Eos Energy Enterprises (EOSE) 10-Q2023 Q1 Quarterly report

(732) 225-8400

Registrant’s telephone number, including area code

FORWARD-LOOKING INFORMATION

All statements included in this Quarterly Report on Form 10-Q (“Quarterly Report”), other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements appear in a number of places in this Quarterly Report and include statements regarding the intent, belief or current expectations of Eos Energy Enterprises, Inc. Forward-looking statements are based on our management’s beliefs, as well as assumptions made by, and information currently available to, them. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. Factors which may cause actual results to differ materially from current expectations include, but are not limited to:    

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Eos Energy Enterprises, Inc. (the “Company,” “we,” “us,” “our,” and “Eos”) designs, develops, manufactures, and markets innovative energy storage solutions for utility-scale, microgrid, and commercial & industrial (“C&I”) applications. Eos developed a broad range of intellectual property with multiple patents covering unique battery chemistry, mechanical product design, energy block configuration and a software operating system (Battery Management System). The Company has only one operating and reportable segment.

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

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

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

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

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its 100% owned, direct and indirect subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All intercompany transactions and balances have been eliminated in the preparation of the unaudited condensed consolidated financial statements. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). The interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in our 2022 Annual Report on Form 10-K. These interim results are not necessarily indicative of results for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

There were no new accounting standards or updates during the three months ended March 31, 2023 that would have a material impact on the Company’s unaudited condensed consolidated financial statements.

3. Revenue Recognition

The Company primarily earns revenue from sales of its energy storage systems and services including installation, commissioning, and extended warranty services. Product revenues, which are generally recognized at a point in time, and service revenues, which are generally recognized over time, are as follows:

For the three months ended March 31, 2023, the Company had one customer who accounted for approximately 97.0% of the total revenue. For the three months ended March 31, 2022, the Company had three customers who accounted for 43.6%, 31.5% and 15.1% of the total revenue, respectively.

The following table provides information about contract assets and contract liabilities from contracts with customers. Contract assets, current and contract liabilities, current and long-term are included separately on the unaudited condensed consolidated balance sheets and contract assets, long-term are included under other assets, net.

The Company recognizes contract assets for certain contracts in which revenue recognition performance obligations have been satisfied but invoicing to the customer has not yet occurred. Contract liabilities primarily relate to consideration received from customers in advance of the Company’s satisfying performance obligations under contractual arrangements. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

Contract assets increased by $1,914 during the three months ended March 31, 2023 due to recognition of revenues for which invoicing has not yet occurred. Contract liabilities decreased by $3,450 during the three months ended March 31, 2023, due to the recognition of $3,450 of revenue during the three months ended March 31, 2023 that was included in the contract liability balance at the beginning of the period.

Contract liabilities of $400 as of March 31, 2023 are expected to be recognized within the next twelve months and long-term contract liabilities of $956 are expected to be recognized as revenue over approximately the next one to two years. Contract assets of $3,844 as of March 31, 2023 are expected to be recognized within the next twelve months. Long-term contract assets of $70 are expected to be recognized as accounts receivable over approximately the next two years.

4. Cash, Cash Equivalents and Restricted Cash

The following table reconciles reported amounts from the unaudited condensed consolidated balance sheets to cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated statements of cash flows:

The following table provides information about inventory balances:

6. Property, Plant and Equipment, Net

The following table provides information about property, plant and equipment, net balances:

Depreciation expense related to property, plant and equipment was $2,667 and $985 for the three months ended March 31, 2023 and 2022, respectively.

Intangible assets include patents valued at $400, which represents the cost to acquire the patents. These patents are determined to have useful lives and are amortized into the results of operations over ten years. The Company recorded amortization expense of $10 for each period for the three months ended March 31, 2023 and 2022 related to patents.

During the three months ended March 31, 2023, the Company capitalized $130 of costs for internal-use software. The software has a useful life and is amortized into the results of operations over 3 years. The company recorded amortization expense of $9 for the three months ended March 31, 2023 related to software.

8. Notes Receivable, Net and Variable Interest Entities (“VIEs”) Consideration

Notes receivable primarily consist of amounts due to the Company related to the financing offered to certain customers. The Company reports notes receivable at the principal balance outstanding less an allowance for losses. The estimate of credit losses is based on historical trends, customers’ financial condition and current economic trends. The Company charges interest at a fixed rate and calculates interest income by applying the effective rate to the outstanding principal balance.

The Company had notes receivable, net of $862 and $863 outstanding as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023 and December 31, 2022, the Company recorded an allowance for expected credit loss from the notes receivable of $2 and $2, respectively.

The customers to whom the Company offers financing through notes receivables are VIEs. However, the Company is not the primary beneficiary, because the Company does not have power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance. Therefore, the VIEs are not consolidated into the Company’s unaudited condensed consolidated financial statements. The maximum loss exposure is limited to the carrying value of notes receivable as of the balances sheet dates.

Accrued expenses were as follows:

The following table summarizes warranty reserve activity:

10. Government Grants

California Energy Commission

For the three months ended March 31, 2023 and 2022, grant expense, net was $0 and $173, respectively.

