Earnings Transcript for EOSEW - Q3 Fiscal Year 2023

Operator: Good day and thank you for standing by. Welcome to Eos Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Liz Higley, Director of Investor Relations. Please go ahead.

Liz Higley: Thank you. Good morning, everyone, and thank you for joining us for Eos's financial results and conference call for the third quarter 2023. On the call today, we have Eos CEO, Joe Mastrangelo, and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call may include forward-looking statements, including but not limited to current expectations with respect to future results for our Company, as well as statements regarding our ability to secure final approval of a loan from the DOE or our anticipated use of proceeds from any such loan, all of 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 expectation or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law. This conference call will be available for replay via webcast through Eos's Investor Relations website at investors.eose.com. Joe and Nathan will walk you through the Company highlights, financial results and business priorities, before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Joseph Mastrangelo: Thanks, Liz, and welcome, everyone, to our 3Q earnings call. It's great to be back here with everybody. Let's just move to our first page, which is really a milestone page of our first Z3 cubes being shipped out to the customers. We announced this when it happened back in September, but this, to me, really is the culmination of a lot of hard work, not just internally to EOS, but also externally with our customers and our supply base. There's so much work that goes into this picture of being able to get parts qualified, suppliers qualified parts in the factory, product off the lines this is just a tremendous achievement when you really think about the timeline that we've been operating on. And we've been very deliberate about the speed at which we do this because the speed at which you're manufacturing determines the speed at which you're spending capital. And we're doing that per customer requirements and then also doing that in our learning curve to optimize the capital that we have on hand. What we've seen when you go through and look at this and move to the next page is our pipeline continues to strengthen, and we're building a credible path to strong orders growth that Nathan will walk through here in a moment. But really, what I'd like that the team has been doing is we're seeing more and more customers come with use cases that fit in with the technology. When the Company was founded 15 years ago, it was founded a four-hour storage, and what we're going to talk about today is how use cases are moving to longer duration. As they become longer duration, you're going to continue to see this pipeline grow. The booked orders grow and the backlog grow over time. Down to the bottom, we continue to discharge energy. We're at 1.6 gigawatts. This really shows that the technology performs. There's a lot of hard work going into being able to do that and a lot of lessons learned, both internally and with third parties, including energy management system, SCADA system suppliers, AC scope suppliers and the customers themselves. At the same time, when you look at our cash on hand, we ended the quarter with $58 million of cash on hand. Again, what I would say here is a capital strategy is not just the capital we raise, but also the capital that you spend and we're going to talk about both sides of that building into when we come into December and talking about the strategic outlook and ultimately, what is the Company's path to profitability over time. So if we go to the following page, as I said, on the first page, one of the key aspects of how you grow any Company is the partnerships and the people that you work with. We are building strong government support, the Department of Energy with the LPO initial commitment that we announced in the beginning of September. We were the first title 17 non-lithium ion battery Company. I think that's a testament to the hard work that's been done in the labs, at suppliers, in the factories, out in the field to really get a technology that the government saw as being eligible for a potential loan as we work through the closing conditions. At the same time, we've been working in one of our core markets in California with the California Energy Commission that goes all the way back to 2014 and is now accelerating into many use cases where that region of the country is looking for longer duration, flexible and safe energy storage technologies. These things don't happen overnight when you really think about it. This has been a nine-year journey to prove out the technology and grow into commercial scale, but we feel like we've got a technology that provides for the use cases that the markets demand. And Nathan will also go through in a moment what we're also doing seeing in ERCOT as that grows. At the same time, our customer base is shifting and continues to grow as we get into more and more U.S. utility customers. That picture that we had earlier is the first unit is going to Duke. Duke is a customer that we again, we've been working with Duke since the 2015, 2016 time frame and are now getting where we're putting the Z3 product out into a small commercial project, which I think we're all proud of, and we'll be able to prove out the flexibility and operability of the Z3 technology. We also have a project that we've talked about with a large U.S. utility. That project will start shipping 47 megawatt hours to start shipping in next year in the latter part of the first half of next year. Also have applied -- that customers also applied for DOE grants and underlying these projects that we're executing with them is a very large conditional frame agreement or offtake agreement, which will help us drive future growth as they look at longer duration energy storage. And we've announced an order in last quarter with Dominion Energy. Again, Dominion announcing when you look at this, you would say, 60 megawatt hours and the size of the market that we're in, seems relatively small, but Dominion was again, another journey. Nathan will talk about what that journey looks like and to be able to get 60 megawatt hours out in commercial operation on a commercial product project then lead you to be able to develop and execute on larger projects with these customers as we move forward. So, really starting to put together pipeline growing, building, and proving out the technology over time out in the field and then working with robust customers and at the same time, you're not going to scale into this growth without great suppliers and great partners to be able to bring the raw materials and the parts into the manufacturing process. We're really happy, and I'll give a quick update on the work that we're doing with ACRO on our automated line and how we're moving forward on our first state-of-the-art manufacturing line, how that implementation is going. But at the same time, we're really scaling up the supply chain of the Company. When you really think about what we've been doing over the past couple of years is truly moving from what is an R&D supply chain on proof of concept to a supply chain with multiple suppliers in global scale at a cost position that allows us to develop and communicate in December our path to profitability. We're working on three core components

