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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 293 added, 167 removed, 114 unchanged (80% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our audited financial statements and related notes thereto included elsewhere in this Annual Report.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations.

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II., in order to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more businesses.

On November 16, 2020, the Company consummated the transactions contemplated by an Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 7, 2020, by and among BMRG Merger Sub, LLC, our wholly-owned subsidiary and a Delaware limited liability company (“Merger Sub I”), BMRG Merger Sub II, LLC, our wholly-owned subsidiary and a Delaware limited liability company (“Merger Sub II”), Eos Energy Storage

LLC, a Delaware limited liability company (“EES”), New Eos Energy LLC, a wholly-owned subsidiary of EES and a Delaware limited liability company (“Newco”) and AltEnergy Storage VI, LLC, a Delaware limited liability company (“AltEnergy”).

Pursuant to the Merger Agreement, (1) Merger Sub I merged with and into Newco (the “First Merger”), whereupon the separate existence of Merger Sub I ceased, and Newco continued as the surviving company (such company, in its capacity as the surviving company of the First Merger, is sometimes referred to as the “First Surviving Company”) and became our wholly owned subsidiary;

and (2) immediately following the First Merger and as part of the same overall transaction as the First Merger, the First Surviving Company merged with and into Merger Sub II, whereupon the separate existence of the First Surviving Company ceased, and Merger Sub II continued as the surviving company and our wholly owned subsidiary.

Upon the closing of the business combination (the “Closing”), the Company changed its name to “Eos Energy Enterprises, Inc.”

Upon the closing of the business combination (the “Closing”) on November 16, 2020, as described in Part I, Item 1.

Business, the Company changed its name to “Eos Energy Enterprises, Inc.”

The business combination is accounted for as a reverse recapitalization.

EES is deemed the accounting predecessor and the combined entity is the successor SEC registrant, meaning that EES' financial statements for previous periods are disclosed in the registrant’s future periodic reports filed with the SEC.

EES is deemed the accounting predecessor and the combined entity is the successor SEC registrant, meaning that EES's financial statements for previous periods are disclosed in the registrant’s future periodic reports filed with the SEC.

Under this method of accounting, BMRG is treated as the acquired company for financial statement reporting purposes.

As a SEC-registered and NASDAQ-listed company, we are required to implement procedures and processes to address public company regulatory requirements and customary practices and have and continue to hire additional personnel in this context.

We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.

As an SEC-registered and NASDAQ-listed company, we are required to implement procedures and processes to address public company regulatory requirements and customary practices and have and continue to hire additional personnel in this context.

On April 8, 2021, the Company entered into a unit purchase agreement (the “Purchase Agreement”) with Holtec.

In accordance with the terms and conditions of the Purchase Agreement, on April 9, 2021, the closing date of the Transaction (as defined below), the Company acquired from Holtec the entire 51% interest in Hi-Power that was not already owned by the Company.

Following the consummation of the transaction set forth in the Purchase Agreement (the “Transaction”), Hi-Power became a 100% indirect, wholly-owned subsidiary of the Company and the obligations of the parties under the Hi-Power joint venture terminated.

We believe that the strategic acquisition of Hi-Power will increase our ability to effectively align manufacturing capacity with customer demands while maintaining our focus on human power, inventory management, production yields, quality, and cost.

Further, we believe that the acquisition will also opportunistically allow us to increase our manufacturing capacity in line with new product introduction and future growth expectations.

Key Factors Affecting Operating Results

Commercialization

We began full commercial production of our Eos Gen 2.3 125|500 DC Battery System and delivering first shipments to customers in January 2021.

Our testing of Gen 2.3 batteries produced in limited quantities during 2020 has indicated performance at expected levels pending movement into commercial production.

While we expect the performance to be the same as we further scale commercial production, the manufacturing line for this battery system has not been fully tested.

We continue to ramp up to full commercial production of our Eos Gen 2.3 120|500 DC Battery System.

Our testing of Gen 2.3 batteries has indicated performance at expected levels.

While we expect the performance to be the same as we further scale commercial production, the manufacturing line for this battery system continues to be tested.

If performance of the battery system does not meet our specifications, we may need to reduce the speed of production to ensure we have quality batteries that meet our performance specifications.

Any delay in production could affect the delivery of batteries to our customers.

We are also in the process of getting a third-party product safety certification from Underwriter Laboratories (UL) for the Eos Gen 2.3 125|500 DC Battery System.

While we anticipate receiving UL Certification, the certification has been delayed due to Covid-19 and is expected in the second quarter of 2021.

We have achieved third-party product safety certification from Underwriter Laboratories (UL) for the Eos Gen 2.3 Battery System and have also achieved UL certification at our Hi-Power facility as of August 10, 2021.

Eos products now meet international UL standards for battery storage systems.

Our growth strategy contemplates increasing sales of a commercial battery system through our direct sales team and sales channel partners.

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For some of these potential partners, we have begun discussions ranging from being a reseller of our product to being a joint venture partner in the manufacturing of our battery systems.

We expect to continue expanding the direct sales force in North America, adding direct sales people outside North America, and entering into strategic alliances to advance our sales growth globally.

We expect to continue expanding the direct sales force in North America, adding direct salespeople outside North America, and entering into strategic alliances to advance our sales growth globally.

We are currently experiencing delays in our commercialization rollout due to project delays in connection with permitting procedures as well as establishing grid connections.

These delays may continue to impact the timing of our deliveries and therefore our results of operations.

We continue to invest in production quality and manufacturing yield as we continue to scale our manufacturing abilities to meet current backlog demand.

We expect overall cost reductions, as well as improved and consistent quality to be driven by (1) training and experience in aligning our engineering and manufacturing processes;

(2) improvement in downtime and equipment maintenance;

and (3) finalization of our material sourcing strategy.

Integration of Alliance Partners

We may in the future seek to construct one or more manufacturing facilities, thereby expanding our manufacturing footprint to meet customer demand.

Provided the arrangement with our joint venture partner HI-POWER continues to meet the quality, cost and delivery timelines set by the HI-POWER Board of Directors, HI-POWER would maintain its exclusivity to manufacture the batteries for products sold and delivered in North

If HI-POWER fails to meet required performance metrics, we can establish our own manufacturing for North America either directly or through other partnerships.

For sales outside of North America, we may establish our own manufacturing facilities or may partner with other companies to manufacture our products.

For sales outside of North America, we may partner with other companies to manufacture our products.

The construction of any such facility would require significant capital expenditures and result in significantly increased fixed costs.

If we establish our own manufacturing facility, we have the right to transfer the manufacturing processes, technology and know-how from the HI-POWER JV to any new facility.

We commission and provide for the operation and maintenance of our battery storage systems deployed to date, and for those battery storage systems sold throughout the life of their operations.

We commission battery storage systems and offer operation and maintenance services throughout the life of their operations.

In addition, we also offer extended product warranties to supplement the life of these assets.

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With approximately 5.5 GW of energy storage commissioned globally in 2020, it is expected to increase to 11.9 GW in 2021.

It is expected the global energy storage market will grow at a 53% compound annual growth rate from 6,480 megawatt hours (“MWh”) in 2019 to approximately 83,000 MWh by 2025.

Based on BNEF, the United States would represent over 15% of this global market.

The percentage of renewable energy in total electricity generation in the United States will change from 18% in 2019 to 36% by 2030 and solar energy is estimated to contribute 20% to the total electricity supply.

