Greetings. Welcome to Eos Energy Enterprises First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jared Ehm [inaudible] and Eos Energy. Thank you. You may begin.
Thank you. Good morning, everyone, and thank you for joining us for Eos' financial results conference call for the first quarter ending March 31st, 2021. On the call today, we have Eos CEO, Joe Mastrangelo, and CFO, Sagar Kurada. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company, which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our projections or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Our remarks during today's discussion should be considered to incorporate this information by reference.
Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events, except as required by law. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies.
This conference call will be available for replay via webcast through Eos' investor relations website at investors.eose.com. Joe and Sagar will walk you through the company's highlights, financial results, and business priorities before we proceed with the Q&A. With that, I'll turn the call over to Joe.
Thanks, Jared, welcome everyone to our 1Q 2021 financial results call. I'd like to thank everybody for joining us today, jump in on page three to walk through some operating highlights. This page, I think, is the snapshot that we like to use to track how we're progressing on building the company. I think it all starts on the upper left-hand side of our page, where we look at discharge energy, that's how the product and the technology is operating out in the field and how it's performing in our test facility in Edison, New Jersey. Since our last earnings call, we've added 20% to the discharge energy, we're now over two million cycles of operation. This is technology that's proving itself not only in the lab but also out in the field.
At the same time, we're very proud of being able to report that we're at $33 million of orders with a $51 million order backlog. I think what's critical here when you look at those two numbers is that already in the first five months of the year, we've booked 33% more orders than we did in prior years. We're starting to really see the traction gaining as we build out our commercial team and really get out and sell the product in the marketplace. In fact, at the same time, when you look at the lower left-hand side of the page, our opportunity pipeline now stands at $3.9 billion, which is up $0.5 billion since our last call and represents 23 GWh of storage opportunities.
At the same time, in order to do this, we've got to continue to build out our capacity and develop our technology. Sagar will walk through in a moment how we've been investing our cash. I think it's critical to note that we spent $9 million in building out capacity and developing our technology, and we'll walk through both of those items as we get further into the presentation. Lastly, and importantly, is just how those five things feed into the most important thing, which is generating revenue. We ship our container to Nigeria, and I'll give an update on that later in the presentation, to generate $200,000 of revenue.
More importantly, the metrics that I talked about earlier, and we'll talk about where we are from a factory capacity build-out, we'll see that number go up as we ramp up to our target of $50 million of revenue in 2021. Today's agenda will focus around the six priorities that we have as a leadership team and as a company in 2021. Give a quick update on where we are versus order bookings so far this year. Importantly is that those strategic LOIs that we've been talking about since we went public are now transitioning from LOIs into firm orders. We've got six projects booked with $13 million of future revenue associated with them. On the overall revenue side, we're at $900,000 of revenues booked to date, and our backlog covers 50% of our 2021 revenue target.
On the UL certification front, we're proud to say that we've achieved our UL 9540A certification, and I'll walk through some details on that in a moment, and we're finalizing the UL 1973 or the overall system certification by the end of June. We continue to march to our build-out of capacity. We'll go through where we are and what we've been able to accomplish on this, but very proud of what Jody Markopoulos coming in as our Chief Operating Officer and the team have been able to accomplish here in the first quarter, and looking forward to our projects team now led by David Leligdon, who's come from us from Black & Veatch, as he starts on the installation and commissioning roadmap that we have. At the same time, we're making good progress on our Gen 3 product launch.
We'll talk about the results of our first prototype and what that means to our customers. Right now, we're tracking ahead of schedule for that launch here in the fourth quarter of this year, whereas our original plan was for the second half of 2022. We continue to build a great team. We closed the acquisition of the 51% share in our HI-POWER manufacturing joint venture. Out of the hires that we've done, 71% of those are going into engineering, technology, R&D, and manufacturing, and we've actually doubled the size of our manufacturing team in our facility in Pittsburgh, Pennsylvania. We're truly building an operating company, and we're proud of the results that we have and realize that we've got more work to do, but we're well on the way of achieving our goals and objectives for 2021.
With that, I'll turn it over to Sagar, who'll walk us through the financials and the growth and revenue profile for the company.
Thanks, Joe. Good morning, everyone. Over the next two pages, I'll be discussing a summary of our first quarter 2021 reported financials. Detailed financial statements and relevant management discussions are available in our 10-Q and supplemental disclosures. Page five is a summary of our first quarter income statement. We reached an important milestone in the quarter as we recognized revenue of $164,000 from our first container shipped out of HI-POWER to a microgrid storage solution in Nigeria, powered by Nayo and the Shell Foundation. Our cost of sales in the first quarter, with $0.1 million, was favorably impacted by the reversal of $1.6 million reserve for losses on firm purchase commitments that we had recorded in Q4 2020.