Inflation Reduction Act of 2022 (“IRA”)

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. The IRA has significant economic incentives for both energy storage customers and manufacturers for projects placed in service after December 31, 2022. Starting in 2023, there are Production Tax Credits under Internal Revenue Code 45X (“PTC”), that can be claimed on battery components manufactured in the U.S. and sold to U.S. or foreign customers. These tax credits available to manufacturers include a credit for ten percent of the cost incurred to make electrode active materials in addition to credits of $35 per kWh of capacity of battery cells and $10 per kWh of capacity of battery modules. These credits are cumulative, meaning that companies will be able to claim each of the available tax credits based on the battery components produced and sold through 2029, after which the PTC will begin to gradually phase down through 2032.

12. Borrowings

On December 29, 2022, the Company issued and sold a convertible promissory note (the “December 2022 Promissory Note”) with an aggregate principal amount of $2,000 in a private placement to Yorkville under a second supplemental agreement to the SEPA (the “Second Supplemental Agreement”). In January 2023, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 1,953,612 shares of common stock to Yorkville to offset all outstanding amounts owed to Yorkville under the December 2022 Promissory Note. This resulted in a loss on debt extinguishment of $338 which is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

On February 1, 2023, the Company issued a convertible promissory note (the “February 2023 Promissory Note”) with an aggregate principal amount of $5,000 in a private placement to Yorkville under the Second Supplemental Agreement. The February 2023 Promissory Note has a maturity date of June 29, 2023, was issued with an original issue discount of 2%, debt issuance costs of $43, and bears an annual interest rate of 5% which shall increase to an annual rate of 15% upon an Event of Default (as defined in the SEPA) for so long as it remains uncured. The February 2023 Promissory Note is convertible into shares of the Company’s common stock at a conversion price equal to the lower of $1.4883 or 96.5% of the lowest daily volume weighted average price of the Company’s common stock during the seven consecutive trading days immediately preceding the conversion date (the “Conversion Price”). The number of shares issuable upon conversion of the February 2023 Promissory Note is subject to the Exchange Cap limitation under the SEPA, unless shareholder approval is obtained. Because shareholder approval is not an input that is indexed to the Company’s shares, the conversion feature is not indexed to the Company’s own stock. Therefore, the conversion feature does not qualify for the scope exception to derivative accounting and bifurcation is required at issuance.

The fair value of the embedded derivative in the February 2023 Promissory Note was estimated using the intrinsic and discounted cash flow model at inception and on subsequent valuation dates. These models incorporate inputs such as the stock price of the Company and its debt yield. The fair value of the embedded derivative upon issuance was $1,323. The fair value of the February 2023 Promissory Note at issuance was $5,887, which was greater than the proceeds received. As such, the Company recorded the excess of fair value of the February 2023 Promissory Note over the proceeds received as interest expense in the amount of $987, which is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

In February 2023, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 3,879,706 shares of common stock to Yorkville, in order to offset all outstanding amounts owed to Yorkville under the February 2023 Promissory Note. This resulted in a loss on debt extinguishment of $479 which is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

On March 17, 2023, the Company issued a convertible promissory note (the “March 2023 Promissory Note” and, together with the December 2022 Promissory Note and the February 2023 Promissory Note, the “Yorkville Convertible Promissory Notes”) with an aggregate principal amount of $15,000 in a private placement to Yorkville under a third supplemental agreement to the SEPA (the “Third Supplemental Agreement”). The March 2023 Promissory Note has a maturity date of August 17, 2023, was issued with an original issue discount of 2%, debt issuance costs of $64, and bears an annual interest rate of 5% which shall increase to an annual rate of 15% upon an Event of Default (as defined in the SEPA) for so long as it remains uncured. The March 2023 Promissory Note is convertible into shares of the Company’s common stock at a conversion price equal to the lower of $1.9368 or 92.5% of the lowest daily volume weighted average price of the Company’s common stock during the seven consecutive trading days immediately preceding the conversion date (the “Conversion Price”). The number of shares issuable upon conversion of the March 2023 Promissory Note is subject to the Exchange Cap limitation under the SEPA, unless shareholder approval is obtained. Because shareholder approval is not an input that is indexed to the Company’s shares, the conversion feature is not indexed to the Company’s own stock. Therefore, the conversion feature does not qualify for the scope exception to derivative accounting and bifurcation is required at issuance.

The fair value of the March 2023 Promissory Note at issuance was $20,665, which was greater than the proceeds received. As such, the Company recorded the excess of fair value of the March 2023 Promissory Note over the proceeds received as interest expense in the amount of $5,965, which is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

The fair value of the embedded derivative upon issuance was $7,026. The fair value of the embedded derivative in the March 2023 Promissory Note was estimated using the intrinsic and discounted cash flow model at inception and on subsequent valuation dates. These models incorporate inputs such as the stock price of the Company and its debt yield. The assumptions used to determine the fair value of the embedded derivatives at issuance and at March 31, 2023 are as follows:

In March 2023, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 5,383,174 shares of common stock to Yorkville, in order to offset a portion of outstanding amounts owed to Yorkville under the March 2023 Promissory Note. This resulted in a loss on debt extinguishment of $817 which is reflected in the unaudited condensed consolidated statements of operations and comprehensive loss.

