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Summary of Findings:
- Energy-storage battery manufacturer EOS Energy Enterprises Inc (“EOS” – ticker $EOSE) has raised and burned through $160m over the 12 years of its existence prior to its SPAC merger on 17 November 2020. EOS was only able to generate $35k revenue in the first nine months of 2020.
- Miraculously, EOS reported an incredible surge in its order book (1,000 times its current battery deployment) before the SPAC. Our findings show the disclosed customers are extremely unlikely to have the financial ability to honour their contracts.
- The company’s zinc battery technology has never taken off despite its long history of technological pilots. The zinc-based batteries designed by EOS have a major technological flaw: lower round trip efficiency compared to conventional lithium-ion technology, a key reason behind the lacklustre adoption among potential customers.
- EOS will face an uphill battle against lithium-ion batteries — the dominant battery storage technology — which commands a 99% market share and their mass production has significantly lowered costs.
- Given its failed technology and dubious clients, we estimate that EOS’ equity is worth only $144m (net asset estimate) which represents a 90% downside from its current market cap of $1.5bn.
Presentation of EOS
Founded in 2008 and headquartered in Edison, New Jersey, Nasdaq-listed EOS Energy Enterprises Inc (fka EOS Energy Storage LLC) designs and manufactures battery energy storage systems (“BESS”) for electrical grids. These batteries are used to balance the variable output of wind and solar farms.
EOS claims its zinc battery technology addresses the limitations of conventional lithium technology, which represents 99% of the US energy storage market. EOS’ batteries are non-flammable, easily recyclable, do not require rare earths or conflict materials, and would be cheaper than lithium-ion technology.
The management of EOS believes the energy storage market will represent a ~US$42bn global opportunity by 2025. It is targeting the US, for which EOS plans to capture between 8.7% and 14.9% of the market by 2024. EOS promises investors that revenue will hit at least US$995m revenue by then.
EOS was listed after its reverse merger with B. Riley Principal Merger Corp. II, a special purpose acquisition company (SPAC), on 17 November 2020. The SPAC stock price is up 174% since its listing with a market capitalization of $1.42b as of 13 January 2021.
Behind EOS’ announcements of huge contracts are companies unlikely to honour their obligations
EOS was clearly struggling before the SPAC merger, having sold just ten battery systems to customers since 2008, representing a total of 3 MWh (the modest equivalent of 13 Tesla Powerpacks). Many of these battery systems were installed under pilot programs to test EOS’ technology.
It is clear that EOS has shown little commercial success, and if not for the merger, was unlikely to survive for more than a few months without raising additional capital. Auditor Deloitte highlighted in the company’s FY19 financial statements that EOS “has stated that substantial doubt exists about the Company’s ability to continue as a going concern.”
Indeed, EOS has burnt $160m of investor monies over its 12 years of existence, and had just $6.5m cash on hand at the end of September 2020. Its recent performance for the first nine months of 2020 (“9M20”) was not any better as 9M20 revenue plunged ~83% to $35k from $211k a year earlier. Its 9M20 net loss was $45m while equity was negative $229m.
However, lo and behold, EOS miraculously announced a flurry of customer commitments just before the SPAC merger. This brought EOS’ order book to 3,000 MWh at the end of October, a thousand times its existing deployment of batteries.
Source: EOS’ October 2020 investor presentation
In turn, the management of EOS believes sales volume will soar to anywhere between 6,786 MWh (Base case) and 11,654 MWh (Growth case) in 2024, the table below shows.
Source: EOS’ September 2020 investor presentation
However, there is one problem with this rosy scenario: EOS has signed contracts with customers that are unlikely to have the financial ability to pay for these contracts. Three named customers — which combined account for 1,680 MWh — in particular explain EOS’ exploding orderbook: Carson Hybrid Energy Storage (“CHES”), International Electric Power, LLC (“IEP”), and EnerSmart Storage LLC (“EnerSmart”). These are our findings:
CHES calls itself a ““grid connected generator”. EOS is expected to supply CHES with 500 MWh of BESS from the first quarter of 2023, making CHES its second largest customer. CHES’ internet presence, however, raises eyebrows with a simple looking website that reads like an advertising piece for EOS.
