Eos Energy Enterprises(EOSE) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for the period ending June 30, 2023, indicate a deteriorating financial position with increased liabilities, a larger shareholders' deficit, and a substantial net loss driven by non-cash derivative losses and higher interest expenses Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Data (in thousands) | Balance Sheet Items | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $108,950 | $106,788 | | Total Current Assets | $63,971 | $55,147 | | Cash and cash equivalents | $23,243 | $17,076 | | Total Liabilities | $338,491 | $239,499 | | Total Current Liabilities | $43,041 | $60,576 | | Convertible notes payable - related party | $141,915 | $82,950 | | Warrants liability - related party | $57,360 | $78 | | Total Shareholders' Deficit | ($229,541) | ($132,711) | - Total liabilities increased by approximately 41% from December 31, 2022, to June 30, 2023, primarily due to increases in convertible notes and warrants liability. This contributed to a 73% increase in the total shareholders' deficit over the same period[11][14] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $249 | $5,895 | $9,084 | $9,193 | | Cost of goods sold | $11,246 | $36,866 | $38,186 | $72,443 | | Operating loss | ($34,597) | ($57,378) | ($72,862) | ($109,080) | | (Loss) gain on change in fair value of derivatives - related party | ($74,633) | $4,248 | ($87,723) | $12,510 | | Net loss | ($131,630) | ($56,687) | ($203,230) | ($102,478) | | Basic and diluted loss per share | ($1.12) | ($1.01) | ($1.99) | ($1.86) | - Revenue for Q2 2023 plummeted by 96% year-over-year. The net loss for the quarter more than doubled to $131.6 million, largely due to a $74.6 million loss on the change in fair value of derivative instruments, compared to a $4.2 million gain in the prior-year period[17] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($75,582) | ($86,992) | | Net cash used in investing activities | ($10,100) | ($11,758) | | Net cash provided by financing activities | $92,612 | $10,584 | | Net increase (decrease) in cash | $6,933 | ($88,164) | - For the first six months of 2023, the company used $75.6 million in cash for operations. This was more than offset by $92.6 million in cash provided by financing activities, primarily from the issuance of convertible notes, common stock, and warrants[26][28] Notes to the Unaudited Condensed Consolidated Financial Statements The notes reveal substantial doubt about the company's going concern ability, significant customer concentration, new complex financing arrangements, the impact of the Inflation Reduction Act, and recent legal proceedings - Management has concluded that there is substantial doubt about the Company's ability to continue as a going concern due to a history of significant losses, negative cash flows, and the need to secure additional outside capital to meet obligations over the next twelve months[35] - In Q2 2023, one customer accounted for 100% of total revenue. For the six months ended June 30, 2023, one customer accounted for 97.8% of total revenue, indicating significant customer concentration risk[41] - The company recognized Production Tax Credits (PTC) of $0.844 million for the six months ended June 30, 2023, under the Inflation Reduction Act, which are recorded as a reduction of cost of goods sold[63] - The company has entered into multiple complex financing arrangements, including convertible notes with Yorkville and AFG, and a Senior Secured Term Loan, resulting in significant debt obligations and embedded derivatives that require fair value accounting[69][70][83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic shift to the Eos Z3™ battery, the competitive advantages from the Inflation Reduction Act, the significant revenue decline and increased net loss, and the ongoing liquidity challenges and reliance on external financing Strategy and Company Highlights - The company is transitioning to its next-generation Eos Z3™ battery, which is designed to reduce cost, improve manufacturability, and double energy density per square foot. The first semi-automated manufacturing line is installed, with initial customer deliveries expected in Q3 2023[154] - The Inflation Reduction Act (IRA) is considered a competitive advantage, providing Production Tax Credits (PTC) for domestic manufacturing and an Investment Tax Credit (ITC) for customers, with a potential bonus for using domestic content[155][157] - During the first half of 2023, the company raised significant capital through various transactions, including a $13.75 million convertible note sale, $48.0 million from registered direct offerings of stock and warrants, and multiple convertible promissory notes issued to Yorkville[160] Results of Operations Revenue and Cost of Goods Sold Comparison (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $249 | $5,895 | -96% | | Cost of goods sold | $11,246 | $36,866 | -69% | - The 96% decrease in Q2 2023 revenue was attributed to reduced production and deliveries resulting from the strategic shift to the next-generation Eos Z3 technology[163] - Selling, general and administrative (SG&A) expenses decreased by 31% in Q2 2023 compared to Q2 2022, primarily due to reductions in outside consulting, legal, and stock compensation costs[167][168] - The company recorded a $74.6 million loss on the change in fair value of derivatives in Q2 2023, a significant reversal from the $4.2 million gain in Q2 2022. This change was largely driven by the company's stock price fluctuations and new warrant issuances[176] Liquidity and Capital Resources - Management reiterates that uncertainties related to recurring losses, negative cash flow, and reliance on external financing raise substantial doubt about the company's ability to continue as a going concern[182][186] - As of June 30, 2023, the company had $23.2 million in unrestricted cash and cash equivalents. Absent securing additional capital, the company may be unable to comply with the minimum financial liquidity covenant of its Senior Secured Term Loan beginning December 31, 2023[187] Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($75,582) | ($86,992) | | Net cash used in investing activities | ($10,100) | ($11,758) | | Net cash provided by financing activities | $92,612 | $10,584 | - Future contractual obligations are substantial, including debt payments totaling $313.8 million related to convertible notes, the senior secured term loan, and equipment financing[200][201] Critical Accounting Estimates - Key critical accounting estimates involve significant judgment and include the warranty liability, the fair value of warrants, and the fair value of convertible notes and their embedded derivatives[203] - The warranty reserve estimate is subject to material changes due to limited historical claim experience for the company's products[204] - The fair value of warrants and embedded derivatives in convertible notes are calculated using models (Black-Scholes, binomial lattice) with unobservable inputs like volatility and effective debt yield, making them sensitive to assumptions[205][206] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes in its market risk exposures during the first six months of 2023 compared to its 2022 Annual Report on Form 10-K - There were no material changes to the company's market risk exposures for the six months ended June 30, 2023[207] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2023, due to material weaknesses in internal control framework, segregation of duties, and review controls - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of June 30, 2023[208] - The ineffectiveness is due to material weaknesses, including a lack of a formalized internal control framework (COSO), inadequate segregation of duties, and lack of management review controls[208] PART II - OTHER INFORMATION Item 1. Legal Proceedings A new class action complaint was filed on August 1, 2023, alleging violations of federal securities laws related to company statements, which the company intends to vigorously defend - A class action complaint was filed against the company and its officers on August 1, 2023[213] - The complaint alleges violations of federal securities laws concerning statements about the company's business, prospects, and backlog. The company intends to defend against the action vigorously[213] Item 1a. Risk Factors A new risk factor highlights the concentration of cash and cash equivalents at a single financial institution, exceeding FDIC insurance limits and posing a liquidity risk - A new risk factor was added regarding assets held at financial institutions that may exceed FDIC insurance coverage[214][215] - The company holds cash and cash equivalents at a single financial institution in excess of the $250,000 FDIC insurance limit, posing a risk of loss in the event of a bank failure[215] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no previously undisclosed unregistered sales of equity securities or use of proceeds - None reported for the period[216] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to financing agreements, warrant forms, and officer certifications