What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-04 compared with 2023-02-28 · 181 added, 182 removed, 130 unchanged (74% of the section changed)

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Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

The Company was originally incorporated in Delaware on June 3, 2019 as a special purpose acquisition company under the name B.

Riley Principal Merger Corp.

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

Upon the closing of a business combination with Eos Energy Storage, LLC on November 16, 2020 (the "Merger”), the Company changed its name to “Eos Energy Enterprises, Inc.” The Company’s common shares started trading under the ticker NASDAQ:

EOSE on November 16, 2020.

On April 9, 2021, the Company acquired, from Holtec, the 51% interest in Hi-Power that was not already owned by the Company.

Following the consummation of 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.

The Company designs, develops, manufactures, and markets innovative zinc-based energy storage solutions for utility-scale, microgrid, and commercial & industrial (“C&I”) applications.

The Company has developed a broad range of intellectual property with multiple patents covering unique battery chemistry, mechanical product design, energy block configuration and a software operating system (Battery Management System).

The Battery Management System (“BMS”) software uses proprietary Eos-developed algorithms and includes ambient and battery temperature sensors, as well as voltage and electric current sensors for the electrical strings and the system.

The Company focuses on designing, developing, producing and selling safe, reliable, long-lasting, low-cost turn-key alternating current (“AC”) integrated systems using Eos’ direct current (“DC”) Battery Energy Storage System (“BESS”).

The Company’s primary applications focus on integrating battery storage solutions with:

(1) renewable energy systems that are connected to the utility power grid;

(2) renewable energy systems that are not connected to the utility power grid;

(3) storage systems utilized to relieve congestion;

and (4) storage systems to assist C&I customers in reducing their peak energy usage or participating in the utilities ancillary and demand response markets.

The Company has a manufacturing facility in Turtle Creek, Pennsylvania to produce DC energy blocks with an integrated BMS.

The Company’s primary market is North America with opportunistic growth opportunities in Europe, Oceania, Africa, and Asia.

The Company has one operating and reportable segment.

The Company offers an innovative Znyth™ technology battery energy storage system ("BESS") designed to provide the operating flexibility to manage increased grid complexity and price volatility resulting from an overall increase in renewable energy generation and a congested grid coming from an increase in electricity demand growth.

The Company’s BESS is a validated chemistry with accessible non-precious earth components in a durable design that is intended to deliver results in even the most extreme temperatures and conditions.

The system is designed to be safe, flexible, scalable, sustainable and manufactured in the United States, using raw materials primarily sourced in the United States.

We believe the Company’s flagship Gen 2.3™ battery module and its newest Z3™ battery module are the core of its innovative systems.

The Z3 battery module is the only US designed and manufactured battery module that today provide utilities, independent power producers, renewables developers, and C&I customers with an alternative to lithium-ion and lead-acid monopolar batteries for critical 3- to 12-hour discharge duration applications.

We believe the Z3 battery will transform how utility, industrial, and commercial customers store power.

In addition to its BESS, the Company currently offers:

(a) a BMS which provides a remote asset monitoring capability and service to track the performance and health of the Company’s BESS and to proactively identify future system performance issues through predictive analytics;

(b) project management services to ensure the process of implementing the Company’s BESS are coordinated in conjunction with the customer’s overall project plans;

(c) commissioning services that ensure the customer’s installation of the BESS meets the performance expected by the customer;

and (d) long-term maintenance plans to maintain optimal operating performance of the Company’s systems .

The Company’s growth strategy contemplates increasing sales of battery energy storage systems and related software and services through a direct sales team and sales channel partners.

The Company’s current and target customers include utilities, project developers, independent power producers and commercial and industrial companies.

Business Trends

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

The Company is currently operating in a period of global economic and geopolitical uncertainty, which has been exacerbated by the ongoing military conflict between Russia and Ukraine.

Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, an increase in cybersecurity incidents as well as additional supply chain disruptions.

The Company’s business has not been materially impacted by the ongoing military conflict in Ukraine as of the date of this filing, however, we continue to monitor these developments.

See Part 1, Item 1A - Risk Factors section for further discussion.

The novel coronavirus (“COVID-19”) outbreak has had an adverse effect on the Company's workforce and operations, as well as the operations of its customers, distributors, suppliers and contractors.

Management continues to monitor for a potential resurgence of COVID-19 and remains focused on maintaining protective measures to ensure the safety, health and welfare of the Company’s workforce.

A potential resurgence of COVID-19 may impact the Company’s financial condition and results of operations in the future.

Refer to Part 1, Item 1A - Risk Factors section for further discussion.

Inflation and cost factors - During 2023, the effects of the Federal Reserve’s interest rate hikes in 2022 and in the first half of 2023 had an impact on reducing inflation.

This eased many investor concerns and worked to stabilize the cost of purchasing supplies and raw materials for companies.

Department of Energy's (DOE) Renewable Energy Project and Efficient Energy Loan Program

In August 2023, the DOE issued a Conditional Commitment Letter to the Company for a loan of an aggregate principal amount of up to $398.6 million through the DOE’s Clean Energy Financing Program.

The Conditional Commitment Letter follows an extensive technical, financial and commercial due diligence process by the DOE.

If finalized, the loan is expected to fund 80% of eligible costs of the Company’s planned manufacturing expansion in Turtle Creek, Pennsylvania.

Eligible costs include capital expenditures and other costs associated with ramping up the manufacturing lines and facility.

Eligible cost include start-up and shakedown costs, as well as certain material and labor costs before efficiencies are met.

The Company is working to finalize the loan documents with the DOE and to fulfill certain conditions precedent.

Eos is spending eligible costs now that would be reimbursable at first funding.

