Eos Energy Enterprises Inc

NASDAQ:EOSE

Earnings Call Analysis

Eos Energy's Q3 Earnings Highlighted Supply Chain Challenges and Revenue Adjustments

In Q3, Eos Energy reported unchanged revenues of $0.9 million compared to Q2, yet 25% higher year-over-year. Revenue guidance for 2024 was adjusted to $15 million due to supply chain delays affecting key components. Operating losses widened to $53.3 million, a significant increase from $37.8 million a year ago, with a net loss of $342.9 million linked primarily to market adjustments. Despite these setbacks, the company's backlog grew to $589 million, and new orders were secured, including a $73 million municipal deal. Management expressed confidence in future growth as supply chain issues stabilize into 2025.

Navigating Supply Chain Challenges

In the third quarter of 2024, Eos Energy faced significant supply chain delays that impacted their revenue, which remained flat at $0.9 million compared to the previous quarter, yet represented a robust 25% increase over the prior year. Much of this revenue shortfall stemmed from delays in receiving enclosure components vital for assembling their new in-line cube technology. This situation did not negatively affect their overall backlog, which remains strong as the company actively engaged with customers to adjust delivery schedules.

Increased Costs and Losses

The company's cost of goods sold (COGS) increased to $25.8 million from $21.3 million year over year, primarily due to commissioning costs for large projects and a decline in inventory value adjustments. Operating losses amounted to $53.3 million, escalating from a prior operating loss of $37.8 million. Notably, the net loss for shareholders was a staggering $342.9 million, compared to a net income of $14.9 million last year, largely influenced by market-to-market adjustments connected to their share price fluctuations.

Strategic Financial Developments

Eos secured a $65 million funding from Cerberus and anticipates solid backing from the U.S. Department of Energy for a loan aimed at expanding manufacturing capacity. The financial flexibility provided by Cerberus has been a significant boon, as they have supported the waiver of financial covenants related to revenue, allowing Eos to focus on stabilizing its operations without the immediate pressure of financial penalties.

Commercial Gradual Growth

Despite current challenges, there are positive indicators in Eos’s commercial pipeline, which stood at $14.2 billion, a 3% increase from the previous quarter. This is bolstered by a noteworthy $73 million order with the City Utilities of Springfield, Missouri—their largest investment yet in energy storage. Furthermore, letters of intent (LOIs) are rising, suggesting robust future order potential as these agreements await final financing confirmations.

Guided Prospects for 2025

Looking forward, Eos anticipates achieving a normalized production rate by December this year, setting the stage for a revenue ramp-up in 2025. Specific guidance predicts that revenues for 2024 will reach approximately $15 million, adjusted downward from expectations due to the noted supply chain challenges. However, management emphasizes that these delays are temporary, and they expect to recover momentum quickly with anticipated improvements in the supply chain and production processes into 2025.

Operational Efficiency Improvements

The company demonstrated substantial achievements in stabilizing production lines, decreasing direct labor costs by 77% since introducing their Z3 battery design, and achieving significant efficiency in production cycles reaching ten seconds per battery. These operational enhancements are pivotal as Eos seeks to drive down costs and improve profit margins.

Future Vision and Market Position

Eos continues to emphasize its vision of delivering not just growth but profitable growth, highlighting a proactive approach to enhancing bankability and product reliability. The management expressed optimism about upcoming technological advancements and strategic partnerships that would underpin the company’s growth trajectory, particularly as they solidify their market position as a leading U.S. manufacturer of energy storage technology.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Eos Energy Enterprises Third Quarter 2024 Conference Call. As a reminder, today's call is being recorded, and your participation implies consent to such recording. [Operator Instructions].

With that, I'd like to turn the call over to Liz Higley, Director of Investor Relations. Thank you. You may begin.

[Elizabeth Higley, executive]

Good morning, everyone, and thank you for joining us for Eos' financial results and conference call for the third quarter 2024. On the call today, we have Eos CEO, Joseph Mastrangelo; and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements, including, but not limited to, current expectations with respect to future results and outlook for our company and statements regarding our ability to secure final approval of a loan from the Department of Energy LPO or our anticipated use of proceeds from any loan facility provided the U.S. Department of Energy, which are subject to certain risks, uncertainties and assumptions.

Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our expectations or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to U.S. GAAP financial information is provided in the press release.

Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same or comparable to similar non-GAAP measures presented by other companies. This conference call will be available for replay via webcast through Eos' Investor Relations website at investors.eose.com. Joe and Nathan will walk you through the company highlights, financial results and business priorities before we proceed to Q&A.

With that, I'll now turn the call over to CEO, Joseph Mastrangelo.

[Joseph Mastrangelo, executive]

Thanks, Liz. Welcome, everyone. Thanks for taking the time this morning to listen in. Let me start off on our page with operating highlights. I just want to start off with the tremendous progress that we're making commercially. And I think that's shown by the announcement that we made this morning on a $73 million order with the City Utilities of Springfield, Missouri, really a phenomenal job by the commercial team, getting our first large order in the municipal market. This is the largest order that City Utilities has ever placed for an energy storage system. We're proud that they selected Eos Energy Enterprises for this project and look forward to start delivering this project throughout 2025. Really an exciting time for us, I think showing the power of the D3 and what it can do out in the marketplace.

