Q2 2021 Lightning eMotors Inc Earnings Call
[music].
Good afternoon, and welcome to Lightning E Motors second quarter 2021 earnings Conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.
At this time I would like to turn the conference over to Nick <unk> director of marketing and sales operations for Lightning E. Motors. Thank you you may begin.
Thank you operator, and thank you everyone for joining us today hosting the call today are leggings are co founder and CEO, Tim Research Chief revenue Officer catch study and CFO Teresa Covington.
I hope this call lightening issued its second quarter 2021 earnings press release and presentation, which we will reference today.
These can be found on the Investor Relations section of our website at Lightning Motors dotcom.
On this call management will be making statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect because of factors discussed in today's earnings news release. During this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at <unk> Dot com.
We do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the company's second quarter 2021 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable financial measures with that let me turn it over to Tim.
Thank you very much snake and good afternoon, everyone.
For today's presentation, we will be referring to the slides that are posted to the investor Relations section of our website earlier this afternoon.
This is our first starting this call since the closing of the business combination with good capital III in May I would like to start by thanking our employees for their contributions to lightning success I would also like to thank shareholders for their patience and support towards the completion of the transaction.
Becoming a public company was an important milestone for lightning and the transaction provided us with the capital needed to execute on our strategy and expanded capacity to address an estimated $67 billion total addressable worldwide market.
Yeah.
Now turning to slide five with today's agenda.
First for investors not familiar with the Lightning story I'll start off by giving a brief introduction of the company and its market opportunities.
Second I will highlight what differentiates us from other industry players and how we are adapting the challenges facing the industry and plan to execute on our vision.
Third cash will discuss our foundational agreement with Forest River and provide an update on our backlog and pipeline wrapped.
Wrapping it up Theresa will provide financial highlights from the second quarter and our 2021 financial outlook. We will then hold a question and answer session.
Moving to slide seven we founded lightning in 2008 to address the lack of availability of hybrid and electric specialty commercial vehicles available to urban medium duty fleets today.
Today like many motors is the only full range manufacturer class three through seven battery electric and fuel cell electric vehicles in the market.
Including ambulances shuttle buses utility trucks and motor coaches, we have built a modular software and hardware architecture that allows us to serve that highly segmented and customize market with a cost effective solution.
Turning to slide eight.
Separates us from our Peter says that we deliver today purpose built end to end commercial electric vehicle solutions for fleets.
In addition to full vehicles, we sell powertrain systems to vocational and commercial vehicle Oems as well as the partners like ABC company to install them and Repower applications.
Historically, our process began with a Ford Hino as soon as your General Motors chassis, which are produced at high volumes of low differentiation and are certified for our customers.
As we announced in earnings release, we have a path for addressing the industry chassis shortage, where their own lightning branded strip chassis and cab chassis products.
We then build out the battery electric and fuel cell electric powertrain systems customized to each customer's vehicle route and duty requirements.
Next we customize the design and software and it fit the vocational requirements of each vehicle a process that requires specialized software engineering and manufacturing skills that were not previously required with internal combustion vehicle manufacturing.
This high level of software and hardware customization is something that legacy Oems have not historically performed or not well suited for and that is both a high value and necessary for the products and markets that lightning serves.
We integrate our proprietary data and analytics hardware and software platform on every vehicle we make.
We spent the last eight years developing and refining this industry, leading technology. Our customers that are fleet service teams received data about their vehicles in real time, enabling actionable intelligence and helping to prevent or reduce downtime for their fleets.
Further our software includes key vocational attribute such as proprietary compliance reporting for <unk> L. CFS carb and other granting subsidy programs as well as key efficiency and safety data.
Our customers appreciate the software capabilities as evidenced by the 100% attach rate on every vehicle we have produced.
We charge customers a fee for these services, which provides a high margin monthly recurring revenue stream.
Lightning offers a full suite of charging solutions to customers, including level, two and level III Chargers installation permitting all CFS monetization software and support integration to complement their vehicle purchase.
It is important to note that although charging is often viewed as a commodity product commercial fleets have very specialized needs and use cases that are very different from public charging businesses and we work with operators to tailor charging solutions to their unique requirements.
Finally, we wrap all of these solutions together with customer financing.