Source: CHES’ website
Michael Munoz, the president of CHES, writes this in his LinkedIn profile:
“CHES has partnered with Eos Energy to develop a 125 MW / 500 MWh Zinc Aqueous BESS power plant in Northern California. CHES has chosen to site this development and its community benefits in an Opportunity Zone. CHES is establishing a QOF to fund the $125 million project.”
This suggests that the project has not been funded.
It’s unclear if this funding will occur anytime soon. For one, CHES’ stated address ‘4532 East Cesar E Chavez Avenue Los Angeles CA 90022, belongs to a legal firm in Los Angeles.
CHES’ website also shows a picture of an installed EOS battery system but this system is in fact installed at another client location at West Caldwell, NJ.
The company’s email is more intriguing. It is the same as a cogeneration power plant called Carson Cogeneration Company (“Carson Cogen”). But this power plant has not been operating since 2017. Court documents (Carson Cogeneration Company v. Scottsdale Insurance Company, et al) also show a fire occurred at Carson Cogen’s facilities in January 2020. Carson Cogen sued its insurer for failing to fully indemnify Carson Cogen. Carson Cogen lost the lawsuit against the insurer on October 2nd. There is no indication that Carson Cogen will be able to reopen its plant anytime soon.
EOS’ largest customer IEP calls itself a “technology agnostic power producer which seeks to build, own and operate a portfolio of generation assets”. Its website does not list any manager despite claims that “our senior managers have over 30 years of industry experience”. We found this information on a hidden old web page: out of four managers, at least two have left the company. And while IEP was involved in energy projects in the mid-2015s, it does not seem to have been really active since then.
EOS has agreed to supply IEP with 1 GWh of battery energy storage systems in connection with the Electric Reliability Council of Texas (“ERCOT”) grid. We found no trace of IEP on the ERCOT website nor did we find any relationship between ERCOT and IEP. A press article reports: “IEP is yet to identify the exact locations where the systems will be sited.” We wonder how IEP can order 1GWh of batteries if they don’t know yet where to put them.
EOS announced on January 4th that it secured a $20 million (90MWh) order with EnerSmart. EOS calls it the “largest contract in Company history” even though it is 11 times smaller than the IEP contract. LinkedIn shows EnerSmart is a two-person firm and is described as a “developer, owner and operator of utility scale energy storage projects”. We asked EnerSmart whether they already has this $20m funded and allocated to the EOS contract. We have not received an answer.
We believe these customers lack financial substance and will be unable to honour their very large contracts. EOS’ executives are clearly incentivised to create these ‘partnerships’ to sell the SPAC merger and boost EOS’ share price e.g., Chief commercial officer Balki Iyer was granted 14.4k options with a conversion price of $8.67 if EOS’ booked orders exceed the stated vesting conditions of > 600 MWh of booked orders.
Death by pilot
EOS formed promising partnerships with credible companies in the past but was unable to convert them into sales. In 2013, the company announced partnerships with energy giants like Enel, GDF SUEZ, National Grid, NRG and Public Service Company of New Mexico for its Genesis Program , to develop and demonstrate its product. Signing with these utilities was an extraordinary opportunity for a startup like EOS to showcase its products in nascent markets. These partners represented “76 million customers in over 70 countries”. But the list of clients in EOS’ prospectus suggests none of these pilots translated into customers. EOS was likely a victim of what the industry calls “death by pilot”.
The company claims its “relatively recent commercialization of its products makes it difficult to evaluate Eos’s future prospects” and that it began commercialising its products only recently in 2018. This suggests that EOS is finally ready to sell its technology after years of development. This is plainly incorrect as EOS sold a battery system to GDF Suez in 2014. The trial with GDF Suez — presented as EOS’ “first international customer” — seemed to have failed: GDF Suez (now called Engie) is not listed as a client of EOS.
Finally, Babcock and Wilcox (market cap of $189m) partnered with EOS to be “the exclusive battery supplier for B&W’s global customer base of industrial, utility and power companies”. What was not disclosed in the announcement is that B&W has a small stake in EOS (200,000 shares) and that B&W plans to sell its shares according to a SEC filing. Not a sign of confidence.