Nathan Kroeker: Thanks, Joe, and good morning, everyone. As many of you already know, on August 31, we announced that we had received a $399 million conditional commitment for a loan guarantee from the Department of Energy. Since that announcement, we have been working through the steps required to get to loan closing and ensuring that all necessary conditions are met. Today, we want to spend a little bit of time discussing the DOE conditional commitment in the context of Project AMAZE. Project AMAZE or Project American-made zinc Energy is a $500 million expansion program with an initiative to scale production of our Z3 storage systems to eight gigawatt hours of storage annually by 2026. This DOE guaranteed loan would fund 80% of eligible project costs, which is the maximum amount available for the statute. Draw-downs on the loan would be based on reimbursement of CapEx and OpEx eligible costs incurred over time as we build and scale up our capacity. Given how we've been progressing on Line 1, we believe overall capital costs may come in below our initial expectations. Furthermore, the recent performance metrics we are seeing on the semi-automated line suggests that less material will be required to dial in the new line than originally anticipated. As we have been running the semi-automated line, we are seeing yield rates that indicate initial yields on the automated line could be much higher than originally modeled, resulting in lower start-up and shakedown costs. While the scope of the project remains the same, we believe the overall project has the potential to cost us less than initially forecasted. The conditional commitment is structured as a senior secured financing and carries an attractive cost of capital for a Company like EOS. The interest rate is a small margin above U.S. treasury rates of a similar tenor and the credit subsidy is being covered by DOE appropriated funds. As mentioned previously, closing and funding of the loan is contingent upon meeting a number of conditions precedent, and we expect this would occur sometime in the second quarter of next year. While we are working through designing and building out the first state-of-the-art line, we are also working through the capital plan required to get us to first advance. This conditional commitment was a critical milestone for the business and has the potential to further support our scaling of Z3 as well as our broader growth plans. As seen on the bottom of the page, we have been in the DOE application process for well over two years, which included a thorough and rigorous due diligence process surrounding our technical, market, financial and legal standards and expectations. At the same time, while all of that was going on, we were simultaneously executing a transition from our Gen 2.3 product and implementing an entirely new manufacturing process as we work toward the launch of Z3. We are very proud of all of the hard work that the team has done to get us to this point, and this commitment is a significant endorsement of both the V3 technology as well as the role that EOS will play in the broader energy storage and transition landscape. Now moving to Page 12, I want to give a little bit more color on the expansion program and some of the questions that we have received. The capacity expansion consists of four state-of-the-art manufacturing lines that would be added over time as supported by customer demand, financial and production forecasts as well as construction costs. As Joe mentioned, we are currently building out the first line, which we expect to come online in the second quarter of 2024 with additional lines to follow thereafter. Each of the lines are capable and expected to produce over 2 gigawatt hours of storage annually when run at capacity, but we plan to run the first line at 1.25 gigawatt hours annually, which is less than the anticipated nameplate capacity until we implement subassembly automation in the future. I would like to point out that as with any industrial manufacturing process, there will be a natural ramp in production and the 1.25 gigawatt hours of capacity will not be online on day one. As you see on this slide, and as consistent with what we said last quarter, the cost of a line that