Inflation Reduction Act of 2022 (“IRA”)

The IRA features significant economic incentives for both energy storage customers and manufacturers for projects placed in service after December 31, 2022.

One of the most important features of the IRA legislation is that it offers a 10-year term tax credit, whereas, historically similar industrial credits have been shorter in duration.

Customers placing new energy storage facilities in service after this date may be allowed to claim at least a thirty percent investment tax credit (“ITC”) under certain conditions.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law.

The IRA has significant economic incentives for both energy storage customers and manufacturers for projects placed in service after December 31, 2022.

One of the most important features of the IRA is that it offers a 10-year term tax credit, whereas historically similar industrial credits have been shorter in duration.

Customers placing new energy storage facilities in service will be allowed to claim at least a thirty percent investment tax credit (“ITC”) under certain conditions.

The IRA also offers an extra ten percent credit if the project is in an “energy community” and another ten percent credit if the project satisfies domestic content requirements, which will be set forth when the implementing regulations are finalized.

The ten percent bonus for domestic content could represent a strategic advantage for the Company resulting from our near-sourcing and Made in America strategy, and we currently anticipate that projects utilizing Eos batteries will qualify for the bonus.

Starting in 2023, there are also meaningful PTC that can be claimed on battery components manufactured in the US and sold to customers, which could apply to the Company, including credits for ten percent of the cost incurred to make electrode active materials, $35 per kWh of capacity of battery cells, and $10 per kWh of capacity of battery modules.

These credits are cumulative, meaning the Company expects to be able to claim the tax credit amount for each component.

The IRA directs the Internal Revenue Service to pay manufacturers the cash value, also known as direct pay, of PTCs for making battery components, and therefore, these credits may be a new source of cash flow for Eos.

The direct pay option is valid for up to five tax years, after which any such tax credits can be sold to other companies for cash.

The ten percent bonus for domestic content could represent a strategic advantage for the Company resulting from the Company’s near-sourcing and Made in America strategy, and we currently anticipate that projects utilizing Eos batteries will qualify for the bonus.

Starting in 2023, there are Production Tax Credits under Internal Revenue Code 45X (“PTC”), that can be claimed on battery components manufactured in the U.S.

and sold to U.S.

or foreign customers.

These tax credits available to manufacturers include a credit for ten percent of the cost incurred to make electrode active materials in addition to credits of $35 per kWh of capacity of battery cells and $10 per kWh of capacity of battery modules.

These credits are cumulative, meaning that companies will be able to claim each of the available tax credits based on the battery components produced and sold through 2029, after which the PTC will begin to gradually phase down through 2032.

In June 2023, the IRS issued temporary and proposed regulations related to applicable tax credit transferability and direct pay provisions of the Inflation Reduction Act.

The Company has reviewed these regulations and believes they do not have a material impact on the financial statements.

These credits are expected to be a new source of cash flow for Eos in the future.

Company Highlights

• In November 2022, the Company announced an order for a 35 MWh energy storage system capable of 10-hour discharge duration.

The order, worth $13.5 million, is funded by a grant through the CEC’s LDES Program as part of a project being carried out by Indian Energy, a 100 percent Native American-owned business, to create a first-of-its-kind resilient clean energy microgrid.

• In September 2022, the Company announced it was invited to the due diligence stage of the U.S.

Department of Energy’s (“DOE”) Renewable Energy and Efficient Energy Loan Program.

The DOE Loan Programs Office’s (“LPO”) invitation to Eos to enter into full due diligence represents an important progression in the LPO’s evaluation of Eos’ loan application.

This stage includes LPO performing its due diligence of Eos’ project to expand manufacturing to support at least 3GWh of production capacity.

During this stage, the Company and LPO are working to negotiate a term sheet setting out the principal terms and conditions of the loan.

However, the DOE invitation to the due diligence stage is not an assurance that the DOE will offer a conditional commitment, or that the Company will secure a loan under the DOE Loan Program.

• In September 2022, the Company announced that Jeff Bornstein, former Chief Financial Officer and Vice Chairman of GE and Managing Partner at Generation Capital Partners and Whipstick Ventures, joined the Company’s Board of Directors.

• In 2022, the Company entered into a $100 million Senior Secured Term Loan Credit Agreement (the "Senior Secured Term Loan") with Atlas Credit Partners (ACP) Post Oak Credit I LLC, as administrative agent for the lenders and collateral agent for the secured parties.

The Company made total borrowings of $100 million under the Senior Secured Term Loan, composed of borrowings on July 29, 2022, August 4, 2022, and December 7, 2022 of $85.1 million, $9.6 million, and $5.3 million, respectively.

• During 2022, the Company entered into a common stock Standby Equity Purchase Agreement (“SEPA”) with YA II PN, Ltd.

an affiliate of Yorkville Advisors.

The SEPA gives the Company the right, but not the obligation, to sell up to $75.0 million of common equity to Yorkville at times of the Company’s choosing during the two-year term of the agreement.

For the year ended December 31, 2022, funds raised under the SEPA were $14.5 million.

See Note 20, Shareholders’ Equity to our consolidated financial statements included elsewhere in this Annual Report.

• During 2022, the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (“Cowen”), with respect to an at-the-market ("ATM") offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.0001 per common share, having an aggregate offering price of up to $100 million through Cowen as its sales agent and/or principal.

For the year ended December 31, 2022, funds raised under the ATM were $38.6 million, net of commissions.

• In July 2022, the Company announced the dedication of the “Eos Ingenuity Lab,” a site focused on expanding the Company’s R&D capacity as it designs future generations of its Znyth™ technology battery and forges a path toward rapid manufacturing and deployment of its energy storage systems.

• In June 2022, Bridgelink Commodities, LLC increased the Bridgelink master supply agreement to 1 GWh of energy storage systems for deliveries over the next three years with an incremental order value of $181 million for new project installations and also issued a separate 40 MWh order valued at $13 million.