At the same time, we also have what people would think is a small order with WATTMORE is a repeat customer and just shows the relationships that the team is building out in the marketplace and the fact that the technology also really works in a microgrid application. So, 2 really strong examples of the commercial offering and the performance of the product. The same time, 2 big things that we also announced recently regarding financing, Nathan has been working on creating the financing capacity for us to scale the company. Last week, we announced achieving the milestones and getting the $65 million funding from Cerberus, that cash balance you see on the lower right-hand side of the page does not reflect that $65 million. It's a great job not only in partnership with Cerberus, but also the team in delivering and bringing that funding in.

And at the same time, we've submitted our paperwork for the final U.S. government approval for a loan with the loan programs with the DOE Loan Programs office for Title 17 loan. Very excited to bring that to closure here by year-end. Been a process of going through that as the company has evolved and changed. We feel really good about the partnership we built and our ability to allow us to scale the company further. On the lower left-hand side of the page, technology continues to prove itself out in the field. We're now at 4.4 gigawatt hours over 4 gigawatt hours discharge out in the field. That discharge out in the field is very important because it shows customers using the product, that incremental 400-megawatt hours that you have to get to 4.4 is also very important because that's the energy that we're generating when we test and prove out the resiliency, performance and operating characteristics of the product.

Every battery is tested before it gets out in the field. We're really excited about the performance that we see. The middle of this page, the bottom of the middle of this page is an area where we're disappointed in our performance, executing on our supply chain strategy, doing 1 million things correctly. If one of those things don't go well, you have a problem. And that's what happened to us here in the third quarter. When we look at what we talked about last year about developing a new cube design that allows us to improve the performance of our product out in the field and get better footprint density. We had some challenges in opening and bringing that supply chain online, which we're working through to bring that product online. Now we're going to work through that. We're going to work through with the supplier.

We're going to continue to develop and grow. The good news is it hasn't had any impact on our backlog. We continue to work with customers on timing of deliveries and continue to work on supply chain diversification. We can and expect to do better than this in the future. What's important here is we brought in some new leadership around the operational team and some new talent that have experienced across the industry, both in other battery technologies and other competitors and integrators. So, we're bringing in experienced people that have done this before to help us scale the company as we move forward. While we're not happy with where we are, I feel very confident with the team's ability to execute and deliver as we look to the future.

Going to the next page, I talked about some of these on the prior page. I just want to hit on a couple of things around the Cerberus milestones. The line continues to perform, and we're really happy with our ability to build a good back. Cycle times are less than 10 seconds and our first pass yield is greater than 97%. You continue to see the performance of that line and what it means to us as far as being able to scale and deliver on large projects will be really the foundation of everything we're going to do going forward. The team is also ahead of target on this cost milestones. I'll talk a little bit more about that as we get into the presentation here on the next page. But really, I think the foundation and the thesis of the investment from Cerberus, we're proving that out to be true every day, and we're just going to continue notably execute and deliver for customers and shareholders.

Commercial momentum, I talked about the 2 new orders that we won, very exciting. But at the same time, working with service has been able to pull together a full bankability offering out in the marketplace. Some of the things we've talked about in the past when Nathan gets to our pipeline page is how do you move things down through that pipeline. We're now bringing -- I'll talk about in more details, the ability for customers to look at us and say, this is a bankable technology, and I have the backstop that I need to take the risk to move with a new technology. Because of that, we see the large utility pipeline strengthening. And Nathan will talk about the numbers that we have underlying this. But what I can tell you is that more and more people are coming to us, more and more customers are coming to us to really look at the inherent benefits of the technology.

What we've learned from the standpoint of operating the business through the due diligence that we've gone through, both with the DOE and the Cerberus is that we have a technology with differentiated performance. We probably haven't done the best job historically in presenting that technology and what it means to deliver benefits to the customers. That's becoming very clear to us, and that's why you see things like city utilities becoming a bookable order in less than 6 months when we first got the request for quotation in the door. So, we move now to operational scale and capacity. We are delivering on our cost-out road map, and we are optimizing our production. On the left-hand side of this page as far as cost-out progress, very critical for us as we really look to switch our mindset from having a path to profitability to delivering profitable growth.

Our goal as a company is to grow but deliver profits while doing so. The left-hand side of this page allows us to do that. On the direct material side, from the launch, we're down 42% of cost. That's ahead of our plan. 80% of our direct material target is achieved and locked in and will be cut in over the next few months to deliver on that initial strategy that we talked about almost a year ago. Now those 2 pieces there really are achieved because what we have is a battery with readily available commodities that you can go out and get great scale on. And as we've gone out and done this and look at doing things, we're also finding ways and suppliers to partner with us to find ways to take cost out of the overall system. On the direct labor side, we've seen a 77% improvement since we launched the Z3. A lot of that has to do with the implementation of the moving.

Our direct labor was 41% lower than Q1. Now while we only had 8% higher battery output with that 41%, we delivered 24% more energy out in the field to our customers. Now what's critical to think about here is we could have done more if we had the cubes to be able to deliver. We timed kind of the way we're manufacturing to what we had to be able to put into the cubes to deliver out to the field to customers. But when you look at this and you think about this, the line is using less hours to operate to deliver more power and batteries in the field. And as we increase that, we're going to see more and more of the benefits, which brings me to the third bucket on the left-hand side, which is our overhead. The overhead has seen an improvement 25% since we launched the product. And that 25% now that the line is up and running includes higher depreciation costs for the moving line.