Favorable regulatory conditions such as the recent court decision validating FERC Order 841, along with state sponsored incentives in New York, California, Massachusetts and other states coupled with the rapid growth of solar PV plus storage applications throughout the United States are expected to grow the utility-scale energy storage market from 172 megawatts (“MW”) / 345 MWh in 2019 to 6,631 MW / 17,563 MWh by 2025.

We estimate 1,250 GW of additional capacity from renewables to be delivered to the grid by 2024, leading to an increased demand for energy storage.

Factors affecting customers to make decision when choosing from different battery storage systems in the market include:

It is expected the global energy storage market will grow at a 33% compound annual growth rate from 10,764 megawatt hours (“MWh”) annual market in 2020 to approximately 174,000 MWh annually by 2030.

Based on BNEF, the United States would represent over 28% of this global cumulative market through 2030.

The percentage of renewable energy in total electricity generation in the United States will change from 20% in 2020 to 33% or more by 2030.

Favorable regulatory conditions such as the recent court decision validating FERC Order 841, along with state-sponsored incentives in New York, California, Massachusetts and other states coupled with the rapid growth of solar-plus-storage applications throughout the United States are expected to grow the energy storage market from 2,473 MWh deployed in 2020 to 43,586 MWh deployed in 2030.

Factors affecting customers to make decisions when choosing from different battery storage systems in the market include:

• product performance and features;

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• customer service and support;

based manufacturing and sourced materials.

Lithium-ion currently has 95% or more market share for the stationary battery industry.

We believe we are the first commercially available battery system that does not have a lithium-ion chemistry.

• U.S.-based manufacturing and sourced materials.

Li-ion currently has 95% or more market share for the stationary battery industry.

We believe we are the first commercially available battery system that does not have a Li-ion chemistry.

We anticipate our battery system using Znyth ™ technology will gradually take some market share of the battery industry.

This considers its unique operating characteristics, including a 100% discharge capability, flattened degradation curve and a 3-12 hour duration, as well as other characteristics related to safety and the cost of operating and maintaining our battery system.

This considers its unique operating characteristics, including a 100% discharge capability, flattened degradation curve and a 3 to 12 hour duration, as well as other characteristics related to safety and the cost of operating and maintaining our battery system.

Our ability to successfully deploy our battery system technology and gain market share in the energy storage market will be important to the growth of our business.

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We have implemented operational and protective measures to ensure the safety, health and welfare of our employees and stakeholders.

This includes implementing work from home policies for non-essential employees, which constitutes 78% of our workforce.

This includes implementing work-from-home policies for nonessential employees, which constitute 78% of our workforce.

We have also ensured that all employees and visitors that visit our office have access to personal protective equipment and we strictly enforce social distancing.

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To date, Covid-19 caused a several week delay in completing the UL certification of the Gen 2.3 product due to the certification company being delayed in completing the in-person witness tests.

In addition, it caused the delay for us to deliver products to one of our customers.

In addition, it caused a delay for us in delivering products to one of our customers.

Other than this, Covid-19 did not have a material impact on our operations or financial condition.

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Components of Results of Operations

As the Merger is accounted for as reverse recapitalization, the operating results included in this discussion reflect the historical operating results of EES prior to the Merger and the combined results of Eos following the closing of the Merger.

The assets and liabilities of the Company are stated at their historical cost.

We have primarily generated revenues from limited sales as we recently launched our next generation energy storage solution Gen 2.3 that is scalable and can be used for a variety of commercial use cases.

As the Merger is accounted for as a reverse recapitalization, the operating results included in this discussion reflect the historical operating results of EES prior to the Merger and the combined results of Eos following the closing of the Merger.

The assets and liabilities of the Company are stated at their historical cost in thousands.

We have generated revenues from limited sales as we recently launched our next-generation energy storage solution Gen 2.3 that is scalable and can be used for a variety of commercial use cases.

We expect revenues to increase as we scale our production to meet demand for the next generation of our product.

Cost of sales

Cost of goods sold

In August 2019, we established a joint venture, Hi-Power, that manufactures the Gen 2.3 battery system on our behalf.

Our cost of sales for the Gen 2.3 battery system includes the purchase of the manufactured system from Hi-Power, the joint venture which produces the Gen 2.3 battery system.

Cost of sales also includes the provision for excess, obsolete and slow-moving inventories, the reserve for losses on firm purchase commitments, cost of products sold directly by the Company to our customers, depreciation of manufacturing plant and equipment, warranty accruals, as well as shipping, logistics and facility related costs.

We expect our cost of sales to exceed revenues in the near term as we continue to scale our business.

Before launching commercial production of our Gen 2.3 battery system, we manufactured our battery systems ourselves and our cost of sales included material, labor, and other direct costs related to the manufacture of energy storage product for sale to customers.

Other items contributing to cost of sales were manufacturing overhead such as engineering expense, equipment maintenance, environmental health and safety, quality and production control and procurement.

Research and development

Research and development expenses consist primarily of salaries and personnel-related costs as well as products, materials, third party services, and depreciation on equipment and facilities used in our research and development process.

Our cost of goods sold for the Gen 2.3 battery system prior to the acquisition of Hi-Power includes the purchase of the manufactured system from Hi-Power, the joint venture which produces the Gen 2.3 battery system.

On April 9, 2021, Hi-Power became our wholly-owned subsidiary after closing of the acquisition of the remaining 51% interest previously held by our joint venture partner.

Therefore, cost of goods sold subsequent to that date primarily consists of direct labor, direct material and the overhead that is directly tied to the production facility.

Other items contributing to cost of goods sold were manufacturing overhead such as engineering expense, equipment maintenance, environmental health and safety, quality and production control and procurement, as well as transportation, logistics, depreciation and facility-related costs.

We expect our cost of goods sold to exceed revenues in the near term as we continue to scale our business.

Research and development expenses

Research and development expenses consist primarily of salaries and personnel-related costs as well as products, materials, third-party services, and depreciation on equipment and facilities used in our research and development process, as well as amortization on intangible assets.

The research and development expense is related to spending on obtaining the UL certificate, improving battery performance and reducing cost on Gen 2.3, as well as designing and developing new generations of our battery storage system.

We expect our research and development costs to increase for the foreseeable future, as we continue to invest in research and development activities that are necessary to achieve our technology and product roadmap goals.

General and administrative expense

General and administrative expenses consist mainly of personnel-related expenses including corporate, executive, finance, and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, and marketing costs.

We expect general, and administrative expenses to increase for the foreseeable future as we scale our headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

Selling, general and administrative expenses

Selling, general and administrative expenses consist mainly of personnel-related expenses including corporate, executive, finance, and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, and marketing costs.

We expect selling, general and administrative expenses to increase for the foreseeable future as we scale our headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

Loss on pre-existing agreement

The company’s pre-existing agreement with Hi-Power was terminated at the time of the acquisition and a loss was recognized in the consolidated statements of operations.

Grant expense (income), net

Grant expense (income), net includes our expenses net of reimbursement related to grants provided by the California Energy Commission (“CEC”).

Sale of tax attributes

The sale of tax attributes represents the benefit recorded from the sale of our State of New Jersey net operating loss carryforwards and R&D tax credits to third parties.

Income (loss) on equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture represents our proportionate share of the income (loss) from our investment in HI-POWER LLC, a joint venture established with Holtec Power, Inc.

Interest expense

Interest expense consists primarily of interest incurred on our convertible notes before the Merger, including the accretion of interest on convertible notes that contained embedded features that permit holders to demand immediate repayment of principal and interest.