• In June 2022, a 300 MWh master supply agreement was signed with a leading Northeast solar developer for front of the meter stand-alone storage and solar storage applications that provide energy shifting and ancillary services with deliveries forecasted over the next three years.

• In January 2023, several investors, including Clear Creek Investments, LLC, Ardsley Advisory Partners LP, and AltEnergy, LLC, and others, made a $13.75 million investment in the Company by purchasing the Company’s 26.5% Convertible Senior PIK Notes due 2026.

The proceeds of this funding supported the Company’s strategic growth initiatives.

See Note 12, Borrowings to our consolidated financial statements included elsewhere in this Annual Report for further discussion.

• In February 2023, the Company announced an initial 47 MWh renewables plus storage project with one of the largest operators of energy storage in the U.S., along with a separate long-term agreement that contributes 4GWh to the Company’s pipeline.

• During 2023, the Company issued three convertible promissory notes with an aggregate principal amount of $35.0 million in a private placement to YA II PN, Ltd.

("Yorkville") under the second, third and fourth supplemental agreements to the Standby Equity Purchase Agreement (SEPA).

During 2023, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 20,993,417 shares of common stock to Yorkville to offset all outstanding amounts owed to Yorkville under the outstanding Promissory Notes.

See Note 12, Borrowings to our consolidated financial statements included elsewhere in this Annual Report for further discussion.

• In February 2023, the Company completed the first Eos Cube powered by the next-generation Eos Z3™ battery.

• In April 2023, the Company issued 16,000,000 shares of the Company’s common stock at a purchase price of $2.50 per share in a registered direct offering.

The Company issued in a concurrent private placement unregistered warrants to purchase up to an aggregate of 16,000,000 shares of common stock.

The gross proceeds to the Company from the offering were $40.0 million, before deducting advisory fees and other offering expenses payable by the Company.

• In May 2023, the Company issued 3,601,980 shares of the Company’s common stock at a purchase price of $2.221 per share in a registered direct offering.

The Company issued in a concurrent private placement unregistered warrants to purchase up to an aggregate of 3,601,980 shares of common stock.

The gross proceeds to the Company from the offering were $8.0 million, before deducting advisory fees and other offering expenses payable by the Company.

• On August 23, 2023, the Company and Yorkville terminated the SEPA, as amended, by mutual written consent.

At the time of termination, there were no outstanding borrowings, advance notices or shares of Common Stock to be issued under the SEPA.

In addition, there were no fees due by the Company or Yorkville in connection with the termination of the SEPA.

• In August 2023, the Company signed a Master Supply Agreement with ACRO Automation Systems to partner in the design, development, and implementation of its state-of-the-art high output manufacturing lines.

ACRO is a recognized leader in high-speed, custom designed, automated manufacturing systems.

• In August 2023, the Company announced Project AMAZE —American Made Zinc Energy, a $500 million planned expansion and a significant milestone to build 8 GWh of clean energy storage production capacity.

• In August 2023, the U.S.

Department of Energy (DOE) issued a Conditional Commitment Letter to the Company for a loan of an aggregate principal amount of up to $398.6 million through the DOE’s Clean Energy Financing Program.

The Conditional Commitment Letter follows an extensive technical, financial and commercial due diligence process by the DOE.

If finalized, the loan is expected to fund 80% of eligible costs of the Company’s planned manufacturing expansion in Turtle Creek, Pennsylvania.

• In October 2023, the Company announced that Jeff McNeil, former Chief Operating Officer, and Executive Vice President of Enphase, joined the Company’s Board of Directors.

• In December 2023, the Company announced that Eos and Pine Gate Renewables, a leading renewable energy company focused on development and strategic financing of solar and storage projects throughout the United States, entered into a memorandum of understanding (MOU) to expand their existing partnership with a minimum additional volume of 500MWh.

The partnership between the two companies launched in 2021 with projects in South Carolina and Utah.

• In December 2023, the Company, in a public offering, issued 34,482,759 shares of its common stock and 34,482,759 common warrants.

The combined offering price to the public of each share of common stock and accompanying one common warrant was $1.45.

The common warrants have an exercise price of $1.60 per share, are exercisable immediately, and expire five years following the date of issuance.

Gross proceeds to the Company from the offering was $50.0 million, before deducting advisory fees and other offering expenses of approximately $2.7 million.

• 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 on the consolidated statement of operations and comprehensive loss, respectively.

Results of Operations

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Revenue $ 16,378 $ 17,924 $ (1,546) (9) %

The Company generates revenues from the delivery of its BESSs and service-related solutions.

The Company generates revenues from the delivery of its BESS and service-related solutions.

The Company expects revenues to increase as it scales production to meet customer demand.

Revenue increased by $13.3 million, or 290% from $4.6 million for the year ended December 31, 2021 to $17.9 million for the year ended December 31, 2022.

The increase in revenue was primarily driven by the Company’s increase in production and delivery of its energy storage systems and, to a lesser extent, other equipment.

Certain customer projects were deferred out of 2022 and into 2023 and beyond, primarily as a result of the recent passage of the IRA.

The IRA includes subsidies for both energy storage customers and manufacturers, which are effective for projects placed in service after December 31, 2022.

Revenue remained relatively flat for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Cost of goods sold

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Cost of goods sold $ 89,798 $ 153,260 $ (63,462) (41) %

Cost of goods sold primarily consists of costs relating to direct labor, direct material and overhead that is directly tied to product manufacturing, engineering, procurement and construction (“EPC”), project delivery, commissioning, start-up test procedures, and other indirect costs.