We reversed this accrual because the batteries that we acquired under the firm purchase commitment in Q1 were ultimately used for R&D purposes, and therefore, we expensed these costs with R&D in the first quarter. This reversal largely was offset by the cost of sale of $1.7 million that are included within this position. We recorded $5 million in R&D expenses for the quarter. R&D expenses increased mainly for two reasons. First, we incurred $2.2 million higher battery testing costs than prior year due to our UL certification process, partially offset by the accrual reversal in cost of sales I discussed earlier. Second, as we are continuing our investment in new technologies, specifically our Gen 3 or Z3 program, we increased our investment in R&D headcount and thus incurred $0.5 million of higher payroll and personnel costs. We also recorded G&A for $16.6 million in 1Q 2021.
General and administrative expenses included $7.8 million expense that is non-recurring in nature incurred in connection with the agreement that we entered into with Holtec to acquire their 51% interest in our JV, HI-POWER. Under that agreement, we were obligated to pay Holtec for contributions they made into the JV over the past years. In addition to this, we incurred $2.9 million in higher fees for professional services. These fees were incurred in the first quarter and were partially still related to our SPAC merger in the fourth quarter of 2020 and are also non-recurring in nature. We incurred higher stock compensation expense of $2.5 million and increased payroll costs for $1.4 million due to higher headcount and larger footprint as a public company. Moving on to page six. As of 3/31, we have $101 million in cash and cash equivalents.
Since year-end, our invested activity included $4 million in capital expenditure for future capacity expansion as we ramp up manufacturing and production. For the first quarter, we have supported for development and project financing with select customers, $3 million in investments. Additionally, our operating activity included $5 million in cost of sales, $5 million in research and development and UL testing, $3 million in general administrative expenses, $1 million in expanding our commercial team, and $1 million in transaction costs. In the next section, I will be reviewing our progress on commercial pipeline and booked orders to deliver on our 2021 financial commitments. Page eight is a snapshot of our commercial activity as of May 4th, 2021. This is a page you are now familiar with from previous presentations.
Our customer engagements start with the lead generation process, where we work with our customers to materialize ideas and assess for feasibility, regulations, project plans, and economics. We today have $2.4 billion or 14 GWh in review within lead generation. This segment has, since fourth quarter of 2020 earnings call in February, increased by approximately $600 million. Our commercial pipeline is $3.9 billion or 23 GWh . This constitutes two key segments: active proposals of $3.3 billion and customers with whom we have firm commitments of $0.6 billion. Active proposals since fourth quarter of 2020 have increased by approximately $500 million. As a reminder, only a customer or a project with a clear mandate on project requirements, technical specifications, and only a use case that satisfies Eos specifications will be included in our pipeline. In this stage, we actively present our commercial and technical proposals to customers.
Our experience indicates 30% of our pipeline over the long run translates into booked orders. In specific circumstances where we have reached an agreement on commercial terms with select customers and have agreed to terms with a letter of intent supported by clearly defined next steps that require actions on part of the customers, we categorize these projects as an LOI or firm commitment. Our experience indicates, on average, 60% within this category translates into booked orders. In 2021, we have converted $13 million or 47 MWh from six projects to booked orders. We continue to work with our customers on material developments within this category. As of 04/30/2021, we have $33 million in booked orders year to date. We consider a project a booked order when there is an agreement for Eos to procure material, manufacture, and deliver on storage solution commitments.
We see strong momentum in demand for the rest of 2021. Booked orders have increased $31 million since our fourth quarter earnings call in February. On page nine, let me review a few financing strategies that enable our ability to partner with customers delivering energy and storage solutions. Firstly, we are engaged in development financing for early-stage clean energy initiatives with select customers where we currently have firm commitments. We have committed to $5 million in capital to partner with independent power producers to determine site, scale, and market potential in the United States. Once potential partners, off-takers, are established, Eos will have exclusive rights to deliver storage solutions. The expected economic value creation from the sale of Eos storage solution is not currently included in the committed capital. We have to date funded $600,000 of such commitments.
Progress on these projects has resulted in successfully securing land rights for projects in consideration and with interconnection approvals in queue. Second, we have partnered to deliver project financing for select customers and support development of comprehensive microgrid renewable energy solutions. We have committed to $9.8 million in capital to partner with these customers who have successfully received interconnections, permitting required for the project. We offer financing solutions tailored to cover project costs such as engineering, pre-development, solar, and construction. The expected economic value creation from Eos storage solution is not currently included in this committed capital. We have to date funded $2.6 million of such commitments. Lastly, we have strategically agreed to partner in asset leasing arrangements with select customers for Eos equipment on a lease-to-own basis. This financing is offered at competitive rates and secured in collateral from storage assets commissioned on ground.