All convertible notes were converted to common stock in connection with Merger and no balance outstanding as of December 31, 2020

Interest expense, net

For the year ended December 31, 2021, interest expense primarily consists of interest accretion on notes payable associated with the Hi-Power acquisition as well as interest expense from equipment financing agreement.

For the years ended December 31, 2020, interest expense is mainly from the one-year invoice securitization facility the Company entered into in January 2020.

Interest expense - related party

For the year ended December 31, 2021, interest expense-related party primarily consists of interest expense on the 2021 Convertible Notes issued to Koch Industries, Inc.

("Koch") in July, as well as the amortization of discounts and issuing costs associated with the 2021 Convertible Notes.

For the years ended December 31, 2020 and December 31, 2019, interest expense-related party consists primarily of interest incurred on our Legacy Convertible Notes issued before the Merger, including the accretion of interest on Legacy Convertible Notes that contained embedded features that permit holders to demand immediate repayment of principal and interest.

All Legacy Convertible Notes issued before the Merger were converted to common stock in connection with the Merger.

Remeasurement of equity method investment

Under the equity method, an investment is recorded at historical cost and adjustments are made to the value at the acquisition date based on percentage ownership in the investee.

Our investment in Hi-Power was accounted for under the equity method until we fully acquired the company on April 9, 2021.

We remeasured our previously held 49% ownership interest in Hi-Power at its acquisition date fair value and a loss was recorded for the difference between the fair value and historical cost.

Loss on extinguishment of convertible notes

Loss on extinguishment represent the loss recognized from the modification of Legacy Convertible Notes in April 2019 issued during 2018 and January 2019.

Change in fair value, embedded derivative

The convertible notes issued during 2019 and 2020 contained an embedded derivative feature that could accelerate the repayment of the convertible notes upon a qualified financing event not within our control.

This embedded derivative resulted in the recording of a premium or discount on convertible notes that were recognized in earnings upon their issuance.

In connection with the Merger, all convertible notes were converted to common stock and the embedded derivative fair value was zero as of December 31, 2020.

The 2021 Convertible Notes issued in July 2021 contain a conversion feature which is precluded from being considered indexed to the Company’s own stock.

Therefore, the conversion feature was accounted for as an embedded derivative and classified as a Level 3 financial instrument.

The Legacy Convertible Notes issued during 2019 and 2020 contained an embedded derivative feature that could accelerate the repayment of the Legacy Convertible Notes upon a qualified financing event not within our control.

This embedded derivative resulted in the recording of a premium or discount on Legacy Convertible Notes that were recognized in earnings upon their issuance.

In connection with the Merger, all Legacy Convertible Notes were converted to common stock and the embedded derivative fair value was zero as of December 31, 2020.

These embedded derivatives are remeasured at their fair value each balance sheet date and the changes in their fair value are recognized in the consolidated statements of operations during the period of change.

Change in fair value, warrants liability - related party

The Private Placement Warrants were recognized by the Company as of the Merger Date at fair value of $559 and classified as a liability in the consolidated balance sheets.

Thereafter, the change in fair value is recognized as a derivative gain (loss) each reporting period in the consolidated statements of operations.

The Private Placement Warrants are classified as Level 2 financial instruments.

Change in fair value, Sponsor Earnout Shares

The Sponsor Earnout Shares classified as liability as of the Merger date through the date they were released from restriction and were reclassified into equity on December 16, 2020.

The change in fair value of the Sponsor Earnout Shares is recognized as a loss in the consolidated statements of operations.

The Sponsor Earnout Shares were valued using a Monte Carlo simulation.

Income (loss) from equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture represents our proportionate share of the income (loss) from our investment in Hi-Power, a joint venture established with Holtec Power, Inc.

We acquired Holtec’s 51% interest in Hi-Power in April 2021.

Gain on debt forgiveness

The gain on debt forgiveness represents the benefit recorded from the forgiveness of the PPP loan approved by the SBA under the CARES Act.

Sale of state tax attributes

The sale of state tax attributes represents the benefit recorded from the sale of our State of New Jersey net operating loss carryforwards and R&D tax credits to third parties.

Results of Operations

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Revenue $ 4,598 $ 219 $ 4,379 2,000

Costing and expenses:

Cost of sales 5,509 8,332 (2,823) (34)

Research and development 13,983 11,755 2,228 19

General and administrative expense 18,883 7,710 11,173 145

Cost and expenses:

Cost of goods sold 46,494 5,509 40,985 744

Research and development expenses 19,193 13,593 5,600 41

Selling, general and administrative expenses 42,998 17,621 25,377 144

Loss on pre-existing agreement 30,368 1,262 29,106 2,306

Grant expense (income), net 269 913 (644) (71)

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Other income (expense)

Interest (expense) income, net (604) (115) (489) 425

Interest expense – related party (4,597) (23,706) 19,109 (81)

Remeasurement of equity method investment (7,480) — (7,480) NM

Change in fair value, embedded derivative 17,507 2,092 15,415 737

Change in fair value, warrants liability - related party 1,775 (2,142) 3,917 (183)

Change in fair value, Sponsor Earnout Shares — (8,220) 8,220 (100)

Income (loss) from equity in unconsolidated joint venture 440 127 313 246

Gain on debt forgiveness 1,273 — 1,273 NM

Sale of state tax attributes 2,194 — 2,194 NM

Net loss $ (124,216) $ (70,643) $ (53,573) 76

Basic and diluted loss per share attributable to common shareholders

Basic and Diluted $ (2.36) $ (7.51) $ 5.15 (69 %)

Revenue was $4.6 million and $0.2 million for the year ended December 31, 2021 and 2020, respectively, which related to sales of our energy storage solution for specific customer application.

In 2020, we transitioned our business to launch our next generation of energy storage solutions Gen 2.3 and generated limited revenue during this period.

During 2021, we delivered 47 cubes for 10 different customers.

Cost of goods sold

Cost of goods sold increased by $41.0 million, or 744%, from $5.5 million for the year ended December 31, 2020 to $46.5 million for the year ended December 31, 2021.

Although the Company began shipping our new Gen 2.3 battery storage system to customers in 2021, we have not yet reached the full scale of our manufacturing capacity and are incurring higher manufacturing overhead costs.

In addition, as we refine and improve our manufacturing process for commercial scale to assure stability and quality consistency, we incurred significant cost of scrap.

We expect our overall gross margin percentage to improve as we further refine our manufacturing process, increase our sales, and spread our overhead costs over larger production volumes.

Research and development expenses

Research and development costs increased by $5.6 million, or 41%, from $13.6 million for the year ended December 31, 2020 to $19.2 million for the year ended December 31, 2021.

The primary drivers for the increase were R&D material, employee costs and professional services.

For the year ended December 31, 2021, R&D material increased by $2.1 million.

As we increased our R&D headcount, we increased our employee and stock-based compensation costs by $3.0 million.

Further, we incurred $0.9 million more outside service costs related to consultants, R&D freight charges and waste disposal.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $25.4 million, or 144%, from $17.6 million for the year ended December 31, 2020 to $43.0 million for the year ended December 31, 2021.

Included in this is an increase of payroll and stock-based compensation costs of $11.3 million as we continue to expand our workforce and hire new employees in various departments.

In addition, selling, general, and administrative expenses increased relating to the following:

$1.3 million in debt issuance costs related to the 2021 Convertible Notes and $10.0 million in legal, recruiting and other outside professional services.

Facility costs increased by $1.3 million also due to the expansion of operation and increase of headcount.