should produce over 2 gigawatt hours annually is estimated to be between $40 million and $50 million. But to get our initial lineup to 1.25 gigawatt hours, we expect to spend closer to $30 million. The total cost of a line consists of direct costs paid to our automation partner, ACRO, but it also includes CapEx costs related to our injection mold en suppliers. We believe the manufacturing process is capital efficient when comparing to other technologies in the marketplace. And if you look at the bottom right-hand side of the page, once we begin to scale production, we expect a significant source of cash to be the production tax credits, which are expected to return up to 125% of the capital investment within one year of full production. Getting into the next few pages, I want to focus on what we're seeing in the market and provide an update on our commercial pipeline and backlog. We are seeing strong and growing interest in deploying energy storage for greater than 4 hours of capacity in several regions of the United States, specifically in the Southeast and ERCO are starting to see a shift to winter net peaks. To really understand what's going on here, you need to understand the fundamentals and the human behavior that is causing this shift. Let's take a look at ERCOT, for example. In the summertime, system peak load has historically been driven by air conditioning during the hottest hours in the late afternoon. These two to four hour peaks in electricity demand in late afternoon are often referred to as the super peak in wholesale power markets. This super peak corresponds with maximum solar output. And so the summer peak, net of increasing solar generation has not kept pace with the overall increase in electricity usage during other times of the year. Winter peaks on the other hand, are at night and tend to be longer, i.e., eight-to-ten hours with small double peaks at the start and end of the overnight period as people warm up the house before going to bed and again, when they get up and get ready for the day. These winter net peaks are driven by population growth, poorly insulated homes and relatively inefficient electric heating, along with decommissioned legacy base-load generation being replaced with more intermittent renewable resources. Because electric heating increases at night, winter peaks do not coincide with solar generation, and so the increase of solar in the overall generation stack has the effect of shifting the net peak from summer to winter. So what does all of this mean for EOS? To keep it simple, two to four hour duration storage may address the summer super peak and help a little with the small winter double peaks. But as these macro trends continue in the market, we expect to see a growing demand for longer duration, say, eight-to-ten hours storage solutions to address the longer overnight winter net peaks. We believe EOS has a competitive advantage as this trend continues as our systems were uniquely designed with the flexibility to operate as low as three hours and up to 12 hours in duration. Furthermore, our energy storage systems get more efficient as we move beyond four hours, effectively getting more energy from the same energy cube. So our footprint and CapEx goes down as duration increases, giving us a growing competitive advantage as solar penetration increases in these markets. Flipping to Page 15, we've talked previously about how our pipeline and backlog is a portfolio of different customers and projects. Before getting into our commercial pipeline update, I wanted to provide a little more color on this portfolio effect by looking at how some of our typical customers tend to operate in the industry. This page highlights two indicative customer types, what you will find is that every customer can behave a little bit differently. The portfolio of projects and customers in our pipeline is comprised of a mix of utilities, IPPs, developers and industrial customers. Today, I'm going to focus on what we generally see with independent developers and utility-backed projects and how they fit in with our order book. Taking a look at independent developers depicted here on the left side of the page, you should think of the project life cycle in three key areas