So, we still see overall operating cost on our overhead costs coming down even with this incremental cost for the line coming in and up and produce more batteries, that gets better and better over time. And that's one of the things that we've always talked about as being one of the drivers for future performance on our cost-out road map. We feel very confident in being able to deliver on this. And Brian Miller, who is our new supply chain manufacturing leader has really brought a fresh set of eyes to this with a lot of experience across different companies to help us really streamline how we operate and improve the throughput that we have the assets that we have. The 3 areas that we're focused on there is on our subassembly process. So, what goes into the moving line. It's still semi-automated. We talked about this on the last call.

We've actually yielded more parts out of that process than we ever have before. We've increased the throughput out of that line and implementing automation as we get into the beginning of next year allows us to take the moving line up to around 2 gigawatt hours of output annually. We see 57% lower direct labor costs with this incremental automation that those direct labor costs are really avoiding having to hire labor to do the work that we're going to do. On battery manufacturing, as I said before, we achieved 10 second cycle times. We exceeded 97% first pass yield. We continue to look at ways to make this line better. As we've been operating the line, we get feedback from our operators on the factory floor who have said, look, if the screens that we're using to control the equipment were simplified, we can make better decisions faster and a lot better throughput.

We're going through and adjusting those to allow us to control the availability of the line better. At the same time, you learn as you build and every day, we run that line and then we stop and we look at what we learn and then we go back and we fix and update and improve. So, 2 of the areas that we've really looked at and are improving is the conveyor traffic management and how batteries flow station to station on the line, while at the same time, how we program the robots to get better reliability and performance out of them. As volume increases, as I said before, that manufacturing overhead that I talked about earlier will actually improve and that number will get better and better and the cost comes down, and that's how we will deliver profitable growth.

On containerization, this is the area where we stubbed our toe here in the quarter. We had a slower ramp-up. We've got to work through that and diversify that supply base while continuing to invest with our existing supplier. We are implementing cube automation in our factory here in Turtle Creek that will increase the output of cubes by 5x once implemented. That's already started and begun. The initial stations are in place, and that will continue here over the next few months. The third quarter enclosure constraint impact will impact our second half revenue. Again, we don't like disappointing versus our expectations, but we feel as though we'll be able to work through here through the end of the year and get into 2025 and deliver the volume that we have committed to our customers.

We're going to get better. We're going to continue to refine. We're going to continue to learn. We're going to continue to improve and continue to become a reliable partner for our customers and someone who reliably delivers for our shareholders as we mature. As we look to the commercial growth section before I turn over to Nathan, I just want to spend a moment looking at how we're strengthening the value proposition. A lot of what we've talked about with our batteries that we have lower round efficiency than other technologies, particularly lithium-ion. But the chart on the left shows is various round-trip efficiencies across a full depth of discharge, so 0 to 100 back down to 0 and what the round-trip efficiencies are. The lines that we see are a 4-hour, 6-hour, 10-hour and a 16-hour. So, we've now taken the Z3 to the point of discharging at 16 hours.

What we've done is we've gone and we looked at how the industry quotes its round-trip efficiency. We were quoting and discussing 0 to 100. Now every battery that's out in the marketplace has a tail off outside of that 20 to 80 discharge window. What happens to other technologies is they degrade their performance faster or they have problems being able to secure the life of their battery. The Eos this doesn't happen. We just have a lower round trip efficiency and the customer can benefit from it if you can. But what we've learned is as you are comparing us to other technologies, you need to compare us on the same basis. So, at a 16-hour discharge, we're above 90% round trip. That's the same size system that you would have for a 4-hour discharge that would be in an 80% discharge. So as the durations get longer, the battery is more efficient as we've always said.

And as you think about us in the standard window, we're competitive with what's out in the market today. And at the same time, we can offer that wider range as the customer requires. And that's why you're starting to see more and more interest in the product. On the right-hand side of the page, we're building this full bankability offering. First one is extending our warranty and launching a suite of insurance products. These are the products where customers question, what's the viability of Eos, how do we move forward? How do we know the product is going to work? And we're going out and now putting that into our business model and now finding financial instruments that will help give the customer the surety that they have to take that first order to be the first to first instead of the first to second.

Next is we've done some critical third-party validation, both with the due diligences with the DOE and Cerberus, adding in there being a BMEF Tier 1 supplier and then refreshing our DNB bankability and our UL certification. All those things give the customers the comfort of knowing that they have the warranty, the guarantee that they're going to get the product that they contracted for. They've got third parties that will validate that the technology will work. And then the last one is proving out this ability to deliver large-scale projects. We continue to work on and improve our supply chain, as I talked about, we continue to ramp as we look at the moving line. I feel really good about a lot of the things that happened in this last quarter, feel disappointed in the revenue, but know that we have the team, the resources and the knowledge to fix and get better as we move forward.

So, with that, I'll turn it over to Nathan.