Loss on pre-existing agreement

The company incurred a loss on pre-existing agreement of $30.4 million and $1.3 million for the years ended December 31, 2021 and December 31, 2020 from the JV agreement with Holtec, respectively.

As Hi-Power became a wholly-owned subsidiary in April 2021, no loss was recognized for the remainder of the year ended December 31, 2021.

Grant expense (income), net

Grant expense (income), net decreased by $0.6 million, or 71%, from $0.9 million for the year ended December 31, 2020 to $0.3 million for the year ended December 31, 2021.

The decrease results from lower grant income earned for the year ended December 31, 2021 and a lower level of research and development activity related to the Company's grants from the California Energy Commission.

Interest (expense) income, net and Interest expense - related party

Interest (expense) income, net increased by $0.5 million, or 425%, from $0.1 million for the year ended December 31, 2020 to $0.6 million for the year ended December 31, 2021.

This increase is a result of interest accretion on notes payable, which were issued in April 2021 in relation to the Hi-Power acquisition.

Interest expense - related party decreased by $19.1 million, or 81%, from $23.7 million for the year ended December 31, 2020 to $4.6 million for the year ended December 31, 2021.

The interest expense for the year ended December 31, 2020 is related to the Legacy Convertible Notes issued by the company in 2020 and 2019, which were converted to common stock in connection with the Merger.

The interest expense for the year ended December 31, 2021 is related to the 2021 Convertible Notes issued to Koch in July, which include interest accrued as well as the amortization of debt issuance cost and discount.

Remeasurement of equity method investment

For the year ended December 31, 2021, we recognized a $7.5 million loss on our equity method investment in Hi-Power.

This loss on our equity method investment resulted from remeasurement of our 49% ownership in Hi-Power on April 9, 2021 due to our acquisition of the remaining 51% interest previously held by Holtec.

Change in fair value, embedded derivative

The $15.4 million or 737% change, from $2.1 million for the year ended December 31, 2020 to $17.5 million for the year ended December 31, 2021 reflects the change in fair value of the embedded derivative feature on our Legacy Convertible Notes for the year ended December 31, 2020 and 2021 Convertible Notes for the year ended December 31, 2021 that was recorded through earnings.

Change in fair value, warrants liability - related party

The $3.9 million, or 183% change, from $(2.1) million for the year ended December 31, 2020 to $1.8 million for the year ended December 31, 2021 reflected the change in fair value of the Private Placement Warrants classified as liability.

Change in fair value, Sponsor Earnout Shares

The change in fair value of $8.2 million for the year ended December 31, 2020 reflected the change in fair value of the Sponsor Earnout Shares classified as liability as of the Merger Date through the date they were released from restriction and reclassified into equity on December 16, 2020.

Income (loss) from equity in unconsolidated joint venture

The income (loss) from equity in unconsolidated joint venture is attributable to the results of our joint venture Hi-Power.

The joint venture commenced its principal operations related to the manufacturing of our Gen 2.3 battery system in the fourth quarter of 2020, and therefore the joint venture incurred losses for the year ended December 31, 2020.

Hi-Power became a wholly-owned subsidiary on April 9, 2021 and its operational results are consolidated within the Company’s consolidated statements of operations for the year ended December 31, 2021.

Gain on debt forgiveness

We recognized a gain on debt forgiveness of $1.3 million for the year ended December 31, 2021 from the forgiveness of the Paycheck Protection Program loan approved by the SBA under the CARES Act.

Sale of state tax attributes

We recognized income of $2.2 million for the year ended December 31, 2021, related to the sale of our state net operating losses and research and development credit carryforwards under the New Jersey Economic Development Authority Technology Business Tax Certificate Transfer Program.

The Company has been approved for selling more state tax attributes for the year ended December 31, 2019 in 2020, and is still working to find a matching purchaser in the market.

Comparison of Year Ended December 31, 2020 to Year Ended December 31, 2019

($ in thousands) 2020

$ Change % Change

Revenue $ 219 $ 496 $ (277) (56)

Cost and expenses:

Cost of goods sold 5,509 8,332 (2,823) (34)

Research and development expenses 13,593 11,755 1,838 16

Selling, general and administrative expenses 17,621 6,589 11,032 167

Loss on pre-existing agreement 1,262 1,121 141 NM

Grant expense (income), net 913 (469) 1,382 (295)

Operating loss (38,679) (26,832) (11,847) 44

Other income (expense)

Interest (expense) income, net (115) 2 (117) (5850)

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Change in fair value, embedded derivative 2,092 (716) 2,808 (392)

Change in fair value, warrants liability - related party (2,142) — (2,142) NM

Change in fair value, Sponsor Earnout Shares (8,220) — (8,220) NM

Income (loss) on equity in unconsolidated joint venture 127 (178) 305 (171)

Income (loss) from equity in unconsolidated joint venture 127 (178) 305 (171)

Sale of state tax attributes — 4,060 (4,060) (100)

Net loss $ (70,643) $ (79,483) $ 8,840 (11)

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Basic and Diluted $ (7.51) $ (20.22) $ 12.71 (63 %)

Revenue was $0.2 million and $0.5 million for the year ended December 31, 2020 and 2019, respectively, related to sales of our initial energy storage solution for specific customer application.

Revenue was $0.2 million and $0.5 million for the year ended December 31, 2020 and 2019, respectively, related to sales of our energy storage solution for specific customer application.

Revenue decreased between 2019 and 2020 as Eos transitioned its business to launch its next generation of energy storage solution, Gen 2.3, in the second half of 2020.

Cost of Sales

Cost of sales decreased by $2.8 million or 34% from $8.3 million for the year ended December 31, 2019 to $5.5 million for the year ended December 31, 2020.

Cost of goods sold

Cost of goods sold decreased by $2.8 million, or 34%, from $8.3 million for the year ended December 31, 2019 to $5.5 million for the year ended December 31, 2020.

The decrease results primarily from a decrease of $3.0 million for manufacturing costs incurred during the year ended December 31, 2019.

In August 2019 (and as amended in August 2020), the Company entered into an agreement with Holtec Power, Inc (“Holtec”) to form the unconsolidated joint venture, HI-POWER LLC (“Hi-Power” or “JV”).

The JV manufactures the products for all of the Company’s projects in North America.

For the year ended December 31, 2019, $0.9 million impairment loss from manufacturing property and equipment were charged to cost of sales.

For 2020, the Company incurred $1.1 million increases in losses resulting from inventory reserves related to excess and obsolescence, lower of cost or market adjustments and reserves for losses on firm inventory purchase commitment, compared to 2019.

Research and Development

Research and development costs increased by $2.2 million or 19% from $11.8 million for the year ended December 31, 2019 to $14.0 million for the year ended December 31, 2020.

The increase results primarily from $3.9 million increase of expenses for material and supplies as well as leases, related to R&D activities associated with our Gen 2.3 battery system, offset by reductions in payroll expenses and personnel related cost of $0.5 million, $0.4 million in outside service, $0.7 million decrease in impairment loss for R&D property and equipment from 2019 to 2020, and $0.2 million in facility cost.

In August 2019 (and as amended in August 2020), the Company entered into an agreement with Holtec Power, Inc.

(“Holtec”) to form the unconsolidated joint venture, HI-POWER LLC (“Hi-Power” or “JV”).

The JV manufactured the products for all of the Company’s projects in North America.

For the year ended December 31, 2019, $0.9 million in impairment loss from manufacturing property and equipment was charged to cost of goods sold.