Although many fleet customers make extensive use of financing for the legacy internal combustion fleets, there's limited financing options available for electric vocational vehicles due to limited data on reliability and future residual values, we see bundling financing and charging with the vehicle as an enabler to the vehicle sale providing customers.
With a single end to end solution that enables them to recognize the tcl savings on a monthly basis.
Now to slide nine it is important to underscore that the high level of customization enabled and required by our technology and demanded by our customers is also what provides one of our competitive moats companies like GM and Ford are building trucks at high volumes and do not have a business model that supports manufacturing for the medium duty.
Segment.
Turning to slide 10.
Despite our efforts to highlight our niche position in the EV space.
A lot of people say, hey, it's a crowded market with many EV players, having recently gone public we.
We want to differentiate ourselves and it's important to say, what we do which is we focus on urban medium duty commercial zero emission vehicles, which are currently being deployed and have been deployed for the last three years.
One of the things I like to say as we build the electric vehicles no. One else is building and in fact, no one else wants to build and you can see that in this chart.
While lightning segments have a large total addressable market. These individuals segments between class III and class eight are generally too small for major Oems and are not targeted by most startups building highly automated low customization production lines.
Now moving to an overview of our supply chain partners in recent supply chain developments on slides 12 and 13.
While we are experiencing a strong and growing product demand supply chain issues have created temporary headwinds for our business.
Although our Q2 revenue was constrained by drivetrain component deliveries, we were able to mitigate several other supply chain constructions and sell 37 vehicles and powertrain systems.
While we're working to remedy the supply chain disruptions through the technical and commercial validation of additional suppliers further supply chain disruptions remain including battery and chassis shortages made.
Major chassis Oems have surprised the industry by shutting down in July for a week or more it.
It is important to note that although revenue is being pushed to future quarters, we have not lost any sales due to the delays.
But we are sitting idly by waiting for the supply chain problems to work themselves out we are in the final stages of negotiations and technical integration validation with one of the world's largest worldwide battery suppliers.
We believe that our work with our battery suppliers may mitigate our supply chain constraints in 2022 and beyond.
Further with the design of our first purpose built <unk> chassis, we are working on addressing the industry chassis shortage with our own lighting branded strip chassis and cab chassis products, but are not limited.
While 2021, it's been a challenging year, we are thrilled with the demand outlook and are taking action to help address the supply chain issues, which we believe will allow us to fulfill customer demand and drive substantial vehicle sales and revenue growth in the years ahead.
Moving to slide 14, I want to briefly mention our manufacturing capacities in plans lightning is in a unique position of having significant and capital efficient manufacturing capacity online and running today with current facilities flexible lines and flex tooling to support up to 1200 powertrain systems in complete vehicles.
Per year.
We added an additional 100000 square feet nine months ago at our Loveland, Colorado campus and are now procuring and installing the automation and tooling required to grow our capacity to 3000 powertrain systems in complete vehicles for 2022.
Not only are we able to build this capacity with very light Capex investment. We are also able to expand quickly due to our agile manufacturing approach and the fact that we don't build bodies or interiors, eliminating many of the heavy and long lead time Capex investments.
We have first rights to the additional square footage needed on our 1 million square foot campus to support a potential expansion at 20000 powertrain systems in complete vehicles by 2024.
And now I'll turn it into cash to provide an overview of recent customer wins and the order backlog and sales pipeline.
Thanks, Dan I will begin on slide 16.
First we are very excited to sign a foundational strategic partnership agreement last week with Forest River.
Workstyle Hathaway subsidiary in North Americas largest shuttle bus manufacturer.
Or is there any family of shuttle bus companies, including popular brands like Starcraft Global El Dorado and champion have a dominant market position selling over 10000 units per year in the class four to six shuttle bus space.
Under this agreement, which has a potential value of up to $850 million.
<unk> expects to build up to 7500 fully electric powertrains and provide charging products and services to forest River over the next four and a half years.
Factory installed all electric shuttle bus offering from Forest River is a game changer as we will leverage their decades of experience relationships and brand reputation in this space.
Or a shipper's electric shuttle buses are being offered with various length in seating configurations supporting ranges from 80 to 160 miles on a single charge with the capability to recharge over a lunch break using lightning DC fast charging solutions.
<unk> energy will offer a comprehensive suite of charging infrastructure related products and services to forest River dealers and customers across the U S and Canada.
Lastly, we are happy to be building all electric vehicles today, instead of only making plans for new products that won't be available for years.