[Nathan Kroeker, executive]

Thanks, Joe, and thanks, everyone, for joining us this morning. I will spend the rest of the time walking through our commercial growth, providing an update on our strategic partnership with Cerberus and then review our third quarter financial performance and our outlook for the remainder of the year. Our commercial pipeline as of September 30th stood at $14.2 billion, which is up $400 million from the prior quarter and represents 59 gigawatt hours of storage, which is up 13% sequentially. This pipeline includes $1.7 billion in signed letters of intent, a 23% increase quarter-over-quarter with most of these either awaiting customer financing or confirmation of interconnect approvals. Notably, in July, we signed a 960-megawatt hour letter of intent with a solar plus storage developer in Puerto Rico, which is now reflected in these numbers.

We expect that LOI to convert into a booked order as soon as the customer completes their financing. As we look forward, we expect Puerto Rico and surrounding island countries to be significant growth markets as we expand our presence in the region. As previously highlighted, we are currently tracking 2.2 gigawatt hours in late-stage approvals, which we define as projects awaiting financing, government grants or final selection from project shortlists. This number includes a few key projects such as the projects that are pending financing in Puerto Rico or the notification of the next phase of DOE grants for 3 long-duration energy storage projects with one of the biggest names in the industry and a long-standing developer relationship, which encompasses a deal predicated on California Energy Commission funding for a Marine Corpsbased storage installation.

This figure is pretty consistent with last quarter, showing minimal change as these projects progress through critical approval stages. The 3% increase in our commercial pipeline quarter-over-quarter reflects the healthy churn of new projects entering, progressing through and sometimes completing interim stages within the pipeline, as Joe discussed earlier. Our strategic partnership with Cerberus has clearly served as a positive catalyst, driving momentum within our pipeline. Cerberus has actively supported commercial initiatives in several important ways. Not only have they leveraged their extensive list of contacts and credibility in the marketplace to initiate and advance conversations with potential customers, but they have been working tirelessly to help us with developing a comprehensive bankability solution, as Joe discussed earlier.

We feel very confident about our pipeline and the positive trends we are seeing. More specifically, with the recent efforts to improve overall bankability, we are seeing renewed interest in larger utility scale project opportunities with blue-chip customer projects in the Southeast and Western regions. Additionally, as we discussed earlier, we continue to experience promising developments with municipalities and electric co-ops as well as microgrid and data center applications.

Now moving to the right. Our backlog as of quarter end was $589 million, which is up 9% from this time last year and up slightly from last quarter. During the quarter, we booked an additional order with WATTMORE, who is a repeat customer, supporting an existing community microgrid in Lincoln, Nebraska. In our first project with WATTMORE, we supported the city of Logan, Utah's electric utility for their first energy storage system. Yesterday, we also announced a large customer agreement with City Utilities to provide 216 megawatt hours of long-duration energy storage for 2 project sites in Springfield, Missouri, which will be included in next quarter's published backlog numbers. This was their largest investment to date in energy storage and a significant win for our team. This is a great example of how a project can advance quickly through our pipeline as we moved directly from proposal to firm contract without going through the LOI phase.

We are very excited about this City utilities relationship as we see this as a model that we can use to expand our presence with other municipal customers. The next page provides an update on our capital position and recent updates related to the Cerberus strategic investment in Eos. As many of you know, since joining the company, I have been laser-focused on securing the foundational capital needed to deliver on our profitable growth strategy. A significant amount of effort has gone into the capital sources on this page, and I believe we are now well positioned to scale the company with our Cerberus relationship and our upcoming DOE loan. As a quick reminder on the structure of that investment, it includes a $210 million delayed draw term loan that funds in increments upon the achievement of certain performance milestones and $105 million revolver that we may draw upon if needed, at Cerberus' discretion.

At the end of August, we announced the successful achievement of all 4 of the first performance milestones. This allowed us to draw an additional $30 million on the delayed draw term loan to fund our capital expansion and ongoing operations. These milestones included targets related to the company's automated production line, materials cost out, improvements in Z3 technology performance and customer cash conversion. Included in this was our successful achievement of battery module production cycle times of less than 10 seconds, while exceeding first pass yield targets in the high 90s on the state-of-the-art battery manufacturing line. This was a critical milestone and an important step toward profitability given the implications to our manufacturing throughput.

I'm also pleased to state that just last week, we successfully met the requirements for the second tranche of performance milestones. And as a result, we're able to draw down an incremental $65 million on the term loan. While achieving all 4 of last week's milestones, a key accomplishment was exceeding our cost-out target and already exceeding yield metrics for the 2 upcoming milestone dates. These accomplishments are important steps as we position the company for growth. We now have $170 million or a little over 80% of the term loan funded without having to give up any incremental equity that was incorporated into the overall strategic investment structure. The next performance milestone date is scheduled for January 31st, and we are actively working towards the next funding tranche of $40.5 million alongside the next round of performance milestones.

This $210 million is a critical piece of getting to profitability, but we also have the optionality presented by the revolver in the event that it is needed to escalate growth and meet customer demand. And finally, as we announced yesterday, we have made significant progress in working with the DOE over the last couple of months as we move closer to closing and funding on the previously announced DOE loan commitment. This loan provides reimbursement for previous eligible capital and operating expenditures associated with Project Amaze as well as funding additional manufacturing capacity at a lower cost of capital than the Cerberus revolver. Depending on the final timing of the first advance, we expect to receive between $50 million and $60 million before funding certain DOE reserve accounts, and then we will be able to continue to submit additional eligible costs for reimbursement every few months as we continue to build out Project Amaze.

