Eos Energy Enterprises, Inc. (EOSE)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

Overview

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 Z3™ battery module is 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

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

Inflation and cost factors - During 2024, 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 back towards normal levels. This eased many investor concerns and worked to stabilize the cost of purchasing supplies and raw materials for the Company.

DOE Loan Facility

On November 26, 2024, the Company entered into the DOE Loan Facility. The DOE Loan Facility is a key step in advancing the Company's Project American Made Zinc Energy ("AMAZE") and is expected to fund the expansion of Eos’ manufacturing capacity to 8 GWh by 2027 to meet the growing demand for longer duration battery energy storage systems. The DOE Loan Facility provides for up to $303.5 million in funding, including capitalized interest.

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The DOE Loan Facility provides for a multi draw term loan facility under a series of at least two and, if the Company elects, up to four tranches of the loan (each, a “Tranche”), subject to the achievement of certain funding conditions, with each Tranche corresponding to the production, maintenance and development, and operation of a given production line to be funded using the proceeds of such Tranche and the principal amount of each Tranche consisting of a maximum principal amount designated for such Tranche in the DOE Loan Facility. Each Tranche provides the Company funding for 80% of the Eligible Project Costs (as defined in the DOE Loan Facility) associated with the corresponding production line, with the Company responsible for funding the remaining 20% of the Eligible Project Costs.

Through December 31, 2024, the Company has received funding under the DOE Loan Facility for an aggregate amount of $68.3 million, at an interest rate of 4.791% for eligible project costs incurred through December 6, 2024. These costs are a portion of Tranche 1 of the DOE Loan Facility. Tranche 1 provides up to $102.0 million for eligible costs in connection with the design, construction, installation, startup and shakedown of a battery automation line and related tools, with a projected annual production capacity of approximately 1.25 GWh ("Line 1").

Inflation Reduction Act of 2022 (“IRA”)

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, which include our Gen 2.3 and Z3™ BESS, could qualify for an investment tax credit (“ITC”). 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. 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 believe that projects utilizing Eos batteries qualify for the bonus.

Production Tax Credits under Internal Revenue Code 45X (“PTC”) 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 April 2024, the IRS issued final 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.

Company Highlights

•In January 2024, the Company entered into a supply agreement with TETRA Technologies, Inc (“TETRA”) that further expanded this partnership. TETRA is a leading global energy services and solutions company. This supply agreement designates TETRA as the preferred strategic supplier of electrolyte products for the Company’s Eos Z3™ long duration energy storage cube.

•In February 2024, the Company entered into a multiyear pricing agreement with SHPP US LLC, a Saudi Basic Industries Corporation (“SABIC”) affiliate, to supply conductive composite thermoplastic for the Eos Z3™ battery module. The Company and SABIC have worked collaboratively to develop a solution using one of SABIC’s new resin materials to replace the titanium used in prior Eos battery iterations.

•In February 2024, the Company achieved “Power On” status of all motion systems on its first state-of-the-art manufacturing line. Reaching this milestone is a significant step in achieving the state-of-the-art manufacturing line being installed and commissioned in the Company’s Turtle Creek facility.

•In April 2024, the Company and Pine Gate Renewables signed an agreement to expand its existing relationship. The new Master Supply Agreement (“MSA”) is for 500 MWh of energy storage systems to be delivered over the next five years.

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•In May 2024, the Company successfully completed its Factory Acceptance Testing on State of the Art (“SotA”) manufacturing line.

•In June 2024, the Company announced a strategic investment of up to $315.5 million from an affiliate of Cerberus Capital Management LP (“Cerberus”), to support the Company’s growth plans.

•In June 2024, the Company recognized a gain on debt extinguishment of $68.5 million from the payoff of the Senior Secured Term Loan.

•In June 2024, the Company completed the installation of the first state of the art line in its Turtle Creek facility and began commercial production of batteries off the new line to be delivered to customer sites.

•In June 2024, the Company announced that Nick Robinson, Senior Managing Director on the Supply Chain and Strategic Opportunities team of Cerberus, joined the Company’s Board of Directors.

•In July 2024, the Company and Indian Energy announced an agreement to expand its existing relationship. The expanded agreement with Indian Energy added 25 MWh of storage to the existing 35 MWh order for an overall project size of 60 MWh.

•In July 2024, the Company regained compliance with the minimum continued listing criteria set forth in Nasdaq Listing Rule 5550(a)(2) as of July 9, 2024, based on the closing bid price of the Company’s common stock being at or above $1.00 per share for the 10 consecutive business days from June 24, 2024 to July 8, 2024. The Company's stock price has performed well above the minimum listing throughout the remainder of 2024 and closed at $4.86 at December 31, 2024.

•In July 2024, the Company announced that Gregory Nixon, Head of Strategic Investments for Cerberus, joined the Company’s Board of Directors.

•In August 2024, the Company successfully achieved all four of the first performance milestones previously agreed upon between Eos and Cerberus as part of Cerberus’s strategic investment in the Company. Achieving these specific performance milestones allowed the Company to draw an additional $30 million on the Delayed Draw Term Loan from Cerberus to fund ongoing operations and production expansion to meet the growing demand for long duration energy storage solutions.

•In October 2024, the Company successfully achieved all four of the performance milestones for the October Draw previously agreed upon between Eos and Cerberus as part of Cerberus’s strategic investment in the Company. Achieving these specific performance milestones allowed the Company to draw an additional $65.0 million on the Delayed Draw Term Loan from Cerberus.

•In November 2024, the Company announced a new customer agreement with City Utilities (CU) to provide 216 MWh of energy storage for two project sites in Missouri.

•In November 2024, the Company signed a Memorandum of Understanding (MOU) with Wabash (NYSE: WNC), a world-class provider of advanced engineering and operational solutions for the transportation, logistics, and distribution industries. The proposed partnership would accelerate Eos’ ability to deliver large-scale battery energy storage systems (BESS) through Wabash’s manufacturing and supply chain expertise and national distribution network.

•In November 2024, the Company entered into the DOE Loan Facility which provides an aggregate principal amount of up to $277.5 million and an aggregate capitalized interest of up to $26.0 million. Through December 31, 2024, the Company has drawn down an aggregate of $68.3 million of principal under the DOE Loan Facility, at an interest rate of 4.791%, for eligible project costs that the Company has incurred or is expected to incur through December 6, 2024. These costs are a portion of Tranche 1 of the DOE Loan Facility, which are related to Line 1.

•In December 2024, the Company announced a 400 MWh standalone storage order with International Electric Power (“IEP”). This marks the second agreement and third project with IEP, a leading developer in the energy space deploying multiple technologies, and builds on Eos’ successful prior delivery of its battery systems to a Texas-based IEP project earlier this year.

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•In December 2024, the Company and FlexGen Power Systems (“FlexGen”) announced they have signed a Joint Development Agreement (JDA) to develop and introduce America’s first fully-integrated, domestic BESS solution to the market by combining Eos’ Z3™ batteries with the FlexGen HybridOS™ Energy Management System (EMS). The agreement is mutually beneficial as it complements each company’s opportunity pipeline and advances their commitment to commercializing safe and reliable, U.S. manufactured, BESS solutions to customers.

•In December 2024, the Company announced its search for a new manufacturing facility in addition to the Mon Valley Works expansion under Project AMAZE. This expansion is part of the Company’s broader strategy to scale up its operations to meet the rapidly growing demand for renewable energy solutions and to further its commitment to American manufacturing and energy independence.

•In December 2024, the Company announced that David Urban, Managing Director at BGR Group and Of Counsel at Torridon Law PLLC, joined the Company’s Board of Directors.

•The Company conducted a Section 382 ownership shift analysis through December 31, 2024. Based on the analysis, the Company expects to be able to utilize approximately $741.2 million of Federal Net Operating Loss Carryforwards, with the majority being available for use by December 31, 2029. The remaining balance will become available over time.

•In January 2025, the Company successfully achieved all operational milestones that guarantees final $40.5 million under the $210.5 million Delayed Draw Term Loan to further solidify its position as a leader in American energy storage systems. Successfully meeting these performance milestones will enable the Company to fuel its ongoing operations, U.S. production expansion, and the creation of an American energy storage powerhouse, without the need to raise additional capital via debt or additional equity offerings.

•With the Delayed Draw Term Loan fully funded, combined with DOE loan facility's first disbursement in December 2024, Eos has a strong foundation and sufficient capital to continue implementing Project AMAZE. The Company is executing its strategy to scale production into strong customer demand for long duration energy storage. Cash from customer projects now play an important role in funding working capital and our American-made system can play a critical role in America achieving energy independence. The $210.5 million Delayed Draw Term Loan ("DDTL") is now fully funded, driven by the Company consistently achieving key operational milestones related to the Company’s state-of-the-art manufacturing line, raw materials cost-out, Z3 technology performance improvement and orders backlog cash conversion. The Company surpassed its January raw materials cost-out target by 6% while delivering manufacturing cycle times below 10 seconds to further demonstrate continued operational efficiency and progress.

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Results of Operations

Revenue

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 slightly decreased for the year ended December 31, 2024 compared to the year ended December 31, 2023, due to reduced production and deliveries due to the installation of the Company’s new manufacturing line.

Cost of goods sold

Cost of goods sold primarily consists of direct costs relating to labor, material and overhead directly tied to product assembly, 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 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. For the year ended December 31, 2024, the Company recognized $3.8 million reduction of cost of goods sold related to the IRA PTC. 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 increased by $9.1 million, or 10% from $89.8 million for the year ended December 31, 2023 to $98.9 million for the year ended December 31, 2024. The increase in cost of goods sold from 2023 to 2024 was primarily due to an increase in project commissioning costs on previously delivered projects, revaluations of inventory balances, along with the underutilization and absorption of labor and overhead associated with implementing the new line.

Research and development expenses

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 increased by $4.1 million or 22% from $18.7 million for the year ended December 31, 2023, to $22.8 million for the year ended December 31, 2024. The increase in research and development costs was driven by higher spending on materials and supplies related to the implementation of the automated line, as well as an increase in payroll and personnel costs.

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Selling, general and administrative expenses

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 $6.4 million or 12%, from $53.7 million for the year ended December 31, 2023 to $60.0 million for the year ended December 31, 2024. The increase was primarily driven by higher consulting fees and payroll, partially offset by decrease in legal fees.

Loss from write-down on property, plant and equipment

The Company incurred losses of $9.1 million and $7.2 million from write-downs of property, plant and equipment for the years ended December 31, 2024 and 2023, respectively. The 2023 write-downs were mainly due to replacement of equipment, outsourcing of certain production processes and the shift in production from the Gen 2.3 battery system to the Z3™ battery system. The 2024 write-downs were primarily related to design changes from the Z3™-Phase 1 to Z3™-Phase 2 production in which the Phase 1 production assets could not be utilized or repurposed for Phase 2 production. Additionally, the 2024 amount contains 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

Interest expense, net includes expenses for accrued interest, amortization of debt issuance costs and debt discounts.

Interest expense, net decreased by $10.1 million for the year ended December 31, 2024, compared to the year ended December 31, 2023. This was mainly due to lower interest expense recognized from the Senior Secured Term Loan due to the loan's extinguishment in June 2024. See Note 13, Borrowings for detail of interest expense recognized for the Senior Secured Term Loan.

Interest expense - related parties

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See Note 13, Borrowings for further discussion.

Change in fair value of debt - related party

The change in the fair value of debt - related party of $33.8 million for the year ended December 31, 2024, related to the Delayed Draw Term Loan. The primary factors contributing to the fair value change was the extension of the maturity date and timing of future cash flows of the DDTL netting with a debt yield reduction which decreased from 47.5% to 30.0% during the year ended December 31, 2024. The change in fair value applicable to the debt yield reduction is included in Change in fair value of debt - credit risk in Accumulated other comprehensive (loss) income.

For the years ended December 31, 2024 and 2023, the change in fair value of warrants was composed of the items below:

Change in fair value of derivatives - related parties

The change in the fair value of embedded derivatives - related parties, was due to our convertible debt (See Note 13, Borrowings) and the change in fair value of warrants - related parties was due to changes in fair value of our SPA Warrant and contingent warrants (See Note 14, Warrants Liability).

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Gain (loss) on debt extinguishment

The Company recognized a gain on debt extinguishment of $68.5 million for the year ended December 31, 2024 from the payoff of the Senior Secured Term Loan.

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.

Other expense

Other expense of $8.1 million for the year ended December 31, 2024 primarily included loss from derecognition of loan commitment assets during 2024 from the Credit and Securities Purchase Transaction. See Note 3, Credit and Securities Purchase Transaction, for more information.

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

Income tax expense

Income tax expense of approximately $0.02 million and $0.03 million was recorded for the years ended December 31, 2024 and 2023. The taxes are attributable to taxable earnings from the Company’s foreign operations which were insignificant for all periods presented.

Liquidity and Capital Resources

Liquidity and Going Concern

As a growth company in the early commercialization stage of its lifecycle, Eos is subject to inherent risks and uncertainties associated with the development of an enterprise. In this regard, substantially all of the Company’s efforts to date have been devoted to the development and manufacturing of battery energy storage systems and complementary products and services, recruitment of management and technical staff, deployment of capital to expand the Company’s operations to meet customer demand and raising capital to fund the Company’s development. However, as a result of these efforts, the Company has incurred significant losses and negative cash flows from operations since its inception and expects to continue to incur such losses and negative cash flows for the foreseeable future until such time that the Company can reach a scale of profitability to sustain its operations.

In order to execute its development strategy, the Company has historically relied on outside capital through the issuance of equity, debt and borrowings under financing arrangements (collectively “outside capital”) to fund its cost structure. While the Company believes its recent entry into new credit facilities as discussed below has significantly improved its capital position and provides a path to sustainable operations and profitability, there can be no assurance the Company will be able to achieve such profitability or do so in a manner that does not require additional outside capital. Moreover, while the Company has historically been successful in raising outside capital, there can be no assurance the Company will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to the Company.

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As disclosed in Note 3, Credit and Securities Purchase Transaction, on June 21, 2024, the Company entered into a financing transaction with CCM Denali Debt Holdings, LP, an affiliate of Cerberus Capital Management LP (herein after referred to as “Cerberus”, “Denali”, “Lender”, “Holder”). As a result of this transaction, Cerberus agreed to provide a $210.5 million secured multi-draw facility to be made in four installments (the “Delayed Draw Term Loan”) as well as a $105.0 million revolving credit facility (“Revolving Facility”), to be made available beginning June 21, 2026, at Cerberus’ sole discretion and only if the Delayed Draw Term Loan is fully funded. As of the issuance date, the Delayed Draw Term Loan was fully funded. As part of the Credit and Securities Purchase Transaction, Cerberus received warrants and preferred stock resulting in a 33% ownership position in the Company as of the issuance date. This ownership percentage represents $644.8 million in market capitalization based on the February 27, 2025 closing share price of the Company’s common stock.

As disclosed in Note 13, Borrowings, on November 26, 2024, the Company successfully closed on the DOE Loan Facility, which provides the Company with up to $303.5 million in funding, including capitalized interest, subject to the achievement of certain funding conditions. The DOE Loan Facility provides for a multi draw term loan facility under a series of at least two and, if the Company elects, up to four tranches, subject to the achievement of certain conditions, with each tranche corresponding to the production, maintenance and development, and operation of a given production line to be funded using the proceeds of such tranche. The DOE Loan Facility specifies the maximum amount subject to each tranche (Tranche 1: $102.0 million; Tranche 2: $117.3 million; Tranche 3: $71.8 million; and Tranche 4: $12.3 million), and any amounts which are not withdrawn under a specified tranche cannot be allocated to another tranche. Through December 31, 2024, the Company had drawn down $68.3 million under Tranche 1.

As of the date the accompanying Consolidated Financial Statements were issued (the “issuance date”), management evaluated the significance of the following negative financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

•Since its inception, the Company has incurred significant losses and negative cash from operations in order to fund its development. During the year ended December 31, 2024, the Company incurred a net loss of $685.9 million. Adjustments to reconcile the net loss to cash used in operations are primarily from non-cash items on the Consolidated Statements of Cash Flows. The non-cash items totaled $549.2 million. The Company incurred negative cash flows from operations of $153.9 million and had an accumulated deficit of $1,561.7 million as of December 31, 2024.

•As of December 31, 2024, the Company had $74.3 million of unrestricted cash and cash equivalents available to fund the Company’s operations, and working capital of $114.9 million, which includes loan commitment assets of $21.7 million classified as current assets on the Consolidated Balance Sheets.

•On June 21, 2024, upon closing of the Credit and Securities Purchase Transaction, Cerberus funded the Company $$75.0 million of the initial draw, and the Company received $71.3 million, net of the 5.0% original issue discount. On August 29, 2024, Cerberus funded the Company $30.0 million (“August Draw”), and the Company received $28.5 million, net of the 5.0% original issue discount. On November 1, 2024, Cerberus funded the Company $65.0 million related to the October 31, 2024 tranche (“October Draw” or “October Tranche”), and the Company received $61.8 million, which is net of the 5.0% original issue discount. On January 24, 2025, Cerberus funded the Company the final $40.5 million related to the January 31, 2025 tranche (“January 2025 Draw”). Subsequent to the January 2025 Draw, the Delayed Draw Term Loan has been fully funded.

•Through December 31, 2024, under the DOE Loan Facility, the Company drew down $68.3 million for the eligible project cost that the Company had incurred through December 6, 2024. These costs are a portion of Tranche 1 of the DOE Loan Facility. Tranche 1 provides up to $102.0 million for eligible costs in connection with the design, construction, installation, startup and shakedown of a battery automation line and related tools. In the event the Company does not achieve certain funding conditions and the DOE chooses not to continue funding, the Company would need to seek alternative sources of capital, which may not be available on favorable terms or at all.

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•The Credit and Securities Purchase Transaction and the DOE Loan Facility contain certain quarterly financial covenants, which include (a) Minimum Liquidity, (b) Minimum Consolidated EBITDA, and (c) Minimum Consolidated Revenue (collectively, the “financial covenants”). As of the fiscal quarter ended December 31, 2024, the only financial covenant in effect was Minimum Liquidity. As of December 31, 2024, the Company was in compliance with this covenant, as well as all non-financial covenants and expects to remain in compliance with the Minimum Liquidity covenant over the next twelve month beyond the issuance date. The Minimum Consolidated EBITDA and Minimum Consolidated Revenue financial covenants are effective starting fiscal quarter ending December 31, 2025. As of December 31, 2024, the Company expects that it may be unable to remain in compliance with the Minimum Consolidated EBITDA and Minimum Consolidated Revenue financial covenant beginning December 31, 2025, absent the Company’s ability to secure a waiver or amend the Credit and Securities Purchase Transaction and the DOE Loan Facility. In the event the Company is unable to comply with the financial and non-financial covenants as of December 31, 2025, and the Company is unable to secure a waiver, Cerberus and DOE may, at their discretion, enter into a forbearance agreement with the Company and/or exercise any and all of their existing rights and remedies, which may include, among other things, asserting their rights in the Company’s assets securing the loans. Moreover, the Company’s other lenders may exercise similar rights and remedies under the cross-default provisions of their respective borrowing agreements with the Company.

•In the event the Company’s ongoing efforts to raise additional outside capital are unsuccessful, the Company will be unable to meet its obligations as they come due over the next twelve month beyond the issuance date. In such an event, management will be required to seek other strategic alternatives, which may include, among others, a significant curtailment in the Company’s operations, a sale of certain of the Company’s assets, a sale of the entire Company to strategic or financial investors and/or allowing the Company to become insolvent.

These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying Consolidated Financial Statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.

Financing Arrangements

The Company has historically relied on outside capital to fund its cost structure and expects this reliance to continue for the foreseeable future until the Company reaches profitability through its planned revenue generating activities. During 2024, the Company closed on the following capital transactions:

•Under the ATM offering program, for the year ended December 31, 2024, the Company sold 16,627,523 shares raising proceeds of $14.1 million, net of fees paid to Cowen, at an average selling price of $0.87 per share.

•The Company secured a strategic investment of up to $315.5 million from Cerberus. The investment by Cerberus is structured as a $210.5 million Delayed Draw Term Loan to be made in four installments. On June 21, 2024 the first installment of $75.0 million was funded, on August 29, 2024, the second draw of $30.0 million was funded, on October 31, 2024 the third draw of $65.0 million was funded, and on January 24, 2025, the final draw of $40.5 million was funded. As part of the strategic investment, a $105.0 million Revolving Facility can be made available to the Company at the Lenders’ sole discretion and only if the Delayed Draw Term Loan is fully funded.

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•On November 26, 2024, the Company entered into the DOE Loan Facility which provides for an aggregate principal amount of up to $277.5 million of borrowings and an aggregate capitalized interest of up to $26.0 million. Through December 31, 2024, the Company has drawn down $68.3 million under the DOE Loan Facility, at an interest rate of 4.791% for eligible project costs that the Company has incurred through December 6, 2024. These costs are a portion of Tranche 1 of the DOE Loan Facility, which are related to Line 1. Additional draws under the DOE Loan Facility are subject to our achievement of certain funding conditions, with each Tranche corresponding to the production, maintenance and development, and operation of a given production line to be funded using the proceeds of such Tranche and the principal amount of each Tranche consisting of a maximum principal amount designated for such Tranche in the DOE Loan Facility. Each Tranche provides the Company funding for 80% of the Eligible Project Costs (as defined in the DOE Loan Facility) associated with the corresponding production line, with the Company responsible for funding the remaining 20% of the Project Costs.

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

Capital Expenditures

Although 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, 2024 and December 31, 2023 were $33.2 million and $29.3 million, respectively. The increase in capital expenditures in 2024 was primarily driven by costs incurred for Phase 2 production of the Z3™ battery system. See Note 7, 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 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.

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

Cash flows from operating activities:

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 $153.9 million for the year ended December 31, 2024 was primarily driven by a net loss of $685.9 million, adjusted for non-cash items of $549.2 million. Non-cash items primarily related to stock compensation expense, depreciation and amortization, non-cash interest expense, gain on debt extinguishment, loss from the write-down of property, plant and equipment, and changes in fair value of debt, warrants and derivatives. The net cash outflows from changes in operating assets and liabilities of $17.2 million was primarily driven by an increase in inventory of $20.5 million, decrease in accrued expenses of $14.7 million, and increase in contract assets of $5.7 million, partially offset by an increase in contract liabilities of $19.7 million.

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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, 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.

Cash flows from investing activities:

Net cash flows used in investing activities for the year ended December 31, 2024 were primarily composed of payments made for purchases of property, plant and equipment of $33.2 million.

Net cash flows used in investing activities for the year ended December 31, 2023 were primarily composed of payments made for purchases of property, plant and equipment of $29.3 million, which included costs incurred for development and construction of a fully automated manufacturing line for the Z3™ battery.

Cash flows from financing activities:

Net cash provided by financing activities was $205.8 million for the year ended December 31, 2024. This was primarily due to the proceeds received from the Credit and Securities Purchase Transaction of $160.3 million, DOE Loan of $66.6 million, and issuance of common stock of $14.1 million. The proceeds were partially offset by payoff of the Senior Secured Term Loan of $19.9 million, debt issuance costs related to the Credit and Securities Purchase Transaction and DOE Loan of $18.1 million, payments on the equipment financing facility of $3.3 million and share repurchases from employees for tax withholding of $1.2 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.

Contractual Obligations

The Company has certain obligations and commitments to make future payments under contracts. As of December 31, 2024, this is comprised of the following:

•Future lease payments, including interest, under non-cancellable operating and financing leases of $4.2 million. The leases expire at various dates prior to 2028. See Note 15, Leases to our Consolidated Financial Statements included elsewhere in this Annual Report.

•In accordance with the Insurer Letter Agreement, the Company shall pay to the Atlas Insurers $4.0 million on June 30, 2025, subject to the absence of certain events of default under the Credit Agreement.

•Principal and Interest payments related to the following debt obligations. See Note 13, Borrowings to our Consolidated Financial Statements included elsewhere in this Annual Report.

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(1) As of December 31, 2024, the Company is obligated to repay future contractual interest payments for these borrowings in-kind.

Critical Accounting Estimates

Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Consolidated Financial Statements, we make assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments, and estimates.

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

The Company generally provides a standard warranty for a period of two years. We also provide extended warranties and performance guarantees, which are identified as separate performance obligations in the Company's contracts with customers. We accrue warranty reserves at the time of recording the sale. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors including actual claim data to date, results of lab testing, factory quality data, and field monitoring. Due to limited claim experience since commercialization of our product, and the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our Consolidated Financial Statements. If actual product failure rates or the frequency or severity of reported claims differ from our estimates, we may be required to revise our estimated warranty liability. We will also update actual warranty experience to determine warranty reserves as such experience becomes available. We review our reserves at least quarterly, seeking to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Initial warranty data can be limited at the early stage in the commercialization of our products and, the adjustments that we record may be material. Thus, it is likely that as we sell additional 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 10, 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 16, Fair Value Measurement to our Consolidated Financial Statements included elsewhere in this Annual Report.

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Convertible Notes and Embedded Derivatives

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. 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. See Note 16, Fair Value Measurements to our Consolidated Financial Statements included elsewhere in this Annual Report.

Instruments issued under the Credit and Securities Purchase Transaction (see Note 16, Fair Value Measurement)

The fair value of the Delayed Draw Term Loan was estimated using a discounted cash flow (“DCF”) method, based on the contractual cash flows discounted at an effective debt yield. The fair value of the loan commitment asset was estimated using the discounted cash flow model, based on the contractual cash flows discounted at the effective debt yield and considering the probability of achieving certain milestones. The fair value for the SPA Warrant is estimated based on its intrinsic value, using the Eos common stock closing price adjusted by a discount for lack of marketability (“DLOM”), less the exercise price of $0.01 for the SPA Warrant. A DLOM was applied considering the underlying shares of the SPA Warrants are unregistered. The fair value of the Contingent Warrants is estimated based on the underlying Eos common stock closing price adjusted by a DLOM using a Black-Scholes model, considering the probability of achieving certain milestones. A DLOM was applied considering the underlying shares of the Contingent Warrants are unregistered. The fair values for all these instruments are designated as level 3 measurements as they rely on significant unobservable inputs. The significant unobservable inputs for each of these instruments are detailed in Note 16, Fair Value Measurement), which include debt yield, DLOM, and milestones achievement expectations. The sensitivity of the fair value calculation to debt yield, DLOM, and milestones achievement expectations could create materially different results under different conditions or using different assumptions.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

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Overview

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

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

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.

U.S. 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.

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Inflation Reduction Act of 2022 (“IRA”)

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 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 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.

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•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.

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Results of Operations

Revenue

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

Cost of goods sold

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 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

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 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.

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Selling, general and administrative expenses

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 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

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

Interest expense, net includes accrued interest, amortization of debt issuance costs and debt discounts, and interest income. Interest expense, net increased by $10.9 million for the year ended December 31, 2023, compared to the year ended December 31, 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

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.

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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:

Change in fair value of derivatives - related parties

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

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.

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Other expense

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

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.

Liquidity and Capital Resources

Liquidity and Going Concern

As a growth company in the early commercialization stage of its lifecycle, Eos is subject to inherent risks and uncertainties associated with the development of an enterprise. In this regard, substantially all of the Company’s efforts to date have been devoted to the development and manufacturing of battery energy storage systems and complimentary products and services, recruitment of management and technical staff, deployment of capital to expand the Company’s operations to meet customer demand and raising capital to fund the Company’s development. As a result of these efforts, the Company has incurred significant losses and negative cash flows from operations since its inception and expects to continue to incur such losses and negative cash flows for the foreseeable future until such time that the Company can reach a scale of profitability to sustain its operations.

In order to execute its development strategy, the Company has historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund its cost structure and expects to continue to rely on outside capital for the foreseeable future. While the Company believes it will eventually reach a scale of profitability to sustain its operations, there can be no assurance the Company will be able to achieve such profitability or do so in a manner that does not require its continued reliance on outside capital. Moreover, while the Company has historically been successful in raising outside capital, there can be no assurance the Company will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to the Company.

As of the date the accompanying consolidated financial statements were issued (the “issuance date”), management evaluated the significance of the following negative financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

•Since its inception, the Company has incurred significant losses and negative cash from operations in order to fund its development. 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.

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•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 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. While the Company was in compliance with this covenant as of December 31, 2023, and expects to remain in compliance as of March 31, 2024, absent the Company’s ability to secure additional outside capital, the Company may be unable to remain in compliance with this covenant beginning on June 30, 2024 and thereafter. In the event the Company is unable to remain in compliance with the minimum financial liquidity covenant and the other nonfinancial covenants required by the Senior Secured Term Loan, and the Company is further unable to cure such noncompliance or secure a waiver, Atlas may, at its discretion, exercise any and all of its existing rights and remedies, which may include, among other things, entering into a forbearance agreement with the Company, and/or asserting its rights in the Company’s assets securing the loan. Moreover, the Company’s other lenders may exercise similar rights and remedies under the cross-default provisions of their respective borrowing arrangements with the Company.

•Absent an ability to secure additional outside capital in the near term, the Company will be unable to meet its obligations as they become due over the next twelve months beyond the issuance date.

•In the event the Company’s ongoing efforts to raise additional outside capital prove unsuccessful, management will be required to seek other strategic alternatives, which may include, among others, a significant curtailment in the Company’s operations, a sale of certain of the Company’s assets, a sale of the entire Company to strategic or financial investors, and/or allowing the Company to become insolvent.

These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

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Financing Arrangements

The Company has historically relied on outside capital to fund its cost structure and expects this reliance to continue for the foreseeable future until the Company reaches profitability through its planned revenue generating activities. During 2023, the Company closed on the following capital 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

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).

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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 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.

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

Cash flows from operating activities:

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, 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. 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 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.

Cash flows from investing activities:

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.

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Cash flows from financing activities:

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

The Company has certain obligations and commitments to make future payments under contracts. As of December 31, 2023, this is comprised of the following:

•Open purchase obligations of $0.1 million, related to a supply purchase agreement with a minimum volume commitment. See Note 16, Commitments and Contingencies to our consolidated financial statements included elsewhere in this Annual Report.

•Future lease payments, including interest, under non-cancellable operating and financing leases of $6.1 million. The leases expire at various dates prior to 2028. See Note 14, Leases to our consolidated financial statements included elsewhere in this Annual Report.

•Principal and Interest payments related to the following debt obligations. See Note 12, Borrowings 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

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we make assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments, and estimates.

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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

The Company generally provides a standard warranty for a period of two years. We also provide extended warranties and performance guarantees, which are identified as separate performance obligations in the Company's contracts with customers. We accrue warranty reserves at the time of recording the sale. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors including actual claim data to date, results of lab testing, factory quality data, and field monitoring. Due to limited claim experience since commercialization of our product, and the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our consolidated financial statements. If actual product failure rates or the frequency or severity of reported claims differ from our estimates, we may be required to revise our estimated warranty liability. We will also update actual warranty experience to determine warranty reserves as such experience becomes available. We review our reserves at least quarterly, seeking to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Initial warranty data can be limited at the early stage in the commercialization of our products and, the adjustments that we record may be material. Thus, it is likely that as we sell additional 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

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

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

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Overview

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. II. ("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.

Business Trends

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

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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. 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.

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.

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•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.

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Results of Operations

Revenue

The Company generates revenues from the delivery of its BESSs 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.

Cost of goods sold

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. 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; (c) higher manufacturing scrap and rework costs and production inefficiencies; and (d) higher EPC and commissioning expenses.

Research and development expenses

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

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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.

Selling, general and administrative expenses

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

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.

Loss from write-down on property, plant and equipment

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

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.

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Interest expense, net

Interest expense, net includes accrued interest, amortization of debt issuance costs and debt discounts, and interest income. Interest expense, net increased by $7.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. 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.

Interest expense - related party

Interest expense, related party includes accrued interest and the amortization of debt issuance costs and debt discounts. Interest expense - related party increased by $6.3 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. 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 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:

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.

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Income from equity in unconsolidated joint venture

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

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) 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.

Income tax expense

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

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Liquidity and Capital Resources

Liquidity and Going Concern

As a growth company in the early commercialization stage of its lifecycle, Eos is subject to inherent risks and uncertainties associated with the development of an enterprise. In this regard, substantially all of the Company’s efforts to date have been devoted to the development and manufacturing of battery energy storage systems and complimentary products and services, recruitment of management and technical staff, deployment of capital to expand the Company’s operations to meet customer demand and raising capital to fund the Company’s development. As a result of these efforts, the Company has incurred significant losses and negative cash flows from operations since its inception and expects to continue to incur such losses and negative cash flows for the foreseeable future until such time that the Company can reach a scale of profitability to sustain its operations.

In order to execute its development strategy, the Company has historically relied on outside capital through the issuance of equity, debt, and borrowings under financing arrangements (collectively “outside capital”) to fund its cost structure and expects to continue to rely on outside capital for the foreseeable future. While the Company believes it will eventually reach a scale of profitability to sustain its operations, there can be no assurance the Company will be able to achieve such profitability or do so in a manner that does not require its continued reliance on outside capital. Moreover, while the Company has historically been successful in raising outside capital, there can be no assurance the Company will be able to continue to obtain outside capital in the future or do so on terms that are acceptable to the Company.

As of the date the accompanying consolidated financial statements were issued (the “issuance date”), management evaluated the significance of the following negative financial conditions in accordance with Accounting Standard Codification 205-40, Going Concern:

•Since its inception, the Company has incurred significant losses and negative cash from operations in order to fund its development. During the year ended December 31, 2022, the Company incurred a net loss of $(229.8) million, incurred negative cash flows from operations of $(196.9) million, and had an accumulated deficit of $(646.3) million as of December 31, 2022.

•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. 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.

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•The Company is required to remain in compliance with a quarterly minimum financial liquidity covenant under its Senior Secured Term Loan. While the Company was in compliance with this covenant as of December 31, 2022, and expects to remain in compliance as of March 31, 2023, absent the Company’s ability to secure additional outside capital, the Company may be unable to remain in compliance with this covenant beginning on June 30, 2023 and thereafter. In the event the Company is unable to remain in compliance with the minimum financial liquidity covenant and the other nonfinancial covenants required by the Senior Secured Term Loan, and the Company is further unable to cure such noncompliance or secure a waiver, Atlas may, at its discretion, exercise any and all of its existing rights and remedies, which may include, among other things, entering into a forbearance agreement with the Company, and/or asserting its rights in the Company’s assets securing the loan. Moreover, the Company’s other lenders may exercise similar rights and remedies under the cross-default provisions of their respective borrowing arrangements with the Company.

•Absent an ability to secure additional outside capital in the near term, the Company will be unable to meet its obligations as they become due over the next twelve months beyond the issuance date.

•In the event the Company’s ongoing efforts to raise additional outside capital prove unsuccessful, management will be required to seek other strategic alternatives, which may include, among others, a significant curtailment in the Company’s operations, a sale of certain of the Company’s assets, a sale of the entire Company to strategic or financial investors, and/or allowing the Company to become insolvent.

These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

Financing Arrangements

The Company has historically relied on outside capital to fund its cost structure and expects this reliance to continue for the foreseeable future until the Company reaches profitability through its planned revenue generating activities. During 2022, 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.

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See Note 13, Borrowings and Note 20, Shareholders' Equity 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.

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. 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.

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.

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. 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. 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.

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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.

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.

Contractual Obligations

We have certain obligations and commitments to make future payments under contracts. As of December 31, 2022, this is comprised of the following:

•Open purchase obligations of $0.2 million, related to a supply purchase agreement with a minimum volume commitment. See Note 17, Commitments and Contingencies to our consolidated financial statements included elsewhere in this Annual Report.

•Future lease payments, including interest, under non-cancellable operating and financing leases of $6.5 million. The leases expire at various dates prior to 2028. See Note 15, Leases to our consolidated financial statements included elsewhere in this Annual Report.

•Principal and Interest payments related to the following debt obligations. See Note 13, Borrowings to our consolidated financial statements included elsewhere in this Annual Report.

* 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.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we make assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. 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.

Warranty Liability

The Company generally provides a standard warranty for a period of two years. We also provide extended warranties and performance guarantees, which are identified as separate performance obligations in the Company's contracts with customers. We accrue warranty reserves at the time of recording the sale. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors including actual claim data to date, results of lab testing, factory quality data, and field monitoring. Due to limited claim experience since commercialization of our product, and the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our consolidated financial statements. If actual product failure rates or the frequency or severity of reported claims differ from our estimates, we may be required to revise our estimated warranty liability. We will also update actual warranty experience to determine warranty reserves as such experience becomes available. We review our reserves at least quarterly, seeking to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Initial warranty data can be limited at the early stage in the commercialization of our products and, the adjustments that we record may be material. Thus, it is likely that as we sell additional BESS, we will acquire additional information on the projected costs to repair or replace items under warranty and may need to make additional adjustments. As of December 31, 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.

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. 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 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.

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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.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in “Forward-Looking Statements” and “Risk Factors.”

Overview

We design, manufacture, and deploy reliable, sustainable, safe and scalable low-cost battery storage solutions for the electric utility industry.

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. II., in order to acquire, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination one or more businesses. Upon the closing of the business combination (the “Closing”) on November 16, 2020, as described in Part I, Item 1. Business, the Company changed its name to “Eos Energy Enterprises, Inc.”

The business combination is accounted for as a reverse recapitalization. EES is deemed the accounting predecessor and the combined entity is the successor SEC registrant, meaning that EES's financial statements for previous periods are disclosed in the registrant’s future periodic reports filed with the SEC. Under this method of accounting, BMRG is treated as the acquired company for financial statement reporting purposes.

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As an SEC-registered and NASDAQ-listed company, we are required to implement procedures and processes to address public company regulatory requirements and customary practices and have and continue to hire additional personnel in this context. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, and audit and other professional service fees.

On April 8, 2021, the Company entered into a unit purchase agreement (the “Purchase Agreement”) with Holtec. In accordance with the terms and conditions of the Purchase Agreement, on April 9, 2021, the closing date of the Transaction (as defined below), the Company acquired from Holtec the entire 51% interest in Hi-Power that was not already owned by the Company. Following the consummation of the transaction set forth in the Purchase Agreement (the “Transaction”), Hi-Power became a 100% indirect, wholly-owned subsidiary of the Company and the obligations of the parties under the Hi-Power joint venture terminated.

We believe that the strategic acquisition of Hi-Power will increase our ability to effectively align manufacturing capacity with customer demands while maintaining our focus on human power, inventory management, production yields, quality, and cost. Further, we believe that the acquisition will also opportunistically allow us to increase our manufacturing capacity in line with new product introduction and future growth expectations.

Key Factors Affecting Operating Results

Commercialization

We continue to ramp up to full commercial production of our Eos Gen 2.3 120|500 DC Battery System. Our testing of Gen 2.3 batteries has indicated performance at expected levels. While we expect the performance to be the same as we further scale commercial production, the manufacturing line for this battery system continues to be tested. If performance of the battery system does not meet our specifications, we may need to reduce the speed of production to ensure we have quality batteries that meet our performance specifications. Any delay in production could affect the delivery of batteries to our customers.

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

Our growth strategy contemplates increasing sales of a commercial battery system through our direct sales team and sales channel partners. We anticipate our customers to include utilities, project developers, independent power producers and commercial and industrial companies. As we intend to expand our sales both in volume and geography, we have started discussions with several companies in North America, Europe, the Middle East and Asia about partnering on selling our product in these regions. For some of these potential partners, we have begun discussions ranging from being a reseller of our product to being a joint venture partner in the manufacturing of our battery systems. We expect to continue expanding the direct sales force in North America, adding direct salespeople outside North America, and entering into strategic alliances to advance our sales growth globally.

We are currently experiencing delays in our commercialization rollout due to project delays in connection with permitting procedures as well as establishing grid connections. These delays may continue to impact the timing of our deliveries and therefore our results of operations.

We continue to invest in production quality and manufacturing yield as we continue to scale our manufacturing abilities to meet current backlog demand. We expect overall cost reductions, as well as improved and consistent quality to be driven by (1) training and experience in aligning our engineering and manufacturing processes; (2) improvement in downtime and equipment maintenance; and (3) finalization of our material sourcing strategy.

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Integration of Alliance Partners

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

For sales outside of North America, we may partner with other companies to manufacture our products. The construction of any such facility would require significant capital expenditures and result in significantly increased fixed costs.

We commission battery storage systems and offer operation and maintenance services throughout the life of their operations. In addition, we also offer extended product warranties to supplement the life of these assets. As our sales expand in volume and geography, we have engaged third parties to perform this function on our behalf.

Market Trends and Competition

According to Bloomberg New Energy Finance (“BNEF”), the global energy storage market is expected to grow to a cumulative 350 gigawatts (“GW”), attracting an estimated $262 billion in future investment by 2030. With approximately 5.5 GW of energy storage commissioned globally in 2020, it is expected to increase to 11.9 GW in 2021. It is expected the global energy storage market will grow at a 33% compound annual growth rate from 10,764 megawatt hours (“MWh”) annual market in 2020 to approximately 174,000 MWh annually by 2030.

Based on BNEF, the United States would represent over 28% of this global cumulative market through 2030. The percentage of renewable energy in total electricity generation in the United States will change from 20% in 2020 to 33% or more by 2030. Favorable regulatory conditions such as the recent court decision validating FERC Order 841, along with state-sponsored incentives in New York, California, Massachusetts and other states coupled with the rapid growth of solar-plus-storage applications throughout the United States are expected to grow the energy storage market from 2,473 MWh deployed in 2020 to 43,586 MWh deployed in 2030.

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

•product performance and features;

•safety and sustainability;

•total lifetime cost of ownership;

•total product lifespan;

•power and energy efficiency;

•duration of the batteries' storage;

•customer service and support; and

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

Li-ion currently has 95% or more market share for the stationary battery industry. We believe we are the first commercially available battery system that does not have a Li-ion chemistry. We anticipate our battery system using Znyth™ technology will gradually take some market share of the battery industry. This considers its unique operating characteristics, including a 100% discharge capability, flattened degradation curve and a 3 to 12 hour duration, as well as other characteristics related to safety and the cost of operating and maintaining our battery system. Our ability to successfully deploy our battery system technology and gain market share in the energy storage market will be important to the growth of our business.

Regulatory Landscape

In North America, geographic distribution of energy storage deployment has been driven by regulatory policy with both federal and state level programs contributing to stable revenue streams for energy storage. Refer to the Business section for a description of these programs and the impact on our business.

Covid-19

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We have implemented operational and protective measures to ensure the safety, health and welfare of our employees and stakeholders. This includes implementing work-from-home policies for nonessential employees, which constitute 78% of our workforce. We have also ensured that all employees and visitors that visit our office have access to personal protective equipment and we strictly enforce social distancing. We will maintain these precautions and procedures until Covid-19 is under adequate control. To date, Covid-19 caused a several week delay in completing the UL certification of the Gen 2.3 product due to the certification company being delayed in completing the in-person witness tests. In addition, it caused a delay for us in delivering products to one of our customers. Other than this, Covid-19 did not have a material impact on our operations or financial condition.

The full impact of the Covid-19 pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers, and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other risks disclosed in Item 1A “Risk Factors” within this Annual Report on Form 10-K. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business from any economic recession or depression that may occur as a result of the pandemic. Therefore, we cannot reasonably estimate the impact at this time. We continue to actively monitor the pandemic and may determine to take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine to be in the best interests of our employees, customers, vendors, and shareholders.

Components of Results of Operations

As the Merger is accounted for as a reverse recapitalization, the operating results included in this discussion reflect the historical operating results of EES prior to the Merger and the combined results of Eos following the closing of the Merger. The assets and liabilities of the Company are stated at their historical cost in thousands.

Revenue

We have generated revenues from limited sales as we recently launched our next-generation energy storage solution Gen 2.3 that is scalable and can be used for a variety of commercial use cases. We expect revenues to increase as we scale our production to meet demand for the next generation of our product.

Cost of goods sold

In August 2019, we established a joint venture, Hi-Power, that manufactures the Gen 2.3 battery system on our behalf. Our cost of goods sold for the Gen 2.3 battery system prior to the acquisition of Hi-Power includes the purchase of the manufactured system from Hi-Power, the joint venture which produces the Gen 2.3 battery system. On April 9, 2021, Hi-Power became our wholly-owned subsidiary after closing of the acquisition of the remaining 51% interest previously held by our joint venture partner. Therefore, cost of goods sold subsequent to that date primarily consists of direct labor, direct material and the overhead that is directly tied to the production facility. Other items contributing to cost of goods sold were manufacturing overhead such as engineering expense, equipment maintenance, environmental health and safety, quality and production control and procurement, as well as transportation, logistics, depreciation and facility-related costs. We expect our cost of goods sold to exceed revenues in the near term as we continue to scale our business.

Research and development expenses

Research and development expenses consist primarily of salaries and personnel-related costs as well as products, materials, third-party services, and depreciation on equipment and facilities used in our research and development process, as well as amortization on intangible assets. The research and development expense is related to spending on obtaining the UL certificate, improving battery performance and reducing cost on Gen 2.3, as well as designing and developing new generations of our battery storage system. We expect our research and development costs to increase for the foreseeable future, as we continue to invest in research and development activities that are necessary to achieve our technology and product roadmap goals.

Selling, general and administrative expenses

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Selling, general and administrative expenses consist mainly of personnel-related expenses including corporate, executive, finance, and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, and marketing costs. We expect selling, general and administrative expenses to increase for the foreseeable future as we scale our headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.

Loss on pre-existing agreement

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

Grant expense (income), net

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

Interest expense, net

For the year ended December 31, 2021, interest expense primarily consists of interest accretion on notes payable associated with the Hi-Power acquisition as well as interest expense from equipment financing agreement. For the years ended December 31, 2020, interest expense is mainly from the one-year invoice securitization facility the Company entered into in January 2020.

Interest expense - related party

For the year ended December 31, 2021, interest expense-related party primarily consists of interest expense on the 2021 Convertible Notes issued to Koch Industries, Inc. ("Koch") in July, as well as the amortization of discounts and issuing costs associated with the 2021 Convertible Notes.

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

Remeasurement of equity method investment

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Under the equity method, an investment is recorded at historical cost and adjustments are made to the value at the acquisition date based on percentage ownership in the investee. Our investment in Hi-Power was accounted for under the equity method until we fully acquired the company on April 9, 2021. We remeasured our previously held 49% ownership interest in Hi-Power at its acquisition date fair value and a loss was recorded for the difference between the fair value and historical cost.

Loss on extinguishment of convertible notes

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

Change in fair value, embedded derivative

The 2021 Convertible Notes issued in July 2021 contain a conversion feature which is precluded from being considered indexed to the Company’s own stock. Therefore, the conversion feature was accounted for as an embedded derivative and classified as a Level 3 financial instrument. The Legacy Convertible Notes issued during 2019 and 2020 contained an embedded derivative feature that could accelerate the repayment of the Legacy Convertible Notes upon a qualified financing event not within our control. This embedded derivative resulted in the recording of a premium or discount on Legacy Convertible Notes that were recognized in earnings upon their issuance. In connection with the Merger, all Legacy Convertible Notes were converted to common stock and the embedded derivative fair value was zero as of December 31, 2020. These embedded derivatives are remeasured at their fair value each balance sheet date and the changes in their fair value are recognized in the consolidated statements of operations during the period of change.

Change in fair value, warrants liability - related party

The Private Placement Warrants were recognized by the Company as of the Merger Date at fair value of $559 and classified as a liability in the consolidated balance sheets. Thereafter, the change in fair value is recognized as a derivative gain (loss) each reporting period in the consolidated statements of operations. The Private Placement Warrants are classified as Level 2 financial instruments.

Change in fair value, Sponsor Earnout Shares

The Sponsor Earnout Shares classified as liability as of the Merger date through the date they were released from restriction and were reclassified into equity on December 16, 2020. The change in fair value of the Sponsor Earnout Shares is recognized as a loss in the consolidated statements of operations. The Sponsor Earnout Shares were valued using a Monte Carlo simulation.

Income (loss) from equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture represents our proportionate share of the income (loss) from our investment in Hi-Power, a joint venture established with Holtec Power, Inc. We acquired Holtec’s 51% interest in Hi-Power in April 2021.

Gain on debt forgiveness

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

Sale of state tax attributes

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

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Results of Operations

Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020

The following table sets forth our operating results for the periods indicated:

Revenue

Revenue was $4.6 million and $0.2 million for the year ended December 31, 2021 and 2020, respectively, which related to sales of our energy storage solution for specific customer application. In 2020, we transitioned our business to launch our next generation of energy storage solutions Gen 2.3 and generated limited revenue during this period. During 2021, we delivered 47 cubes for 10 different customers.

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Cost of goods sold

Cost of goods sold increased by $41.0 million, or 744%, from $5.5 million for the year ended December 31, 2020 to $46.5 million for the year ended December 31, 2021. Although the Company began shipping our new Gen 2.3 battery storage system to customers in 2021, we have not yet reached the full scale of our manufacturing capacity and are incurring higher manufacturing overhead costs. In addition, as we refine and improve our manufacturing process for commercial scale to assure stability and quality consistency, we incurred significant cost of scrap. We expect our overall gross margin percentage to improve as we further refine our manufacturing process, increase our sales, and spread our overhead costs over larger production volumes.

Research and development expenses

Research and development costs increased by $5.6 million, or 41%, from $13.6 million for the year ended December 31, 2020 to $19.2 million for the year ended December 31, 2021. The primary drivers for the increase were R&D material, employee costs and professional services. For the year ended December 31, 2021, R&D material increased by $2.1 million. As we increased our R&D headcount, we increased our employee and stock-based compensation costs by $3.0 million. Further, we incurred $0.9 million more outside service costs related to consultants, R&D freight charges and waste disposal.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $25.4 million, or 144%, from $17.6 million for the year ended December 31, 2020 to $43.0 million for the year ended December 31, 2021. Included in this is an increase of payroll and stock-based compensation costs of $11.3 million as we continue to expand our workforce and hire new employees in various departments. In addition, selling, general, and administrative expenses increased relating to the following: $1.3 million in debt issuance costs related to the 2021 Convertible Notes and $10.0 million in legal, recruiting and other outside professional services. Facility costs increased by $1.3 million also due to the expansion of operation and increase of headcount.

Loss on pre-existing agreement

The company incurred a loss on pre-existing agreement of $30.4 million and $1.3 million for the years ended December 31, 2021 and December 31, 2020 from the JV agreement with Holtec, respectively. As Hi-Power became a wholly-owned subsidiary in April 2021, no loss was recognized for the remainder of the year ended December 31, 2021.

Grant expense (income), net

Grant expense (income), net decreased by $0.6 million, or 71%, from $0.9 million for the year ended December 31, 2020 to $0.3 million for the year ended December 31, 2021. The decrease results from lower grant income earned for the year ended December 31, 2021 and a lower level of research and development activity related to the Company's grants from the California Energy Commission.

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

Interest (expense) income, net increased by $0.5 million, or 425%, from $0.1 million for the year ended December 31, 2020 to $0.6 million for the year ended December 31, 2021. This increase is a result of interest accretion on notes payable, which were issued in April 2021 in relation to the Hi-Power acquisition.

Interest expense - related party decreased by $19.1 million, or 81%, from $23.7 million for the year ended December 31, 2020 to $4.6 million for the year ended December 31, 2021. The interest expense for the year ended December 31, 2020 is related to the Legacy Convertible Notes issued by the company in 2020 and 2019, which were converted to common stock in connection with the Merger. The interest expense for the year ended December 31, 2021 is related to the 2021 Convertible Notes issued to Koch in July, which include interest accrued as well as the amortization of debt issuance cost and discount.

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Remeasurement of equity method investment

For the year ended December 31, 2021, we recognized a $7.5 million loss on our equity method investment in Hi-Power. This loss on our equity method investment resulted from remeasurement of our 49% ownership in Hi-Power on April 9, 2021 due to our acquisition of the remaining 51% interest previously held by Holtec.

Change in fair value, embedded derivative

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

Change in fair value, warrants liability - related party

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

Change in fair value, Sponsor Earnout Shares

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

Income (loss) from equity in unconsolidated joint venture

The income (loss) from equity in unconsolidated joint venture is attributable to the results of our joint venture Hi-Power. The joint venture commenced its principal operations related to the manufacturing of our Gen 2.3 battery system in the fourth quarter of 2020, and therefore the joint venture incurred losses for the year ended December 31, 2020. Hi-Power became a wholly-owned subsidiary on April 9, 2021 and its operational results are consolidated within the Company’s consolidated statements of operations for the year ended December 31, 2021.

Gain on debt forgiveness

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

Sale of state tax attributes

We recognized income of $2.2 million for the year ended December 31, 2021, related to the sale of our state net operating losses and research and development credit carryforwards under the New Jersey Economic Development Authority Technology Business Tax Certificate Transfer Program. The Company has been approved for selling more state tax attributes for the year ended December 31, 2019 in 2020, and is still working to find a matching purchaser in the market.

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

Revenue

Revenue was $0.2 million and $0.5 million for the year ended December 31, 2020 and 2019, respectively, related to sales of our energy storage solution for specific customer application. Revenue decreased between 2019 and 2020 as Eos transitioned its business to launch its next generation of energy storage solution, Gen 2.3, in the second half of 2020.

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Cost of goods sold

Cost of goods sold decreased by $2.8 million, or 34%, from $8.3 million for the year ended December 31, 2019 to $5.5 million for the year ended December 31, 2020. The decrease results primarily from a decrease of $3.0 million for manufacturing costs incurred during the year ended December 31, 2019. In August 2019 (and as amended in August 2020), the Company entered into an agreement with Holtec Power, Inc. (“Holtec”) to form the unconsolidated joint venture, HI-POWER LLC (“Hi-Power” or “JV”). The JV manufactured the products for all of the Company’s projects in North America. For the year ended December 31, 2019, $0.9 million in impairment loss from manufacturing property and equipment was charged to cost of goods sold. For 2020, the Company also incurred $1.1 million of higher losses resulting from inventory reserves related to excess and obsolescence, lower of cost or market adjustments and reserves for losses on firm inventory purchase commitment, compared to 2019.

Research and development expenses

Research and development expenses increased by $1.8 million, or 16%, from $11.8 million for the year ended December 31, 2019 to $13.6 million for the year ended December 31, 2020. The increase resulted primarily from a $3.5 million higher of expenses for material and supplies as well as higher lease costs, related to R&D activities associated with our Gen 2.3 battery system, partially offset by reductions in payroll expenses and personnel related costs of $0.5 million, $0.4 million in outside service, $0.7 million decrease in impairment loss for R&D property and equipment from 2019 to 2020, and $0.2 million in facility costs. As the Company transitioned its efforts from research and development activities to focus on the commercial production of its next-generation energy storage solution, it reduced its R&D headcount.

Selling, general and administrative expenses

Selling, general and administrative expenses increased by $11.0 million, or 167%, from $6.6 million for the year ended December 31, 2019 to $17.6 million for the year ended December 31, 2020. Included in this is an increase of stock-based compensation expenses for employees and service providers of $5.0 million in 2020. Vesting of certain stock options and performance-based options was accelerated in accordance with terms of the related award agreement of the Merger. The increase of selling, general and administrative expenses was also due to a $4.1 million increase in payroll and personnel cost for the year ended December 31, 2020 as well as $2.5 million of higher professional fees and marketing expenses related to our public listing efforts. As the Company is commercializing the Gen 2.3 battery storage solution, as well as since becoming a public company in November 2020, we incurred significantly higher legal, accounting and other expenses.

Loss on pre-existing agreement

The company incurred a loss on pre-existing agreement of $1.3 million and $1.1 million for the years ended December 31, 2020 and December 31, 2019, respectively. The loss represents the expense recorded under the JV agreement with Holtec.

Grant expense (income), net

Grant expense (income), net increased by $1.4 million, or 295%, from $(0.5) million for the year ended December 31, 2019 to $0.9 million for the year ended December 31, 2020. The increase resulted from lower grant income earned for the year ended December 31, 2020 and the level of research and development activity related to its grants from the California Energy Commission.

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

Interest expense, net increased by $0.1 million, or 5,850%, from $— million for the year ended December 31, 2019 to $0.1 million for the year ended December 31, 2020. This increase is a result of interest from one-year invoice securitization facility the Company entered into in January 2020.

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Interest expense - related party decreased by $26.0 million from $49.7 million for the year ended December 31, 2019 to $23.7 million for the year ended December 31, 2020. Eos’s convertible notes issued during 2019 and 2020 included an embedded feature permitting holders to demand immediate repayment of all outstanding principal and interest resulting in the immediate accretion of interest expense. During the year ended December 31, 2019, proceeds allocated to the issuance of convertible notes were $19.3 million and Eos recorded $49.7 million of interest expense related to these convertible notes that included a demand feature that could require repayment of principal and interest during 2019. During the year ended December 31, 2020, proceeds allocated to the issuance of convertible notes were $9.0 million, and Eos recorded $23.7 million of interest expense related to these convertible notes.

Loss on extinguishment of convertible notes — related party

The loss on extinguishment of convertible notes of $6.1 million in 2019 was the result of the modification in April 2019 of convertible notes issued during 2018 and January 2019.

Change in fair value, embedded derivative

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

Change in fair value, warrants liability - related party

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

Change in fair value, Sponsor Earnout Shares

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

Income (loss) from equity in unconsolidated joint venture

The income (loss) on equity in unconsolidated joint venture results from our portion of HI-POWER LLC’s income and loss incurred. The joint venture was established in August 2019 and incurred initial losses in 2019. The joint venture turned a profit for the year ended December 31, 2020.

Sale of state tax attributes

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

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Liquidity and Capital Resources

The Company is in the early commercialization stage of its lifecycle and, as such, has limited revenue generating activities. Accordingly, the Company has incurred significant recurring losses, and net operating cash outflows from operations since inception, which is attributable to its higher operating costs relative to its revenue base. The Company continues to invest heavily in research and development to optimize our battery technology system not only for the current generation product but for future generation products and services. In addition, we continue to invest in capital to expand manufacturing capacity to meet current customer commitments and fulfill orders from current backlog and anticipated future orders. We are also investing in sales and marketing activities and other costs associated with implementing the infrastructure to support our growth strategy. While management and the Company’s Board of Directors anticipate the Company will eventually reach a scale of profitability through the sale of battery energy storage systems and other complimentary products and services, the Company believes the current stage of its lifecycle justifies continued investment in the development and launch of product at the expense of short-term profitability. Accordingly, we expect to continue to incur significant losses and net operating cash outflows from operations for the foreseeable future. As of December 31, 2021, based on the factors described above, management concluded that there was substantial doubt about the Company's ability to continue to operate as a going concern for the 12 months following the issuance of our consolidated financial statements.

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to access additional sources of capital, including, but not limited to, equity and/or debt financings, licensing revenue, and government loans or grants. For example, the Company has passed Part I of the application under the U.S. Department of Energy’s Loan Guarantee Solicitation for Applications for Renewable Energy Projects and Efficient Energy Projects (the “DOE Loan Program”). There can be no assurance that we will successfully complete Part II of the DOE Loan Program or otherwise be able to obtain this new funding on terms acceptable to us, on a timely basis, or at all. Our inability to obtain significant additional funding on acceptable terms could have a material adverse effect on our business and cause us to alter or reduce our planned operating activities, including but not limited to delaying, reducing, terminating or eliminating planned research and development and manufacturing activities, to conserve our cash and cash equivalents. Our anticipated expenditure levels may change if we adjust our current operating plan. Such actions could delay development and manufacturing timelines and have a material adverse effect on our business, results of operations, financial condition and market valuation. Therefore, we will need to secure additional capital or financing and/or delay, defer or reduce our cash expenditures by later in the second half of 2022 if adequate funding is not secured. There can be no assurance that we will be able to obtain additional capital or financing, including DOE Loan Program funding, on terms acceptable to us, on a timely basis or at all.

As of December 31, 2021, we had cash and cash equivalents of $104.8 million. Since our inception, we have financed our operations primarily through funding received from the Private Placement of convertible notes and the issuance of common and preferred units. In November 2020, we received $142.3 million in connection with the consummation of the Merger and the Private Placement upon the Closing. In July 2021, we received $100.0 million in proceeds from the issuance of 2021 Convertible Notes to Koch (refer to Note 15 in our consolidated financial statements). In September 2021, the Company entered into a $25.0 million Equipment Financing Agreement with Trinity, the proceeds of which will be used to acquire certain equipment and other property, subject to Trinity's approval. As of December 31, 2021, the Company drew $7.0 million from the financing agreement.

We expect capital expenditures and working capital requirements to increase as we seek to execute on our growth strategy. We currently anticipate that total capital expenditures for fiscal 2022 will be approximately $25 million to $35 million which will be used primarily for additional equipment, automation, and implementation to increase our capacity and efficiency to meet our customer’s needs. Our capital expenditure and working capital requirements in the foreseeable future may change depending on many factors, including but not limited to the overall performance of existing equipment, our sales pipeline, our operating results and any adjustments in our operating plan needed in response to industry conditions, competition or unexpected events.

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

Cash flows from operating activities:

Our cash flows used in operating activities to date have been primarily composed of costs related to research and development, manufacturing of our initial energy storage products, and other selling, general and administrative activities. As we continue to expand commercial production, we expect our expenses related to personnel, manufacturing, research and development and selling, general and administrative activities to increase.

Net cash used in operating activities was $116.1 million for the year ended December 31, 2021, which was composed of our net loss of $124.2 million, adjusted for non-cash interest expense on convertible debt of $1.5 million and other non-cash charges that include stock-based compensation of $15.1 million, depreciation and amortization of $2.6 million, debt cost amortization of $1.4 million, change in fair value of embedded derivative of $17.5 million, change in fair value of warrants liability - related party of $1.8 million, and loss from remeasurement of equity investment of $7.5 million. The net cash outflow from changes in operating assets and liabilities was $2.9 million for the year ended December 31, 2021, primarily driven by an increase in notes payable of $18.7 million and an increase in accounts payable and accrued expenses of $7.1 million, offset by an increase in inventory of $10.1 million, a decrease of provision for firm purchase commitment of $5.5 million, an increase in accounts receivable of $1.9 million, and an increase in vendor deposits of $7.4 million. The cash used in operating activities includes $15.1 million of payments made to Holtec in connection with the termination of the JV agreements. In addition, a significant amount of cash was spent on materials to refine and improve our manufacturing process as well as research and development activities to improve quality consistency.

Net cash used in operating activities was $26.6 million for the year ended December 31, 2020, which was composed of our net loss of $70.6 million, adjusted for non-cash interest expense on convertible debt of $23.7 million and other non-cash charges that include stock-based compensation of $5.1 million, depreciation and amortization of $1.6 million, change in fair value of embedded derivative of $2.1 million, change in fair value of Sponsor Earnout Shares of $8.2 million, and change in fair value of warrants liability - related party of $2.1 million. The net cash inflow from changes in operating assets and liabilities was $5.6 million for the year ended December 31, 2020, primarily driven by a decrease in receivable from the sale of state tax attributes of $4.1 million and an increase in accounts payable and accrued expenses of $2.6 million, partially offset by the increase of prepaid expense of $2.0 million.

Net cash used in operating activities was $23.8 million for the year ended December 31, 2019, which was composed of our net loss of $79.5 million, adjusted for non-cash interest expense on convertible debt of $49.7 million and other non-cash charges that include depreciation and amortization of $2.1 million, change in fair value of embedded derivative of $0.7 million, impairment of property and equipment of $1.6 million, loss on extinguishment of convertible notes — related party of $6.1 million. The net cash outflow from changes in operating assets and liabilities was $4.9 million for the year ended December 31, 2019 primarily related to an increase in receivable from the sale of state tax attributes of $4.1 million and a decrease in accounts payable and accrued expenses of $1.1 million.

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Cash flows from investing activities:

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

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

In August 2019, we began to make investments in the Hi-Power joint venture, which provided us the exclusive rights to manufacture our battery storage systems in North America, subject to meeting certain performance targets. Our initial financial commitment to this joint venture was $4.1 million in the form of cash and special purpose manufacturing equipment. The special purpose manufacturing equipment continues to be classified as property and equipment on our balance sheet until it is fully commissioned and operational and has produced the first 10 megawatts per hour of commercial product. During the latter half of 2019, the Company made cash contributions of $0.6 million to Hi-Power. In the year ended December 31, 2020, the Company made additional contributions of $3.0 million. The increase of the contribution was a result of the shorter period of time for Hi-Power's operation in 2019, which only included four months, compared to a full year of operation in 2020, as well as increasing production at the JV.

Cash flows from financing activities:

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

Net cash provided by financing activities was $154.2 million for the year ended December 31, 2020 and included $142.3 million in proceeds from the Merger with BMRG, with $10.3 million paid for direct incremental transaction cost, and proceeds from a Paycheck Protection Program loan of $1.3 million. Prior to the Merger, the Company also received $11.8 million from issuance of contingent redeemable preferred units and $9.0 million from issuance of convertible notes.

Net cash provided by financing activities was $22.1 million for the year ended December 31, 2019 and included proceeds from the issuance of convertible notes payable — related party of $21.1 million and proceeds of $2.0 million attributable to the issuance of contingently redeemable preferred units. These proceeds were partially offset by a cash outflow related to the repayment of short-term notes payable of $1.0 million.

We have certain obligations and commitments to make future payments under contracts. The following table sets forth our estimates of future payments at December 31, 2021. See Note 10, Note 15, Note 16, Note 17, and Note 21 of the consolidated financial statements for further information of these obligations and commitments.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our consolidated financial statements, we make assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments, and estimates.

Product Warranty

The Company generally provides a standard warranty for a period of two years and an optional 20-year degradation guarantee, commencing upon commissioning. We also provide extended warranties, which are identified as separate performance obligations in the Company's contracts with customers. We accrue warranty reserves at the time of recording the sale. Warranty reserves include management’s best estimate of the projected costs to repair or to replace any items under warranty, which is based on various factors including actual claim data to date, results of lab testing, factory quality data, field monitoring, and data on industry averages for similar products. Due to limited claim experience, we have since commercialization, and the potential for variability in these underlying factors, the difference between our estimated costs and our actual costs could be material to our consolidated financial statements. If actual product failure rates or the frequency or severity of reported claims differ from our estimates, we may be required to revise our estimated warranty liability. We will also update actual warranty experience to determine warranty reserves as such experience becomes available. We review our reserves at least quarterly, seeking to ensure that our accruals are adequate in meeting expected future warranty obligations, and we will adjust our estimates as needed. Initial warranty data can be limited at the early stage in the commercialization of our products and, the adjustments that we record may be material. Thus, it is likely that as we sell additional battery system, we will acquire additional information on the projected costs to repair or replace items under warranty and may need to make additional adjustments. As of December 31, 2021 and 2020, we had $2,112 and $— in warranty reserves, respectively. Adjustments to warranty reserves are recorded in cost of goods sold.

Contingently issuable common stock and Sponsor Earnout Shares

The Company estimated the original fair value of the contingently issuable common stock on the Merger date (refer to Note 2 of the consolidated financial statements) that is contingently issuable as well as the Sponsor Earnout Shares on the Closing date based on a Monte Carlo simulation pricing model. The assumption for the Monto Carlo Simulation include risk-free interest rate, and stock price volatility utilizing a peer group based on a five-year term. Changes to the inputs described above could have a material impact on the company's financial position and results of operations in any given period.

1 The methods of interest payments for the 2021 Convertible Notes are based on the Company's current intentions, which are subject to change. As of the date of this Annual Report on Form 10-K, the Company intends to repay the contractual interest due on June 30, 2022 in-kind and the remaining interest in cash.

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2021 Convertible Notes - Related Party

The 2021 Convertible Notes were accounted for in accordance with FASB ASC 470, Debt and ASC 815, Derivatives and Hedging. The 2021 Convertible Notes contain an interest make-whole payment provision that can be triggered only in connection with an induced conversion. Because this adjustment is calculated in a manner in which the make-whole payment may exceed the time value of the embedded conversion feature, the embedded conversion feature is precluded from being considered indexed to the Company’s own stock, and therefore, does not qualify for any of the available scope exceptions to derivative accounting. We were, therefore, required to account for the embedded conversion feature separately as a derivative instrument.

The Company estimates the fair value of the embedded conversion feature, using a binomial lattice model at inception and on subsequent valuation dates. This model incorporates inputs such as the stock price of the Company, dividend yield, risk-free interest rate, the effective debt yield and expected volatility. Certain inputs involve unobservable inputs and are classified as level 3 of the fair value hierarchy. The sensitivity of the fair value calculation to these methods, assumptions, and estimates included could create materially different results under different conditions or using different assumptions.

Legacy Convertible Notes - Related Party

We record conventional convertible debt in accordance with ASC 470-20, Debt with Conversion and Other Options. The Legacy Convertible Notes issued contained an embedded derivative feature that could accelerate the repayment of the convertible notes upon either a qualified financing event or the note holders’ put exercise. The fair values of the derivative liabilities were determined using probability-weighted average of cash flows approach that incorporated a range of inputs that are both observable and unobservable in nature. The unobservable inputs used in the initial and subsequent fair value measurements for the embedded derivative predominantly relate to cash flow projection, a risk-adjusted discount rate and the probabilities of future events occurring and the date on which they may occur. The probabilities are determined based on all relevant internal and external information available and are reviewed and reassessed at each reporting date. The assumptions underlying the valuations represent the Company best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if the Company used significantly different assumptions or estimates, its interest expense for prior periods could have been materially different.

Business Combinations

We account for business combinations using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective fair values. Identifiable assets acquired and liabilities assumed are recognized and measured as of the acquisition date at fair value. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. The Company used information available to make fair value determinations and engaged independent valuation specialists to assist management in the fair value determination for the acquisition of Hi-Power. The fair value is determined using the income approach, cost approach and/or market approach. Determining the fair value of purchase consideration, assets acquired, liabilities assumed, as well as the Joint Venture agreement the Company terminated in connection with the acquisition requires management’s judgment. The fair value determination of the Joint Venture agreement and of the consideration transferred in exchange for the Hi-Power business involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected cash flows and the discount rate. The Company believes the estimates applied to be based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine fair value of the assets acquired, which could result in material impairment losses in the future.

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