The carrying value of the March 2023 Promissory Note is as follows:

2021 Convertible Notes Payable – Related Party

On July 6, 2021, the Company entered into an investment agreement with Spring Creek Capital, LLC, a wholly-owned, indirect subsidiary of Koch Industries, Inc. The investment agreement provides for the issuance and sale to Koch Industries of the 2021 Convertible Notes in the aggregate principal amount of $100,000. The maturity date of the 2021 Convertible Notes is June 30, 2026, subject to earlier conversion, redemption, or repurchase.

As of March 31, 2023 and December 31, 2022, the fair value of the embedded conversion feature was $1,684 and $918, respectively. The (loss) gain from the change in fair value of the embedded derivative conversion feature for the three months ended March 31, 2023 and 2022 amounted to $(766) and $7,695, respectively.

Interest expense recognized on the 2021 Convertible Notes is as follows:

As of March 31, 2023 and December 31, 2022, interest payable attributable to the 2021 Convertible Notes was $1,637 and $—, respectively. As of March 31, 2023, the Company was obligated to repay all contractual interest attributable to the 2021 Convertible Notes in-kind in accordance with the terms under the Senior Secured Term Loan (see below). Therefore, such interest was recorded as a long-term liability on the unaudited condensed consolidated balance sheets.

AFG Convertible Notes - Related Party

On January 18, 2023, the Company entered into the Investment Agreement with the Purchasers relating to the issuance and sale to the Purchasers of $13,750 in aggregate principal amount of the Company’s AFG Convertible Notes.

The fair value of the embedded derivative upon issuance was $6,451. The embedded derivative is presented on the unaudited condensed consolidated balance sheet as a component of Convertible notes payable - related party. The loss from the change in fair value of the embedded derivative for the three months ended March 31, 2023 amounted to $10,272.

The fair value of the AFG Convertible Notes at issuance was $16,623, which was greater than the proceeds received. The Company recorded the difference of $2,873 as interest expense on the unaudited condensed consolidated statement of operations and comprehensive loss.

Interest expense recognized on the AFG Convertible Notes is as follows:

On July 29, 2022, the Company entered into a $100,000 Senior Secured Term Loan Credit Agreement with Atlas Credit Partners (ACP) Post Oak Credit I LLC., as administrative agent for the lenders and collateral agent for the secured parties. As of March 31, 2023, the Company had total borrowings of $100,000 under the Senior Secured Term Loan.

The Senior Secured Term Loan is scheduled to mature on the earlier of (i) July 29, 2026, and (ii) 91 days prior to the current maturity date of the 2021 Convertible Notes of June 30, 2026. The Company has the right at any time to prepay any Borrowing in whole or in part in an amount of not less than $500.

The outstanding principal balance of the Senior Secured Term Loan bears interest, at the applicable margin plus, at the Company’s election, either (i) the benchmark secured overnight financing rate (“SOFR”), which is a per annum rate equal to (y) the Adjusted Term SOFR (as defined in the agreement) plus 0.2616%, or (ii) the alternate base rate (“ABR”), which is a per annum rate equal to the greatest of (x) the Prime Rate (as defined in the agreement), (y) the NYFRB Rate (as defined in the agreement) plus 0.5% and (z) the SOFR. The applicable margin under the Credit Agreement is 8.5% per annum with respect to SOFR loans, and 7.5% per annum with respect to ABR loans. Interest on the Senior Secured Term Loan accrues at a variable interest rate, and interest payments are due quarterly. The Company may elect to convert SOFR Loans to ABR (and ABR Loans to SOFR). As of March 31, 2023, the interest rate in effect for the Senior Secured Term Loan for the first quarter of 2023 interest payment was 13.66%.

Any repayment of principal prior to the second anniversary of the issuance date is subject to a call premium. The call premium is equal to the present value of all interest payments due through June 30, 2024, calculated using a discount rate equal to the applicable treasury rate as of the repayment date plus 50 basis points. The Company deemed that the fair value of the embedded derivative features which qualify for bifurcation was de minimis.

Concurrently, the Company entered into a Guarantee and Collateral Agreement which secures and guarantees the Senior Secured Term Loan with substantially all the assets of the Company and its subsidiaries, other than the Company’s equity interests in Hi-Power and assets of Hi-Power. Additionally, interest is required to be escrowed in an amount equal to the aggregate amount of the four immediately following interest payments owed on the Loans which was $11,450 at March 31, 2023. This escrowed and restricted cash is presented on a separate line item on the unaudited condensed consolidated balance sheets as long-term restricted cash.

The following table summarizes interest expense recognized:

The Company entered into an agreement on September 30, 2021 with Trinity Capital Inc. (“Trinity”) for a $25,000 equipment financing facility, the proceeds of which will be used to acquire certain manufacturing equipment, subject to Trinity’s approval. Each draw is executed under a separate payment schedule (a “Schedule”) that constitutes a separate financial instrument. The financing fees included in each Schedule are established through monthly payment factors determined by Trinity. Such monthly payment factors are based on the Prime Rate reported in The Wall Street Journal in effect on the first day of the month in which a Schedule is executed.

On September 30, 2022, the equipment facility’s unused commitment of $13,784 expired.