A lot of progress has been made on this loan since we last spoke to you. Working alongside Cerberus, we have reached agreement on all of the significant loan documents with the DOE and are currently awaiting final approvals. It's important to note that the size of the loan is expected to be reduced somewhat, and you may recall Joe explaining this in previous quarters, some of our shakedown and operating costs are coming in lower than previously anticipated. In addition, with the Cerberus capital getting us closer to profitability, we just don't expect to need as much additional capital as we were thinking when we originally applied for the loan. We ultimately ended the quarter with $23 million in cash on the balance sheet, not including $7.6 million in short- and long-term restricted cash related to escrowed security deposits and our minimum liquidity covenant under the Cerberus loan.

We continue to explore opportunities to monetize our production tax credits and recently sold our electrode active material or EAM credits for the first time, netting over $800,000 just ahead of the October 15th tax return filing deadline. As you may recall, the EAM credits are related to the utilization of cathode and anode materials as well as electrochemically active components like solvents, additives and electrolyte salts that are critical to our energy storage processes. We have calculated the credit as 10% of the costs incurred during production, excluding material cost. However, we continue to review and assess the final regulations and expect a sizable increase in the amount of our EAM credits as a result of these final regulations.

This monetization is an important milestone given the added complexity and due diligence requirements on the EAM credits and shows the importance of being an American manufacturer, building American products with American materials. We feel confident that we will be able to monetize these EAMs along with our 45X credits going forward. In addition, customer deposits and milestone payments continue to be a source of cash to fund our working capital requirements as we ramp up operations. The purchase order we announced yesterday includes a sizable deposit, which will help fund some of the upfront working capital requirements of production, and we continue to see positive momentum and anticipate an increase in customer deposits as pipeline continues to convert to booked orders.

With that, let's get into our third quarter financial results. In the third quarter, revenue was $0.9 million, which was unchanged compared to the prior quarter and roughly 25% higher than the prior year. As you may recall, last December, we discussed some of the benefits and cost reductions associated with our new in-line cube design. Unfortunately, our Q3 revenue was much lower than our expectation as we were negatively impacted by the delays in these newly designed enclosure receipts, which are a critical component in the assembly of our new in-line cubes. As Joe mentioned earlier, we've taken proactive measures to address the supply chain constraints we are facing. We are actively working with our key supplier and look at ways to diversify our supply chain and get more reliable performance and minimize the impact to our production schedule.

This delay has had no adverse impact on our total committed backlog, and we are actively working with customers on updated delivery schedules. Cost of goods sold was $25.8 million compared to $21.3 million in the prior year. The increase was mainly driven by 2 large projects undergoing commissioning in the quarter and a $6.3 million lower of cost or market inventory reserve adjustment. Just to remind everyone, given we still have negative margins on our finished product, the accounting requirements are to book a reserve to reduce the value of all finished goods and work-in-process inventory at the end of the quarter. And given the enclosure delays we discussed earlier; we had more WIP at the end of the third quarter than we otherwise would have had.

Including the LCM adjustment, there was $9.8 million or 35% of COGS in noncash items such as depreciation, amortization, reserve adjustments and stock-based compensation. As we increase production going forward, the fixed cost components of indirect labor and factory overhead will be absorbed across a greater number of units, driving down unit costs and supporting our path to profitability. Other operating expenses for the quarter totaled $28.4 million, an increase of 65% compared to prior year, mainly driven by shakedown costs associated with the state-of-the-art manufacturing line, which are eligible costs for reimbursement under the DOE loan, along with higher legal and professional fees related to financing activities and a $3.2 million noncash PP&E write-off in the quarter as we made enhancements to Z3.

Excluding noncash items such as depreciation, amortization, stock-based compensation and PP&E write-offs, other operating expenses were $19.8 million. The operating loss in the quarter was $53.3 million compared to an operating loss of $37.8 million in the prior year. Excluding noncash items that I've already mentioned, our operating loss was $35.0 million. Net loss to shareholders for the quarter was $342.9 million compared to net income of $14.9 million in the prior year, while net loss to common shareholders was $384.1 million compared to $14.9 million in the prior year. These significant differences were mainly the result of a change in fair value of derivatives tied to market-to-market adjustments as our share price increased by approximately 134% in the current quarter comparable to our share price decrease of approximately 50% for the prior period.

This quarter, we elected to introduce non-GAAP measures, including adjusted EBITDA and adjusted EPS as we believe these metrics provide a more accurate and relevant comparison of our financial performance period-over-period given the large noncash movements included in our net loss. We plan to continue to report these non-GAAP metrics going forward. Adjusted EBITDA in the quarter was negative $46.1 million compared to negative $30.8 million in the prior year with an adjusted EPS of negative $0.44.

Finally, let's shift our focus to 2024 outlook on the next slide. As we discussed earlier, driven by the challenges we've had with our enclosure supply chain, we are reducing our revenue guidance and expect to recognize approximately $15 million in revenue for the full year. Importantly, this reduction is not driven by the cancellation of any orders or customer deliveries, but rather we have been working with our customers to reschedule deliveries to align with our latest estimates of Enclosure availability. As with any supply chain disruption, it takes a while to get back on schedule, and our fourth quarter revenue estimates now take this into account as well. The delayed deliveries and corresponding revenue from Q3 and Q4 of 2024 should occur in Q1 and Q2 of 2025 as the Enclosure supply chain stabilizes to meet customer demand.

