EOSEW - Eos Energy: Shares Rally Upon $398.6 Million DoE Conditional Loan Guarantee Commitment

2023-08-31 21:10:28 ET

Summary

• Zinc-based energy storage solutions provider Eos Energy Enterprises finally announced an eagerly-awaited conditional loan guarantee commitment by the Department of Energy.
• With up to $398.6 million in potential funding, the conditional loan guarantee commitment exceeds management's previous projections by a substantial amount.
• However, funding remains subject to a number of undisclosed technical, legal, and financial conditions.
• As near-term funding appears unlikely, I would expect Eos Energy to continue selling newly-issued shares into the open market under its recently expanded Sales Agreement with Cowen and Company LLC.
• With the major catalyst for the shares having played out and considering the likely requirement to cover material near-term cash burn with additional open market share sales and ongoing execution risks, I am reiterating my "Hold" rating on the stock.

Note:

I have covered Eos Energy Enterprises Inc. ( EOSE , EOSEW ) previously, so investors should view this as an update to my earlier article on the company.

After the close of Thursday's regular session, controversial zinc-based energy storage solutions provider Eos Energy Enterprises, Inc. or "Eos Energy" finally announced an eagerly-awaited large-scale conditional loan guarantee commitment by the Department of Energy "DoE" (emphasis added by author):

(...) Eos Energy Enterprises, Inc. (...) today announced Project AMAZE —American Made Zinc Energy, a $500 million planned expansion and a significant milestone to build 8 GWh of clean energy storage production capacity .

Project AMAZE supports Eos' strategy to address increased long-duration energy storage demand driven by the Inflation Reduction Act (IRA) implementation, using its Eos Z3™ energy storage system. The project secured an up to $398.6 million conditional commitment for a loan guarantee from the DOE LPO , the result of a rigorous and thorough due diligence process by the DOE that, if the loan is finalized, would fund 80% of Eos’ planned expansion .

Please note that the loan guarantee amount is substantially higher than the $250+ million number previously advertised by management.

According to the DoE Loan Programs Office, the loan guarantee provides for the construction of up to four state-of-the-art production lines to produce the “Eos Z3™,” a next-generation utility- and industrial-scale zinc-bromine battery energy storage systems ("BESS") in Turtle Creek, Pennsylvania.

If finalized, the project is expected to manufacture 8 GWh of storage capacity annually by 2026, sufficient to provide electricity to over 300,000 average U.S. homes instantaneously or meet the annual electricity needs of approximately 130,000 homes if fully charged and discharged daily.

However, more efforts are required before the company will be able to access the funds (emphasis added by author):

While this conditional commitment demonstrates the Department’s intent to finance the project, several steps remain for the project to reach critical milestones, and certain technical, legal and financial conditions must be satisfied and diligenced to the satisfaction of DOE before the Department enters into definitive financing documents and funds the loan.

According to the DoE Loan Programs Office, conditions precedent often require the borrower to address or mitigate various risks associated with the loan, and they are established by DOE in the term sheet to help ensure the borrower’s ability to meet a reasonable prospect of repaying the loan.

In most cases, the borrower is required to demonstrate its ability to meet certain financial or equity obligations, complete the required environmental permitting, or attain engineering or manufacturing performance or quality expectations.

To protect taxpayers, these conditions are often structured so they have to be met prior to loan closing or prior to first and subsequent advances of loan proceeds.

Unfortunately, the company has not filed the term sheet with the SEC, thus leaving investors in the dark regarding the exact conditions the company is required to meet and the timeline for finalizing the loan.

Particularly, details regarding potential financial or equity obligations would be important to assess the likelihood and potential degree of further shareholder dilution.

That said, with near-term funding of the loan being unlikely, I would expect Eos Energy to continue selling newly-issued shares into the open market under its Sales Agreement with Cowen and Company LLC ("Cowen")

Just last week, the company doubled the maximum amount to be raised under the agreement from $100 million to $200 million. After deducting $83.5 million in sales already having been made, Eos Energy would be able to raise another $116.5 million under the agreement.

Following the 50%+ after hours rally on massive volume, I wouldn't be surprised to see the company aggressively selling more shares into the market over the next couple of sessions to fund elevated near-term capex commitments and the requirement to invest in working capital as Z3 production is ramping up.

Considering these issues, I wouldn't be surprised to see H2 cash burn exceeding $100 million following cash usage of $86.7 million in the first half of the year.

Since the beginning of 2023, outstanding shares have increased by more than 60% to approximately 134 million as of August 9.

However, given the vastly increased share price, additional dilution is likely to occur at a more measured pace.

Even when assuming Eos Energy utilizing the entire $116.5 million still available under the Sales Agreement with Cowen at an average price of $4 per share, outstanding shares would increase by just 22%.

Bottom Line

Thursday's $398.6 million conditional loan guarantee commitment by the Department of Energy represents a major milestone for Eos Energy Enterprises.

However, near-term funding of the loan isn't likely due to the company still being required to satisfy a number of undisclosed technical, legal and financial conditions.

Given this issue, Eos Energy will likely have to sell more shares into the open market under its recently expanded Sales Agreement with Cowen to cover substantial cash burn and potentially meet some of the undisclosed financial conditions of the DoE term sheet.

But following the massive after hours rally, additional dilution is likely to occur at a more measured pace.

With the major catalyst for the shares having played out and considering the likely requirement to cover material near-term cash burn with additional open market share sales and ongoing execution risks, I am reiterating my " Hold " rating on the stock.

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