For 2020, the Company also incurred $1.1 million of higher losses resulting from inventory reserves related to excess and obsolescence, lower of cost or market adjustments and reserves for losses on firm inventory purchase commitment, compared to 2019.

Research and development expenses

Research and development expenses increased by $1.8 million, or 16%, from $11.8 million for the year ended December 31, 2019 to $13.6 million for the year ended December 31, 2020.

The increase resulted primarily from a $3.5 million higher of expenses for material and supplies as well as higher lease costs, related to R&D activities associated with our Gen 2.3 battery system, partially offset by reductions in payroll expenses and personnel related costs of $0.5 million, $0.4 million in outside service, $0.7 million decrease in impairment loss for R&D property and equipment from 2019 to 2020, and $0.2 million in facility costs.

As the Company transitioned its efforts from research and development activities to focus on the commercial production of its next-generation energy storage solution, it reduced its R&D headcount.

General and Administrative Expenses

General and administrative expenses increased by $11.2 million or 145% from $7.7 million for the year ended December 31, 2019 to $18.9 million for the year ended December 31, 2020.

Included in this is an increase of stock-based compensation for employees and service providers by $ 5 million in 2020.

Vesting of certain stock options and performance-based options was accelerated in accordance with terms of the related award agreement at the Merger.

The increase of General and administrative expenses was further due to a $4.1 million increase in payroll and personnel cost for the year ended December 31, 2020 as well as $2.5 million higher professional fees and marketing expenses related to our public listing efforts.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $11.0 million, or 167%, from $6.6 million for the year ended December 31, 2019 to $17.6 million for the year ended December 31, 2020.

Included in this is an increase of stock-based compensation expenses for employees and service providers of $5.0 million in 2020.

Vesting of certain stock options and performance-based options was accelerated in accordance with terms of the related award agreement of the Merger.

The increase of selling, general and administrative expenses was also due to a $4.1 million increase in payroll and personnel cost for the year ended December 31, 2020 as well as $2.5 million of higher professional fees and marketing expenses related to our public listing efforts.

As the Company is commercializing the Gen 2.3 battery storage solution, as well as since becoming a public company in November 2020, we incurred significantly higher legal, accounting and other expenses.

Loss on pre-existing agreement

The company incurred a loss on pre-existing agreement of $1.3 million and $1.1 million for the years ended December 31, 2020 and December 31, 2019, respectively.

The loss represents the expense recorded under the JV agreement with Holtec.

Grant expense (income), net

Grant expense (income), net increased by $1.4 million, or 295%, from $(0.5) million for the year ended December 31, 2019 to $0.9 million for the year ended December 31, 2020.

The increase results from lower grant income earned for the year ended December 31, 2020 and level of research and development activity related to its grants from the California Energy Commission.

Sale of state tax attributes

We recognized income of $— million and $4.1 million during the years ended December 31, 2020 and 2019, respectively related to the sale of our state net operating losses and research and development credit carryforwards under the New Jersey Economic Development Authority Technology Business Tax Certificate Transfer Program.

The Company has been approved for selling more state tax attributes for the year ended December 31, 2019 in 2020 and is still working to find matching purchaser in the market.

Income (loss) on equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture results from our portion of HI-POWER LLC’s income and loss incurred.

The joint venture was established in August 2019 and incurred initial losses in 2019.

The joint venture turned a profit for the year ended December 31, 2020.

Interest expense — related party

The increase resulted from lower grant income earned for the year ended December 31, 2020 and the level of research and development activity related to its grants from the California Energy Commission.

Interest (expense) income, net and Interest expense - related party

Interest expense, net increased by $0.1 million, or 5,850%, from $— million for the year ended December 31, 2019 to $0.1 million for the year ended December 31, 2020.

This increase is a result of interest from one-year invoice securitization facility the Company entered into in January 2020.

Interest expense - related party decreased by $26.0 million from $49.7 million for the year ended December 31, 2019 to $23.7 million for the year ended December 31, 2020.

Eos’s convertible notes issued during 2019 and 2020 included an embedded feature that permits holders to demand immediate repayment of all outstanding principal and interest resulting in the immediate accretion of interest expense.

During the year ended December 31, 2019, proceeds allocated to the issuance of convertible notes was $19.3 million and Eos recorded $49.7 million of interest expense related to these convertible notes that include a demand feature that could require repayment of principal and interest during 2019.

During the twelve months ended December 31, 2020, proceeds allocated to the issuance of convertible notes was $9.0 million, and Eos recorded $23.7 million of interest expense related to these convertible notes.

Eos’s convertible notes issued during 2019 and 2020 included an embedded feature permitting holders to demand immediate repayment of all outstanding principal and interest resulting in the immediate accretion of interest expense.

During the year ended December 31, 2019, proceeds allocated to the issuance of convertible notes were $19.3 million and Eos recorded $49.7 million of interest expense related to these convertible notes that included a demand feature that could require repayment of principal and interest during 2019.

During the year ended December 31, 2020, proceeds allocated to the issuance of convertible notes were $9.0 million, and Eos recorded $23.7 million of interest expense related to these convertible notes.

Loss on extinguishment of convertible notes — related party

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Change in fair value, embedded derivative

The change in fair value of $2.1 million and $(0.7) for the years ended December 31, 2020 and December 31, 2019 reflect the change in fair value of the embedded derivative feature on our convertible notes that was recorded through earnings.

The change in fair value of $2.1 million and $(0.7) million for the years ended December 31, 2020 and December 31, 2019, respectively, reflected the change in fair value of the embedded derivative feature on our convertible notes that was recorded through earnings.

Change in fair value, warrants liability - related party

The change in fair value of $(2.1) million for the year ended December 31, 2020 reflected the change in fair value of the Private Placement Warrants classified as liability as of the Merger Date through December 31, 2020.

Change in fair value, Sponsor Earnout Shares

The change in fair value of $(8.1) million for the years ended December 31, 2020 reflects the change in fair value of the Sponsor Earnout Shares classified as liability as of the Merger date through the date they were released from restriction and reclassified into equity on December 16, 2020.

The change in fair value of $(8.2) million for the year ended December 31, 2020 reflected the change in fair value of the Sponsor Earnout Shares classified as liability as of the Merger Date through the date they were released from restriction and reclassified into equity on December 16, 2020.

Income (loss) from equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture results from our portion of HI-POWER LLC’s income and loss incurred.

The joint venture was established in August 2019 and incurred initial losses in 2019.

The joint venture turned a profit for the year ended December 31, 2020.

Sale of state tax attributes

We recognized income of $— million and $4.1 million during the years ended December 31, 2020 and 2019, respectively, related to the sale of our state net operating losses and research and development credit carryforwards under the New Jersey Economic Development Authority Technology Business Tax Certificate Transfer Program.

Liquidity and Capital Resources

The Company is in the early commercialization stage of its lifecycle and, as such, has limited revenue generating activities.

Accordingly, the Company has incurred significant recurring losses, and net operating cash outflows from operations since inception, which is attributable to its higher operating costs relative to its revenue base.

The Company continues to invest heavily in research and development to optimize our battery technology system not only for the current generation product but for future generation products and services.

In addition, we continue to invest in capital to expand manufacturing capacity to meet current customer commitments and fulfill orders from current backlog and anticipated future orders.

We are also investing in sales and marketing activities and other costs associated with implementing the infrastructure to support our growth strategy.