Manufacturing in this case has already begun and we expect to deliver the first batch of buses to dealerships by the end of this year.
This agreement has the potential to be the largest contract in the electric shuttle bus market and we look forward to working with Forest River and their dealer network in leading the industry towards a zero emissions future.
Now I would like to turn to slide 17 to discuss our backlog and pipeline.
As of June 32021 light things order backlog included all electric commercial vehicles, all electric powertrain systems and charging systems of approximately 1600 units up.
508% from the prior year period.
Quantify that in dollars that is $168 million versus $26 million in the prior year period.
The increase in backlog orders reflects robust demand for our all electric trucks and buses powertrain systems charging infrastructure products and services telematics analytics and other related accessories.
Our sales pipeline at the end of the second quarter was $1.3 billion, which represents more than 500% growth since Q1.2020.
Our pipeline is diversified with more than 200 deals in the works across several market segments.
I expect this growth to continue in 2020, one due to successful pilot deployment validating our technology in the field and expanding sales team now engaging with a wider audience new vehicle partnerships that unlock new market verticals for us in the commercial vehicle space and favorable news at the state and.
Federal level, that's the just broad support for commercial fleet electrification.
We see significant upside potential in the wide variety of funding programs now available across the country, including new programs that will come out as a result of the bite and infrastructure plan.
We believe we are positioned nicely to capitalize on these programs and continue increasing our backlog and pipeline.
And with that I will turn it over to Teresa to provide an update on <unk> financial results and outlook.
Thank you Kash I will now provide some commentary on our second quarter results, followed by our third quarter outlook.
On slide 19 for the second quarter, we generated revenues of $5.9 million, which increased 580% from the year ago period.
And by an over 300% increase in vehicle and powertrain systems unit sales.
During the second quarter Lightning, so 36 vehicles and one powertrain system compared to nine vehicles in the prior year period.
Cost of goods sold in the second quarter.
It was $7 million compared to one $4 million during the prior year period, primarily due to an increase in revenues, partially offset by improved product mix.
As we ramp production, we expect to generate operating leverage as we benefit from higher volume fixed cost leverage on labor improve battery supply terms and operational efficiency.
SG&A in the second quarter was $16 million compared to $2 million in the prior year period.
The increase was driven by nonrecurring professional cost of $9.1 million related to our business combination as well as planned increased head count to support our growing sales backlog in production.
Research and development expense in the second quarter was $743000 compared with $212000 in the prior year period, driven by increased spending on engineering to advance the development and design of new vehicle platforms.
Refine and improve our production processes product testing and enhance our in house engineering capabilities.
Operating expenses in the second quarter were $16.8 million compared to $2.2 million in the prior year period.
The operating loss was $17.9 million compared to $2.7 million in the prior year period.
The adjusted operating loss was $8.7 million compared to $2.7 million in the prior year period.
Turning to our balance sheet.
Upon closing of the business combination and May lightning received approximately $217 million in net proceeds.
As of June 32021, we had cash and cash equivalents of $202 million.
As Tim mentioned earlier, we are a capital efficient manufacturing process, leading to lower capital needs relative to many of our peers.
Our full year 2021 capital spending is expected to be in the range of $10 million to $12 billion.
We ended the quarter with approximately $73.2 million shares outstanding.
If all outstanding warrants for converted today, we would have approximately $97.6 million diluted shares outstanding not counting and employee stock options and the convertible note payable.
Moving to our outlook, primarily because of unexpected chassis production disruption.
And Covid related delays, we are withdrawing our prior guidance for 2021, although we no longer expect to meet our full year guidance.
And are only providing guidance for one quarter out at this time. It is important to note that no orders have been canceled and we expect to fulfill those orders in future quarters.
As Tim noted earlier, we are taking steps to mitigate the supply chain issues through securing new drivetrain and battery suppliers as well so the development of the new Lightning E chassis.
Although supply chain has been the primary impact to our business. We are also seeing order push outs due to the delta variant and Covid resurgence, resulting in delays and return to work, which is pushed out orders for campus coach and shuttle buses.
Now I want to say a few words about our outlook for the third quarter. Please turn to slide 'twenty.
Based upon current market conditions, we currently expect vehicle and powertrain system sales to be in the range of 28 to 40 units.
Revenue to be in the range of $4 million to $6 million.