Operator: All right. [Operator Instructions] For your first question, it comes from the line of Vincent Anderson from Stifel. Please go ahead.

Vincent Anderson: Yeah, thanks. Good morning, so this may seem a little too optimistic of a spin, but I'm curious if there's almost just a little bit too much demand relative to your near-term capacity plans to get commitments to convert to orders, and particularly, if I'm like a small or medium-sized project that I'm worried about a utility scale customer coming in and locking up a couple of years' worth of your capacity. And then maybe just more broadly speaking, how are you managing these relationships between customers that could provide more immediate orders and deposit cash flows and still keeping those large-scale customers happy by not committing too much of your initial capacity?

Joseph Mastrangelo: Vincent, I wouldn't say optimistic, it's realistic. I mean I think that's the balancing act that we're doing to try to put together the pieces of the puzzle. We do capacity planning of projects given on when the customer says they're going to go live. And the conversations that we're having with people is like, look, we want to have a mix, so you don't -- you can't run the Company on just small projects or do you want to run the Company only on really big projects because big projects are going to be lumpy. And over time, if one doesn't happen, you wind is as we start scaling. So we're always going to have a mix between the two, and part of what we're trying to do now is what are the best use cases that highlight the technology, what's the best average selling price for us as we go down this road on our path to profitability. And then as well, if the demand comes once you get through getting the first line up and running, which is the longest implementation because you're designing and debugging and putting in controls, we can accelerate line two, line three, line four, depending on what happens. That's the way we've always designed the companies to do this in a modular fashion and bring on capacity as required, but like we are balancing between where we think we're going to be in managing that really production and capacity curve to make sure that we can deliver. The last thing we want to do is make a lot of commitments and then not be able to deliver. What we've been able to do so far as we've gone through the past really 12 to 18 months, is managing with customers on when they really need the product on site to be able to operate and delivering to that demand. And that's a dynamic process as you go through this of where they are in the overall execution of the project and where we are in our ability to deliver.

Vincent Anderson: Okay. All right. That's helpful, thanks. And then just following on that, if you're willing to discuss a bit more specifically which of the factors you listed on the new order guidance change, maybe which of those changed most meaningfully over the course of the third quarter that impacted your expectations on new orders for this year?

Joseph Mastrangelo: So what I would say that we're seeing is a lot of opportunity coming through on the pipeline. Like one of the big things is, and I think Nathan mentioned this, pages the amount of new opportunities that are in the pipeline, we're actually getting into the pipeline or the discussion with customers earlier in the process. So you've got to work through a bunch of different factors from a permitting side, from a financing side. But when you really look at this too, it's not just timing, right? I mean this is really working through on timing and delivery and then going back, Vincent and really referencing back to your earlier question, it's then us telling people, "Look, if you want to deliver by this date, here's the capacity we have, and here's where we need a decision by," and then working through to be able to do this. But I think the overall trend that we're seeing is longer duration storage, people having to work through getting their permitting and everything lined up to be able to do this. wanting to do this with EOS technology, which has five hours, that five-hour storage really favors our technology than the safety factor layering in on top of that and really being thoughtful as we work through these things with not just the direct customer but also the end user, the system operator and the local municipalities to get everything cited then approved.

Operator: And to your next question, it comes from the line of Martin Malloy from Johnson Rice & Company.

Martin Malloy: Congratulations on all the accomplishments you've had recently. My first question was just how we should think about reimbursement under the DOE loan program and that first advance. And maybe if you could talk about what would be covered in that? Would it be past not just CapEx, but worker training, R&D, how should we be thinking about getting once you get to that first advance?

Nathan Kroeker: Sure, Marty, it's Nathan. Good to hear from you. So as we think about the reimbursement mechanism that's built into this loan structure, it's reimbursement of eligible costs. And eligible cost is a defined term, you could go out and find it on the DOE's website. But essentially, it's a combination of the CapEx associated with the line or lines and project-related OpEx. And so if I hire somebody, just to give a simple example, if I hire somebody to manage the ACRO relationship, that's OpEx, but it would be considered an eligible cost because it's directly related to the expansion program. The manager who's out on the floor today, managing the semi-automated line, that's not an eligible cost. So it's operating expenses directly related to the expansion program are considered eligible costs. The other one that's probably not quite as easy to understand is the ramp-up and the shakedown costs. So when we get the line up and running and it's operating, but it's operating in scrap rates that are higher than normal, those incremental scrap costs are considered eligible costs as well, and we get to borrow against that. So there's ongoing eligible costs even after the line is built that we're going to be able to submit for reimbursement as we get ramped up to full capacity.