While management and the Company’s Board of Directors anticipate the Company will eventually reach a scale of profitability through the sale of battery energy storage systems and other complimentary products and services, the Company believes the current stage of its lifecycle justifies continued investment in the development and launch of product at the expense of short-term profitability.

Accordingly, we expect to continue to incur significant losses and net operating cash outflows from operations for the foreseeable future.

As of December 31, 2021, based on the factors described above, management concluded that there was substantial doubt about the Company's ability to continue to operate as a going concern for the 12 months following the issuance of our consolidated financial statements.

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to access additional sources of capital, including, but not limited to, equity and/or debt financings, licensing revenue, and government loans or grants.

For example, the Company has passed Part I of the application under the U.S.

Department of Energy’s Loan Guarantee Solicitation for Applications for Renewable Energy Projects and Efficient Energy Projects (the “DOE Loan Program”).

There can be no assurance that we will successfully complete Part II of the DOE Loan Program or otherwise be able to obtain this new funding on terms acceptable to us, on a timely basis, or at all.

Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including but not limited to delaying, reducing, terminating or eliminating planned research and development and manufacturing activities, to conserve our cash and cash equivalents.

Our anticipated expenditure levels may change if we adjust our current operating plan.

Such actions could delay development and manufacturing timelines and have a material adverse effect on our business, results of operations, financial condition and market valuation.

Therefore, we will need to secure additional capital or financing and/or delay, defer or reduce our cash expenditures by later in the second half of 2022 if adequate funding is not secured.

There can be no assurance that we will be able to obtain additional capital or financing, including DOE Loan Program funding, on terms acceptable to us, on a timely basis or at all.

As of December 31, 2021, we had cash and cash equivalents of $104.8 million.

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In November 2020, we received $142.3 million in connection with the consummation of the Merger and the Private Placement upon the Closing.

In July 2021, we received $100.0 million in proceeds from the issuance of 2021 Convertible Notes to Koch (refer to Note 15 in our consolidated financial statements).

In September 2021, the Company entered into a $25.0 million Equipment Financing Agreement with Trinity, the proceeds of which will be used to acquire certain equipment and other property, subject to Trinity's approval.

As of December 31, 2021, the Company drew $7.0 million from the financing agreement.

We expect capital expenditures and working capital requirements to increase as we seek to execute on our growth strategy.

We currently anticipate that total capital expenditures for fiscal 2021 will be approximately $35 to $40 million which will be used primarily for additional equipment, automation, and implementation to increase our capacity and efficiency to meet our customer’s needs.

We currently anticipate that total capital expenditures for fiscal 2022 will be approximately $25 million to $35 million which will be used primarily for additional equipment, automation, and implementation to increase our capacity and efficiency to meet our customer’s needs.

Our capital expenditure and working capital requirements in the foreseeable future may change depending on many factors, including but not limited to the overall performance of existing equipment, our sales pipeline, our operating results and any adjustments in our operating plan needed in response to industry conditions, competition or unexpected events.

We believe that our existing cash, together with cash from operations, will be sufficient to meet our capital expenditure and working capital requirements for the foreseeable future.

The following table summarizes our cash flows from operating, investing and financing activities for the periods presented.

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Cash flows from operating activities:

Our cash flows used in operating activities to date have been primarily comprised of costs related to research and development, manufacturing of our initial energy storage products, and other general and administrative activities.

As we continue and expand commercial production, we expect our expenses related to personnel, manufacturing, research and development and general and administrative activities to increase.

Net cash used in operating activities was $26.6 million for the year ended December 31, 2020 which is comprised of our net loss of $68.8 million, adjusted for non-cash interest expense on convertible debt of $23.7 million and other non-cash charges that includes stock-based compensation of $5.1 million, depreciation and amortization of $1.6 million, change in fair value of embedded derivative of $(2.1) million, change in fair value of Sponsor Earnout Shares of $8.1 million, provision for firm purchase commitment of $1.6 million.

The net cash flows inflow from to changes in operating assets and liabilities was $4.4 million for year ended December 31, 2020,

primarily driven by a decrease in accounts receivable from the sale of state tax attributes of $4.1 million and an increase in accounts payable and accrued expenses of $3.0 million, offset by the increase of prepaid expense and other expense of $1.6 million.

Net cash used in operating activities was $23.8 million for the year ended December 31, 2019, which is comprised of our net loss of $79.5 million, adjusted for non-cash interest expense on convertible debt of $49.7 million and other non-cash charges that includes depreciation and amortization of $2.1 million, change in fair value of embedded derivative of $0.7 million, impairment of property and equipment of $1.6 million loss on extinguishment of convertible notes — related party of $6.1 million and other non-cash charges of $0.2 million.

The net cash outflow from changes in operating assets and liabilities was $4.9 million for the year ended December 31, 2019 primarily related to an increase in accounts receivable from the sale of state tax attributes of $4.1 million and a decrease in accounts payable and accrued expenses of $1.1 million.

Our cash flows used in operating activities to date have been primarily composed of costs related to research and development, manufacturing of our initial energy storage products, and other selling, general and administrative activities.

As we continue to expand commercial production, we expect our expenses related to personnel, manufacturing, research and development and selling, general and administrative activities to increase.

Net cash used in operating activities was $116.1 million for the year ended December 31, 2021, which was composed of our net loss of $124.2 million, adjusted for non-cash interest expense on convertible debt of $1.5 million and other non-cash charges that include stock-based compensation of $15.1 million, depreciation and amortization of $2.6 million, debt cost amortization of $1.4 million, change in fair value of embedded derivative of $17.5 million, change in fair value of warrants liability - related party of $1.8 million, and loss from remeasurement of equity investment of $7.5 million.

The net cash outflow from changes in operating assets and liabilities was $2.9 million for the year ended December 31, 2021, primarily driven by an increase in notes payable of $18.7 million and an increase in accounts payable and accrued expenses of $7.1 million, offset by an increase in inventory of $10.1 million, a decrease of provision for firm purchase commitment of $5.5 million, an increase in accounts receivable of $1.9 million, and an increase in vendor deposits of $7.4 million.

The cash used in operating activities includes $15.1 million of payments made to Holtec in connection with the termination of the JV agreements.

In addition, a significant amount of cash was spent on materials to refine and improve our manufacturing process as well as research and development activities to improve quality consistency.

Net cash used in operating activities was $26.6 million for the year ended December 31, 2020, which was composed of our net loss of $70.6 million, adjusted for non-cash interest expense on convertible debt of $23.7 million and other non-cash charges that include stock-based compensation of $5.1 million, depreciation and amortization of $1.6 million, change in fair value of embedded derivative of $2.1 million, change in fair value of Sponsor Earnout Shares of $8.2 million, and change in fair value of warrants liability - related party of $2.1 million.

The net cash inflow from changes in operating assets and liabilities was $5.6 million for the year ended December 31, 2020, primarily driven by a decrease in receivable from the sale of state tax attributes of $4.1 million and an increase in accounts payable and accrued expenses of $2.6 million, partially offset by the increase of prepaid expense of $2.0 million.

Net cash used in operating activities was $23.8 million for the year ended December 31, 2019, which was composed of our net loss of $79.5 million, adjusted for non-cash interest expense on convertible debt of $49.7 million and other non-cash charges that include depreciation and amortization of $2.1 million, change in fair value of embedded derivative of $0.7 million, impairment of property and equipment of $1.6 million, loss on extinguishment of convertible notes — related party of $6.1 million.

The net cash outflow from changes in operating assets and liabilities was $4.9 million for the year ended December 31, 2019 primarily related to an increase in receivable from the sale of state tax attributes of $4.1 million and a decrease in accounts payable and accrued expenses of $1.1 million.