Operating loss to be in the range of $12.5 million to $13.6 million and adjusted operating loss to be in the range of 12 million to $13 million.
Iraqi a reconciliation of GAAP operating loss to the adjusted operating loss can be found on slide 21.
Now I will turn it back to back over to Tim for closing remarks.
Thank you Theresa.
Before I wrap it up I would like to summarize why we are so excited about the opportunities we have ahead of us.
One we have strong and growing customer demand visible both from what we have in contracted revenue and orders and also from our growing sales pipeline that is now beginning to translate into both new and repeat orders.
In addition, our foundational agreement with Forest River has significant commercial potential in the years ahead.
Number two operating in multiple large niche markets, requiring significant customization and multi stage go to market approaches lightning is a meaningful headstart and few competitors in the areas where it operates.
Three we believe new federal and state regulations, including the Biden infrastructure plan corporate mandates focused on zero emissions and rapidly falling total cost of ownership for commercial Evs provide significant tailwind in the years ahead.
And finally, while 2021 will prove to be a transition year in terms of profitability. We are working on diversifying our supply chain focusing on operational excellence and making progress on our capacity expansion plans, which we believe will be key factors that allow the company to enhance its long term margins.
Thank you for your time today now we'll open up the line for questions.
Ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad on a confirmation tone will indicate that your line is in the queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Colin Rusch with Oppenheimer. Please proceed.
Thanks, so much guidance.
As Youre looking at your customer conversations and obviously it was for sugar and ethanol was a big one could you speak to the advantage you guys have or or how important. It is that you're on your third generation of vehicles and drop ability elements of those vehicles and being able to close those customers.
Thank you Colin great to hear from you again, and obviously you have some unique context, having driven one yourself not too long ago. So.
I appreciate the question and the thought around it.
Obviously, we.
Put a lot of of a weight on the fact that the customers have driven the vehicles seen the vehicles and the impact that has and I think most people in the electric vehicle space today would say that.
Driving is believing as one of the statements you'll see a lot of the reason why as they obviously are quieter and smoother, but in the fleet vehicle space, where customers are very concerned about reliability uptime is probably the number one concern even more important than money or a total cost of ownership.
We have to have customers, who have faith and belief that we have reliable vehicle. So the fact that we've had vehicles out there for three years. The fact that these customers have had the opportunity to build a.
Our faith in what we've done to get used to it to understand and to know that we have service those vehicles, well that we respond well when they call with questions. All of those are part of the maturing process that we've been through and the relationship building and trust building process, we've been through with customers.
Certainly gives us a significant leg up and I think that the validation of that is when customers placed repeat orders.
We're seeing that we have seen that we've announced a few repeat orders with folks like DHL and now Forest River and others and so I think.
That certainly validates the point that how key is to customers to to know that we have reliability and that we already have a service network in place.
That's super helpful. And then just as you look at trying to manage the supply chain issues, which.
Even having a balance sheet, where you're putting deposits down isn't really securing thing what.
What are the most effective levers you're finding in terms of being able to procure components.
Components.
Secure as much supply as you can is it having some of those orders with some of those Brendan customers is it putting deposits down.
If you go from relatively modest volumes and to a much higher volumes.
But that it's going to be something you guys are they need to manage really affect your place you just want to understand the dynamics around your leverage from a purchasing perspective, but it is actually.
They've been working right now to get get compounded 10.
Yes, Colin and I think there's one other thing I'll point to and then come back to your point that I think is relevant but one of the things. We're finding is giving us leverage and a leg up is the reputation. We now have from an engineering standpoint, so in the past one of the things we find with suppliers is they perceive a law.
A lot of risk with companies in terms of are we going to use their product correctly are we going to make their product look good and you can imagine that the risk. If you think of yourself in any one of our supplier standpoint of placing their product with somebody who doesn't have the engineering prowess our experience to integrate the software correctly to integrate the <unk>.
We're correctly to service that product correctly in the field and ensure everybody has a successful.
The launch of these products. So part of what we're finding is giving US a leg up right now is our engineering reputation of the fact that we've integrated these products for quite a while we know the way. They work we already have pre written the software and that certainly given many of our suppliers the kind of confidence they need to.
Really make the investments in us and to trust the investments, we're making them. Then secondly, obviously the second part to that is yes now for the last three months being a public company. So really only very recently, if we had the balance sheet to take advantage of being able to to place larger orders, but now as you pointed out the third.