As of March 31, 2023 and December 31, 2022, total equipment financing debt outstanding was $7,900 and $8,577, respectively of which $2,981 and $2,872 are recorded as a current liability on the unaudited condensed consolidated balance sheets, respectively. For the three months ended March 31, 2023 and 2022, the Company recognized $317 and $219 as interest expense attributable to the equipment financing agreement, respectively.

The change in fair value for the three months ended March 31, 2023 and 2022 amounted to $156 and $567, respectively. The change has been recognized in (loss) gain on change in fair value of derivatives - related parties in the Company’s unaudited condensed consolidated statements of operations and comprehensive loss.

14. Fair Value Measurement

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, private placement warrants, accounts receivable, notes receivable, contract assets, accounts payable, note payable, convertible notes payable — related party, contract liabilities and long-term debt.

Accounting standards establish a hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Accounting standards require financial assets and liabilities to be classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and the exercise of this judgment may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The carrying value of cash and cash equivalents, restricted cash, accounts receivable, contract assets, contract liabilities and accounts payable are considered to be representative of their fair value due to the short maturity of these instruments.

The table below summarizes the fair values of certain liabilities that are included within the Company’s accompanying unaudited condensed consolidated balance sheets, and their designations among the three fair value measurement categories:

The estimated fair value of financial instruments not carried at fair value in the unaudited condensed consolidated balance sheets was as follows:

*Includes the embedded derivative liabilities.

The Company has lease commitments under lease agreements. As of March 31, 2023, future lease payments amounted to $5,897.

Minimum Volume Commitment

Legal Proceedings

Department of Justice

On July 7, 2022, the Company entered into a settlement agreement with the U.S. Department of Justice (the “DOJ”) and Vincent Icolari (“Relator”) to resolve the previously disclosed investigation by the DOJ for underpayment of certain custom duties in past years in connection with imports of batteries and battery components manufactured abroad. The investigation resulted from a qui tam lawsuit (the “Civil Action”) filed by the Relator in December 2019 alleging violations of the False Claims Act.

Pursuant to the terms of the settlement agreement, the Company has agreed to pay a total of $1,017 to the United States Department of Justice and $70 to Relator’s counsel. Upon receipt of such payments, the DOJ and the Relator have agreed to release the Company from civil monetary and administrative claims under the False Claims Act and the Relator has agreed to release the Company from any claims related to the Civil Action. The Company has fully settled this liability.

Delaware Section 205 Petition

On November 12, 2020, B. Riley Principal Merger Corp. II (“BMRG”), the predecessor to the Company, held a special meeting of stockholders (the “BMRG Special Meeting”) to approve certain matters relating to the business combination between BMRG and Eos Energy Storage LLC.

One of these matters was a proposal to amend and restate BMRG’s certificate of incorporation in order to, among other things, increase the number of authorized shares of common stock from 125,000,000 shares of common stock, consisting of 100,000,000 shares of Class A common stock and 25,000,000 shares of Class B common stock, to 200,000,000 shares of common stock, and to reclassify all Class A common stock and Class B common stock as a single class of common stock (the “Charter Amendment Proposal”). The Charter Amendment Proposal was approved by a majority of the outstanding shares of Class A common stock and Class B common stock of BMRG as of the record date for the BMRG Special Meeting, voting together as a single class, although voting records indicate that a majority of each of the shares of Class A common stock and Class B common stock also approved the Charter Amendment Proposal. After the BMRG Special Meeting, BMRG and Eos Energy Storage LLC closed the business combination and the Company’s certificate of incorporation, as amended to give effect to the Charter Amendment Proposal, became effective.

A recent ruling by the Delaware Court of Chancery introduced uncertainty as to whether Section 242(b)(2) of the Delaware General Corporation Law (the “DGCL”) would have required the Charter Amendment Proposal to be approved by separate votes of the majority of BMRG’s then-outstanding shares of Class A common stock and Class B common stock. To resolve potential uncertainty with respect to the Company’s capital structure, the Company filed a petition in the Delaware Court of Chancery under Section 205 of the DGCL to seek validation of the Charter Amendment Proposal. Section 205 of the DGCL permits the Court of Chancery, in its discretion, to ratify and validate potentially defective corporate acts.

On February 27, 2023, the Court of Chancery approved the Company’s request for relief and entered an order under Section 205 of the Delaware General Corporation Law (1) declaring the Company’s Third Amended and Restated Certificate of Incorporation (the “Charter”), including the filing and effectiveness thereof, as validated and effective retroactive to the date of its filing with the Office of the Secretary of State of the State of Delaware on November 16, 2020, and all amendments effected thereby and (2) ordering that the Company’s securities (and the issuance of the securities) described in the Petition and any other securities issued in reliance on the validity of the Charter are validated and declared effective, each as of the original issuance dates.

Class Action Complaint

On March 8, 2023, Plaintiff Richard Delman filed a class action complaint (the “Complaint”) in the Court of Chancery of the State of Delaware. The Complaint names certain of the Company’s former directors as defendants. Neither the Company nor Eos Energy Storage LLC was named as a defendant in the Complaint, but each was identified as a relevant non-party and the Company owes certain indemnification obligations relating to the lawsuit to the Company’s former directors.

The stock compensation expense has been recorded in cost of goods sold, research and development expenses, and selling, general and administrative expenses.