Other indirect costs include manufacturing overhead, equipment maintenance, environmental health and safety, quality and production control procurement, transportation, logistics, depreciation and facility-related costs.

Cost of goods sold primarily consists of direct costs relating to labor, material and overhead directly tied to product manufacturing, engineering, procurement and construction (“EPC”), project delivery, commissioning, and start-up test procedures.

Indirect costs included in cost of goods sold are manufacturing overhead such as manufacturing engineering, equipment maintenance, environmental health and safety, quality and production control procurement, transportation, logistics, depreciation and facility-related costs.

As a nascent technology with a new manufacturing process that is early in its product lifecycle, the Company still faces significant costs associated with production start-up, commissioning of various components, modules, and subsystems and other related costs.

The Company expects its cost of goods sold to exceed revenues in the near term as it continues to scale production and prepares BESSs delivered to customers to go-live.

Cost of goods sold increased by $106.8 million, or 230% from $46.5 million for the year ended December 31, 2021 to $153.3 million for the year ended December 31, 2022.

The increase was driven by the following:

(a) an increase in production volumes and related manufacturing costs;

(b) higher freight costs and material costs due to volume and inflation;

and (d) higher EPC and commissioning expenses.

The Company expects its cost of goods sold to exceed revenues in the near term as it continues to scale production and prepares battery energy storage systems delivered to customers to go-live.

Cost of goods sold decreased by $63.5 million, or 41% from $153.3 million for the year ended December 31, 2022 to $89.8 million for the year ended December 31, 2023.

The decrease in cost of goods sold from 2022 to 2023 was primarily due to approximately 44% fewer containers delivered to customers in 2023 compared to 2022.

Also, the Company reduced and concluded Gen 2.3 battery system production in the first half of 2023, and ramped up the Gen Z3™ manufacturing process.

The focus on Gen Z3 battery system research and development in 2023, and the reduced material orders and other ancillary costs on the retired Gen 2.3.

battery system contributed to the decrease in cost of goods sold from 2022.

Additionally, all 2022 expenses were related to the higher cost Gen 2.3 battery system.

However, in 2023, expenses from the higher cost Gen 2.3 battery systems were replaced with lower cost Gen Z3 battery system expenses.

Research and development expenses

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Research and development expenses consist primarily of salaries and other personnel-related costs, materials, third-party services, depreciation, and amortization of intangible assets.

Research and development costs decreased by $0.7 million or 4% from $19.2 million for the year ended December 31, 2021, to $18.5 million for the year ended December 31, 2022.

The decrease in research and development costs was primarily driven by a decrease of $3.4 million in costs for materials and supplies, partially offset by increases of $1.4 million for outside professional services, $0.5 million of payroll and personnel costs, $0.6 million of stock compensation costs and $0.2 million of facility costs.

Research and development costs increased by $0.2 million or 1% from $18.5 million for the year ended December 31, 2022, to $18.7 million for the year ended December 31, 2023.

The increase in research and development costs was primarily driven by higher payroll and personnel costs, higher materials and supplies, partially offset by lower third party services.

Selling, general and administrative expenses

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Selling, general and administrative expenses primarily consist of payroll and personnel-related, outside professional services, facilities, depreciation, travel, marketing, and public company costs.

Selling, general and administrative expenses increased by $17.6 million or 41%, from $43.0 million for the year ended December 31, 2021 to $60.6 million for the year ended December 31, 2022.

The increase was primarily driven by increases of $10.8 million in payroll and personnel costs and $8.9 million of outside service expenses, partially offset by decreases of $1.9 million in stock compensation costs.

Loss on pre-existing agreement

For the Years Ended December 31,

($ in thousands) 2022 2021

Loss on pre-existing agreement $ — $ 30,368

The Company incurred a loss on a pre-existing agreement of $30.4 million for the year ended December 31, 2021 due to the termination of the joint venture agreement with Holtec during the second quarter of 2021.

Selling, general and administrative expenses decreased by $7.0 million or 12%, from $60.6 million for the year ended December 31, 2022 to $53.7 million for the year ended December 31, 2023.

The decrease was primarily driven by decreases in outside consulting expenses of $7.2 million, duties and insurance fees of $1.5 million, and legal and professional costs of $0.3 million, offset by increases of $1.2 million of payroll and personnel costs and $0.8 million of facility costs.

Loss from write-down on property, plant and equipment

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Loss from write-down on PP&E $ 7,159 $ 6,846

The Company incurred a loss of $6.8 million from the write-down on property, plant and equipment for the year ended December 31, 2022, compared to $0.1 million for the year ended December 31, 2021.

The increase in loss is due to replacement of equipment, outsourcing of certain production processes, and a shift in production from the current generation Gen 2.3 BESS to the next generation Z3 system.

Grant expense, net

For the Years Ended December 31,

($ in thousands) 2022 2021

Grant (income) expense, net $ (16) $ 269

Grant (income) expense, net includes grant-related expenses net of grant income received pursuant to grant agreements with the California Energy Commission (“CEC”).

The change in grant (income) expense, net, for the years ended December 31, 2022 and 2021 relates to the timing of grant activity and recovery of expenses from the CEC grant.

The Company incurred losses of $7.2 million and $6.8 million from write-downs of property, plant and equipment for the years ended December 31, 2023 and 2022, respectively.

The 2023 amount is a result of higher costs for disposal of equipment and tooling that was used for manufacturing of the Gen 2.3 battery, but cannot be repurposed for the Eos Z3 battery production.

Interest expense, net

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Interest expense, net increased by $10.9 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.

These increases are a result of higher interest expense recognized due to interest on the Senior Secured Term Loan, which was issued in 2022, and from a further draw on the equipment financing facility in 2022.

This increase is primarily due to 12 months of interest expense recognized in 2023 related to the Senior Secured Term Loan, which was issued in July 2022, compared to five months of expense in 2022.