Cash flows from investing activities:

Our cash flows from investing activities have been comprised primarily of purchases of property and equipment of $3.6 million and $2.3 million for the year ended December 31, 2020 and December 31, 2019, respectively, as well as investments in joint venture.

In August 2019, we began to make investments in the HI-POWER joint venture, which has the exclusive rights to manufacture our battery storage systems in North America, subject to meeting certain performance targets.

Our cash flows used in investing activities for the year ended December 31, 2021 are primarily composed of purchases of property and equipment of $15.6 million, investment in joint venture of $4.0 million, notes receivable advanced to customer of $4.9 million, notes receivable proceeds of $1.3 million, and payments made for the Hi-Power acquisition of $0.2 million.

Our cash flows used in investing activities are composed primarily of purchases of property and equipment of $3.6 million and $2.3 million for the years ended December 31, 2020 and December 31, 2019, respectively, as well as investments in our joint venture.

In August 2019, we began to make investments in the Hi-Power joint venture, which provided us the exclusive rights to manufacture our battery storage systems in North America, subject to meeting certain performance targets.

Our initial financial commitment to this joint venture was $4.1 million in the form of cash and special purpose manufacturing equipment.

The special purpose manufacturing equipment continues to be classified as property and equipment on our balance sheet until it is fully commissioned and operational and has produced the first ten megawatts per hour of commercial product.

During the latter half of 2019, the Company made cash contributions of $0.6 million to Hi-Power.

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Cash flows from financing activities:

Through December 31, 2020, we have raised capital from the Merger with BMRG and financed our operations through the sale of common and preferred units and convertible notes.

Net cash provided by financing activities was $154.2 million in the year ended December 31, 2020 and included $142.3 proceeds from the Merger with BMRG, with $10.3 million paid for direct incremental transaction cost, and proceeds from a Paycheck Protection Program loan of $1.3 million.

Prior to the Merger, the Company additionally received $11.8 million from issuance of contingent redeemable preferred units and $9.0 million from issuance of convertible notes .

Net cash provided by financing activities was $123.3 million in the year ended December 31, 2021, primarily due to the proceeds received from issuance of 2021 Convertible Notes of $100.0 million, equipment financing of $7.0 million, warrants exercised of $20.1 million, and options exercised of $1.1 million, partially offset by debt issuance costs associated with the 2021 Convertible Notes and the Equipment Financing facility of $4.4 million.

Net cash provided by financing activities was $154.2 million for the year ended December 31, 2020 and included $142.3 million in proceeds from the Merger with BMRG, with $10.3 million paid for direct incremental transaction cost, and proceeds from a Paycheck Protection Program loan of $1.3 million.

Prior to the Merger, the Company also received $11.8 million from issuance of contingent redeemable preferred units and $9.0 million from issuance of convertible notes.

Net cash provided by financing activities was $22.1 million for the year ended December 31, 2019 and included proceeds from the issuance of convertible notes payable — related party of $21.1 million and proceeds of $2.0 million attributable to the issuance of contingently redeemable preferred units.

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The following table sets forth our estimates of future payments at December 31, 2021.

See Note 7 —Investment in Unconsolidated Joint Venture, Note 8 — Commitment and contingencies and Note 13 — Long term debt for a further description of these obligations and commitments.

See Note 10, Note 15, Note 16, Note 17, and Note 21 of the consolidated financial statements for further information of these obligations and commitments.

($ in thousands) Total Less than 1 year 1-3 years 3-5 years More than 5 years

Paycheck Protection Program Loan $ 1,258 978 280 — —

2021 Convertible Notes, including interest 1 $ 127,186 2,650 10,600 113,936 —

Notes Payable, including interest $ 20,000 5,000 10,000 5,000 —

Operating and capital lease $ 4,600 1,222 1,782 1,596 —

Firm purchase commitment $ 5,370 5,370 — — —

Other loans $ 93 93 — —

Equipment financing, including interest $ 8,042 2,453 4,906 683 —

Total $ 165,198 16,695 27,288 121,215 —

At December 31, 2020, we had an agreement to provide a loan commitment to one of our customer for $1 million.

$0.1 million were drawn on that commitment as of December 31, 2020.

Off-Balance Sheet Arrangements

On January 10, 2020, the Company entered into a one-year invoice securitization facility (the “LSQ Invoice Purchase Agreement Facility”) pursuant to (i) an Invoice Purchase Agreement (the “IPA”), as sellers, (the “Seller”), and LSQ Funding Group, L.C.

(“LSQ”), as purchaser (the “Purchaser”).

Under the terms of the IPA, the Company contributes certain invoices, related collections and security interests (collectively, the “Invoices”) to LSQ on a revolving basis.

Under the terms of the IPA, the Company issues to the Purchasers an ownership interest in the Invoices for up to $3.5 million in cash proceeds.

This facility was terminated in September 2020.

During the year ended December 31, 2020 , the Company sold $4.1 million of receivables from sales of state tax attributes and $1.5 million of grant receivables.

Costs incurred on the sale was $0.1 million for the year ended December 31, 2020.

These amounts are recorded in interest expense in the statements of operations.

As of December 31, 2020 and December 31, 2019, we did not have any off balance sheet receivables outstanding nor did we incur any costs associated with off-balance sheet arrangements.

We did not have any other material off-balance sheet arrangements as of December 31, 2020 and December 31, 2019.

Critical Accounting Policies and Use of Estimates

Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with U.S.

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We regularly reevaluate our assumptions, judgments, and estimates.

Our significant accounting policies are described in Note 1, “Nature of Operations and Summary of Significant Accounting Policies,” in the Notes to the audited financial statements.

Our most significant accounting policies, which reflect significant management estimates and judgment in determining amounts reported in our audited financial statements were as follows:

Principles of Consolidation and Reverse Acquisition

The Merger was accounted for as a reverse recapitalization in accordance with ASC 805 Business combination.

Under this method of accounting, BMRG has been treated as acquiree and EES is treated as acquirer for financial reporting purposes.

This determination was primarily based on current shareholders of EES having a relative majority of the voting power of the combined entity, the operations of EES prior to the acquisition comprising the only ongoing operations of the combined entity, and senior management of EES comprising the majority of the senior management of the combined entity.

Accordingly, for accounting purposes, the financial statements of the combined entity represent a continuation of the financial statements of EES with the acquisition being treated as the equivalent of EES issuing stock for the net assets of BMRG, accompanied by a recapitalization.

The net assets of BMRG were recognized at historical cost as of the date of the Merger, with no goodwill or other intangible assets recorded.

Inventory Valuation

Inventory is stated at the lower of cost or net realizable value.

The Company capitalizes inventory costs when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized;

otherwise, such costs are expensed as research and development.

Inventory is evaluated for impairment periodically for excess, obsolescence and for instances where cost of the inventory is in excess of its estimated net realizable value.

In estimating a provision for excess, obsolete and slow-moving inventory, we consider such factors as competitor offerings, market conditions and the life cycle of the product.

If inventory on-hand is determined to be excess, obsolete or has a carrying amount that exceeds its net realizable value, we will reduce the carrying amount to its estimated net realizable value.

In preparation with the launch of our next generation energy storage solution, we will begin building inventory levels based on our forecast for demand.

A significant decrease in demand could result in an increase in the amount of excess inventory on hand, which could lead to additional charges for excess and obsolete inventory.

The Company assesses whether losses on purchase commitments should be accrued.