Martin Malloy: For my follow-up, I wanted to ask about Slide 12 and the tax credit you point out the PTC. Could you maybe talk about -- Section 45 tax credits and domestic content you mentioned, but maybe talk some more about that and any sharing that you might do with the customers on those?

Nathan Kroeker: So really -- I mean, tax credits fall into two buckets, as you alluded to. You got the production tax credit, which it's $45, $35 plus $10 per kilowatt hour for any projects that are built and shipped after January 1, 2023. We've been recording that since the first quarter of this year. That one is pretty straightforward, and I think we have enough guidance now to where we feel comfortable recording that and looking -- actually starting to look at opportunities to monetize those because there's enough clarity around that. The second piece of it is the 10% electrode active materials piece, still working through trying to get formal guidance on that and exactly how we can calculate that and how we can quantify that. So that's ongoing. But then flipping over to the customer side, which is what I think you're pointing to on the ITC, customers will get to 30% credit plus the 10% for being located in the correct zones. And then the area that we're involved in is the domestic content bonus credit or 10% bonus credit, and this is for -- this is not based on production dates. This is based on placed in-service dates. And so we're actually working through with a few customers right now on quantifying those tax credits for projects that are being placed in service in 2023. And working together with a third party going through and understanding the guidance. And as we look through even on Gen 2.3, we are far in excess of the domestic required for customers to get that bonus credit. And so just like I said, working together with individual customers on their specific project economics to see how does this play into their overall IRRs and how much improvement do they get on it. So if Gen 2.3 is far in excess of the threshold, we're confident needs even better. And I think it's a significant source of value with customers. Now that conversation shifts, as you suggested, to, hey, how do we share in the revenue on this or share in the economic benefit of this, right? If our high domestic content percentage helps to push the entire project above the threshold, and it unlocks value on other components of the project that another storage provider might not be able to unlock for a customer, there's a discussion there about how do we share in that economic benefit. And once we have more clarity on that and we'll be happy to talk about it in more detail, but those are the conversations that are ongoing today.

Joseph Mastrangelo: And Marty, the only thing I would add on top of what Nathan just said, what he just described is a lot of work that has been done by the team on supply chain development. So everybody talks about the line, the line, the line, when are you going to get the line from ACRO? But having a line where there's no material, you're not going to get a product. Having a line where there's no trained employees, we're not going to deliver product. A couple of key things that Nathan talked about in there is like we qualify today for the tax credit. The move that we're making with our FFELP supply is not... It's to get the product as close as we can to a 100% U.S. supply chain because that derisks the supply chain. And what saved the Company during COVID was the fact that we had such a high U.S. content, we're able to continue to do developing -- development on the product and manufacturing. What we're also doing, and I want to clarify, like as we think about the ramp and how this plays into the credits, we're diversifying our supply base. So everything I talked about earlier in the presentation, it links in with how you get those credits, how you scale the Company and how you have material flowing and really upscaling, if you will, or getting into higher-volume suppliers to be able to deliver and having those higher-volume suppliers be in the United States. We have been dormant as it comes to manufacturing, if you will, as a country when you look at what was happening. So it's not like you just walk into a supplier and say, "Let's start doing this." There's a journey to... gain journey and working through that journey, and that's one of the things we're also focused on as we bring the new line into production.

Operator: And for your next question, it comes from the line of Christopher Souther from B. Riley.

Christopher Souther: So it sounds like we're going to keep production pretty low out of the semi-automated lines to conserve cash, which makes a lot of sense. But we basically assume a similar run rate in 3Q, 4Q and 1Q, pretty minimal revenue of $10 million kind of burn per month. And I'm just curious if there's -- we should expect any increases as we start to build out and test the line from that side.

Joseph Mastrangelo: So Chris, what I would say is when you look at the production in the month of October, it's 5.5x higher than what we were doing in September. So the line has scaled up. What our goal is around production, just to be very clear, we want to get our project out and shipped and installed in ERCOT. That's an important project to show the use case of going back to winning orders in the market, having a scaled project that's installed and operating helps you win orders in the market. So that's what we're going to be focused on here over the next three months, if you will, as we get in two months like what Nathan talked about is we're cutting over into a lot of the cost out work that's been going on. So building off of the comment that I made to Marty earlier. Not only are we developing a domestic supply chain and developing and diversifying our supply base, we're also taking significant cost out of the product. So cutting... Manufacturing, when you know you have a bill of material coming that's going to cost less. That's as good as capital management as anything you can do, and that's what we're going to be able to do. From there, we shift the focus to delivering our 47 megawatt-hour project to the large utility here in the United States, and then you're going to be ramping up the line. And that's kind of the cadence as you think about how you go through this, where we'll talk about in December is what all that timing looks like and what that puts together as you start thinking about the road map to profitability for the Company.

Christopher Souther: Yes. Okay. Thanks for clarifying. I thought you were potentially pushing those projects into the fully only environment, but that makes more sense. And then just...

Joseph Mastrangelo: Just one other thing on that question, is we start flowing parts from suppliers in a controlled fashion, so that lets you get quality control over your material flow. We have a workforce here that you start to train on the operations and get them up to speed. And more importantly, when you want to scale and run an operation 24/7, you put your leadership team in place, you let them start running under a controlled fashion. We're all learning and we're ramping into that. But the important thing here is, as you look at the schedule for this project in ERCOT, we've tailored the production and shipment of those to their schedule and also to allow us to manage our capital efficiently.

Christopher Souther: Okay, thanks. And then just the remaining CapEx amount and timing on Line 1. I think you previously talked about $40 million to $50 million of CapEx for that. But Slide 9 is it's like $30 million. Is that just coming in under previous cost assumptions? Or was that prior $40 to $50 million, including some of that additional subassembly automation? And then just where are we in the CapEx for Line 1?

Nathan Kroeker: So I'll just -- I think you're on it. I'll just clarify a couple of things. We have previously said $40 million to $50 million to build a fully automated line. That fully automated line has a nameplate capacity of two gigawatt hours or higher. So you're absolutely correct in those numbers. What... Was the first automated line, we're assuming that it has an output of 1.25 gigawatt hours. We're also assuming that we don't have full automation of the subassemblies on day one. And so as we look at the CapEx associated with get to 1.25 gigawatt hours of production, that's around $30 million. So less than what it will be on subsequent lines. And part of that is we don't have the same amount of cost associated with the sub-automated subassemblies. So it's lower cost, but also lower output. At a later date, we could go in and add some of that automation and get the capacity of that line up above two gigawatt hours as well, but we can do that as a separate stage in the process.

Christopher Souther: Okay. And where are we in that $30 million spend?

Nathan Kroeker: The second part of your question is of that $30 million, where are we at? First of all, it's two primary nation design and systems that ACRO is working on. And the second large bucket of cost in there is all of the tooling that's associated with the new parts and the new line. We are approximately 40% of the way through paying for the line.

Christopher Souther: Okay. Perfect. And then maybe just a last one here. On the current pipeline, can you give us a sense of the mix overall from a percentage of gigawatt hours between utilities, smaller customers, ICP like just what does the overall mix look like? It seems like it's shifting more towards kind of the blue-chip utility type customers, but I wanted to get a sense where are we in that shift, just given the size of some of those potential customers?

Nathan Kroeker: Yes. No, we talked a lot today about some of these blue chip names in the portfolio, the utilities versus the independent we want a diversified portfolio of projects, both in terms of utility backed versus independent developer. We also want a portfolio in terms of large projects and small projects run of the meter behind the meter. I would say we're very comfortable with the portfolio of projects that we have, and we're going to continue to manage it as a portfolio.

Operator: And for your next question, it comes from the line of Joseph Osha from Guggenheim.

Joseph Osha: A couple of questions. First, as we think about meeting these LPO conditions precedent, I know there's a lot that's complicated, but can you characterize for me what you think the real challenges are and what we should be focused on as you move through that process?

Nathan Kroeker: Listen, Joe, I don't think there's anything there that we can't accomplish. They take different amounts of effort and different amounts of time, but we're moving forward on all fronts. Some of them have to do with real estate, some have to do with capital requirements to get to first advance. Some of them are things like permitting. And so nothing there that we're seeing as an insurmountable challenge. We're just working through the process.

Joseph Mastrangelo: And Joe, I think the big gating item is the first line.

Joseph Osha: Okay. I'm just trying to understand as investors, how we should think about this other than sort of one day the press release drops. Is there some way you have that you might be able to communicate with us in progress towards meeting those CPs?

Nathan Kroeker: The number1 thing, like Joe said, is the first line. And so we'll continue to give updates on where we are at with the first line. I think that's the most critical thing to be watching.

Joseph Osha: Okay. And then next question, between now and then your shipping product that's still more expensive product off of the semi-automated line. Is it the case that by the time you factor in what it costs you to make that product? But then you've got the $45 sort of counterbalancing it. Does that -- by the time you put that all in the mix, is this a positive gross margin proposition or not?

Nathan Kroeker: Sorry, were you asking about a specific point in time? What was the first part of your question?

Joseph Osha: Well, between now and when the automated line comes up I'm trying to understand whether this revenue -- we expect this revenue that you're generating between now and then, which is de minimis, but it's there, right? But in particular, by the time you add the 45x credits back, is there more money coming in the door and been going out? That's my question.

Nathan Kroeker: No, I think we've been pretty consistent the last couple of quarters and saying getting to full automation is critical for us to get to positive gross margin. The added scale that you for that fully automated line is a key component. When we talk...

Joseph Osha: What I'm trying to say -- I'm sorry, what I'm trying to understand is, is that still the case if you add the 45x revenue back.

Nathan Kroeker: Yes, yes.

Joseph Osha: Okay. And then last question buyback...

Joseph Mastrangelo: More color on that, Joe. Some of the cost-out initiatives that we're working on dwarf the 45x credit. So as we think about the path to profitability, it's really around scale, automation and driving cost out of the product.

Joseph Osha: Okay. And then do you have some plans -- obviously, those credits are transferable now. Do you have some plans to go out and monetize those as they become available on the 45x guide?

Nathan Kroeker: Yes. We're in discussions with a couple of different counterparties to be able to monetize those as we earn them in 2024.

Operator: And we have a follow-up question from Vincent Anderson from Stifel.

Vincent Anderson: I just wanted to touch on a couple of the supply chain comments that you made earlier, Joe. So I assume the DOE loan includes the budget for bringing some of this stuff in-house, like I think you mentioned electrolyte mixing and maybe injection molding as well. But is the Westinghouse property permitted and cited for either both of those activities or are those songs that are going to be contemplated with future lines?

Joseph Mastrangelo: So we have multiple pieces that we're looking at, Vincent. There is the ability to do it here on the current facility, and that's been our plan. The permitting you require, I mean, there's no additional permitting that we need that's already contemplated. So that's one of the things that we're also working through and more to come on that as we go through this. What is not from a permitting standpoint, but in the area, what could be the best site from a logistics standpoint, from trucking in and out of the facility. So there's multiple things we're looking at with our current landlord that makes the most sense for us to scale the Company over the long term.

Vincent Anderson: Okay. All right. That makes sense. Sorry, it just seems still rare to not have permitting issues. But the electrolyte mixing benefit, I assume that's maybe more about flexibility on the working capital side by being able to stock individual raw materials than it is maybe a big cost out? Or are there more cost savings and mixing than maybe I'm appreciating here?

Joseph Mastrangelo: No. Look, I think the biggest thing is the formula of the electrolyte being simplified over time. One of the things that we've learned as we switched over to conductive plastics in the bipolar is that you get better zinc plating and there are some things that we had in the electrolyte without getting into the details that you don't really need when you have -- when you're not using titanium. So there's a lot of things you can get from a manufacturing stability standpoint with using the conductive plastic versus using the former titanium that allow us to simplify like cost out. From a mixing standpoint, there's going to be multiple -- there's multiple -- when you look at the scale and when we scale the Company as orders come in, you're going to need more than one Company mixing the electrolyte just from -- and you're going to want that from a supply chain security standpoint. We're going through on what the right let's say, what the right mix of mixing needs to be.

Vincent Anderson: Sure. Yes. Okay. And then last quick one. Injection molding, maybe it's fair to say it's a little bit outside of the manufacturing expertise of the current workforce. So I'm just wondering about...

Joseph Mastrangelo: We're not in-sourcing injection molding. This is about diversifying the injection molders that we're using. We're trying to do is, we've worked with a lot of companies over a period of time and the people that stuck with us when we were an R&D Company or they stay with us. We believe in long-term relationships. But at the same time, as you scale the Company, you need more than capacity of any one supplier and you're going to want more than one supplier to be able to do this. So the thing that we're doing on the injection molded and the injection molded parts is not in-sourcing-that's not contemplated anywhere in our plan and not what our core comp put in.

Operator: And for your last question, it comes from the line of Thomas Curran from Seaport Research Partners.

Thomas Curran: Thanks for going to know over time here and taking my questions. Nathan, could you just tell us how much of Z3 did you ship in September just in megawatt hours? And then for as long as you remain on the semi-automated line, what would be the maximum you would ship in a given month? Just given Joe's comment about the step-up from September to October. Just trying to help us set expectations and fine-tune the modeling parameters here between now and when the ERCOT automated line is fully commissioned and up and running.

Nathan Kroeker: Yes, Tom. So Joe did a pretty good job, I think, of walking through the priorities that we're balancing on this line. We're ramping up the line. It serves multiple purposes. One is to help work out some of the details in the manufacturability of the product so that when we do get the state-of-the-art line, it meets or exceeds our expectations from day one. And so continuing to learn and make improvements off the semi-automated line. The second one is to deliver on critical customer shipments, so we can get product in the field so we can collect cycling data. Obviously, there's ERCOT in particular, might be in over time. And so we have several projects that we're trying to get delivered before you get into ERCOT summer. And so really, it's just working with customers, balancing their delivery schedules with our production capacity and the necessary capital. And so we'll continue to balance those as we get towards the fully automated line.

Thomas Curran: Got it. Okay. And then among the strategic partnerships you're working on, do you expect to continue it or maybe renegotiate the zinc bromide supply agreement you have with TETRA?

Nathan Kroeker: Look, we're in active negotiations throughout the supply chain. TETRA, obviously, we've been pretty vocal about that relationship. It's a great partnership with TETRA, and we're continuing to work through what that relationship looks like going forward.

Joseph Mastrangelo: Thanks, everybody, for listening in sticking with us here, as Tom said, a little bit of over time. A lot of things going on, a lot of stitching together and want everyone to understand not just what the numbers are, but the work going on underneath the numbers to get there. We feel really confident on where we are in the orders pipeline. We know that we have to convert those opportunities into orders. There's a lot of work that goes on underneath that on the timing of when those orders come in. To me, in my view, this is a question of not if, but when this is going to happen, as Nathan will though the market is shifting to longer duration storage. So there is always going to be some timing elements that we have to work through here but feel really good about what we have in the pipeline and how to be able to do that. And then as it relates to scaling up capacity, it's a complex -- it's a complex puzzle that we're putting together here. We're building the line is actually one piece of, if you will, a couple of legs that we have to build out simultaneously while continuing to deliver for our customers in the backlog and how we get product out in the field operating, which is the big proof point people look for as they're making purchasing decisions on future projects. So we'll keep our heads down and keep working on building the Company, and we'll be back in December with a little more color around what the road map looks like to turn the Company into a profitable Company over time and what the factors are around that, that could accelerate or slow down that. But we feel really good operationally about where the Company is and the work that the team is doing and how we're building a Company for the long term that is going to capture growth in one of the biggest secular shifts we've seen in the energy industry in my career. So thanks, everyone, for the time today.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.