Thing is having the anchor customers that these suppliers believe and understand that indeed, we are selling the product to a quality customer who's going to use the product and unexpected way and and we have a very reliable demand and.
Demand that we can count on going forward in terms of ramping up so I think all three of those things are aspects that are giving us confidence and our confidence in our supply chain going forward and confidence that we can build the kind of relationships and the kind of agreements we need to ensure we have solid supply chain moving forward.
Excellent. Thanks, so much.
Okay.
Our next question is from Mike Swartz with D. A Davidson. Please proceed.
Hey, Good afternoon, guys can you hear me okay.
Can I hear you well, Mike great to hear from you it's been a little while since we've seen you in person, but marvelous to hear from you and congrats on.
Your new role there at D. A.
Thank you so much.
I wanted to ask a question first on as far as bigger deal can you give us some sense as to how you arrived at the $850 million.
Was it.
So back and forth as to how much how much more of a topic of snow.
Is it their best estimate as to whether they can sell or is there some inventory that they have to get picked up first before you can start.
Shipping in large quantities there.
Cash do you want to take this one.
Yes, absolutely.
So far as tourism in this space standards and what the demand is out there and that picture will buffer.
They've been engaging with the market for a few years. So heavily so yes, we came together and determined.
How many units would the market need in the short term and the long term what kind of adoption could be drive by by committing to higher volumes to our suppliers getting the price down and making the total cost of ownership attracted to the customer. So it is absolutely a number we came up with them together.
Okay great.
And I also wanted to ask about your purpose built purpose built chassis that's coming up here.
Can you give us some details what what size of class vehicle is it.
What the use case might be passenger cargo and maybe even if you have a date for the launch of that product.
Certainly so I have a new person I'm going to introduce who's in the room with me Bill Kelly most of you know him, but I know it didn't didn't speak on the earlier remarks.
But this has been a project bill has been driving for a while so I'll, let bill answer that question.
Yes, we we see the thank you Tim we see the purpose built chassis.
Expanding across.
Two classes of vehicles, and we're not really ready to divulge the particulars there, but we believe that because of the modular nature of our electrification solution. If we can marry that to this to this purpose built chassis, we should be able to serve a fairly broad market with a with a very.
<unk> design simple and elegant design.
And that process as Tim mentioned, it's been ongoing now for quite some time and we were very excited too to.
<unk> prototypes before the end of this year.
Okay.
If I could throw one more in there about your outlook for this quarter do you have the ability to do any.
Additional beyond this quantity next quarter and in the fourth quarter or is the 28% 20 to 40 vehicle range. You got this quarter kind of this constrained level that might just be.
For a while.
So we still expect and have been all year as the I think the terminology we've used as we're very Q4 weighted.
And historically Q4 has always been when we've manufactured the most also when we received the most new orders. So that's usually been the case in the past what is making Q4 difficult in terms of visibility. This year is primarily the chassis constraint. So several of our chassis providers have pulled them.
They're delivery date guidance and that's why we've made the decision to pull guidance on Q4 until we can get.
Their guidance back on when they're actually going to deliver chassis.
We are from a manufacturing scale, we have are ready to build the vehicles and in fact will partially built everything we can build so the assembly line is still going to be moving at full pace. Many of the things were progressing on in terms of reductions in cost.
Reductions in labor.
Additional automation all of those things are still at full pace. So the only thing. We're concerned about are constrained on is chassis. We don't know yet, though Mike whether that chassis constraint will be as limited as Q3 is right now or whether we'll see it start to open back up in Q4, we do know that many of the.
Factories are back running after having some shutdowns.
Due to chip shortages, but obviously anybody's guess on what happens with Covid, but.
I'm always the optimistic guy on the phone and Teresa is here to provide the.
The appropriate financial balanced what I say, but.
I am hopeful that our chassis manufacturers will be able to pick back up and give us better delivery guidance for Q4 and that would certainly give us an opportunity to make more in Q4 than than our current constraints in Q3.
Okay.
Okay, great. Thanks, so much I'll pass it along.
Ladies and gentlemen.
As a reminder, if you'd like to ask your question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue.
Our next question is from Steven Fox with Fox Advisors. Please proceed.
Thanks, Good afternoon.
Tim can you maybe.
