product cost out time line. So if you look at our time line, one of the decisions that we’ve made this quarter, which Nathan will walk through in more detail is to focus on getting a key project delivered in ERCOT over the course of 4Q into the first six weeks of 2024 and then cut in lower-cost products that everything we ship from the end of February, beginning of March on ships at a lower cost. Rushing to shift things into the field that are not going to be utilized or not going to go online in a time period isn’t smart for customers and isn’t smart for EOS from the standpoint of the capital that it takes to build and put product out in the field.

And while we’re doing that, this also allows leadership focus on delivery of the state-of-the-art manufacturing line. So we say state-of-the-art manufacturing line. I think many people just think about the equipment coming in from Wisconsin, from ACRO installing the line, turning the line on and then you start ramping production. Well, inside of that, it’s not just that manufacturability or that line itself. There’s also developing a workforce. We’ve been doing this over the course of the three-plus years that we’ve been here in Turtle Creek, but really, what we’re doing now is as we’re changing the way that we build the product, we’ve got to change the skill set of the employees that we have on the shop floor. So, overloading production early on is going to detract from our ability to prepare the workforce for the new line coming on and starting to operate.

So we want to be able to manage and continue to build and put product out in the field for critical projects while training the workforce for the new way we’re going to have to work when our new line comes in and is installed. At the same time, our engineering, R&D and manufacturing team is looking at every core process of how we build our products and finding ways to simplify that and improve yield and improve quality. The biggest thing that we’ve learned as we’ve gone through the semi-automated line, and we’ll talk about this and Nathan will also mention this in his section is that the number one driver of a defect on the semi-automated line is operator error. Operator error meaning the way that we flow material through the line and the manual operations that we have creates variability that goes away when the state-of-the-art line comes in.

We’ve proven out that we can manufacture. We’ve dialed in, if you will, the technology that we’re using to build the batteries, but at the same time, we’ve got to look at that and say, in most cases, a human versus a state-of-the-art operation, the state-of-the-art operation operates at higher quality as you do material movement in some of the actual manufacturing processes. So we want to make sure that we lower the scrap rates that we have by getting to the automated line faster and producing, if you will, less on the semi-automated line to deliver for key customers. At the same time, I talked earlier about supply chain development and the partnerships that we’re building. Inside of that are things like critical part qualification and wanting to make sure that the parts that hit the factory floor are of the specifications that we need and can go into production.

So when you take these three factors put them together, you really look at this and say, given the capital that we have and the investment that we want to make in expanding the workforce, we’ve got to take the people that we have and really focus them on those projects that are core and critical for the Company, getting a commercial project, a larger-scale commercial project installed in ERCOT, delivering on the utility customers 47 megawatt hour project while developing the new line and training the workforce to bring up suppliers. So we’re trying to balance multiple priorities here to scale the Company faster in the long term for profitable growth. So rather than focus on individual quarterly metrics as we go into 2024, we’re looking at 2024 as a ramp year.

And we’ll talk about this more in December, but we will ramp into production and ramp into the line and do that in a way that’s prudent and effectively use capital. So let’s go into a little bit more detail on operational scale and building capacity for manufacturing. If we go to Page 8, we came up with a strategy that had three phases to it for how we wanted to scale manufacturing. We wanted to first develop discrete manufacturing operations; second, implement a semi-automated line to really learn and see how material flows and understand our bottlenecks and then install and ramp up state-of-the-art manufacturing capacity. When we go through each one of these phases, there’s been lessons learned at each phase that’s making us better for what we’re trying to do in the third phase, which is scale up manufacturing.

The discrete operations, this was really moving from hand-built prototype product in our Edison facility that was tested and proven out to optimizing design and coming up with manufacturing processes that could scale. Where we started on discrete automation, we’ve changed many of the core manufacturing technologies that we’re using in that manufacturing line. So if you look at that picture under number one, that’s how we integrate the bipolar single-piece stiffeners into the top or into the frame that we use to build the battery. We changed that technology and went with a lower on the surface technology but lower cost technology that delivered higher quality. And that’s why we wanted to do that because if we would have gone in with a large automated line from day 1, you would have automated around a technology that wasn’t optimized, wound up spending a lot of money and wind up with a line that could produce the quality that you want.