Additionally, the Senior Secured Term Loan has a variable interest rate, therefore, higher 2023 interest rates contributed to the increase.

See Note 11, Borrowings for detail of interest expense recognized for the Senior Secured Term Loan for the years ended December 31, 2023 and 2022.

Interest expense - related party

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Interest expense - related party $ (37,466) $ (10,898)

Interest expense, related party includes accrued interest and the amortization of debt issuance costs and debt discounts.

Interest expense, related party includes accrued interest, amortization of debt issuance costs and debt discounts.

Interest expense - related party increased by $26.6 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.

2022 reflects a full year of interest expense and amortization of debt issuance costs recognized in 2022 for the 2021 Convertible Notes - Related Party and the Yorkville Convertible Promissory Note - Related Party.

In 2021, there was only interest expense and amortization of debt issuance costs for the 2021 Convertible Notes- Related Party, which were issued in July 2021.

Remeasurement of equity method investment

For the Years Ended December 31,

($ in thousands) 2022 2021

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

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

The loss was a result of the remeasurement of our 49% ownership in Hi-Power due to our acquisition of the remaining 51% interest previously held by Holtec.

The Company consolidated Hi-Power for the full year of 2022, therefore, it was not accounted for as an equity method investment for the year ended December 31, 2022.

Gain on change in fair value of derivatives - related parties

The gain on change in fair value of derivatives - related parties is composed of the following:

For the Years Ended December 31,

($ in thousands) 2022 2021

Change in fair value, embedded derivatives - related party $ 10,880 $ 17,507

Change in fair value, warrants liability - related party 848 1,775

Gain on change in fair value of derivatives - related parties $ 11,728 $ 19,282

The 2021 Convertible Notes Payable - Related Party, and the December Yorkville Convertible Promissory Notes contain conversion features that are accounted for as embedded derivatives and remeasured at its fair value at each balance sheet date.

The decrease in the embedded derivatives' fair value, as well as the warrants liability's fair value, for the year ended December 31, 2022, compared to the year ended December 31, 2021, is largely a result of the change in the value of the underlying asset, the Company’s common stock.

Income from equity in unconsolidated joint venture

For the year ended December 31, 2023, in addition to interest expense on outstanding debt, the Company recognized losses on the issuances of Yorkville Convertible Promissory Notes in the amount of $17.6 million and AFG Convertible Notes in the amount of $2.9 million.

These losses were recorded because the fair value of these notes exceeded the total net proceeds received at issuance.

See Note 12, Borrowings for further discussion .

Change in fair value of warrants

For the years ended December 31, 2023 and 2022, the change in fair value of warrants was composed of the items below:

For the Year Ended December 31, 2023

($ in thousands) Loss on issuance

Gain on Change in Fair Value

Net (Loss) Gain

April 2023 Transaction

(26,366) 18,330 (8,036)

May 2023 Transaction

(5,267) 3,403 (1,864)

December 2023 Public Offering

$ (21,294) $ 6,191 $ (15,103)

Change in fair value of warrants

$ (52,927) $ 27,947 $ (24,980)

For the Year Ended December 31, 2022

($ in thousands) Loss on issuance

Gain on Change in Fair Value

Net (Loss) Gain

Change in fair value of warrants

$ — $ 848 $ 848

Change in fair value of derivatives - related parties

For the Years Ended December 31,

($ in thousands) 2023 2022

Income from equity in unconsolidated joint venture $ — $ 440

Income from equity in unconsolidated joint venture for the year ended December 31, 2021 includes the results of the Company’s joint venture Hi-Power before it became a wholly-owned subsidiary of the Company on April 9, 2021.

Subsequent to the acquisition, Hi-Power’s operational results have been consolidated within the Company’s consolidated statements of operations and comprehensive loss, therefore, there is no income or loss recognized from the joint venture for the year ended December 31, 2022.

(Loss) gain on debt (extinguishment)/forgiveness

Change in fair value of derivatives - related parties

$ 9,983 $ 10,880

The change in the fair value of derivatives - related parties, includes the change in fair value of the embedded derivatives in our convertible debt (See Note 12 , Borrowings ) for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The change was largely a result of the change in the Company's stock price.

Loss on debt extinguishment

For the Years Ended December 31,

($ in thousands) 2023 2022

(Loss) gain on debt (extinguishment)/forgiveness $ (942) $ 1,273

Loss on debt extinguishment

$ (3,510) $ (942)

The Company recognized a loss on debt extinguishment of $3.5 million for the year ended December 31, 2023 from the issuance of common stock upon Yorkville's redemption of their Convertible Promissory Notes.

See Note 12, Borrowings for further discussion.

The Company recognized a loss on debt extinguishment of $0.9 million for the year ended December 31, 2022 from repayment of the Hi-Power note payable.

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

Other (expense) income

Other expense

For the Years Ended December 31,

($ in thousands) 2023 2022

Other (expense) income $ (477) $ 2,194

Other (expense) income of ($0.5) million for the year ended December 31, 2022 included commitment fees of ($1.1) million paid upon signing of the SEPA, partially offset by a $0.5 million gain from settlement of the SEPA advance.

During the year ended December 31, 2021, the Company recognized income of $2.2 million from the sale of state net operating losses and research and development credit carryforwards in accordance with the New Jersey Economic Development Authority Technology Business Tax Certificate Transfer Program.

Other expense

$ (1,795) $ (477)

Other expense of $1.8 million for the year ended December 31, 2023 primarily includes equity issuance costs from the April, May, and December 2023 equity and warrant issuances.

See Note 13, Warrants Liability for further discussion.