Give us some sort of a roadmap on how youre thinking about supply constraints easing for you over say a longer period maybe.
Maybe not just for Q4 getting little bit better, but how things normalized.
So let's call. It 12 to 24 months, what happens first what happens second too.
To alleviate it and where do you feel that you'll be down the road on these things where we can see significant bottlenecks relief. Thanks, and then I had a follow up.
Certainly Stephen Thank you for the time, great to hear from you again as well so.
We certainly look out and the impacts obviously everybody has seen on the chip shortage that have impacted chassis and some other components.
I think from our standpoint, we expect those to be partially alleviate and we've been told by some of those chassis providers. They expect to have either redesigned in different chips or have a different plan for how they're going to start meeting their expectations. Starting Q2 of next year. So that's the kind of input we've had to this to the what we're hearing.
And then in the same thing as we've talked about beginning to scale up our our own lightning each assay to also provide additional supply of each assay into.
Mid and second half of 2022.
We look at the other major constrained item in batteries in the same way.
We are working with additional battery suppliers in each of our battery suppliers has made real progress in.
Now.
Guaranteeing or pulling down some of their supply constraints and so we feel that our suppliers are doing the right things to improve this in 2022, and we're certainly doing that not only working with those suppliers to help them do the right things, but also adding additional suppliers and adding is in the case of a chassis and other things some of our own.
New vertical integrated products so.
All of those variables together, our expectation as we get into 2022 and a much better position certainly by the second half of 2022 and much better position.
Is that going to free up in Q2 of 2022, I think we could all debate that but quite lively.
And I don't know the answer on that today, but but certainly my belief is it will begin to get better into Q4, and then again into Q1 and Q2.
Assuming as well it will all put out the day, we all thought COVID-19 was going away and we could not have to talk about it during the summer and then we've obviously seen the delta variant kick back up and it impacts some of our suppliers. So that those kind of risks aside we feel very good about the things we're doing as well as the things our suppliers are doing put us.
All in a much better position in 2022.
Great. That's a really interesting roadmap helps a lot and then just as a follow up on the chassis can you I thought well one can you sort of remind us on what you need to do to scale. It up internally and then secondly, I thought I heard you mentioned that.
It would not be impacted by the current chip <unk>.
Constraints and I was wondering if you could just be more specific on that thank you.
Yes so.
I'll answer the first one and then I'll ask Bill to help me with the second one on some of the things that one thing to keep in mind with.
Straight strip chassis differ from there many of the chassis we buy at a day have components on it that we in the end don't necessarily need and some chips that we don't necessarily need.
And secondly, when we're designing and working with our own E chassis, we have an option of putting in chips. We can get today. So we have a few more option and a few more options. When we think about our own chassis versus buying an off the shelf chassis from somebody else who.
Probably can't change it overnight, but it is important to note the chassis itself when it doesn't have a transmission controller or navigation systems or some of these other things that we often get whether we want it or not on chassis today.
Those things don't exist in the simplest form of of the chassis. So it's quite frankly, just easier to we don't have the bottlenecks that other chassis have making our own chassis.
And secondly, we can design it with fewer of those bottlenecks out of the gate, which is obviously a big benefit in many aspects of the chassis. So with that I'll ask bill maybe to elaborate a bit on.
Some of what he sees as we look at how do we scale it.
ESD.
Probably the most intriguing aspect of the chassis to me is the is the notion that because we have a little more freedom with the architecture. We can make the purpose built chassis configuration very friendly to many different specialty vocations. So today, we do utilize chassis that we get.
From the traditional Oems and we've worked it worked it out I think quite nicely, but we just see a lot more opportunity now.
Does the vocational vehicles have very unique requirements in the shape and size of this E chassis will be highly aligned with it with their business interests.
Great. That's helpful. Thank you.
Yeah.
Yeah.
Our next question is from Sebastian <unk> Chandra with Northland Securities. Please proceed.
Hi, Tim.
Just wanted to know.
Apologize ahead of time I did jump on late so if you covered any of it.
Never mind, but.
Couple of questions just on I guess, the sales channel as it exists today first.
Where's the leasing program, but now I'm, assuming there wasn't much of that that accounted for second quarter sales and then the HVAC too.
What you saw coming out of that at least the first half of the HVAC program how influential that is.
And just tying into that the new chassis.
Is there.
Yes, we're going to see a breakpoint.
Where the scores river type deals.