But really, what we did in this whole process was we took 50% of the parts out of the design, we found 25% savings on the injection-molded parts, and we truly mitigated our automation risk because we really understood how parts flow from the raw materials that come in from suppliers to a battery going into an enclosure and an enclosure going out in the field. On the semi-automated line, the beauty of the way that we’re running the semi-automated line is you can stand in our factory and look ACROss the line, and you could see bottlenecks. Bottlenecks, not just of material, but also where people are gathering and when you look and you see these things, you should go and try to figure out what’s happening, why do we have more people at this operation or why are we seeing material buildup at this station on the line.

And then you go in and run a lean workout and go through your lean processes and take cycle time out. When you look at what the team has done here, we’ve taken the initial cycle time down from nine minutes when we started, we thought we had a theoretical cycle time of around five to four and a half minutes; the team is now running at three minutes to two and a half minutes of cycle time; all that happens because you can easily move things around. The one thing that happens when you implement an automated line is you lose the flexibility to move equipment around and change material flow. This allowed us to do that. It also allowed us to bring ACRO on-site with us, our supplier for the state-of-the-art line to watch how everything was happening, give us feedback on the discrete processes and the way that we’re moving, but then take that learning and incorporate it into how we want to implement the automated line.

We were able and are able, as I said earlier, our number1 driver of scrap is manual operations. Over time, we’ve been able to drive that number down below 5%. It moves around a lot because, again, it’s highly variable with the people that you have on the line. And from where we were talking about shipping cubes in September, our output off the line has gone up 5.5x in the month of October. So we continue to learn and grow and execute. On the state-of-the-art manufacturing line, let me just move quickly to Page 9. We’re in the midst of executing on the state-of-the-art manufacturing line at the ACRO facility in Wisconsin. It’s critical to note that there’s 30 discrete processes that make up our state-of-the-art manufacturing line. hat may sound like a lot to some people, but from the standpoint of what we’re trying to do from product manufacturing, it is relatively simple, but it requires a lot of precision to make sure that you get quality off the line and achieve the output goals that we have as a Company.

So we’re being very thoughtful about how we work through this. Right now, you see we’re in the phase of working towards factory acceptance of the line in the ACRO facility. So we are assembling these lines and the pictures that you see down the bottom are the actual EOS equipment being installed and we’re starting to work individual stations and how you pick and manufacture and move equipment to then work through to get to the point where the line runs and we get a factory acceptance test and then the line comes to Turtle Creek, where we install it and then run a site acceptance test and then start manufacturing. Question always would be, why not just do the factory acceptance that’s right in Turtle Creek and skip the step of installing the line in Wisconsin?

We’ve looked at that, and we continue to analyze ways to accelerate the schedule. But the thought process behind what we’re doing right now is to have access to the full range of technical expertise that ACRO has. By doing that on their site, their experts walk out of their offices and go and look and fix and can react quickly to challenges as we’re updating the line versus if we were to do it in Turtle Creek, you lose travel time and it would cost more from the standpoint of the travel and living to get the people to come and work on the lines. So we feel like this is a faster long-term lower cost way of bringing the line up into production over time. Now Nathan talked — Nathan will talk about how the size of the line is a little bit lower than the line — than the subsequent lines that we’ll be able to execute on, and that’s just our way of ramping into the growth over time.

The good news is that as we look at this right now, we continue to seek ways to both accelerate the schedule and reduce the capital spend. But we’re looking at where we are right now and the performance that we’re seeing in the semi-automated line and why it was so important to be able to do that semi-automated line that we believe that it will require less working capital to bring the line up and running. Therefore, the original cost projections, there should be some favorability in that number over time as we work through the process. We feel really strongly about the partnership that we have with ACRO and the way that we’ve been working together, and the progress that we’re seeing and the work that’s been done over the past 12 to 18 months to bringing the Z3 product to a product that can be produced at scale really is starting to show the promise here as we start working through this and a lot of the hard work, but behind-the-scenes things that you don’t see, we’ll start paying dividends as we bring that line on — into production in 2024.

With that, I’ll turn the discussion over to Nathan to walk us through a couple of core topics here and the Q3 financial results. Thanks for listening and look forward to Q&A.