While disappointed in the impact to this year's revenue outlook, we feel confident about our growth trajectory as we look at 2025 and beyond. Cerberus sees the strategic value in their investment and continues to support our strategy to deliver profitable growth. They have been very understanding as a partner as we've worked together to ramp up production and also reviewed the supply chain issue and agreed to give us a waiver on our September 30th revenue covenant without any additional fees for doing so. We anticipate a similar waiver or amendment for the December 31st covenant as well. Since making our initial investment, Cerberus has not only provided financial support, but also valuable insights and resources that will improve our product offering, strengthen our product supply chain and open up new commercial opportunities.

Their commitment to our vision and operational goals is enabling us to navigate challenges more effectively and capitalize on emerging opportunities. Lastly, we expect to achieve positive contribution margin before year-end. And just to remind everyone, we define contribution margin as sales price less direct labor, direct materials and also includes the benefit of the production tax credits. The team continues to be very focused on cost out and has been driving both product performance improvements and material cost out as we move forward on delivering key customer projects. We look forward to providing more information on our expectations for 2025 on a future call and look forward to keeping you updated on our progress.

And with that, I want to thank everybody for their time today, and I would now like to turn it over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from Thomas Boyes with TD Cowen.

[Thomas Boyes, analyst]

Maybe just the first one, could you give us any insight into the underlying issues that led to the new in-line enclosures being delayed? Is it a manufacturing issue with molds, shortage of capital equipment for the suppliers' production setup? Was there a shortage of raw materials? Just any insight there would be helpful.

[Joseph Mastrangelo, executive]

I just want to clear up like what we're talking about because we've gotten some e-mails into the IR inbox with people asking specifically what this is. So let me first explain to everybody what we're talking about. So, the battery module is the gray box that goes into a steel enclosure. So, you take battery modules, you manufacture them on our automated line. That production was at a higher, more productive rate than we've ever done in the past. We didn't have any issues with the plastics or anything else around us. We're manufacturing batteries. And as we sit here right now, we have 27 cubes worth of batteries manufactured waiting for steel enclosures to show up. The steel enclosure, you put 672 batteries inside of that steel enclosure. There were some challenges with our supplier transitioning from prototype to scaled manufacturing.

To be able to get the throughput that we needed and the quality that we require to get out in the field, we've been working with the supplier to be able to get to that point and to be able to flow production, but we're not wasting a crisis. At the same time that these things have been happening, we went into our process where we integrate the batteries into the cube, and we're finding ways to reduce cycle time and do that faster that will allow us to catch up once the supply chain catches up. At the same time that we're doing this, we're out in the market looking for second and third sources of supply. The natural question would be, why didn't you do that before? But I think everybody has to take a step back and realize that up until June of this year, we were an undercapitalized company. So, it was hard to go out and get 2 sources of supply.

So, we bet on a supplier that's always delivered for us, and I believe will deliver for us in the future. And we had an acute supply chain issue that resulted in lower shipments than anticipated. We are working through it and we'll work through it, and we'll come back with updates to everybody as we have more information. But I just wanted to clear that up and make it clear on what we're talking about and get at the underlying issue that we have and how the team is working on that to resolve and get back to the flow that we expect coming off of our automated line and also out of the factory with the cubes that go out to the field.

[Thomas Boyes, analyst]

Got it. That's very helpful. How quickly can this be dual sourced? Obviously, it looks like just with this customer, it takes a little bit of time to get to the quality level that you're looking for. I'm just trying to maybe assess what's the risk of seeing these supply chain challenges persist into 1Q '25 or if it's something that can be achieved in a relatively short amount of time?

[Joseph Osha, analyst]

Thomas, great question. What I'd say is like we were out -- like no one supplier is going to be able to deliver what we need from a product as the company scales and grows. So, as you start looking at where we are, like the order that we signed that we announced last night and you put on top of that the backlog that we have and the projects that we're executing on, we need more than one supplier to be able to do that. We're in the process of bringing in a second source of supply. We already have a prototype in-house from that supplier to be able to look at that design and do all the quality verifications with the goal of getting production started by the end of this year from the second supplier.

[Operator]

Our next question comes from Martin Malloy.

[Martin Malloy, analyst]

First one, I just wanted to find out if you have any early customer feedback from the early installations of the Z3 battery.

[Joseph Mastrangelo, executive]

Nothing that -- we'll talk about that as we go forward here. In the future, what I would tell you on the modules themselves is that they perform well. We're in the process of installing them with the customers. We're being purposeful in how we're doing that. It is a new product for the customer and working through that and getting them up and operating. What I'd say is like the initial results that we're seeing are positive, but we have more work to do with them.

[Martin Malloy, analyst]

Okay. And then it's great to see a large order like what you announced with the utility. Can you maybe talk about customers visiting either your -- I think you have a pilot project in New Jersey or demonstration project or the automated line. Has that type of customer changed? Or are you seeing more customers come through and wanting to see what you're capable of here now that you've got the automated line up and running?