Drive the business versus the <unk>.
<unk> program, which has historically driven business.
I'm curious if with the new chassis if that has to be.
If your <unk> offerings have to be updated for that.
Certainly it's great to hear from you.
Excited to hear but I think it's been a month or two since you were here. So excited to have a chance to chat with you bet.
I'll start with the.
Last question, which I think is well let me start with the leasing question just real quick and then I'll turn some of the HFF question over to cash as well.
Leasing has been so the first one is it's been our plan to not have leasing on our balance sheet. So we're working with partners.
If balance sheet to do leasing for partially for the reason you point out that we.
We want to do full revenue accounting and so by not having it in our balance sheet and working with partners on that we can have full revenue accounting, which obviously simplifies many aspects of the business and simplifies the.
The analysts do you have on the business as well.
So we have not had any.
Significant leasing business on the on our books and we aren't planning to at this point, we'll do it off balance sheet, so, but the the work on making sure we have offerings for our customers in the finance space continues.
Both with several different partners and also as we look at internally how do we marketed how do we package it what our customers really need and require.
Then in the meantime, while that's all that's going on we have done some already with some partners off balance sheet. So the activities there the values there the scale ups in the early stages, but it's our intention to keep it off our balance sheet. So that from a revenue recognition. It is fairly simple in that sense.
With HP.
Much like your.
Thought there because we see it the same way that.
With the the these large deals the costs come down to a point, where the customers no longer need.
Major government subsidy to make compelling purchases.
So therefore get rid of some of the odd behavior.
<unk> that occurs when things enter weird government subsidy line. So that said, obviously, we've been in <unk>.
Participants for quite some time and I'll, let cash speak a little bit to how we see the industry changing around afib.
Sure.
So anybody in the audience, who doesn't have the background atrium, it's been a really nice tool for fleets to offset the incremental vehicle acquisition cost.
So they can prove out the total cost of ownership and feel comfortable with the technology.
Going forward.
What came out of <unk>. This summer was actually the 2000.22021 program. It was supposed to come out late last year. It got delayed into this year due to a couple of different reasons Covid and they were Rihanna revamping their complete software system that we'll use to secure voucher. So.
It's been really exciting some of wage grip.
<unk>.
Our growing supply of funds, which is a clear signal that technology is working in the field fleets are feeling comfortable not just buying <unk> five they want to buy 10 totaling 500.
As a result of that there was more demand for funds that was available in both the June and August rounds.
The good news is that this year as they fit program, which is the 'twenty. One 'twenty. Two program is supposed to come out this fall with more than $200 million accounted for it. So some of that is still being finalized at the state level, but broadly speaking it's about what we're seeing is that.
There is many of the programs popping up across the country as you know <unk> been only in California.
State level programs around the country, there is federal programs coming up and looking at the future the bite and administrations infrastructure plan looks very promising and we expect they will provide significant funding to accelerate adoption across the country and not have this being just the California business.
And lastly, as a result of deals like <unk>, where we're moving much more volume and mentioned the cost of prices coming down to a level, where we want need incentives in a few years. So a lot of progress happening in that regard.
Yes.
Follow up so.
Was the hbf.
A material driver for revenues or will it be a material driver.
Revenues in the second half of the year.
Or <unk>.
Okay, Okay, and a follow up on that one as well.
Yes, absolutely, yes, we expect that to be the case. So some of it comes down to how long the program Biggs to review, new eight bit voucher applications and assigned them voucher amounts sometimes that takes a couple of weeks, sometimes they take a couple of months. So based on how fast the system works and Glenn It's got approved that will determine.
And whether we build those units in Q4 or Q1, and then obviously the other pieces be when those projects are green lighted we've got to look at but we've got to look at supply chain again to see how those two pieces are lumpy and when does that become to Q4 activity or tier one activity.
Okay got it a couple of steps got it okay.
Thanks, guys.
Yeah.
Our next question is from.
<unk> with Bank of America. Please proceed.
Hi, good afternoon, everyone.
Just had a quick question looking at your slides it seems.
Like you have about 200 unit annual capacity for production, which is a bit ahead of schedule from the analyst day projections.
Then on the old projections, we'd expected positive gross margin in the fourth quarter on roughly 300 units or so I estimated what now do you expect to be the unit breakeven on gross margin given the pull forward and production capacity.
We provided guidance for Q3 at $4 million to $6 million with the adjusted operating loss of $12 million to $13 million.
As we think about gross margin as we ramp production.
We expect to generate the operating leverage as we benefit for higher volumes fixed cost leverage on labor are improved battery supply terms and operational efficiency that we do believe will drive to a positive gross margin, but with what's happening with the supply chain.
We're just not.
Prepared at this time to say exactly which quarter that would be.
Yeah.
Understood. It was more of a comment on volumes rather than the actual quarter.
But also just.
<unk> for the orders and backlog what portion of orders of that 6500 units are binding orders versus non binding.
Okay.
Good question <unk> I don't think we know off the top of our head.
And I think it's worth and I know.
You and I have had a chance to talk some about this in the past. So I think it's a very relevant question a good question.
I'll break our backlog into and I think it's important to note. The backlog is made up of purchase orders. So these are.
One of the things about purchase orders as you could define purchase orders and a variety of ways. Some purchase orders or cancel some are not some purchase orders have a contingency like <unk> or.
First article confirmation, so theres a variety of things that a purchase order a commercial purchase order with a major fleet.
May at terms that it may have in our purchase orders kind of have all of the above so we do have some that are.
What might come under the the terminology of binding because they arent cancel but most have some form of cancellation opportunity.
Obviously that has those are two way streets.
Prices were something were to happen and we didn't want to go forward with with fulfilling the purchase order it goes both ways.
But they typically fall under most of those would fall under non binding so.
We can as we go back and look at what's in our backlog will do some work for next quarter and see if we can give you a more succinct answer to that question.
We are so I apologize I don't have something more succinct, but I think overall, it's an important question something we're <unk>.
Certainly constantly managing and obviously always trying to work to have a more binding purchase orders and fewer places for cancellations, but like I said that also has a.
Two way street that often comes with that as well.
Understand arena.
Sure just just to follow up there.
As we talk about our backlog.
We talk about it as it is comprised of non binding agreements and purchase orders from the customers.
Although they they does not constitute a legal obligation.
We believe that the amounts included in backlog our firm even those.
As Tim mentioned these non binding orders may be canceled or delayed by customers.
Without penalty.
Understandable I appreciate the color on that if I could just one more question.
On the work with the supply base I understand you've been adding a lot of suppliers to help fill in some of the shortages and working on the E chassis. When you were talking with customers, who have tried the product and driven it and so forth.
They.
Looking for specific components or are they saying I want a transit with a pro Terra battery and so forth or are they flexible in terms of what youre delivering in what the components are from a supplier standpoint.
I would say all of the above so we do have some customers, who say hey it.
We've really been impressed with a specific component and will this product include that specific component or brand name that they've liked and that certainly happens on the chassis front. It's certainly happens on the battery front many of the other components less so most customers don't.
Arent aware of what brand somebody may be using for their heating air conditioning systems or are there.
Other aspects of the vehicle the thermal management aspects of the vehicle.
Or the charging systems, but then when you think of major components, especially batteries and chassis. Some some customers are indeed wanting to choose their favorites, but many customers don't and so I would say that there are aspects where the customer is looking at the complete package and saying does it meet the vocational needs into they.
Our engineering and when they have test driven the vehicle they like the product in general So I would say, it's a mixed bag of some people who are absolutely wanting to be.
Driving some aspect of that and other people, who don't aren't at all concerned and then obviously part of part of our team's job. When we think about business development is steering that too at some level. When there is an opportunity to Stuart. So some customers may ask hey can I get it with this battery and it becomes our job to say hey.
We have another battery that we think is a better potential fit for your particular need use case et cetera.
But then I'll kind of give a third category and that has some categories like buy America do become specific.
Some customers have a very specific requirement on something like buy America, where obviously that will dictate.
For example, what battery might have to go on a specific vehicle. So there are certainly some cases like that that are dictated at a higher level are dictated by grant solution or something like that so all of the above I realize that may not give you. The answer you needed, but hopefully gives you a color.
Thanks, I appreciate that.
Thank you.
At this time.
This will conclude that.
A question and answer session and I would like to turn the call back to Tim Reserve for closing remarks.
Thank you very much and I'd like to close by thanking all of our employees for their contributions to lightning success, our shareholders for their support and our customers for their commitments, we look forward to future discussions updating you on our progress.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation and have a great day.