Nathan Kroeker: Thanks, Joe, and good morning, everyone. As many of you already know, on August 31, we announced that we had received a $399 million conditional commitment for a loan guarantee from the Department of Energy. Since that announcement, we have been working through the steps required to get to loan closing and ensuring that all necessary conditions are met. Today, we want to spend a little bit of time discussing the DOE conditional commitment in the context of Project AMAZE. Project AMAZE or Project American-made zinc Energy is a $500 million expansion program with an initiative to scale production of our Z3 storage systems to eight gigawatt hours of storage annually by 2026. This DOE guaranteed loan would fund 80% of eligible project costs, which is the maximum amount available for the statute.

Draw-downs on the loan would be based on reimbursement of CapEx and OpEx eligible costs incurred over time as we build and scale up our capacity. Given how we’ve been progressing on Line 1, we believe overall capital costs may come in below our initial expectations. Furthermore, the recent performance metrics we are seeing on the semi-automated line suggests that less material will be required to dial in the new line than originally anticipated. As we have been running the semi-automated line, we are seeing yield rates that indicate initial yields on the automated line could be much higher than originally modeled, resulting in lower start-up and shakedown costs. While the scope of the project remains the same, we believe the overall project has the potential to cost us less than initially forecasted.

The conditional commitment is structured as a senior secured financing and carries an attractive cost of capital for a Company like EOS. The interest rate is a small margin above U.S. treasury rates of a similar tenor and the credit subsidy is being covered by DOE appropriated funds. As mentioned previously, closing and funding of the loan is contingent upon meeting a number of conditions precedent, and we expect this would occur sometime in the second quarter of next year. While we are working through designing and building out the first state-of-the-art line, we are also working through the capital plan required to get us to first advance. This conditional commitment was a critical milestone for the business and has the potential to further support our scaling of Z3 as well as our broader growth plans.

As seen on the bottom of the page, we have been in the DOE application process for well over two years, which included a thorough and rigorous due diligence process surrounding our technical, market, financial and legal standards and expectations. At the same time, while all of that was going on, we were simultaneously executing a transition from our Gen 2.3 product and implementing an entirely new manufacturing process as we work toward the launch of Z3. We are very proud of all of the hard work that the team has done to get us to this point, and this commitment is a significant endorsement of both the V3 technology as well as the role that EOS will play in the broader energy storage and transition landscape. Now moving to Page 12, I want to give a little bit more color on the expansion program and some of the questions that we have received.

The capacity expansion consists of four state-of-the-art manufacturing lines that would be added over time as supported by customer demand, financial and production forecasts as well as construction costs. As Joe mentioned, we are currently building out the first line, which we expect to come online in the second quarter of 2024 with additional lines to follow thereafter. Each of the lines are capable and expected to produce over 2 gigawatt hours of storage annually when run at capacity, but we plan to run the first line at 1.25 gigawatt hours annually, which is less than the anticipated nameplate capacity until we implement subassembly automation in the future. I would like to point out that as with any industrial manufacturing process, there will be a natural ramp in production and the 1.25 gigawatt hours of capacity will not be online on day one.

As you see on this slide, and as consistent with what we said last quarter, the cost of a line that should produce over 2 gigawatt hours annually is estimated to be between $40 million and $50 million. But to get our initial lineup to 1.25 gigawatt hours, we expect to spend closer to $30 million. The total cost of a line consists of direct costs paid to our automation partner, ACRO, but it also includes CapEx costs related to our injection mold en suppliers. We believe the manufacturing process is capital efficient when comparing to other technologies in the marketplace. And if you look at the bottom right-hand side of the page, once we begin to scale production, we expect a significant source of cash to be the production tax credits, which are expected to return up to 125% of the capital investment within one year of full production.

Getting into the next few pages, I want to focus on what we’re seeing in the market and provide an update on our commercial pipeline and backlog. We are seeing strong and growing interest in deploying energy storage for greater than 4 hours of capacity in several regions of the United States, specifically in the Southeast and ERCO are starting to see a shift to winter net peaks. To really understand what’s going on here, you need to understand the fundamentals and the human behavior that is causing this shift. Let’s take a look at ERCOT, for example. In the summertime, system peak load has historically been driven by air conditioning during the hottest hours in the late afternoon. These two to four hour peaks in electricity demand in late afternoon are often referred to as the super peak in wholesale power markets.