[Joseph Mastrangelo, executive]

Yes. So, what I'd say, Martin, is yes. We have a lot of people coming in, both to Edison, New Jersey and to Turtle Creek in Pennsylvania. I think when you walk into the factory and you see the batteries moving down the line, people then look at this and say, we see that you can scale when we take them over to where we do the containerization and show them the processes that we're putting in place to allow us to get the throughput that we want. I mean that's ultimately why City utilities felt comfortable with placing their largest order for energy storage that they've ever placed on us. And I think the team that we've built, we continue to build out talent on the organization. We've had a talented team. But as the company scales, we need more of that talent on the field here, helping the company perform. We're doing that.

We're bringing in people that have worked for competitors, that have worked in lithium-ion, that have worked in the space, and they're coming to Eos because when they come and interview, they see what we have and they realize what the market needs, and they know that they can be part of building something that's going to change the way we power the future. I really believe in this, and I think the team believes in it. And unfortunately, we had this period of time where we had a hiccup. A supply chain is doing 1 million things right every day, million simple things at the end of the day, like when you look at what happened here, you say, wow, this is a simple steel cube. Yes. These things happen all the time. But when you're a company of our size, they can cause a big issue with being able to deliver on your commitments.

Balanced by the fact that we're not only a commitment, but have a high conviction that the team will deliver and that the customer sees the benefit of the product. The page that I presented with the roundtrip efficiencies, that's pretty powerful. We never went up to a 16-hour discharge before. But when you look at that, when you look at that round trip efficiency there in the normal operating window that everybody talks about, that's very powerful.

The other thing I'd add inside of that is, although the sound wasn't really great, I understand when I was talking, and we hopefully, we fixed that now. But like when you think about like we've got this battery out there, we've got our own EMS and now partnering with Cerberus to bring in AI and edge computing and software and analytics, that performance of that battery is only going to improve over time. I mean we are in the early stages of bringing this product to market. There's a lot more we can do, and we love sharing that with our customers because when they see it, they believe it and then you see the impact of that in our pipeline.

[Operator]

Our next question comes from Stephen Gengaro with Stifel.

[Stephen Gengaro, analyst]

I think 2 questions for me. You talked a little bit about this. But when you think about the supply chain issues, I mean, obviously, we're talking about small numbers turning into large numbers. So, the revenue ramp and the pushout look large, right, relative to what you reported. But how should we think about -- I know it's early, but should we think about a major revenue inflection point in the first quarter next year or the second quarter next year? Is there any color you can give us around that?

[Joseph Mastrangelo, executive]

Great question, Stephen. So, what I would say, like we'll come out with 2025 guidance. But when we just talk about ramping into the production, right? What I would say is we'll get to a normalized rate of production here in December. You have to realize like even with those 27 cubes of batteries sitting on the shop floor waiting for a cube to show up, we're not running the line to its full capacity as a number of hours per day, like we're trying to manage to deliver for customers while managing the cost, the cash and inventory impact that we're having. So, we're trying to time everything. I think we'll get to a normalization. We'll talk about that on a future call. But what I would say is I'd anticipate a first quarter that's relatively higher, obviously, than what we're doing now, but relatively flat, ramping into growth as we get into the second quarter and second half of next year.

Principally driven by -- when I spoke about the automation of the subassemblies to be able to get the line to be up above 2 gigawatt hours of production. That's when we're going to see the ramp. We're being very purposeful on that subassembly manufacturing. We're getting good performance out of our semi-automated line in order to get with good quality, automating that process, which we've always talked about, gets us the throughput to get more batteries off the line, time that with multiple suppliers coming in on the cube and the changes we're making in the containerization process. I think you really see the growth coming in as we get into the second quarter and second half of next year.

[Stephen Gengaro, analyst]

Great. Now that's good color. And the other question I had was given sort of your stage of production growth and you obviously had the city utility order come in, is there any way to think about the LOIs and the commitments? And how much of that is in limbo until you guys prove the production and the delivery, et cetera. So, they're kind of on the cusp of being signed, but you need traction for those customers to sign? Or is it just other issues and timing that's driving when these things get signed?

[Joseph Mastrangelo, executive]

No. Thanks for that question. Look, I think this is really -- as we talked about earlier in the call, this is really about customers closing on their financing, getting their interconnections, getting important pieces of their projects pulled together. In many cases, they're on project shortlist and just waiting to get projects awarded. I would say it's really not about us proving out our manufacturing capabilities. It really has to do with normal project development milestones that customers are working through. So again, we continue to work with them, as we talked about on the bankability side, coming up with insurance products and other warranty enhancements in order to help them with their bankability and their financing. I think you're going to see a significant increase in throughput through our pipeline as a result of that, and we're looking forward to talking more about that in future quarters as it comes to fruition.

[Operator]

Our next question comes from Joseph Osha with Guggenheim.

[Joseph Osha, analyst]

The first question I was going to ask has just been asked. It sounds like we can look forward to the fully automated line probably hitting its full stride kind of second half of next year. Is that fair from the comments I just heard?

[Joseph Mastrangelo, executive]

Second quarter, Joe, is what I would say.

[Joseph Osha, analyst]

Okay. And then I thought this news item in the press release on the insurance wrap is interesting. Is this something that some of your customers are asking for in order to secure attractive financing or just 1 or 2 of them or all of them? I'm just trying to understand how important getting this done is going to be in terms of getting a revenue ramp in product in the field.