Losses that are expected to arise from firm, non-cancellable, commitments for future purchases are recognized unless recoverable.

The recognized loss on purchase commitments is reduced as inventory items are received and the remaining purchase commitment decreases.

Fair Value Measurement

The Company estimated the original fair value of the contingently issuable common stock (refer to Note 2 of the financial statement) that is contingently issuable based on a Monte Carlo Stimulation pricing model considering stock price of the Company, risk free rate of 0.41% and volatility of 60% utilizing a peer group based on five year term.

The fair values of the Sponsor Earnout Shares on the Closing date were estimated using a Monte Carlo simulation based on stock price of the Company, a risk free rate of 0.41% and volatility of 60% utilizing a peer group based on a five year term.

The fair value of the first tranche of Sponsor Earnout Shares that vested on December 16, 2020 was based on the closing share price of the Company’s publicly traded stock on that date.

Stock-based compensation is estimated at the grant date based on the fair value of the awards and is recognized as expense over the service period.

We estimate the fair value of stock options and stock purchase warrants using the Black-Scholes option pricing model.

Refer to “ Fair Value of Financial Instruments ” in Note 1 in our “Notes to the Consolidated Financial Statements” for additional information about fair value measurements.

Convertible Notes Payable

Product Warranty

The Company generally provides a standard warranty for a period of two years and an optional 20-year degradation guarantee, commencing upon commissioning.

We also provide extended warranties, which are identified as separate performance obligations in the Company's contracts with customers.

We accrue warranty reserves at the time of recording the sale.

Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors including actual claim data to date, results of lab testing, factory quality data, field monitoring, and data on industry averages for similar products.

Due to limited claim experience, we have since commercialization, and the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our consolidated financial statements.

If actual product failure rates or the frequency or severity of reported claims differ from our estimates, we may be required to revise our estimated warranty liability.

We will also update actual warranty experience to determine warranty reserves as such experience becomes available.

We review our reserves at least quarterly, seeking to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed.

Initial warranty data can be limited at the early stage in the commercialization of our products and, the adjustments that we record may be material.

Thus, it is likely that as we sell additional battery system, we will acquire additional information on the projected costs to repair or replace items under warranty and may need to make additional adjustments.

As of December 31, 2021 and 2020, we had $2,112 and $— in warranty reserves, respectively.

Adjustments to warranty reserves are recorded in cost of goods sold.

Contingently issuable common stock and Sponsor Earnout Shares

The Company estimated the original fair value of the contingently issuable common stock on the Merger date (refer to Note 2 of the consolidated financial statements) that is contingently issuable as well as the Sponsor Earnout Shares on the Closing date based on a Monte Carlo simulation pricing model.

The assumption for the Monto Carlo Simulation include risk-free interest rate, and stock price volatility utilizing a peer group based on a five-year term.

Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period.

1 The methods of interest payments for the 2021 Convertible Notes are based on the Company's current intentions, which are subject to change.

As of the date of this Annual Report on Form 10-K, the Company intends to repay the contractual interest due on June 30, 2022 in-kind and the remaining interest in cash.

2021 Convertible Notes - Related Party

The 2021 Convertible Notes were accounted for in accordance with FASB ASC 470, Debt and ASC 815, Derivatives and Hedging .

The 2021 Convertible Notes contain an interest make-whole payment provision that can be triggered only in connection with an induced conversion.

Because this adjustment is calculated in a manner in which the make-whole payment may exceed the time value of the embedded conversion feature, the embedded conversion feature is precluded from being considered indexed to the Company’s own stock, and therefore, does not qualify for any of the available scope exceptions to derivative accounting.

We were, therefore, required to account for the embedded conversion feature separately as a derivative instrument.

The Company estimates the fair value of the embedded conversion feature, using a binomial lattice model at inception and on subsequent valuation dates.

This model incorporates inputs such as the stock price of the Company, dividend yield, risk-free interest rate, the effective debt yield and expected volatility.

Certain inputs involve unobservable inputs and are classified as level 3 of the fair value hierarchy.

The sensitivity of the fair value calculation to these methods, assumptions, and estimates included could create materially different results under different conditions or using different assumptions.

Legacy Convertible Notes - Related Party

We record conventional convertible debt in accordance with ASC 470-20, Debt with Conversion and Other Options .

Conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash.

Convertible instruments that are not bifurcated as a derivative, and not accounted for as a separate equity component under the cash conversion guidance are evaluated to determine whether their conversion prices create an embedded beneficial conversion feature at inception, or may become beneficial in the future due to potential adjustments.

A beneficial conversion feature is deemed to be a nondetachable conversion feature that is “in-the-money” at the commitment date.

The in-the-money portion, also known as the intrinsic value of the option, is recorded in equity, with an offsetting discount to the carrying amount of convertible debt to which it is attached.

The intrinsic value of the beneficial conversion feature within its convertible debt, including amortization of the debt discount recorded in connection with a beneficial conversion feature, was not material to our audited financial statements.

The convertible notes issued during 2019 and 2020 contained an embedded derivative feature that could accelerate the repayment of the convertible notes upon either a qualified financing event or the note holders’ put exercise.

For the year ended December 31, 2020 , embedded derivative assets with initial fair value of $411 was recognized.

Embedded derivative assets with initial fair value of $181 and embedded derivative liabilities with initial fair value of $1,145 were recognized during 2019.

As of December 31, 2019, the embedded derivatives were classified as current liabilities on the consolidated balance sheet and had fair values of $1,681.

The embedded derivatives were fair valued through the Merger date.

During the year ended December 31, 2020 a gain from the change in fair value of embedded derivative of $2,092 was recognized, while for the year ended December 31, 2019 a loss of $716 was recorded.

The fair value of the embedded derivative was zero as of December 31, 2020 as a result of the conversion of the notes in connection with the Merger.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable to a smaller reporting company

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Please see our Financial Statements beginning on page F-1 of this Annual Report

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The Legacy Convertible Notes issued contained an embedded derivative feature that could accelerate the repayment of the convertible notes upon either a qualified financing event or the note holders’ put exercise.

The fair values of the derivative liabilities were determined using probability-weighted average of cash flows approach that incorporated a range of inputs that are both observable and unobservable in nature.

The unobservable inputs used in the initial and subsequent fair value measurements for the embedded derivative predominantly relate to cash flow projection, a risk-adjusted discount rate and the probabilities of future events occurring and the date on which they may occur.

The probabilities are determined based on all relevant internal and external information available and are reviewed and reassessed at each reporting date.

The assumptions underlying the valuations represent the Company best estimates, which involve inherent uncertainties and the application of management’s judgment.

As a result, if the Company used significantly different assumptions or estimates, its interest expense for prior periods could have been materially different.

Business Combinations

We account for business combinations using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective fair values.

Identifiable assets acquired and liabilities assumed are recognized and measured as of the acquisition date at fair value.

Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities.

The Company used information available to make fair value determinations and engaged independent valuation specialists to assist management in the fair value determination for the acquisition of Hi-Power.

The fair value is determined using the income approach, cost approach and/or market approach.

Determining the fair value of purchase consideration, assets acquired, liabilities assumed, as well as the Joint Venture agreement the Company terminated in connection with the acquisition requires management’s judgment.

The fair value determination of the Joint Venture agreement and of the consideration transferred in exchange for the Hi-Power business involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected cash flows and the discount rate.

The Company believes the estimates applied to be based on reasonable assumptions, but which are inherently uncertain.

As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis