Eos Energy Enterprises(EOSE) - 2023 Q4 - Annual Report

Part I Business Eos Energy designs and manufactures zinc-based battery energy storage systems, primarily the Znyth™ BESS with Z3™ modules, for long-duration utility, microgrid, and C&I applications in North America - Eos designs, manufactures, and markets innovative zinc-based energy storage solutions for utility-scale, microgrid, and commercial & industrial (C&I) applications, positioned as an alternative to Lithium-ion batteries[13] - The company's flagship product is the Znyth™ BESS with the newest Z3™ battery module, designed for 3- to 12-hour discharge applications and offering improved cost-effectiveness, energy density, and manufacturing simplicity[14][21] - Eos's strategy focuses on scaling Z3 battery production in the U.S. to leverage Production Tax Credits (PTC) and customer Investment Tax Credits (ITC) under the Inflation Reduction Act (IRA)[21][23][32] - In August 2023, the Department of Energy (DOE) issued a Conditional Commitment Letter for a loan of up to $398.6 million to fund 80% of eligible costs for manufacturing expansion in Turtle Creek, Pennsylvania[30] - The company competes with traditional Li-ion manufacturers like Tesla and LG Chem, and other long-duration storage companies such as ESS Inc. and Form Energy[36] - For fiscal year 2023, two customers accounted for 49.9% and 45.2% of total revenue, indicating significant customer concentration[39] - As of December 31, 2023, the company had 420 full-time employees, none of whom are represented by a labor union[43] Risk Factors The company faces significant risks including historical losses, negative cash flows, material weaknesses in internal controls, reliance on external capital, and manufacturing challenges, raising substantial doubt about its going concern ability - The company has a history of net losses ($229.5 million in 2023) and negative operating cash flows, raising substantial doubt about its ability to continue as a going concern for the next 12 months[57] - Management identified material weaknesses in internal controls over financial reporting as of December 31, 2023, potentially leading to reporting failures or material misstatements[65][68] - Eos requires significant additional financing to achieve its goals, and failure to obtain it on acceptable terms could adversely impact business growth and continued operations[122][61] - The company may be unable to remain in compliance with the minimum financial liquidity covenant in its Senior Secured Term Loan beginning June 30, 2024, potentially leading to default[123] - Eos has limited experience in commercial-scale manufacturing and may face difficulties in scaling production, potentially leading to delays, quality control issues, and cost overruns[97][99] - The business is heavily dependent on third-party suppliers, and supply chain disruptions could adversely affect operations[109] - The company's ability to utilize its significant net operating loss (NOL) carryforwards of approximately $638.5 million is likely to be substantially limited due to an "ownership change" under Section 382 of the Internal Revenue Code[62][64] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None Cybersecurity Eos employs a cybersecurity model focused on prevention, detection, assessment, and remediation, managed by its IT Department with Board and CFO oversight, identifying no material threats in 2023 - The company's cybersecurity program is managed by the Director of ITD, reporting to the CFO, with overall oversight from the Board of Directors[166] - In 2023, the company identified no cybersecurity threats that materially affected or are reasonably likely to materially affect its business, operations, or financial condition[167] Properties The company's corporate headquarters, comprising office, testing, and design space, is located in Edison, New Jersey, and its manufacturing facility is in Turtle Creek, Pennsylvania, where it expanded its leased space in 2023 - Corporate headquarters are located in a 63,000 sq. ft. leased facility in Edison, New Jersey, with the lease expiring in September 2026[168] - The primary manufacturing facility is in Turtle Creek, Pennsylvania, where the company expanded its leased space in 2023[169] Legal Proceedings Eos is involved in two significant legal matters: the settled Delman Complaint, primarily funded by D&O insurance, and the ongoing Houck Complaint, which the company intends to vigorously defend - The Delman Complaint, a class action against former directors, was settled for $8.5 million, primarily funded by $1.0 million in cash and $7.5 million from D&O liability insurance policies[172] - The Houck Complaint, a class action filed in August 2023, alleges false or misleading statements by the company and three officers, which the company denies and intends to defend against[173] Mine Safety Disclosures The company reports no mine safety disclosures - None Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Eos's common stock and warrants are traded on The Nasdaq Capital Market under the symbols "EOSE" and "EOSEW," and the company has never paid cash dividends nor anticipates doing so - Common stock and warrants trade on The Nasdaq Capital Market under ticker symbols "EOSE" and "EOSEW"[175] - The company has never declared or paid cash dividends and does not plan to in the foreseeable future[176] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Eos Energy's revenue remained flat at $16.4 million while cost of goods sold decreased 41% to $89.8 million due to the Z3 battery transition, resulting in a $229.5 million net loss and raising substantial doubt about its going concern ability, despite significant capital raises and a conditional DOE loan commitment Results of Operations For 2023, revenue decreased 9% to $16.4 million, while cost of goods sold significantly reduced by 41% to $89.8 million due to Z3 battery production, yet the company reported a $229.5 million net loss, similar to 2022, heavily impacted by non-operating expenses Comparison of Operations for the Years Ended December 31, 2023 and 2022 (in thousands) | Financial Metric | 2023 | 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $16,378 | $17,924 | ($1,546) | (9)% | | Cost of goods sold | $89,798 | $153,260 | ($63,462) | (41)% | | R&D expenses | $18,708 | $18,469 | $239 | 1% | | SG&A expenses | $53,650 | $60,623 | ($6,973) | (12)% | | Operating loss | ($152,937) | ($221,258) | $68,321 | (31)% | | Interest expense, net | ($18,770) | ($7,915) | ($10,855) | 137% | | Interest expense – related party | ($37,466) | ($10,898) | ($26,568) | 244% | | Change in fair value of warrants | ($24,980) | $848 | ($25,828) | N/A | | Net loss | ($229,506) | ($229,813) | $307 | (0.1)% | - The decrease in cost of goods sold was primarily due to approximately 44% fewer containers delivered in 2023 and the transition to the lower-cost Z3 system from the higher-cost Gen 2.3 battery system[196] - For the year ended December 31, 2023, the Company recognized the IRA's Production Tax Credit of $3.3 million as a reduction of cost of goods sold[192] - The net loss was significantly impacted by a $25.0 million loss on the change in fair value of warrants and a $37.5 million interest expense from related parties[203][205] Liquidity and Capital Resources The company's financial condition raises substantial doubt about its going concern ability, with $69.5 million in cash as of December 31, 2023, relying on external financing, having raised significant capital in 2023, and facing potential non-compliance with its Senior Secured Term Loan covenant - Management concluded 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 reliance on outside capital[212][215] - As of December 31, 2023, the company had $69.5 million of unrestricted cash and cash equivalents, compared to $17.1 million at the end of 2022[215][295] Cash Flow Summary (in thousands) | Financial Metric | For the Year Ended Dec 31, 2023 | For the Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($145,018) | ($196,857) | | Net cash used in investing activities | ($29,461) | ($17,170) | | Net cash provided by financing activities | $227,918 | $139,544 | - In 2023, the company raised significant capital through various financing activities, including $92.9 million from an at-the-market (ATM) offering, $50.0 million from a public offering in December, and $48.0 million from registered direct offerings in April and May[218] - The company may be unable to remain in compliance with the minimum financial liquidity covenant of its Senior Secured Term Loan beginning on June 30, 2024, without securing additional outside capital[215] Critical Accounting Estimates The company's critical accounting estimates, including Warranty Liability, Warrants Liability, and Convertible Notes and Embedded Derivatives, involve significant judgment and rely on subjective, unobservable inputs, potentially leading to material financial impacts - Warranty Liability: Accruals are based on management's best estimate of projected costs, but are subject to material changes due to limited historical claim experience[233] - Warrants Liability: Fair value is estimated using the Black-Scholes model, relying on Level 3 unobservable inputs, particularly expected volatility[234] - Convertible Notes and Embedded Derivatives: Fair value is estimated using a binomial lattice model, relying on Level 3 unobservable inputs like effective debt yield and volatility[235] Quantitative and Qualitative Disclosure about Market Risk The company's primary market risks are liquidity risk, stemming from ongoing funding needs and going concern doubts, and equity price risk, impacting the fair value measurement of liability-classified warrants due to stock price volatility - The company's primary market risk is liquidity risk, driven by its need to raise funds and sustain operations, leading to substantial doubt about its ability to continue as a going concern[237] - The company is exposed to equity price risk due to outstanding warrants measured at fair value, where stock price volatility can significantly impact liability valuation[238] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements and the independent auditor's report, which includes a "Going Concern" paragraph and identifies the valuation of convertible notes and warrants as a Critical Audit Matter - The independent auditor's report includes a "Going Concern" paragraph, citing recurring losses and potential non-compliance with a financial covenant, raising substantial doubt about the company's ability to continue as a going concern[283] - The auditor identified the valuation of Convertible Notes Payable and Warrants Liability as a Critical Audit Matter due to subjective and complex fair value estimation judgments[288][291] Key Financial Data (in thousands) | Financial Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $186,492 | $106,788 | | Total Liabilities | $297,292 | $239,499 | | Total Shareholders' Deficit | ($110,800) | ($132,711) | | Statement of Operations | | | | Total Revenue | $16,378 | $17,924 | | Net Loss | ($229,506) | ($229,813) | | Basic and Diluted Loss Per Share | ($1.81) | ($3.68) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no disagreements with its accountants regarding accounting principles, practices, or financial statement disclosure - None Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2023, due to material weaknesses in internal control over financial reporting, for which a remediation plan is underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[241] - The ineffectiveness is due to material weaknesses, including a lack of a formalized internal control framework (COSO), inadequate segregation of duties, and insufficient management review controls[246] - A remediation plan is in progress, involving developing a risk framework, enhancing policies, redesigning controls, and engaging external experts, though weaknesses are not yet fully remediated[247][248][249] Other Information Director Audrey Zibelman notified the board on February 28, 2024, of her decision not to stand for reelection at the 2024 Annual Meeting of Stockholders, unrelated to any disagreement with the company - Director Audrey Zibelman will not stand for reelection at the 2024 Annual Meeting of Stockholders[251] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end - The information required by this item is incorporated by reference to the company's Proxy Statement to be filed within 120 days of the fiscal year ended December 31, 2023[253] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end - The information required by this item is incorporated by reference to the company's Proxy Statement to be filed within 120 days of the fiscal year ended December 31, 2023[255] Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end - The information required by this item is incorporated by reference to the company's Proxy Statement to be filed within 120 days of the fiscal year ended December 31, 2023[256] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end - The information required by this item is incorporated by reference to the company's Proxy Statement to be filed within 120 days of the fiscal year ended December 31, 2023[257] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's Proxy Statement for the 2023 Annual Meeting of Stockholders, to be filed within 120 days of fiscal year-end - The information required by this item is incorporated by reference to the company's Proxy Statement to be filed within 120 days of the fiscal year ended December 31, 2023[258] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K, including consolidated financial statements and the independent auditor's report - This item contains the consolidated financial statements and a list of all exhibits filed with the Annual Report[259][260] Form 10-K Summary This item is not applicable to the report - Not applicable