[Joseph Mastrangelo, executive]

Joe, what I would say is just a little bit of color on what we're doing, right? We have quotes. This isn't like, let's go out and find it. This is which one do we want to use. I think what this helps us do is accelerate what's sitting in LOIs and what's sitting in late stage because it takes off the table any questions you would have about Eos being here to deliver, the references of the products. So now that we're able to go in with the production that we have and then tell people, look, as you come in and you're making your first buy, here's the way you get comfortable with your first buy. And I think over time, that goes away. So, that’s just in my view, and I'll let Nathan comment as well because he's leading the charge here, this is a way for us to accelerate pipeline conversion as we look forward here.

[Nathan Kroeker, executive]

Yes. And I would just add, I think it's specific to each individual customer, right? It depends on how they're putting their financing together. In some cases, it's bridge financing, which is tied to ITC. So, it's short-term insurance products around the ITC. There’re insurance products around the ITC claw back. There's performance guarantee insurance. There are warranty backstop options. We're talking also about extending our standard warranty terms. So again, it's case by case, customer by customer. What we're endeavoring to do is have a suite of products with a large name insurance underwriter who's done their due diligence on our technology, done their due diligence on our ability to manufacture and deliver and then tailor those offerings to a particular project or a particular customer in order to meet their needs in order to get their deals closed and progress.

[Joseph Osha, analyst]

Okay. Let me just perhaps before I go away ask this a different way then because you guys are talking about advancing LOIs, which is great. Is the shipping of any of this $589 million of hard backlog contingent on closing insurance or not?

[Nathan Kroeker, executive]

No, those are firm orders that we have in our backlog today. So, what we're really talking about is how do we move things from opportunities into our pipeline through LOIs and into booked orders.

[Operator]

Our next question comes from Chip Moore with ROTH Capital Partners.

[Alfred Moore, analyst]

I just wanted to maybe follow up there, Joe, on sort of near-term pipeline conversion. I guess just any early thoughts given the new political environment on what that could mean? Does that introduce some potential for delays sort of near term as people wait to see how things shake out? Or what are your thoughts there?

[Joseph Mastrangelo, executive]

Yes. I mean, so here's how I would think about this. I think we need energy storage regardless of who's in the White House. The industry needs it, there's global growth around it. There was growth 5 years ago in storage, and there's been growth here as technology gets adopted over the last 24 months. I think the other piece that we need is we need American-built energy storage. And we need safe assets on our grid that we sleep well at night knowing that we can control them. And that's what Eos brings. And I think it's very clear on making America manufacturer again, which we've done proactively. And we look at accelerating into that demand for a product that the industry needs, combined with a long strategy that we've held for the last 5 years of being a U.S. manufacturer with a present that we need to see with potentially President elect.

I've been busy here. I don't know where the election stands, but it looks like with the Trump administration that's come in and has been very clear about how they feel about importing from China. Well, we're here. We build our product in Pennsylvania. Our suppliers go through Ohio, Michigan, New York, Massachusetts. I mean it's the center of the country. It's 91% U.S. manufactured, moving towards 100% with the software being developed by an American company. I think that's pretty powerful. And I think we need this technology. And I said this many times every time everybody asked me about this. I'm an energy executive. I'm not a green tech person. I've worked across every possible area of the energy value chain. We need this technology regardless of who's there, and it's being adopted because it's required and it can work.

[Operator]

This concludes our question-and-answer session. I would now like to turn it back over to Joseph Mastrangelo for closing comments.

[Joseph Mastrangelo, executive]

Thank you. Thanks, everyone, for listening in today. Just a couple of points I want to reiterate. We will come back with the progress that we're having on opening up the supply chain around bringing cubes in and where we stand on that. I think when we talk about bankability, we've got to be very clear that this was something that given where we are with the capital available that Nathan has brought to the company, we now went out proactively with Cerberus to find Marsh to be able to go out and get quotes in to be able to do this. This wasn't a, oh my God, we have to do it. It was, let's play on our toes versus being on our heels when we're out in the market commercially. And that's where we're bringing in. I think one of the things that we didn't talk a lot about on the call, I mentioned it in one of my answers is being able to bring in the suite of analytics and performance monitoring to improve the way the technology performs out in the field.

I think we're starting to expand the team and put a world-class team on the field to be able to do this. And I think the last thing, which we weren't asked, but I want to proactively address because we talked about it. As it relates to the covenant and the loan around revenue, Cerberus approached Eos about waiving that covenant. They approached us because they understand what was happening around the supply chain and that this was an acute issue, not a systemic issue. And they believe in the team, they believe in the ability to scale this business, and they have been a good partner for Eos and being able to do this. We look forward to continuing to work through, get the DOE loan closed get the supply chain stabilized and running and continuing to work our pipeline and convert that pipeline through to bookable orders out into the field.

I feel really good about the prospects of the company growing. I feel disappointed in the revenue that we delivered in this quarter, but this isn't a company that we should be looking at on individual quarters. This is a company that we have to look at over a period of time. And when you look at the product that we're putting out in the field, it's an amazing product. And it's an amazing product that proves that not only can you invent technology in the U.S., but you can manufacture technology in the U.S. and you can deploy technology in the U.S. And that's what the team at Eos has done and will continue to do. And we're hard at work making that happen every day. I thank everyone again for their time, and we'll be back soon with further updates as they happen.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.