Other expense of $0.5 million for the year ended December 31, 2022 includes commitment fees of $1.1 million paid upon signing of the SEPA, partially offset by a $0.5 million gain from settlement of the SEPA advance.

Income tax expense

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Income tax expense $ 31 $ 51

Income tax expense of approximately $0.1 million was recorded for the year ended December 31, 2022.

Income tax expense of approximately $0.03 million and $0.1 million was recorded for the years ended December 31, 2023 and 2022.

The taxes are attributable to taxable earnings from the Company’s foreign operations which were insignificant for all periods presented.

There was no income tax expense recorded for the year ended December 31, 2021.

Liquidity and Capital Resources

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During the year ended December 31, 2023, the Company incurred a net loss of $229.5 million, incurred negative cash flows from operations of $145.0 million, and had an accumulated deficit of $875.8 million as of December 31, 2023.

• As of December 31, 2022, the Company had $17.1 million of unrestricted cash and cash equivalents available to fund the Company’s operations, no additional borrowings available to fund its operations under pre-existing financing arrangements (see Note 13, Borrowings ) and negative working capital of $(5.4) million, inclusive of $5.6 million of outstanding debt that is currently scheduled to mature within the next twelve months beyond the issuance date.

• While the Company has available capacity under certain pre-existing arrangements to issue shares of the Company’s common stock, including under the SEPA and the ATM offering program, (see also Note 20, Shareholders’ Equity ) to aid in funding the Company’s operations, the Company’s ability to secure such funding is dependent upon certain conditions, such as investors’ willingness to purchase the Company’s common stock and at a price that is acceptable to the Company.

• As of December 31, 2023, the Company had $69.5 million of unrestricted cash and cash equivalents available to fund the Company’s operations, no additional borrowings available to fund its operations under pre-existing financing arrangements (see Note 12, Borrowings ) and working capital of $61.5 million, inclusive of $3.3 million of outstanding debt that is currently scheduled to mature within the next twelve months beyond the issuance date.

• While the Company has available capacity under certain pre-existing arrangements to issue shares of the Company’s common stock, including the at-the-market (“ATM”) offering program, (see Note 19, Shareholders’ Deficit ) to aid in funding the Company’s operations, the Company’s ability to secure such funding is dependent upon certain conditions, such as investors’ willingness to purchase the Company’s common stock and at a price that is acceptable to the Company.

Accordingly, as of the issuance date there is no assurance the Company will be able to secure funding under these pre-existing arrangements or on terms that are acceptable to the Company.

• Similarly, while the Company has historically been successful in raising additional outside capital to fund the Company’s operations, as of the issuance date no assurance can be provided the Company will be successful in obtaining additional outside capital or on terms that are acceptable to the Company.

In this regard, the Company is currently in the process of negotiating additional outside capital under the U.S.

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

As of the issuance date, the Company remains in the due diligence phase of negotiations with the DOE, however, there can be no assurance that the Company will be able to secure such loan or on terms that are acceptable to the Company.

In this regard, the Company continues to progress through the Department of Energy (“DOE”) Loan Programs Office’s (“LPO”) process for its Title XVII loan.

In August 2023, the DOE issued a Conditional Commitment Letter to the Company for a loan of an aggregate principal amount of up to $398.6 million through the DOE’s Clean Energy Financing Program.

Certain technical, legal, and financial conditions must be met and due diligence to the satisfaction of the DOE must be completed before the DOE enters into definitive financing documents with the Company and funds the loan.

There can be no assurance that the Company will be able to secure such a loan or on terms that are acceptable to the Company.

• The Company is required to remain in compliance with a quarterly minimum financial liquidity covenant under its Senior Secured Term Loan.

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During 2023, the Company closed on the following capital transactions:

• a common stock Standby Equity Purchase Agreement with YA II PN, Ltd.

an affiliate of Yorkville Advisors.

For the year ended December 31, 2022, funds raised under the SEPA were $14.5 million.

See Note 20, Shareholders' Equity to our consolidated financial statements included elsewhere in this Annual Report.

• a Sales Agreement with Cowen, with respect to an at-the-market offering program.

For the year ended December 31, 2022, funds raised under the ATM were $38.6 million, net of commissions.

See Note 20, Shareholders' Equity to our consolidated financial statements included elsewhere in this Annual Report.

• a $100.0 million Senior Secured Term Loan Credit Agreement with Atlas Credit Partners (ACP) Post Oak Credit I LLC.

For the year ended December 31, 2022, the funds raised from borrowings under the Senior Secured Term Loan were $100.0 million.

The Senior Secured Term Loan contains customary affirmative and negative covenants, which limit the Company’s and its subsidiaries’ ability to incur indebtedness, make restricted payments, including cash dividends on its common stock, make certain investments, loans and advances, enter into mergers and acquisitions, sell, assign, transfer or otherwise dispose of its assets, enter into transactions with its affiliates and engage in sale and leaseback transactions, among other restrictions.

It also requires the Company to hold enough available liquidity as of the last day of each fiscal quarter to meet the Interest Escrow Required Amount (as defined in the Senior Secured Term Loan), which is calculated as the aggregate amount of the four immediately following interest payments on loans under the Senior Secured Term Loan.

See Note 13, Borrowings to our consolidated financial statements included elsewhere in this Annual Report.

• an additional $4.2 million from Trinity Capital Inc.

under the $25.0 million equipment financing facility (the "Equipment Financing Facility"), which was entered into during 2021.

See Note 13, Borrowings to our consolidated financial statements included elsewhere in this Annual Report.

See Note 13, Borrowings and Note 20, Shareholders' Equity for all of the Company’s outstanding debt and equity transactions.

• On January 18, 2023, the Company raised $13.8 million from the issuance of the AFG Convertible Notes, which mature in June 2026.