For the three months ended March 31, 2023 and 2022, income tax expense (benefit) was $10 and $(42), respectively, related to taxable earnings from the Company’s foreign operations. The income tax expense differs from the amount computed by applying the statutory U.S. federal income tax rate of 21% to the loss before income taxes. This is due to non-taxable income, foreign operations, and pre-tax losses for which no tax benefit can be recognized for U.S. income tax purposes.

The Company estimates and applies the annual effective tax rate to its ordinary earnings each interim period. Any significant unusual or infrequent items, if any, are not included in the estimation of the annual effective tax rate. Rather, these items and their related income tax expense are separately stated in the interim period in which they occur. The quarterly estimate of the annual effective tax rate and related tax expense is subject to variation due to a multitude of factors. Factors may include, but are not limited to, the inability to accurately predict the Company’s pre-tax and taxable income and loss.

At each balance sheet date, management assesses the likelihood that the Company will be able to realize its deferred tax assets. Management considered all available positive and negative evidence in assessing the need for a valuation allowance. The realization of deferred tax assets depends on the generation of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction during the future periods in which the related temporary differences become deductible. Management has determined that it is unlikely that the Company will be able to utilize its U.S. deferred tax assets at March 31, 2023 and December 31, 2022 due to cumulative losses. Therefore, the Company has a valuation allowance against its net deferred tax assets.

As of March 31, 2023 and December 31, 2022, the Company has unrecognized tax benefits associated with uncertain tax positions that, if recognized, would not affect the effective tax rate on income from continuing operations. The Company is not currently under examination by any taxing jurisdiction, and none of the uncertain tax positions are expected to reverse within the next 12 months.

The Company files income tax returns in U.S. federal and various state jurisdictions, as well as Italy and India. The open tax years for federal returns are 2019 and forward, and open tax years for state returns are generally 2018 and forward. In addition, net operating losses generated in closed years and utilized in open years are subject to adjustment by the tax authorities.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. There are two major corporate tax provisions included in the Act. In general, the IRA creates a 15% corporate alternative minimum tax (“CAMT”) on any corporation that has (or has had) average annual “adjusted financial statement income” for a three-year period preceding the tax year that exceeds $1 billion. The CAMT is effective for tax years beginning after December 31, 2022. The IRA also imposes on publicly traded U.S. corporations a 1% excise tax on certain repurchases of their stock. The excise tax is effective for stock repurchases after December 31, 2022. The Company does not expect the aforementioned provisions in the IRA to have any material impact on the Company’s unaudited condensed consolidated financial statements.

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s Board of Directors. At March 31, 2023 and December 31, 2022, there were no shares of preferred stock issued or outstanding.

Common Stock

On June 28, 2022, the Company’s shareholders approved an amendment to the Company’s Third Amended and Restated Certificate of Incorporation to increase the authorized shares of common stock with $0.0001 par value from 200,000,000 to 300,000,000. The holders of the Company’s common stock are entitled to one vote for each share. At March 31, 2023 and December 31, 2022, there were 95,222,670 and 82,653,781 shares of common stock issued and outstanding.

Treasury Stock

For the three months ended March 31, 2023 and 2022, the Company recorded treasury stock of $345 and $826 for shares withheld from employees to cover the payroll tax liability of RSUs vested, respectively. The treasury stock was immediately retired.

Public Warrants

The Company sold warrants to purchase 9,075,000 shares of the Company’s common stock in a public offering and a private placement on May 22, 2020. Each warrant entitles the holder to purchase a share of common stock at a price of $11.50 per share. For the three months ended March 31, 2022, 600 public warrants were exercised. There were no public warrants exercised for the three months ended March 31, 2023. As of March 31, 2023 and December 31, 2022, there were 7,001,654 public warrants outstanding.

On April 28, 2022, the Company entered into the SEPA with Yorkville. Pursuant to the SEPA, as amended, the Company has the right, but not the obligation, to sell to Yorkville up to $75,000 of shares of its common stock at the Company’s request at any time during the commitment period, which commenced on April 28, 2022 and will end on the earlier of (i) May 1, 2024, or (ii) the date on which Yorkville shall have made payment of advances requested by the Company totaling up to the commitment amount of $75,000. Each sale the Company requests under the SEPA (an “Advance”) may be for a number of shares of common stock with an aggregate value of up to $20,000. The SEPA provides for shares to be sold to Yorkville at 97.0% of market price.

Subject to the mutual consent of Yorkville and the Company, from time to time the Company may request, and Yorkville shall provide, pre-advance loans (each, a “Pre-Advance Loan”) each in the principal amount not to exceed $50,000, pursuant to a promissory note on terms and conditions to be agreed by both parties.

For the three months ended March 31, 2023, total funds raised under the SEPA, inclusive of proceeds received from the Yorkville Convertible Promissory Notes, were $20,850. Shares issued pursuant to the Yorkville Convertible Promissory Notes for the three months ended March 31, 2023 were 11,216,492. Additionally, shares issued under the SEPA for the three months ended March 31, 2023 were 683,908.

At-the-Market Offering Program

On August 5, 2022, the Company entered into the Sales Agreement with Cowen and Company LLC (“Cowen”), with respect to an ATM offering program under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $100,000 (the “Placement Shares”) through Cowen as its sales agent and/or principal.