This super peak corresponds with maximum solar output. And so the summer peak, net of increasing solar generation has not kept pace with the overall increase in electricity usage during other times of the year. Winter peaks on the other hand, are at night and tend to be longer, i.e., eight-to-ten hours with small double peaks at the start and end of the overnight period as people warm up the house before going to bed and again, when they get up and get ready for the day. These winter net peaks are driven by population growth, poorly insulated homes and relatively inefficient electric heating, along with decommissioned legacy base-load generation being replaced with more intermittent renewable resources. Because electric heating increases at night, winter peaks do not coincide with solar generation, and so the increase of solar in the overall generation stack has the effect of shifting the net peak from summer to winter.

So what does all of this mean for EOS? To keep it simple, two to four hour duration storage may address the summer super peak and help a little with the small winter double peaks. But as these macro trends continue in the market, we expect to see a growing demand for longer duration, say, eight-to-ten hours storage solutions to address the longer overnight winter net peaks. We believe EOS has a competitive advantage as this trend continues as our systems were uniquely designed with the flexibility to operate as low as three hours and up to 12 hours in duration. Furthermore, our energy storage systems get more efficient as we move beyond four hours, effectively getting more energy from the same energy cube. So our footprint and CapEx goes down as duration increases, giving us a growing competitive advantage as solar penetration increases in these markets.

Flipping to Page 15, we’ve talked previously about how our pipeline and backlog is a portfolio of different customers and projects. Before getting into our commercial pipeline update, I wanted to provide a little more color on this portfolio effect by looking at how some of our typical customers tend to operate in the industry. This page highlights two indicative customer types, what you will find is that every customer can behave a little bit differently. The portfolio of projects and customers in our pipeline is comprised of a mix of utilities, IPPs, developers and industrial customers. Today, I’m going to focus on what we generally see with independent developers and utility-backed projects and how they fit in with our order book. Taking a look at independent developers depicted here on the left side of the page, you should think of the project life cycle in three key areas: project development where a project is identified, technology is selected and permits are obtained; project execution where the project will be constructed and built out; and in project operations where someone will come in and operate the project.

At each stage of this process, new investors may come in or the entire project can be sold off to an independent investor or an investment fund. The final project once fully operational, could be owned by the developer, an independent investor or the end user. You may recall, we highlighted IEP last quarter. IEP has two projects in our backlog, and it’s a good example of an independent developer. We are currently shipping energy cubes to the Orchard project in Texas, in which IEP was the developer who found the lines and obtained the permits but then sold the equity interest in the project to a large North American Infrastructure Fund, who is now well into the execution phase on this project. This type of ownership change is common in the industry, and many times, developers hold the rights to the project and obtain the permits, but are out looking for financing to come in for project execution.

These independent developers may sign larger, longer-term master supply agreements with us to lock in a technology and a price for a predetermined amount of storage to assist them building out their economic models as they seek financing for their projects. A developer or owner may choose to keep the project merchant to take advantage of price arbitrage opportunities in the market or they may contract some or all of the storage capacity to a third-party off-taker in order to lock in future cash flows and assist in securing project financing. Similarly, ongoing operations and maintenance of the project once completed can be done by the owner or contracted out to a third party. As you can see, there are a number of ways that a project may move through the development life cycle when initiated by an independent developer.

Now, moving to utility-backed projects, which generally have different objectives and priorities, with the utility, it’s often going to take longer to qualify a new technology. There’s an extensive due diligence period, and it can take years from initial discussions to full-scale order approvals. As Joe mentioned earlier, we are focused on delivering a few critical customer orders in early 2024. One of these orders is a utility-backed project that is in the initial pilot phase as seen on the right-hand side of the page. This 47 megawatt hour pilot order is a critical one for us and allows us to showcase our technology to one of the largest U.S. utilities, which we expect to translate into significant future opportunities once it’s fully commissioned and in operation.

In addition, we have been working with several different utilities over the last couple of years, and we are seeing a lot more traction as many of these customers in the pipeline were in a holding pattern and are reengaging in in-depth due diligence due to Z3 coming operational and the recent conditional commitment from the LPO. Now, moving into our commercial pipeline and orders backlog, I’m going to walk you through our classic pipeline page that I’m sure many of you are familiar with. This page is broken out into three key buckets: lead generation; current pipeline; and backlog. We keep this page in the same format every quarter, so you all can just focus on the numbers in which you will see both growing market demand and average sales prices increasing from prior quarter.

Starting on the left side of the page is lead generation, which at the end of the quarter was $13 billion, representing 44 gigawatt hours of storage, up $2.2 billion from the prior quarter. As a reminder, we do not count lead generation in our current pipeline. And generally, there is a lot of churn in this bucket as things move in, drop out or progress into our pipeline. Now moving to the middle of the page, we get to our pipeline, which is now at $11.6 billion, up $1.9 billion from the prior quarter. The pipeline represents over 43 gigawatt hours with $10 billion in active proposals and $1.5 billion in signed letters of intent. During the quarter, we had one order moved from LOI into booked orders. And shortly after the quarter ended, we signed a 1 gigawatt hour letter of intent with a developer in Texas, which you can see represented in the parenthetical eight gigawatt hours in LOIs/firm commitments here on the page.

As mentioned on previous calls, an opportunity can progress into an order from any stage in the pipeline. And while LOIs can be an important metric for us, we look at the pipeline holistically and in a portfolio of projects. In fact, some large utility names do not sign letters of intent, and you will see their projects move directly from active proposal into backlog upon receipt of a booked order. We continue to see an improvement in the overall quality of our customer pipeline with the average price of new proposals in 2023 being up nearly 30% from 2022 and up over 40% from 2021. With the continued movement to longer duration storage applications, we are seeing customers focus on the economic benefits, combined with the safety aspects of the EOS Z3 systems relative to some of the other options in the market.

We are very encouraged by the trends that we are seeing in this regard. Now, moving to the far right, the backlog stands at $539 million, representing over 2 gigawatt hours as of September 30. During Q3, we booked two new orders, one with Dominion Energy and then a small behind-the-meter project with a repeat customer. We continue to see traction with utility names in our pipeline, and this recent order is an important milestone as we have been working with Dominion for over three years to get to this point. This order enables us to showcase our technology to a top-tier utility and has also provided increased exposure to developers knowing that our systems are being selected by highly regarded utility names like Dominion. Moving into our third quarter financial results; lots to be proud about in the third quarter with receiving the DOE conditional commitment in August and shipping the first Z3 customer cubes in September and being selected by Dominion for an important pilot project, but there is still a lot of work to be done, and the focus of the business is on successful implementation of the state-of-the-art manufacturing line and the path to profitability.

Revenue for the quarter was $0.7 million as we shipped the first Z3 cubes at the end of September. Cost of goods sold for the quarter was $21.3 million, of which $11.2 million is noncash-related items, a decrease of $28.8 million compared to $5.0 million in the third quarter of 2022, primarily driven by lower shipments and corresponding revenue recognition as we began to deliver our first Z3 customer systems. Approximately 40% of COGS was attributed to onetime noncash accounting reserve adjustments for project commissioning, warranty and inventory valuations. R&D investment was $3.2 million, a 28% decrease compared to $4.5 million in the third quarter of 2022, driven by a reduction in outside services spend. $1.0 million or 31% of total R&D was noncash stock compensation and depreciation.

While some may expect R&D costs to decline now that Z3 is in production, we expect R&D to stay relatively flat or even increase slightly over time as the R&D team continues to assist with the implementation of the state-of-the-art automated line and is leading a number of product cost out initiatives, including increased system performance and the development of our homegrown battery management systems. SG&A for the quarter was $13.1 million, including $3.7 million of non-cash items, which is $1.6 million lower than $14.7 million in the third quarter of the prior year, driven by decreases in outside consulting and professional fees. SG&A is primarily made up of personnel costs as well as external expenses related to being a public Company. During the quarter, approximately 34% of SG&A was personnel costs, 28% was noncash items such as stock comp and depreciation and 24% was related to outside services, which includes accounting and fees supporting public Company operations.

Net interest expense was $9.4 million for the quarter, of which $3.7 million was cash and $5.7 million was noncash. The resulting operating loss was $37.8 million with a positive net income of $14.9 million. Lastly, I will give you an update on where we are with our full year Company objectives. As mentioned earlier, a lot to be proud about in the third quarter with both receiving the DOE conditional commitment in late August and shipping the first initial Z3 customer cubes in late September, but clarity on timing around our financing has affected overall 2023 timing and original expectations that were set at the beginning of the year. For our booked order target, we expect to come in below the previously announced outlook. As we have stated, we believe there are three things that customers are waiting on before committing to a booked order; One, certainty around our financing; two Z3 cycling data from the field and three, formal and final guidance from the IRAs 10% domestic content bonus credit.

Since receiving the DOE conditional commitment, we have seen an increased level of engagement from customers, and we are continuing to progress these conversations and customer diligence and expect to see an increase in booked orders as we move forward. We understand that some of these opportunities are being pushed out to the right a bit due to various reasons, including timing of DOE grants or securing other sources of project financing, but that should simply be a matter of timing as the interest and the demand for long-duration storage is there. Our pipeline remains healthy, and we’re confident that continued progress against the three items I mentioned earlier, will continue to move these discussions forward. Compared to the end of last quarter, we increased our opportunity pipeline by $1.9 billion, and we continue to see the projects in our pipeline getting larger for longer discharge durations and oftentimes are coming from repeat customers.

We are very focused on streamlining the manufacturing process, producing batteries and delivering several critical projects in order to begin accumulating customer discharge data from the field. While we are now shipping initial Z3 orders, timing on the corresponding Z3 cycle data is dependent on customer installation and commissioning time lines. And lastly, for the IRA domestic content bonus credit, it should no longer be a matter of if EOS customers will qualify, but it’s a matter of understanding the total cost savings and the impact to overall customer project economics. In working through the domestic content review and the validation process with the third party, we believe we will far exceed the domestic content threshold for our customers, which could translate into expanded financial benefits for many of these projects.

Now, moving on to revenue guidance, you may recall from our last earnings call that we expected revenue for 2023 to be back-end weighted in Q4. We’ve previously shared that due to most of our revenue recognition occurring at the time of delivery as well as specific guidance in ASC 606, there could be risks of revenue shifting to the right and into next year. Our revenue recognition cadence varies depending on certain performance obligations unique to each contract. As we have gained more visibility into the last quarter of the year, we made the strategic decision to focus on stabilizing the manufacturing line, partially delivering a key customer commitment and then reducing the Q4 production plan in anticipation of the cut-in of a number of product cost out modifications in Q1, which should result in lower unit costs.

This decision will result in some revenue being recognized in early 2024 rather than the fourth quarter. As Joe discussed earlier, the primary purpose of the semi-automated line was to optimize the manufacturing process while delivering on critical customer commitments. As a result of balancing these priorities, we expect our 2023 revenue to come in below our previous $30 million to $50 million guidance. I would like to highlight that this change in our production schedule should not negatively impact any customer commitments as they continue to work through permitting, construction time lines and non EOS supply chain delays on critical components such as transformers and inverters. We will continue to be diligent in running the semi-automated line as we build out the new state-of-the-art line in order to ensure we are making the most capital-efficient decisions for the business.

Lastly, one of our top initiatives continues to be taking cost out of the product and progressing on the path to profitability. We are on track, and we expect to end the year above target as we have locked in cost out projects that will result in more than 15% cost reduction from Z3 launch. These projects include savings derived from design enhancements, density improvements and procurement initiatives, several of which are scheduled to cut over in February of 2024. Before I wrap up and turn the call over for questions, I want to spend a few minutes discussing our various financing options and how we are thinking about a comprehensive solution to our funding needs. While we are very encouraged to have received conditional approval for the DOE loan, we expect the first reimbursements of eligible costs from the Department of Energy to occur in 2024.

With that, we will need to raise capital between now and then in order to continue to meet critical customer deliveries and fund ongoing business operations, including the build-out of our first state-of-the-art manufacturing line. In addition, and as previously stated on the Jane call in September, we expected to end the third quarter with a strong cash position. And while financing is something that we continue to work on, it wasn’t something that needed to be done right away. We had several sources of capital available to us in the third quarter, but as you know, we’re experiencing a very challenging capital market at the moment, and the primary source that we’ve been using recently is the ATM, which we believe we have been utilizing very responsibly.

While it was not practical to have detailed discussions to address our longer-term capital needs without knowing the details contained within the DOE’s conditional commitment, now that we have the detailed DOE term sheet, we have been having much more substantive discussions to explore the various options available to us. We are in detailed discussions with several different counterparties on potential capital solutions, and we’re pleased thus far with the nature of these conversations. We look forward to updating the market as appropriate. However, based on feedback from these discussions, we believe that our capital needs will be met with a combination of debt and equity. While we move towards the broader capital solution, we will focus on balancing customer output, managing our cash position and building out our state-of-the-art manufacturing line.

With that, I want to thank everybody for their time and for listening today, and I’ll turn the call over to the operator for questions. Operator, please open the line for questions.

Operator: All right. [Operator Instructions] For your first question, it comes from the line of Vincent Anderson from Stifel. Please go ahead.

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Q&A Session

Vincent Anderson: Yeah, thanks. Good morning, so this may seem a little too optimistic of a spin, but I’m curious if there’s almost just a little bit too much demand relative to your near-term capacity plans to get commitments to convert to orders, and particularly, if I’m like a small or medium-sized project that I’m worried about a utility scale customer coming in and locking up a couple of years’ worth of your capacity. And then maybe just more broadly speaking, how are you managing these relationships between customers that could provide more immediate orders and deposit cash flows and still keeping those large-scale customers happy by not committing too much of your initial capacity?

Joseph Mastrangelo: Vincent, I wouldn’t say optimistic, it’s realistic. I mean I think that’s the balancing act that we’re doing to try to put together the pieces of the puzzle. We do capacity planning of projects given on when the customer says they’re going to go live. And the conversations that we’re having with people is like, look, we want to have a mix, so you don’t — you can’t run the Company on just small projects or do you want to run the Company only on really big projects because big projects are going to be lumpy. And over time, if one doesn’t happen, you wind is as we start scaling. So we’re always going to have a mix between the two, and part of what we’re trying to do now is what are the best use cases that highlight the technology, what’s the best average selling price for us as we go down this road on our path to profitability.

And then as well, if the demand comes once you get through getting the first line up and running, which is the longest implementation because you’re designing and debugging and putting in controls, we can accelerate line two, line three, line four, depending on what happens. That’s the way we’ve always designed the companies to do this in a modular fashion and bring on capacity as required, but like we are balancing between where we think we’re going to be in managing that really production and capacity curve to make sure that we can deliver. The last thing we want to do is make a lot of commitments and then not be able to deliver. What we’ve been able to do so far as we’ve gone through the past really 12 to 18 months, is managing with customers on when they really need the product on site to be able to operate and delivering to that demand.

And that’s a dynamic process as you go through this of where they are in the overall execution of the project and where we are in our ability to deliver.

Vincent Anderson: Okay. All right. That’s helpful, thanks. And then just following on that, if you’re willing to discuss a bit more specifically which of the factors you listed on the new order guidance change, maybe which of those changed most meaningfully over the course of the third quarter that impacted your expectations on new orders for this year?

Joseph Mastrangelo: So what I would say that we’re seeing is a lot of opportunity coming through on the pipeline. Like one of the big things is, and I think Nathan mentioned this, pages the amount of new opportunities that are in the pipeline, we’re actually getting into the pipeline or the discussion with customers earlier in the process. So you’ve got to work through a bunch of different factors from a permitting side, from a financing side. But when you really look at this too, it’s not just timing, right? I mean this is really working through on timing and delivery and then going back, Vincent and really referencing back to your earlier question, it’s then us telling people, “Look, if you want to deliver by this date, here’s the capacity we have, and here’s where we need a decision by,” and then working through to be able to do this.

But I think the overall trend that we’re seeing is longer duration storage, people having to work through getting their permitting and everything lined up to be able to do this. wanting to do this with EOS technology, which has five hours, that five-hour storage really favors our technology than the safety factor layering in on top of that and really being thoughtful as we work through these things with not just the direct customer but also the end user, the system operator and the local municipalities to get everything cited then approved.

Operator: And to your next question, it comes from the line of Martin Malloy from Johnson Rice & Company.

Martin Malloy: Congratulations on all the accomplishments you’ve had recently. My first question was just how we should think about reimbursement under the DOE loan program and that first advance. And maybe if you could talk about what would be covered in that? Would it be past not just CapEx, but worker training, R&D, how should we be thinking about getting once you get to that first advance?

Nathan Kroeker: Sure, Marty, it’s Nathan. Good to hear from you. So as we think about the reimbursement mechanism that’s built into this loan structure, it’s reimbursement of eligible costs. And eligible cost is a defined term, you could go out and find it on the DOE’s website. But essentially, it’s a combination of the CapEx associated with the line or lines and project-related OpEx. And so if I hire somebody, just to give a simple example, if I hire somebody to manage the ACRO relationship, that’s OpEx, but it would be considered an eligible cost because it’s directly related to the expansion program. The manager who’s out on the floor today, managing the semi-automated line, that’s not an eligible cost. So it’s operating expenses directly related to the expansion program are considered eligible costs.