• In April 2023, the Company issued 16,000,000 shares of the Company’s common stock at a purchase price of $2.50 per share in a registered direct offering.

The Company also issued in a concurrent private placement unregistered warrants to purchase up to an aggregate of 16,000,000 shares of common stock.

The gross proceeds to the Company from the offering were $40.0 million, before deducting advisory fees and other offering expenses payable by the Company.

• In May 2023, the Company issued 3,601,980 shares of the Company’s common stock at a purchase price of $2.221 per share in a registered direct offering.

The Company also issued in a concurrent private placement unregistered warrants to purchase up to an aggregate of 3,601,980 shares of common stock.

The gross proceeds to the Company from the offering were $8.0 million, before deducting advisory fees and other offering expenses payable by the Company.

• For the year ended December 31, 2023, total funds raised under the SEPA, inclusive of net proceeds received from the Yorkville Convertible Promissory Notes, were $35.6 million.

• Under the ATM offering program, for the year ended December 31, 2023, the Company sold 37,126,137 shares raising proceeds of $92.9 million, net of fees paid to Cowen, at an average selling price of $2.58 per share.

• In December 2023, the Company issued in a combined public offering (i) 34,482,759 shares of its common stock and (ii) accompanying common warrants to purchase one share of common stock for each share of common stock sold.

The gross proceeds to the Company from the offering were $50.0 million, before deducting underwriting fees and selling concessions at closing.

See Note 12, Borrowings, and Note 19, Shareholders' Deficit for all of the Company’s outstanding debt and equity transactions.

Capital Expenditures

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

Total capital expenditures for the year ended December 31, 2022 were $20.1 million.

These expenses were primarily used to purchase additional equipment and to automate certain manufacturing processes that will increase our capacity and efficiency.

Our capital expenditure and working capital requirements 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 necessary in response to industry conditions, competition or unexpected events.

The Company expects capital expenditures and working capital requirements to increase as it seeks to execute its growth strategy.

Total capital expenditures for the years ended December 31, 2023 and December 31, 2022 were $29.3 million and $20.1 million, respectively.

The increase in capital expenditures in 2023 was primarily driven by costs incurred for development and construction of a fully automated manufacturing line that will be used for the Z3™ battery in 2024 and years thereafter.

These costs are classified as Construction in Progress (see Note 6, Property, Plant and Equipment for further discussion).

Discussion and Analysis of Cash Flows

The Company relies heavily on private placement of convertible notes, term loans, equipment financing and issuance of common stock.

The Company relies heavily on private placement of convertible notes, term loans, equipment financing and issuance of common stock and warrants.

Our short-term working capital needs are primarily related to funding of debt interest payments, repayment of debt principal, product manufacturing, research and development, and general corporate expenses.

The Company’s long-term working capital needs are primarily related to repayment of long-term debt obligations and capital expenses for capacity expansion and maintenance, equipment upgrades and repair of equipment.

We have taken steps to conserve working capital and reduce expenses to better manage cash outflows.

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 primarily been 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.

Cash flows used in operating activities primarily comprise of costs related to research and development, manufacturing of products, project commissioning and other general and administrative activities.

Net cash used in operating activities of $145.0 million for the year ended December 31, 2023 was primarily driven by a net loss of $229.5 million, adjusted for non-cash items of $94.2 million.

Non-cash items included stock-based compensation expense, depreciation and amortization, interest accretion and amortization of debt issuance costs, changes in fair value of derivatives, and loss from the write-down of property, plant and equipment.

Non-cash items included stock-based compensation expense, depreciation and amortization, non-cash interest expense, changes in fair value of warrants and derivatives, and loss from the write-down of property, plant and equipment.

The net cash outflows from changes in operating assets and liabilities of $9.7 million was primarily driven by decrease in accounts payable of $11.5 million, increase in contract assets of $6.3 million, increase in other receivables of $7.5 million, and increase in grant receivables of $3.0 million, partially offset by an increase in accrued expenses of $19.3 million.

Net cash used in operating activities of $196.9 million for the year ended December 31, 2022 was primarily driven by a net loss of $229.8 million, adjusted for non-cash items of $31.0 million.

The net cash inflows from changes in operating assets and liabilities of $2.0 million was primarily driven by an increase in accounts payable and accrued expenses of $23.4 million, an increase in contract liabilities of $4.0 million, and a decrease in vendor deposits of $6.8 million.

These inflows were partially offset by an increase in inventory of $10.3 million and a decrease in the Hi-Power note payable of $19.6 million.

Net cash used in operating activities of $116.1 million for the year ended December 31, 2021 was primarily driven by a net loss of $124.2 million, adjusted for non-cash items of $11.0 million.

Non-cash items included stock compensation expense, depreciation and amortization, remeasurement of the Hi-Power JV equity and changes in the fair value of derivatives.

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 the Hi-Power notes payable of $18.7 million and an increase in accounts payable and accrued expenses of $7.1 million, partially offset by an increase in inventory of $10.1 million, increase in vendor deposits of $7.4 million, decrease in provision for firm purchase commitment of $5.5 million, and increase in accounts receivable of $1.9 million.

Cash flows from investing activities:

Net cash flows used in investing activities of $17.2 for the year ended December 31, 2022 were primarily composed of payments made for purchases of property, plant and equipment of $20.1 million, note receivable advanced to a customer of $0.3 million, partially offset by proceeds from notes receivable of $3.2 million.

Net cash flows used in investing activities of $23.3 for the year ended December 31, 2021 were primarily composed of purchases of property, plant and equipment of $15.6 million, investment in joint venture of $4.0 million, notes receivable advanced to customers of $4.9 million and payments made for the Hi-Power acquisition of $0.2 million, partially offset by proceeds from notes receivable of $1.3 million.

Net cash flows used in investing activities of $29.5 million for the year ended December 31, 2023 were composed of increase in property, plant and equipment of $29.3 million, which includes costs incurred for development and construction of a fully automated manufacturing line that will be used for the Z3™ battery in 2024 and years thereafter.

Net cash flows used in investing activities of $17.2 million for the year ended December 31, 2022 were primarily composed of payments made for purchases of property, plant and equipment of $20.1 million, note receivable advanced to a customer of $0.3 million, partially offset by proceeds from notes receivable of $3.2 million.

Cash flows from financing activities:

Net cash provided by financing activities of $139.5 million in the year ended December 31, 2022, was primarily from net proceeds received from the Senior Secured Term Loan of $98.0 million, issuance of common stock under the ATM program of $38.6 million, Yorkville Convertible Promissory Notes of $9.3 million, issuance of common stock under the SEPA of $5.0 million, and an increase in the equipment financing facility of $4.2 million.

The proceeds were partially offset by debt issuance costs related to the Senior Secured Term Loan of $12.4 million, payments on the equipment financing facility of $1.9 million, and $1.0 million for share repurchases from employees for tax withholding purposes.

Net cash provided by financing activities of $123.3 million for the year ended December 31, 2021, primarily due to the proceeds received from issuance of the 2021 Convertible Notes of $100 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 $227.9 million for the year ended December 31, 2023.

This was primarily from the issuance of common stock and warrants in the amount of $192.2 million, as well net proceeds received from the issuance of Yorkville Convertible Promissory Notes and AFG Convertible Notes, totaling $48.1 million.

The proceeds were partially offset by equity issuance costs of $5.0 million, debt issuance costs related to the Yorkville Convertible Promissory Notes, AFG Convertible Notes and Senior Secured Term Loan of $4.2 million, payments on the equipment financing facility of $2.9 million and share repurchases from employees for tax withholding purposes of $0.6 million.

Net cash provided by financing activities of $139.5 million for the year ended December 31, 2022, was primarily from net proceeds received from the Senior Secured Term Loan of $98.0 million, issuance of common stock of $43.6 million, issuance of Yorkville Convertible Promissory Notes of $9.3 million, and an increase in the equipment financing facility of $4.2 million.

The proceeds were partially offset by debt issuance costs related to the Senior Secured Term Loan of $12.4 million, payments on the equipment financing facility of $1.9 million, and share repurchases from employees for tax withholding purposes of $1.0 million.

Contractual Obligations

We have certain obligations and commitments to make future payments under contracts.

The Company has certain obligations and commitments to make future payments under contracts.

As of December 31, 2023, this is comprised of the following:

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Future Debt Payments

Yorkville Convertible Promissory Note - due June 2023* $ 2,000

AFG Convertible Notes - due June 2026 (1)

2021 Convertible Notes Payable – due June 2026 (1)

Senior Secured Term Loan - due March 2026 131,838

Equipment financing facility - due April 2025 10,561

Equipment financing facility - due April 2025 and April 2026

Total $ 305,145

* Amounts owed under the Yorkville Convertible Promissory Note were offset by the issuance of common shares in January 2023- See Note 21, Subsequent Events to our consolidated financial statements included elsewhere in this Annual Report.

(1) As of December 31, 2023 , the Company is obligated to repay future contractual interest payments for the 2021 Convertible Notes and AFG Convertible Notes in-kind.

Critical Accounting Estimates

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We regularly reevaluate our assumptions, judgments, and estimates.

In addition to the below, for further information regarding our critical accounting policies, refer to Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report.

Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations.

Warranty Liability

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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.

As of December 31, 2022 and 2021, we had $3.8 million and $2.1 million in warranty reserves, respectively.

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

Thus, it is likely that as we sell additional BESS, we will acquire additional information on the projected costs to repair or replace items under warranty and may need to make additional adjustments (See Note 9, Accrued Expenses to our consolidated financial statements included elsewhere in this Annual Report).

Warrants Liability

The Company estimated the fair value of the April 2023 warrants, the May 2023 warrants, and the December 2023 warrants using the Black-Scholes model at inception and on subsequent valuation dates.

This model incorporates inputs such as the stock price of the Company, exercise price, risk-free interest rate, expected volatility, and time to expiration.

The expected volatility involves unobservable inputs classified as Level 3 of the fair value hierarchy.

The sensitivity of the fair value calculation to this assumption could create materially different results under different conditions or using different assumptions.

See Note 15, Fair Value Measurement to our consolidated financial statements included elsewhere in this Annual Report.

Convertible Notes and Embedded Derivatives

Some of our debt financings contain embedded derivatives, such as conversion features in our 2021 Convertible Notes Payable - Related Party.

The Company evaluates each debt agreement to determine whether any embedded features require bifurcation from the debt host in accordance with ASC 815, Derivatives and Hedging ("ASC 815").

If the embedded feature requires bifurcation from its debt host, the Company will account for it as either a derivative liability or as a derivative in equity.

The Company uses valuation models to estimate the fair value of the embedded derivatives.

For the valuation of the embedded derivative related to the 2021 Convertible Notes- Related Party, the Company uses a binomial lattice model at inception and on subsequent valuation dates.

The Company estimated the fair value of the embedded conversion features in the 2021 Convertible Notes and the AFG Convertible Notes 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 (see Note 16, Fair Value Measurement to our consolidated financial statements included elsewhere in this Annual Report).

The effective debt yield and volatility involve unobservable inputs 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.

Business Combinations

We have accounted 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 these estimates are inherently uncertain.

If any of our assumptions or judgements used to determine fair value of the assets acquired, are ultimately incorrect, we could experience material impairment losses.

See Note 15, Fair Value Measurements to our consolidated financial statements included elsewhere in this Annual Report.

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