The Company will pay Cowen a commission equal to 3.0% of the gross sales proceeds of any Placement Shares sold. The Company will also reimburse Cowen for certain expenses incurred in connection with the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all Placement Shares subject to the Sales Agreement or (ii) termination of the Sales Agreement in accordance with the terms and conditions set forth therein.

There were no shares issued under the ATM offering program for the three months ended March 31, 2023.

Earnings (Loss) Per Share

Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating EPS on a diluted basis. As the Company incurred a net loss for the three months ended March 31, 2023 and 2022, the potential dilutive shares from stock options, restricted stock units, warrants, and convertible redeemable notes were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented. Therefore, basic and diluted EPS are computed using the same number of weighted average shares for the three months ended March 31, 2023 and 2022. The following potentially dilutive shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented:

19. Subsequent Events

Yorkville

In April, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 3,258,744 shares of common stock to Yorkville, in order to offset the remaining $6,000 owed to Yorkville under the March 2023 Promissory Note.

On April 10, 2023, the Company issued and sold a convertible promissory note (the “April 2023 Promissory Note”) with an aggregate principal amount of $15,000 in a private placement to Yorkville under the SEPA. The April 2023 Promissory Note has a maturity date of August 31, 2023, was issued with an original issue discount of 2%, and bears an annual interest rate of 5% which shall increase to an annual rate of 15% upon an Event of Default (as defined in the SEPA) for so long as it remains uncured. The April 2023 Promissory Note is convertible into shares of the Company’s common stock at a conversion price equal to the lower of $2.8093 or 90% of the lowest daily volume weighted average price of the Company’s common stock during the seven consecutive trading days immediately preceding the conversion date.

In April, 2023, Yorkville delivered Investor Notices requiring the Company to issue and sell an aggregate of 1,349,926 shares of common stock to Yorkville, in order to offset a portion of the outstanding amounts owed to Yorkville under the April 2023 Promissory Note.

Equity and Warrant Issuance

On April 12, 2023, the Company entered into a securities purchase agreement (the “Purchase Agreement”) for the issuance and sale of an aggregate of 16,000,000 shares of the Company’s common stock at a purchase price of $2.50 per share in a registered direct offering (the “Offering”). The Company has also agreed to issue in a concurrent private placement unregistered warrants to purchase up to an aggregate of 16,000,000 shares of common stock. The warrants have an exercise price of $3.14 per share, are not exercisable until six months from the date of issuance, and will expire 5.5 years from the date of issuance. The gross proceeds to the Company from the Offering were $40,000, before deducting advisory fees and other offering expenses payable by the Company.

The Company engaged Cowen to serve as the Company’s exclusive financial advisor in connection with the Offering. The Company agreed to pay Cowen an advisory fee of $2,000, net of any value-added taxes paid or payable, in connection with its services.

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, including the financial statements and notes thereto.

Overview

The Company offers an innovative Znyth™ aqueous zinc battery energy storage system designed to provide the operating flexibility to manage increased grid complexity deriving from an overall increase in renewable energy generation and a congested grid coming from an increase in electricity demand growth. The Company’s battery energy storage system is a proven chemistry with accessible non-precious earth components in a durable, safe, scalable and sustainable design that delivers results in a wide variety of temperatures and conditions. Manufactured in the United States, the Company’s battery energy storage system is the core of the Company’s innovative systems that today provide utilities, independent power producers, renewables developers, and C&I customers with a proven, reliable energy storage alternative for 3- to 12-hour discharge durations. The Company’s innovative spirit extends to its manufacturing strategy, which includes proprietary equipment and processes that allow the Company to scale quickly and with a lower capital intensity than other similar technologies. The Company believes its technology will continue to reduce cost and improve the operating efficiency and competitiveness of its battery energy storage systems.

The Company’s growth strategy contemplates increasing sales of battery energy storage systems and related software and services through a direct sales team and sales channel partners. The Company’s current and target customers include utilities, project developers, independent power producers and commercial and industrial companies.

Strategy

The Company continues to invest in the design and development of its next generation product, the Eos Z3™ battery, which builds off the same electrochemistry that has not fundamentally changed for the better part of a decade. The next generation Eos Z3 battery is being designed to reduce cost and weight while improving manufacturability and system performance. The Eos Z3 battery is expected to be cost-effective and have a simpler tub design with 50% fewer cells and 98% fewer welds per battery module. The Company expects the Eos Z3 battery will give customers the benefit of two times energy density per square foot with the same safety and reliability as the previous generation battery.

The Company expects to launch the Eos Z3 battery in the second half of 2023. The Company expects to scale the Eos Z3 battery production at a cost competitive position, with the opportunity for revenue growth.

The Company believes the simplicity, flexibility, and safety of our products are what the market desires. In addition, we understand that the Inflation Reduction Act may give us a competitive advantage with production tax credits (“PTC”) that can be claimed on battery components manufactured domestically, in addition to a tax credit for customers for projects that satisfy domestic content requirements.