We have $10.1 million of asset leasing commitments. This specific segment of strategic investment is included in our booked orders. These projects and customers satisfy the criteria for booked orders highlighted on page eight. In our $3.9 billion pipeline, we have more than $100 million in additional opportunities with select customers ranging from development financing to project financing and asset leasing. On page 10, I'd like to offer you more specific details on the $33 million in year-to-date booked orders we reviewed when discussing commercial activity on page eight. Our current booked orders constitute nine projects with eight customers and 141 MWh . $18.5 million are cash sales of Eos equipment representing 104 MWh . $8.2 million of asset leasing represents 37 MWh and four projects. We discussed asset leasing in context of our overall financing strategies on page nine. These two categories deliver $26.7 million in equipment orders.
Additionally, our booked orders constitute of $6.3 million in recurring services from monitoring and maintenance obligations that typically begin in year three and range from five to 18 years. We currently have eight of nine projects with contractual recurring revenue among our year-to-date booked orders. Development financing and project financing from page nine are not booked orders. We expect the momentum on booked orders to continue in 2021 to deliver our forecasted commitments. I'd also like to expand on page 11 on the details of our orders backlog, which is now a reflection of our 2021 year-to-date booked orders, plus 2020 year-end backlog, minus any shipments to meet customer commitments. This backlog comprises of 25 projects with 19 customers and 204 MWh . On February 25th, 2021, in our 4Q earnings presentation, we reported orders and backlog of $21.2 million.
Since then, we have recorded $30.4 million new booked order activity, as reflected on page 10. Through today, we have successfully shipped six containers to Motor Oil, ReNew, and Shell Nayo, which subtract the backlog by $0.9 million, resulting in a total of $50.5 million in outstanding customer commitments. Delivery on these commitments is expected in 2021 and 2022, with approximately $25 million contracted for 2021, and an additional $17 million in 2022. Expected delivery in 2021 will be primarily ready to ship in the second half 2021, and will include a combination of Gen 3.0 or our rebranded Z3 system and our current technology in production, Gen 2.3. Our progress on backlog is more than two times our earnings call from 100 days ago.
We expect this positive momentum to continue as we lean forward to invest further in our commercial team, manufacturing capacity, and create market awareness of our competitive advantages. To elaborate on all of these advantages and topics, I will hand the conversation back over to Joe on page 12. Thank you.
Thanks, Sagar. Now let's focus for a second on UL certification, which is critical to deliver on those growth numbers that Sagar just talked about. Moving on to page 13. There's two UL certifications that we go after. One of them is on the battery module itself, which is the UL 9540A, which is safety for thermal runaway or the risk of fire and explosion. We've completely passed that testing, and I'll walk through some results on that testing in a moment. The second is the overall storage system, which is UL 1973, which we have gone through the testing for that certification and are now just qualifying the material, the plastics that we use in our frames for the RTI, or Relative Temperature Index, of 80 degrees C.
We're halfway through that testing as we speak, and we anticipate that we'll be able to close out the UL 1973 certification by the end of June. Tremendous results by the team. A lot of this was done virtually and over Zoom and Microsoft Teams, so really great work by the team to get us to this point in this period of time. If we flip quickly to page 14, just want to talk quickly about the results of our 9540A tests. We like to say that our battery is inherently fireproof in that it will not catch on fire or explode, and does not need ancillary systems like HVAC cooling systems or software to manage the risk of thermal runaway. If you look at the four main tests here, the first one is over discharge.
If you over discharge the battery beyond down to zero voltage, you don't see any degradation in the battery itself. There's no loss of capacity or performance, and you can rest the battery and get it back to continued operation. You're not going to damage or destroy the battery in and of itself doing this test. The second one is shooting a 2.5 in nail into the battery. Again, nothing happens. These tests were relatively boring because you'd watch the nail go in, the temperature would go up a little bit, but there's no flame, there's no explosion, there's no thermal runaway. The two on the right-hand side, which are really critical, is overcharging the battery 2x its normal capacity. The battery gets up to 90 degrees C. Again, no flame, no explosion.
There's a little bit of electrolyte and steam release from the battery, which we manage through a capture system to be able to knowing that this does happen if in the unlikely event this should happen. The second one is on a battery short circuit test, where we're short-circuiting the battery into itself. Again, you see the thermodynamics take over, the temperature rises to 80 degrees C. When you look at these two tests and the curves that come out of these two tests, and you lay them over what you would see from a lithium-ion battery, the curves look exactly the same. There's one important difference.
Our battery doesn't go above 100 degrees C. Lithium ion, when you separate it out, its temperature will rise to 700 or 800 degrees Celsius. What we see in our battery is a battery that's inherently safe and fireproof and allows you to operate in the harshest conditions with the simplest ancillary systems and the least amount of parasitic load or load that you need to use to protect the safety of your product to keep it operating out in the field. It's something that we see as a competitive advantage, and we see as something that our customers can rely upon us to provide reliable energy storage in any environment. Moving forward now, shifting gears to our manufacturing capacity. If we go to page 16, there's four key things that we want to talk about today.