Fundamental flaw in EOS’ technology caused commercial failure
EOS believes its zinc-based technology is superior to and cheaper than lithium-ion batteries. So why were there so many commercial disappointments and why isn’t there a long queue of customers to buy EOS’ energy storage system?
Although zinc battery technology does have some advantages over lithium, its own limitations have dramatically hampered both development and adoption. In its presentations, EOS does not spend much time on a crucial limitation: round-trip efficiency (“RTE”). RTE is the amount of usable energy that can be discharged from a storage system relative to the amount of energy that was put in. Zinc batteries have a lower RTE than lithium batteries. EOS’ batteries have an RTE of 75%-80%, according to its presentation, while the RTE of lithium batteries is close to or exceeds 90%.   It is a significant hidden cost as renewable energy producers will see part of their produced electricity, and therefore revenue, disappear. This alone has discouraged potential customers from adopting zinc-based technology.
EOS admits in the prospectus that “Compared to traditional energy storage technologies, Eos’ products have less power density and round trip efficiency and may be considered inferior to competitors’ products.” “If customers were to place greater value on power density and efficient power delivery over the numerous other advantages of Eos’s technologies, (….) Eos could have difficulty positioning its batteries as a viable alternative to traditional Li-ion batteries and its business would suffer.”
The higher RTE for lithium batteries is one reason why 99% of batteries are still lithium-based and alternatives such as zinc batteries have not taken off. EOS does not hope to fill the RTE gap in future iterations of its battery, as it predicts its technology will achieve an 80%+ RTE in 2021.
Source: EOS October presentation
To make matters worse, mass production and innovation have allowed lithium batteries producers to dramatically reduce their price, leaving alternative technologies in the dust. Lithium-ion battery pack prices have fallen 89% in real terms from above $1,100 per kilowatt-hour in 2010 to $137/kWh in 2020. BloombergNEF forecasts average prices to be close to $100/kWh by 2023.
Lithium’s dominant position is best summarized by the head of clean power research at BloombergNEF:
“Many companies have promised to out-compete lithium-ion on cost and performance over the last decade, with limited commercial success. Ever cheaper and better lithium-ion batteries remain the preferred technology.”
“BloombergNEF expects lithium-ion batteries to stay dominant for years to come, even as demand for longer-duration storage grows. As costs come down, lithium-ion battery suppliers are expanding their current sweet spot of applications requiring 1 to 4 hours of storage discharge to 5 hours and beyond, the market that Eos and other storage aspirants are targeting.”
“Cheaper lithium-ion batteries can compete for longer duration contracts, which narrows the market opportunity for companies like Eos”
In the past, EOS claimed its technology was cheaper because of the abundance of metals it used. In 2017 for instance, EOS promised its systems would cost $160 per Kwh versus $350 per Kwh for lithium-ion systems at the time. Greentech Media, a subsidiary of Wood Mackenzie cast doubt on EOS’ claim when it wrote the following:
“So for Eos to come out of nowhere and sell at $160 per kilowatt-hour has many in the industry understandably suspicious.” 
“In 2019, Greentech Media reviewed internal documents in which Eos quoted the DC system cost at $222 per kilowatt-hour, considerably more than the alleged price back in 2017.” 
EOS has no chance of competing on cost because of the ever declining cost of lithium batteries. Scientific articles also suggest there are many technical problems to solve before zinc becomes a serious alternative to lithium. The company does not have the financial resources to conduct this research with just $150m cash post SPAC merger. This compares to behemoths such as Samsung, LG Chem, and Tesla, all of which employ lithium-ion technologies. The window of opportunity for startups long in the tooth like EOS is gone.
EOS has been sold to investors eager to buy a piece of the renewable energy hype. Believing in the prospects of an industry does not mean that every company will succeed. EOS’ technology has been marketed for years but has failed to take off due to lower RTE. We expect the dubious clients to be unable to pay for these contracts. EOS would have eventually run out of cash if it had not been saved by the SPAC merger. This has only delayed an inevitable outcome. We estimate EOS’ equity value at only $144m (net asset estimate) which represents a 90% downside from its current market cap of $1.4bn.
Source: EOS filings and Iceberg calculations
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