Inflation Reduction Act of 2022 (“IRA”)

The IRA features significant economic incentives for both energy storage customers and manufacturers for projects placed in service after December 31, 2022. One of the most important features of the IRA is that it offers a 10-year term tax credit, whereas historically similar industrial credits have been shorter in duration. Customers placing new energy storage facilities in service will be allowed to claim at least a thirty percent investment tax credit (“ITC”) under certain conditions. The IRA also offers an extra ten percent credit if the project is in an “energy community” and another ten percent credit if the project satisfies domestic content requirements, which will be set forth when the implementing regulations are finalized. The ten percent bonus for domestic content could represent a strategic advantage for the Company resulting from the Company’s near-sourcing and Made in America strategy, and we currently anticipate that projects utilizing Eos batteries will qualify for the bonus.

Company Highlights

Results of Operations

The Company generates revenues from the delivery of its battery energy storage systems and service-related solutions. The Company expects revenues to increase as it scales production to meet customer demand.

Revenue increased by $5.5 million, or 168% from $3.3 million for the three months ended March 31, 2022 to $8.8 million for the three months ended March 31, 2023. The increase in revenue for the three months ended March 31, 2023 was primarily driven by the Company’s increase in production and delivery of its energy storage systems and higher unit pricing, and to a lesser extent, other equipment, from backlog compared to the same period of 2022.

Cost of goods sold

Cost of goods sold primarily consists of costs relating to direct labor, direct material and overhead that is directly tied to product manufacturing, engineering, procurement and construction (“EPC”), project delivery, commissioning, and start-up test procedures. Other indirect costs included in cost of goods sold are manufacturing overhead such as manufacturing engineering, equipment maintenance, environmental health and safety, quality and production control procurement, transportation, logistics, depreciation and facility-related costs. As a nascent technology and a new manufacturing process that is early in its product lifecycle, the Company still faces significant costs associated with production start-up, commissioning of various components, modules, and subsystems and other related costs. The Company expects its cost of goods sold to exceed revenues in the near term as it continues to scale production and prepares battery energy storage systems delivered to customers to go-live.

Cost of goods sold decreased by $8.6 million, or 24% from $35.6 million for the three months ended March 31, 2022 to $26.9 million for the three months ended March 31, 2023. Cost of goods sold decreased for the three months ended March 31, 2023 mainly due to: (a) reduced labor and material costs, driven primarily by lower felt and resin cost, and (b) reduced freight costs.

Research and development expenses

Research and development costs increased by $0.5 million or 10% from $5.0 million for the three months ended March 31, 2022 to $5.4 million for the three months ended March 31, 2023. The increase in research and development costs was primarily driven by increases of $0.6 million for materials and supplies used and $0.1 million for outside professional services, all partially offset by $0.2 million decrease in payroll and personnel costs.

Selling, general and administrative expenses

Selling, general and administrative expenses primarily consist of payroll and personnel-related, outside professional services, facilities, depreciation, travel, marketing, and public company costs.

Selling, general and administrative expenses decreased by $0.3 million or 2% from $14.3 million for the three months ended March 31, 2022 to $14.0 million for the three months ended March 31, 2023. The decrease was primarily driven by decreases in outside consulting expenses of $0.9 million and legal and professional costs of $0.4 million, offset by increase in payroll and personnel costs of $0.8 million.

Loss from write-down of property, plant and equipment

The Company incurred a loss of $0.8 million from write-down of property, plant and equipment for the three months ended March 31, 2023, which was primarily due to loss on disposal of equipment.

Grant expense, net

Grant expense, net includes grant-related expenses net of grant income for a grant with the California Energy Commission (“CEC”). Grant expense recorded for the three months ended March 31, 2022 relates to the timing of grant activity and recovery of expenses from the CEC grant.

Interest expense, net

Interest expense includes accrued interest and the amortization of debt issuance cost and the debt discount. Interest expense, net increased by $4.5 million for the three months ended March 31, 2023. These increases are a result of interest recognized on the Senior Secured Term Loan and the equipment financing facility.

Interest expense - related party

Interest expense, related party includes accrued interest and the amortization of debt issuance cost and debt discount. Interest expense - related party increased by $11.6 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

For the three months ended March 31, 2022, there was only interest expense related to the 2021 Convertible Notes.

(Loss) gain on change in fair value of derivatives - related party

The 2021 Convertible Notes, Yorkville Convertible Promissory Notes, and the AFG Convertible Notes contain embedded derivatives and remeasured at its fair value at each balance sheet date. The increase in the embedded derivatives’ fair value, as well as the warrants liability’s fair value, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, is largely a result of the change in the value of the underlying asset, the Company’s common stock.

Other income (expense) remained flat for the three months ended March 31, 2022, compared to the three months ended March 31, 2023.

Income tax expense (benefit)

Income tax expense (benefit) remained relatively flat for the three months ended March 31, 2022, compared to the three months ended March 31, 2023.

Liquidity and Capital Resources

Liquidity and Going Concern

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

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

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

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

The Company has historically relied on outside capital to fund its cost structure and expects this reliance to continue for the foreseeable future until the Company reaches profitability through its planned revenue generating activities. During the three months ended March 31, 2023, the Company closed on the following capital transactions:

Capital Expenditures

The Company expects capital expenditures and working capital requirements to increase as it seeks to execute its growth strategy. Total capital expenditures for the three months ended March 31, 2023 were $2.9 million, which will be used primarily for additional equipment, automation, and other infrastructure to expand the Company’s capacity to meet customer demand. The decrease in capital expenditures was due to a shift in production to the Eos Z3™ battery. The Company’s capital expenditure and working capital requirements in the foreseeable future may change depending on many factors, including but not limited to: equipment requirements to support the next generation(s) of products, growth in customer backlog, the Company’s operating results and its ability to secure funding, and any adjustments to the Company’s operating plan necessary to respond to industry conditions, competition or unexpected events.