The first one is the facility or our factory ourselves itself. We have fully repurposed the factory in 11 months. We'll show what that looks like today and what we've been able to do. Our equipment today, our yields coming off of the line are above 90%. Tremendous amount of work done by the team to both ramp up production and improve the quality of our product. The third one is material availability and product cost. We've been able to take 40% of our battery cost out in the last five months and secure multiple sources of supply to keep the factory flowing. The last one, which is actually the most important one, is bringing in great people.
As I talked about earlier in the presentation, we've been able to double the size of our team over the last five months, and we're proud of the work that they're doing, and we'll continue to recruit, hire, and train the best to deliver our product to the marketplace. If we go to page 17, and when you look at the page, the left-hand side of the page is what the facility looked like 11 months ago. The right-hand side of the page are screenshots from various parts of our factory. What the team's been able to do is ramp up production on our electrode line and improve the yields and quality to single-digit scrap rates on how we produce this critical component of our battery.
We've ramped up a new technology in how we build the mechanical or enclosure of the battery using infrared welders, and continue to expand that production to increase throughput in the factory. We're optimizing the processes of quality control and filling our battery with electrolyte, and are now working on a lean manufacturing roadmap across the factory from not only manufacturing batteries, but getting batteries into the container and getting containers shipped to customers. Really a great amount of work, a ton of progress here in 11 short months from going from an empty facility into a factory that's shipping product out into the field. When we look at page 18, what has always been a strength of our system is that we have abundant raw materials that can be locally sourced at a lower cost point than other technologies.
I wanted to show you how our four key raw materials that go into our battery. When you look at what they are, where else they're used in the world, and more importantly, if we focus on the bottom two portions of the right-hand graph. If you look at the percent of the global demand for those raw materials, if we're producing a gigawatt of production out of our factory, you can see that we have a de minimis demand on the overall global supply chain for each one of our raw materials. We don't just sit back and rely upon that. The team continues to work to be able to look at how we're doing electrolyte in-source the mixing process to both reduce cost and accelerate cycle time.
On titanium, although we're a very small percentage of the global demand, we do look at this as a key component in the aerospace industry. As aerospace comes back, to be able to mitigate any supply chain risks that we have, we are looking at alternate materials to titanium to be able to put into the battery. On graphite felt, we're testing new material specifications to be able to open ourselves up to new sources of supply to be able to reduce that 4.5% down lower as we grow the business. On plastics, what was critical for us here was not so much the supply of the raw material, the actual plastic itself, but was to make sure that we had multiple molders to be able to ramp up our production as we move forward to truly keep the supply chain flowing.
Although we're at a ramp-up period in production, as we think and plan the factory, we're planning it as though we're at scale and making sure that we're mitigating those risks to get to scale in our production process. If we move forward to page 19, this is a critical page that talks about how we're ramping up production. Today, when you look at where we are, we're getting up to 50% capacity on our existing factory. We're optimizing the electrode line. We're expanding capacity on our IR welding, and we're doing increased product testing. We're running at a lower utilization rate to make sure that the product going out into the field is of high quality. As we think about the next couple of months, we're going to continue to add resources in the factory and hire workers to work the line.
We're going to add more capacity and continue to streamline processes to get by midsummer to 70% output. From there, it's working from July to September to get up to 100% by continuing to optimize the process of how we build and integrate batteries into containers, bringing our factory automation online, and really driving lean manufacturing across the facility. This September date gets us to 100% capacity on the equipment that we have today. Starting in October, November, December, we start bringing online the additional capacity that we're developing as we bring our new Generation III product to the marketplace to get to the 800 MWh that is our target for 2021. The same time, if we move to page 20, it's critical to think about the cost entitlement and how we're delivering a product that will become profitable.
Today, when you look at where we are, we've already secured 2/3 of our 2021 cost out plan by the end of the first half of 2021. When you look at the actions that we're doing, these are really building strategic agreements with suppliers, optimizing our equipment and manufacturing processes, delivering additional volume discounts as we continue to grow our backlog and ramp up revenue. We continue to look for supplier diversification with drives, not only quality, but also cost out, and taking cycle time out of the factory to improve throughput.
The final 20% there that you see that gets us down to our target at the end of 2021 really ties into what we're doing as you start blending the cost of the Gen 3 and the Gen 2.3 product line and getting to the next tier of pricing discounts as we hit higher volume rates and truly delivering on the investment that we're making in automation and capacity of the factory as we move forward. If we transition from a look at the work that the team has been doing on cost out and start looking at where we are on the development of our next-gen product. If we go to page 22, we call the Z3 battery and how that changes the performance of our Eos Cube, our 20-ft container, which is our primary product to the market. We have prototypes on test right now.
If you look at the lower left-hand side of page 22, you see in the middle there a Z3 battery. Sitting on its left is a Gen 2 battery, and sitting on its right is a Gen 2.3 battery. Although you may not be able to see in the picture the 1/3 smaller size, you have to remember that that battery that you see there is smaller in dimensions, and instead of 40 cells, it has 28 cells. Those 28 cells are delivering 15% higher energy discharge out of the battery. What does that mean for our customers? With 1/3 of the size, with 15% higher energy out of a smaller footprint, we're delivering 40% more power out of a container, which reduces the footprint required to deliver, and doing all of that with the same safety aspects of having an inherently fireproof battery.
At the same time, because you have fewer cells and because we've changed the aspect ratio, we are operating the system at lower voltage with the same voltage curves as the Znyth Gen 2.3 battery. What does that mean? It means a lower temperature footprint coming out of the battery, and that's the chart that you see on the far right-hand side. What does that lower temperature mean to a customer? It means 25% lower levelized cost of storage for an Eos system. That 25% is driven by the fact that we have lower temperatures, which simplifies our system configurations and allows us to deliver performance with a much simpler, more robust, and inherently safe system. We're early days in the testing of the product, but we like what we see so far.
There's going to be more prototypes going on to test here over the next few weeks, and we'll come back in our next call, coming out of Q2, to give you an update on where we stand on not only the product, but also ramping up and developing the manufacturing process. Really great start by the team to bring this product from the drawing board to the test so we can see the reality of how it's going to perform. If we go to the next page, on page 23, I'd like to just focus for a moment on a couple of key customer deals. Everything that we talk about, this is where we deliver for customers. The first one I'd like to talk about is a project that we signed with Hecate. This is providing locational capacity for the ERCOT market in Texas.
It's a great project for us. First off, it's an LOI into an order. We've got another 47 MWh of opportunities that look like this Hecate project here. This will be one that we'll be delivering here as we go through into 2022. The middle one, that shows the shipment of the first four containers to Motor Oil in Greece. This is building a safe lower cost energy for oil refinery operations in Greece. There's another 250 MWh of opportunities similar to the Motor Oil project. We're going to be starting the commissioning of those containers here in the next week and look to get that project online here as we get into the early summer. The last one, if you look at the picture in the background there, that's the Eos container sitting in Nigeria for the Shell Nayo project.
When you look at this, I think the picture tells 1,000 words, and that sometimes if you want to operate and bring reliable power to remote locations in a microgrid application, you can't have complex systems around it. You got to deliver something that's simple and safe. You could see the container sitting there ready to be commissioned, which we'll be completing here over the next 30 days. There's another 100 MWh of projects that look like that Shell Nayo project. Three examples of a recently signed deal, a recently shipped deal, and a project that is going to be going live here in the next 60 days.
Things that we're proud of as we really look at delivering and continuing to build upon those operating hours that I talked about in the beginning of the presentation. Lastly, just as a wrap-up, we're going to continue to execute on the same six priorities. When you look at booked orders, we've got to continue to expand the global pipeline coverage. We're working to obtain a green bond rating, as we feel like that'll be a competitive advantage for our customers as they look for financing of their projects. We're on track to get to the $50 million in revenue. We're going to be commissioning 10 containers, and we're going to be shipping 10 million of cells in the next five months as we ramp up, going back to that page I talked about earlier of ramping up the factory.
On UL, we'll close out the 1973 certification and start our CE mark certification for the European market. We'll come back on the 800 MWh of capacity. We'll give you an update on where we are on our raw material sources and then talk about the lean improvements that we're making in the factory. On the Z3 product launch, we'll be able to show you the performance of the configurations and walk through where we are as far as ramping up production and what that will look like over time. We'll continue to invest in the best people and build a great culture. We're going to build out and start our European sales team, and we're going to expand our software and systems engineering team to be able to bring multiple configurations to the marketplace.
What I leave you with is that all the work that we're doing and the way that we're investing our cash is to strengthen the company to deliver for the long term and to be able to capture the growth that we see in the energy storage market. With that, I'll turn it back over to the operator and open up for some Q&A here this morning. Thanks for listening.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Christopher Souther with B. Riley. Please proceed.
Hey, guys. Thanks for taking my question here. Based on the slide deck here, we're looking at about $10 million in sales over the next five months. I'm just curious, are all those Gen 2.3 products? Any sense of the split between second and third quarter recognition? Should we assume the rest of the $50 million in revenue that we're targeting for this year will be that Z3 coming in the fourth quarter?
Hey, Chris. Good morning. The $10 million that we talk about here and really into the fourth quarter, there's going to be a mix of Gen 2.3 product that'll be shipping throughout the year. It's not going to be a hard stop. There's going to be a transition depending on customer requirements. Sagar, I'll let you talk a little bit about the split over the next five months, as we ramp up the ramp page, Chris, that we had earlier in the presentation, is all Gen 2.3 product.
Hey, Chris. Good morning. Hope you're getting some sleep with the baby and everything. With that said, to answer your first question, the deliveries that we have over the next five months will all be 2.3. At this point, we are not giving any additional quarterly guidance. As the shipments go along, we'll be sure to keep you posted, and they'll fall into the quarter that they will. The rest of the year after that, i.e., the fourth quarter, will be a combination, to Joe's point, of 2.3 and 3.0. To the extent that split is concerned, it'll be determined both by the customer's needs, wants, and expectations, plus our delivery schedule, but we intend to be fully functional on both products, and that's about the level of visibility we are willing to offer right now.
Okay, got it. That makes a lot of sense. We've seen some nice-
Yeah.
Progress here on building the order book. 50% of the 2021 targeted orders are booked at this point. Can you talk about how much of the balance that you're looking to close for revenue this year that is either late stage or LOI or firm commitments? How should we think about kind of the coverage there?
Yeah, look, there are indicators that we can talk about. As we talked about on page eight, there is $3.9 billion of pipeline, of which the LOIs and firm commitments are $600 million. As we discussed, $13 million of that $0.6 billion has been converted. There'll be a portion of that that will continue to turn into booked orders over the course of the next few months, and we feel good about that piece. Secondly, the remaining portion of it will come through from our active pipeline that we are discussing. There are a variety of projects in different stages. You know how transactions go. They need to take their right time for both economic benefits to both customer and ourselves, as well as to make sure that we do the right thing for Eos in totality. I would say that by the end of.
Sagar, the one point I would add, Sagar, Chris, the way that we build the model is we assume a 20%-30% transition rate from pipeline into order. When you think about the $50 million, we have more than enough opportunities to be able to close that. As Sagar was discussing, I think we just have to work through the timing of how projects close, where customers are in closing out their financing and other things, and we'll continue to work that. We have enough in front of us to get to that $50 million revenue target.
Got it. Okay. No, that's very helpful. I'm just curious, are any customers waiting on a full system UL before putting in orders? Is that a gating factor? Is it mostly just typical stuff that's going to be on the customer end to hit the $50 million and $300 million targets?
Yeah, look, UL testing is expected to be complete here in the second quarter, prior to the close of it. Now, all booked orders are subject to UL testing and certification. It just is a part of our overall operating rhythm from a commercial perspective today.
Okay. That makes sense. As the pipeline continues to expand for some of those earlier stage opportunities, how many customers do those upticks in lead generation, non-binding quotes represent? Or would you say it is more about having customers who are already in that pipeline just coming back with other potential projects?
Yeah, there are a few repeat customers. Of our booked orders, we have new customers, which is predominantly what's driving the improvement in backlog by 2x in the last 100 days. With that said, our pipeline today is more than 90% in the U.S., and to Joe's point, we'll be focusing on expanding that globally. Our customers are both front of the meter, behind the meter, utilities, microgrids, and they are evenly distributed. Now, some of the larger projects will take a little bit time here to turn them into booked orders, but that's just the nature of the course of having initiated commercial activity in the last less than one year. We are on our way to having a very balanced portfolio going forward.
Yeah, I would just add, Chris, on your question, I do think we are seeing a good uptake in repeat customers coming back in with other projects as they work with us on the orders that we've closed. What I'd like to see us do here over the next few months is to continue to expand that and add more customers to it. Sagar said we have some traction, I do think we can do more. Particularly, I think what we always try to balance is, we look good against ourselves, we're growing the opportunity pipeline versus where we were the last time we talked. What we really have to focus on is where's the market how do we grow that pipeline vis-a-vis the available market, that's why we're expanding the commercial team.
Okay. As we're looking at, obviously, there's been a lot of discussion in the market about lithium ion shortage issues. I'm curious, is that causing any incremental near midterm opportunities for you guys and how it's impacting the pricing you're going out to the market with? Also, you highlighted the wide availability of your materials. Are there any commodity or component supply chain issues you're seeing within the market that might provide concerns for you guys, or is it pretty clean?
Yeah-
On the last part Oh, go ahead. Sagar, go ahead.
No, I was going to say, Joe, the pricing side of it, look, our pricing holds steady and firm to what our guidance has been in the past, and any improvements we see here will come through as we discuss more about pricing over the course of this year. With that said, Joe, I'll let have you talk about the lithium side of it.
Yeah. Chris, what I was going to focus on was on our supply chain. We don't see any shortages today in the material inside of our product. What we're trying to balance and keeping an eye out for is just around the power electronics that we have in the product to be able to run our battery management system. Right now, we're okay with sources of supply on that. On the lithium side, we are seeing more and more near-term projects that are out there that have commitments coming to get quotations from us, and that's one of the things that's been driving up the pipeline.
As you know, when we do our process, there's an education process we have to go through of explaining how we're different and where the value is, and we're working through that with these new customers that are coming to understand how the technology works.
Okay. No, that's very helpful. Just on the JV buyout impact, can you talk a little bit about how that changes the path toward positive margins, and where do you see the gross margin breakeven points from a revenue run rate or utilization rate, based on the cost reduction efforts and bringing that production in-house?
JV, as you know, we purchased the remaining 51%. The series of payments here are over the course of the next five years, $15 million in 2021 between paying back the contribution of $10 million plus $5 million upcoming here in May, and then the $5 million thereafter for another four years. As far as that impacting, I think a large majority of the impact has been positive on having our supply chain being vertically integrated and having our focus on both the cost out that Joe spoke about and the production of both 2.3 and 3.0 batteries. We're very thankful for the investment and the focus Holtec has put into the company up to that point.
With that said, as far as financials go, we continue to remain with our guidance on what the expected margins are from a five, four-year projection perspective that we had offered earlier at the end of last year. As we have improved guidance for 2022, later in the year or closer to the fourth quarter, we'll be sure to come back to you guys. From a cash flow perspective, look, I think we have always reported income from JV below the line. Now it will just be a matter of geography, where to the extent that the guidance remains the same, it'll now be reflected above the line. A lot of the cost out is going to be where the margins are going to expand here in 2022 and 2023.
Okay. Just the last one, maybe you could walk through the CapEx cadence for the rest of the year, and also maybe the expected cash burn for 2021 between the losses during the ramp up, CapEx and the project financing. Just kind of bring that together for us is the last one here.
Yeah, of course. So, we have committed capital on the customer side headed in three parts, right? We'll talk about customers first and then talk about the rest. From a customer's perspective, as we discussed on page nine, we have development financing and project financing along with asset leasing. The committed capital between development and project financing is close to about $15 million. We'll continue to meet our customer demands and expectations here with respect to that. We are actively looking for what the right financing strategy would be to syndicate that off our balance sheet and ensure that we continue to remain to our core competency of battery and storage facilities. With that said, we'll be applying similar financing strategies on the asset leasing side. We have been continuously evaluating who our strategic partners are but will not rush into it.
A big part of what Joe talked about, our focus being on green bond rating will also substantiate a lot of the financing here. That's on the customer side of it. On the CapEx side of it, the last time we spoke, look, we talked about $40 million to expand our investments in the manufacturing capacity. We continue to hold to that guidance. Sorry, there's a little bit of background noise. Given that we have purchased the HI-POWER facility from Holtec, there'll be some level of incremental investment we'll have to make, call that somewhere between $15 million or so for the portion of the JV that they would have invested in. That, along with the capital contributions that we repatriated back, is on a 2.5-year payback and very much in line with our capital allocation and return on investment strategy.
That's on the CapEx side of it. The investment in capacity continues to be a focus area for us. Then the rest of it is really operating cash flow. To the point I made on page six with our cash, our G&A per se, on a run rate basis is about $3 million burn rate on a quarter-over-quarter basis. Call it even $4 million with the commercial team in there. The rest of our cash burn is really discretionary to either the CapEx we need to spend, the testing we need to do, and to the cost of sales that we need to incur to produce the revenue and to commercialize the business as we are. That will continue to remain steady state from an operability point of view.
[inaudible]That impacts our overall cash strategy, which the board continues to evaluate on a periodic basis, we'll be sure to come back to you and the broader group on what that means going forward.
Excellent. I appreciate all the color there, guys. I'll hop in the queue.
Yeah. Thanks, Chris.
Thanks, Chris.
Our next question is from Subash Chandra with Northland Securities. Please proceed.
Good morning, guys. Just to understand, the revenue there includes the service revenue. I guess of the $50 million or so, should we consider, say, $42 of that, kind of a hard code in the revenue line, and then the balance of it spread quarterly over the time frames, Sagar, that you referenced?
Yeah, look, great question, Subash. Off our booked orders, call that the $50 million in backlog and/or the $33 million year to date. Of the $50 million, about $8.5 million is service revenue, and of the $33 , $6.3 million of service revenue. That revenue is not contemplated to be accreted on our P&L from a reported earnings basis till year three and beyond. That's really building to the longevity of Eos as a value proposition, and the margins on that will obviously be much more accretive than equipment sales, as you can expect. With that said, that's not contemplated in our current $50 million projection.
As we come closer to the end of the year here, look, the service revenue will become an important part of our value proposition and our strategy, and we'll be sure to discuss how that impacts the toggle of the $50 million from the rest of the year reporting perspective. Even in our projections, we never considered the service revenue to be accretive to current year earnings, and we'll continue to hold to that guidance at this point.
Subash, remember the way the service model works is it won't kick in until year three of after shipment. This was always a year where revenue would be 100% product shipments.
Okay. Just to clarify again, that is $50 million of product shipments?
Yes.
For 2021, yes.
For 2021. Okay. That's essentially what I was asking. Okay, thanks. Thanks for boiling that down.
Yep.
Yeah. Back to the gross margin question, just put another way, should we consider that being in the positive category? Understandably, it wasn't in the first quarter. If it's not positive, when do you see gross margins flipping to positive this year?
Yeah. Good question, Subash. In 2021, we do not expect gross margin to be positive in line with our guidance. In 2022, in the fourth quarter, on a quarter basis, is when we expect to see gross margin positive, and that'll have its natural reflection on a year-to-date basis. 2023 is where we expect the run rate of gross margin to continue to yield positive results.
Okay.
That is exactly in line with our guidance. We are not offering, just to be clear, any revised guidance from what we had projected at that point.
Okay.
Not yet.
Right. On the titanium alternatives, you talk about how you've been looking for it, and now you're sort of referencing there's a competitive element there that you want to anticipate. Previously, was there a cost element, or that this could have a meaningful impact on your battery costs?
Yeah. Subash, the thing on the titanium alternative, we've got some things on test that we have to work through, and we're proving out that it works in the battery. When you start thinking through once you get the material to work, then you've got to get a source of supply, you've got to get the quality, you've got to get the manufacturing process. We're working through what that transition plan looks like and tying that into our CapEx model. It is a cost-out opportunity for us in the long term but given the ramp that we have of adding capacity and bringing the factory up, we're trying to come up with the best integrated plan to hit that target. The ability, if we have to flip a switch if something happens, to accelerate that if need be.
Okay. Got it. When you think of a cost out in the long term, say the Z3 kicks up, when do you think that transition happens? Is that sort of a 2023 event when you think that it can have an impact on manufacturing costs?
You mean the titanium question, or sorry, I just wanted to be clear.
Correct. Yeah, the substitution of titanium.
Yeah.
If you. Yeah.
Yeah. Joe, if it's okay, I'll take this here.
Sure.
Look, Subash, material substitution will always continue to remain a part of our cost-out strategy. Frankly, it's part of our optimization on manufacturing process that drives all of it, right? If you take a step back as a technology company always looking to put the best product out there, we'll be looking at a variety of different materials that replace and substitute for all five of our earth-abundant materials at this point. Titanium and the alternate materials is one such category. At this point, we have not really contemplated when we would go live with the Gen4 or the next version of a battery. Our focus today is to get the manufacturability of Gen 3.0 and/or the Z3 product out in the marketplace successfully, have our customers continue to appreciate that value proposition.
That cost out of all of that is included in the 40% targets that Joe spoke about on the page here on cost. I believe it was page 20. Titanium will, or the substitute material will have an impact that's incremental to what's on page 20, and that's a core value proposition for the company. It will come through sometime when we are ready to deploy it, and we'll be sure to let you guys know what the timing of it is when we are ready.
Okay, yeah.
I think, Subash, the one thing I would say is there is no concern with titanium today for us from a supply standpoint. It's readily available. What we're planning for and planning ahead on is if aerospace takes off, you could see price inflation, or you could see tightness on supply, but there's no urgency to be able to do that switch. What I want to make sure everyone understands, different than when you talk about other battery technologies, is we have readily available abundant raw materials, and we're building optionality into the supply chain to mitigate risks that we see in the future. Not something in the short term, but something that we're preparing for in case there's changes in the market, so we don't get caught out.
Right. Okay. Understood. Finally, on the certifications, just is there anything additional, for instance, the New York Fire Department, which you've been working with, is there additional certifications that they would require for urban placement of these batteries, or does this get you over all those humps?
No. Subash, there are additional certifications both with the Fire Department and the building department in New York City, of which we're working through those processes. What we want to do from a communication standpoint is we're focused on getting UL because that ties to the orders backlog and the pipeline we have in front of us. We'll give an update as we switch off to that, to doing the CE marking for Europe, and then also talk about where we are in the urban storage qualification process, which is well underway.
Okay. Got you. Great detail, guys. Thank you.
Thanks, Subash.
Thanks, Subash.
We have reached the end of our question-and-answer session. I would like to turn the conference back over to Joe for closing comments.
Thanks. Look, thanks everybody for listening in today. Thanks, Subash and Chris, for the great questions. We're excited about the company that we're building and the opportunity in front of us. We'll keep everyone posted on the progress that we make and look forward to talking here at the end of the second quarter. Thanks for the time today.
Thank you. This does conclude today's conference. You may disconnect your lines at this time.