Discussion and Analysis of Cash Flows

The Company relies heavily on private placement of convertible notes, term loans, equipment financing and issuance of common stock. Our short-term working capital needs are primarily related to funding of debt interest payments, repayment of debt principal, product manufacturing, research and development, and general corporate expenses. The Company’s long-term working capital needs are primarily related to repayment of long-term debt obligations and capital expenses for capacity expansion and maintenance, equipment upgrades and repair of equipment. We have taken steps to conserve working capital and reduce expenses to better manage cash outflows.

Cash flows used in operating activities primarily comprise of costs related to research and development, manufacturing of products, project commissioning and other general and administrative activities.

Net cash used in operating activities was $30.5 million for the three months ended March 31, 2023 was primarily driven by a net loss of $71.6 million, adjusted for non-cash items of $34.0 million, primarily related to stock compensation expense, depreciation and amortization, non-cash interest expense, changes in fair value of derivatives, and loss on debt extinguishment. The net cash inflows from changes in operating assets and liabilities was $7.1 million, primarily driven by a decrease in inventory of $9.2 million, increase in accounts payable and accrued expenses of $4.8 million and increase in interest payable - related party of $2.4 million, offset by decrease in contract liabilities of $3.5 million, increase in accounts receivable of $2.0 million and increase in contract assets of $1.9 million.

Net cash used in operating activities was $42.7 million for the three months ended March 31, 2022, was primarily driven by a net loss of $45.8 million, adjusted for non-cash items of $2.5 million, primarily related to stock compensation expense, depreciation and amortization, and changes in fair value of derivatives. The net cash inflows from changes in operating assets and liabilities was $5.6 million, primarily driven by an increase in accounts payable and accrued expenses of $2.8 million, an increase in interest payable - related party of $1.5 million, a decrease in inventory of $2.7 million, and increase in contract liabilities of $2.1 million, partially offset by an increase in accounts receivable of $0.8 million and an increase in vendor deposits of $2.3 million.

Net cash flows used in investing activities for the three months ended March 31, 2023 were composed of payments made for purchases of property, plant and equipment of $2.9 million.

Net cash flows used in investing activities for the three months ended March 31, 2022 were primarily composed of payments made for purchases of property, plant and equipment of $5.1 million.

Net cash provided by financing activities was $32.5 million for the three months ended March 31, 2023, was primarily due to the net proceeds received from the Yorkville Convertible Promissory Notes and AFG Convertible Notes of $33.4 million and the issuance of common stock under the SEPA of $1.3 million. The proceeds were partially offset by debt issuance costs related to the Yorkville Convertible Promissory Notes and AFG Convertible Notes of $1.1 million, payments on the equipment financing facility of $0.7 million and $0.3 million for share repurchases from employees for tax withholding purposes.

Net cash used in financing activities was $1.2 million for the three months ended March 31, 2022, primarily due to payment of equipment financing facility of $0.4 million and payment for share repurchases from employees for tax withholding purposes of $0.8 million.

Contractual Obligations

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

Critical Accounting Estimates

The Company’s unaudited condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). In preparing the Company’s unaudited condensed consolidated financial statements, management makes assumptions, judgments, and estimates on historical experience and various other factors that management believes to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. Management regularly reevaluates assumptions, judgments, and estimates.

There have been no material changes in the Company’s market risk exposures for the three months ended March 31, 2023, as compared to those discussed in its Annual Report on Form 10-K for the year ended December 31, 2022.

The Company’s management, under the supervision of the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, and consistent with the evaluations previously reported in prior periods, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2023 because of material weaknesses resulting from lack of a formalized internal control framework in accordance with COSO, inadequate segregation of duties in the financial reporting process, lack of review and approval of journal entries, and a lack of management review controls.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including its CEO and its CFO, to allow timely decisions regarding required disclosure.

In light of these material weaknesses, management performed additional analyses, reconciliations, and other post-closing procedures to determine that the Company’s unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP. Based on this review, management concluded that the unaudited condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

From time to time, the Company may be involved in litigation relating to claims arising out of the Company’s operations. While the outcomes of these types of claims are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

As of the date of this Quarterly Report on Form 10-Q, there have been no additional material changes to the risk factors disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2022, except as discussed below. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

Risks Related to our Business

Recent turmoil in the banking sector has led to the failure of several financial institutions. Although these failures have not impacted us to date, we currently have our cash and cash equivalents held in deposit at a single financial institution. The amounts held in the deposit accounts are in excess of the insurance coverage offered by the FDIC. In the future, we may maintain our cash assets at additional financial institutions in the United States in amounts that may be in excess of the FDIC insurance limit of $250,000. In the event of a failure of any of these financial institutions where we maintain our deposits or other assets, we may incur a loss to the extent such loss exceeds the FDIC insurance limitation, which could have a material adverse effect upon our liquidity, financial condition and our results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds