Q3 2024 Xos Inc Earnings Call
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Speaker Change: Good day and welcome to the EXOS Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Kristen Romero, General Counsel. Please go ahead.
Kristen Romero: Thank you everyone for joining us today. Hosting the call with me today are Chief Executive Officer Dakota Semler, Chief Operating Officer Giordano Sordoni, and Acting Chief Financial Officer Liana Pogosyan.
Kristen Romero: On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties.
Kristen Romero: 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.
Kristen Romero: We do not undertake any duty to update any forward-looking statements.
Kristen Romero: Today's presentation also includes references to non-GAAP financial measures and performance metrics.
Kristen Romero: Please refer to the information contained in the Company's 3rd Quarter 2024 Earnings Press Release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures.
Kristen Romero: Participants should be cautioned not to put undue reliance on forward-looking statements.
Speaker Change: And with that, I now turn it over to our CEO, Dakota.
Thanks, Kristen, and thank you, everyone, for joining us.
Dakota Semler: On today's call, I'm thrilled to share the highlights from the third quarter of 2024, during which we generated $15.8 million in revenue, delivered 94 units, and achieved a gross margin of 18.1%.
Dakota Semler: Exos is one of the very few electric vehicle manufacturers delivering double-digit gross margins on our products.
Dakota Semler: This marks the fifth quarter of delivering consecutive positive gross margins.
Dakota Semler: In addition to our improved margin performance, Exos continues to focus on improving year-over-year growth and liquidity.
Speaker Change: In my remarks, I plan to cover some of our achievements in vehicle deliveries, the hub product ramp-up, and shifting market conditions in the commercial electric vehicle market. Then, Gio and Liana will then dive deeper into our operational and financial achievements.
Speaker Change: Of the 94 deliveries this quarter, we've seen growing momentum with increasing customer and product diversity.
Speaker Change: This quarter, we began shipping hubs in significant volumes with nearly 12 units shipped through the end of the quarter, underscoring the rising demand for our rapid deployment mobile charging solution.
Speaker Change: Overall, unit deliveries increased by 4.4% compared to the second quarter, while top-line revenue increased by 1.6%.
Speaker Change: In our step van business, we are seeing positive shifts with an increase in strip chassis deliveries relative to completed vehicle deliveries.
Speaker Change: This drives substantial improvements in our working capital turnover. By delivering strip chassis units ahead of the bodying up process, we accelerate our delivery cycle and better ensure quicker turnaround times relative to completed vehicle deliveries.
Speaker Change: While not all of our deliveries will transition to stripped chassis, we believe that a rising proportion of these orders will positively impact our cash flow and inventory turnover.
Speaker Change: We also made significant strides in our powertrain business, delivering our first powertrain product to be utilized in a Bluebird school bus.
Speaker Change: This short-wheelbase Type C school bus is an exciting product offering as Bluebird continues to lead the market with its electric school bus solutions for districts nationwide.
Speaker Change: The product provides school districts with a durable and reliable Type C commercial chassis frame-on-body school bus, while meeting the constraints of narrow streets and tight turning radiuses that are typical of many school districts.
Speaker Change: This quarter marked a major milestone as we reached low-volume series production with our hub product. And by the end of the quarter, we were building approximately two units per week, delivering this valuable tool to our customers.
Speaker Change: Regarding our hub deliveries, we've delivered several units including to top-tier companies like Waymo, a leading self-driving car operator, ABM, a top facility service provider, and Loomis, one of our valued fleet customers.
Speaker Change: We also delivered units to other key customers such as Xcel Energy, which is one of the largest investor owned utilities in the country, and SSA Pacific, a subsidiary of SSA Marine, one of the largest terminal operating companies and stevedoring businesses in the world.
Speaker Change: In short, hub deliveries are being put in the hands of well-regarded companies and excitement around the product is growing.
Speaker Change: While charging infrastructure continues to be a challenge, and fleets such as FedEx ground contractors face continued delays, we believe that the hub can offer a solution.
Speaker Change: As mentioned, we've already seen adoption from some of our largest customers.
Speaker Change: Such momentum reflects the strong demand for our hub solutions, not just across fleet operators, but across a range of industries.
Speaker Change: In light of the hub's success and growing interest in the product, we ramped up demonstrations of the hub in Q4.
Speaker Change: Evaluations are intended to showcase the hub's versatility and ability to provide diverse fleet charging, mobile charging and events, and crucial disaster response charging infrastructure during storms and public safety power shutoffs.
Speaker Change: Beyond our deliveries, we've secured several million dollars in new incentives, providing critical support to small and large national accounts.
Speaker Change: Such incentives, available in key states like Texas, New York, and California, help enable a more seamless and affordable transition to electric vehicles.
Speaker Change: Despite these new incentive applications and a growing number of approvals, incentive collections on delivered vehicles continues to be a challenge.
Speaker Change: There are several state programs and agencies that oversee the disbursement of such funds and the processes vary significantly depending upon the state agencies involved.
Speaker Change: Incentive collection has become a primary focus at Exos, and the backlog of delivered incentives in our accounts receivable exceeds $25 million.
Speaker Change: Fortunately, we've developed several new processes to streamline the incentive application process and the redemption approval and collection workflows.
These efforts are a key step in accounts receivable collection.
Speaker Change: I want to personally thank all of the Exosians who have worked tirelessly to help customers receive incentive benefits and to streamline Exos' collection of such incentives.
Speaker Change: While we do not anticipate collecting 100% of the over $25 million in backlogged incentive receivables this quarter, we do expect these payouts to accelerate, which would improve our cash position and access to working capital.
Speaker Change: We have also begun to improve our inventory carrying costs and better ensure our customers receive vehicles as needed by increasing our sales through dealer partnerships.
Speaker Change: This helps us manage inventory carrying costs and better ensures our customers receive vehicles as needed. We've found dealers to be supportive in delivering vehicles and providing ongoing maintenance services.
Speaker Change: This is especially true for our dealer partner, Thompson Truck Centers in Tennessee.
Speaker Change: Just as the year started, we continue to be sharply focused on the reduction of operational expenses. GEO will detail our efforts in reducing facility-based operational expenses.
Speaker Change: We also reduced a portion of our overall headcount in the quarter and subsequent to the quarter end. While this decision was difficult for Exos and all of the impacted employees, we believe it puts us on a better trajectory towards achieving positive free cash flow in the near term.
Speaker Change: We continue to be excited about achieving free cash flow through increased revenues and reduced operational expenses to bring this goal within reach.
Speaker Change: With that, I'll hand it over to Gio for more on our operational updates.
Thank you for watching!
Thank you, Dakota, and good afternoon, everyone.
Speaker Change: The manufacturing, supply chain, and quality teams delivered strong results in the quarter and continued their focus on consistent, high-quality production, all while improving efficiency.
Speaker Change: In addition to regular chassis production, the team worked hard in the quarter to prepare for the launch of a new, longer wheelbase variant of our step-in chassis platform.
Speaker Change: We are now producing this 208-inch wheelbase variant on our main production line.
Speaker Change: This longer wheelbase allows for a longer body and an increase of 200 cubic feet of cargo capacity.
Speaker Change: This was driven by requests from some of our linen customers and other folks that are looking for larger cubic volume on our Class 6 platform.
Speaker Change: We increased our hub production build rates up in the quarter, achieving a steady pace of approximately two hubs per week. This significant accomplishment positions us well to build and deliver additional hub units to meet customer demand before the end of the year.
Speaker Change: The engineering and supply chain teams remain dedicated to a bill of material cost reduction program, both through optimizations of our vehicle design as well as partnering with our supply base to introduce cost savings changes to the components that we source and bring in.
Speaker Change: In the last 12 months, our team has implemented over $10,000 in cost reductions, and we have additional reductions planned this quarter and well into 2025.
Speaker Change: We remain focused on our strategy to invest more in Tennessee, which is proving to be a central hub for our operations.
Speaker Change: Our Stepman chassis and the Exos hub are both built at our main plant in Birdstown, Tennessee.
Speaker Change: Recently, we secured a sublease for part of our Los Angeles facility and transferred possession to our new tenant. This move will reduce our operational expenses through the end of the lease term.
Speaker Change: We are also actively working on subleasing two additional real estate facilities that we assumed through our acquisition of Electromechanica, which closed in Q1.
Speaker Change: There is interest in both properties and we hope to provide more updates on these potential subleases in the near future.
Speaker Change: Our operational improvements and cost control measures are designed to keep us on track for our long-term goals while supporting our short-term needs for production and delivery.
Speaker Change: In light of the recent election results, we anticipate potential changes at the federal level that could impact our industry and our business. Among these, one of the most significant changes could be an increase in tariffs on imported components from our global suppliers.
Speaker Change: While we're closely monitoring this evolving situation, with the help of Customs Advisors, no immediate changes are expected until 2025.
Speaker Change: Meanwhile, we're actively working with suppliers to pursue alternative sourcing strategies, including reshoring components to North America where possible, and increasing our investments in our U.S.-based supply chain.
Speaker Change: Although these tariffs may be disruptive, we're confident they won't hinder our ability to source necessary components.
Speaker Change: Additionally, we anticipate mitigating much of the impact from these tariffs through ongoing reductions in our cost of goods along with positive effects from our engineering supply chain initiatives aimed at lowering direct material costs.
Speaker Change: We are committed to American manufacturing which is why we've invested significantly in our Tennessee facility and we'll continue to strengthen our manufacturing and supply chain infrastructure and manage potential changes in the federal landscape effectively.
Speaker Change: With that, I'll turn it over to Liana for an in-depth look at our financial performance.
Thank you, Tia.
Liana Pogosyan: For the third quarter of 2024, our revenue was $15.8 million up from $15.5 million in the second quarter this year. Our cost of goods sold during the quarter decreased to $12.9 million compared to $13.5 million in the second quarter.
Liana Pogosyan: Gap growth margin during the quarter was a profit of $2.9 million or 18.1%, compared to a profit of $2 million or 13.1% in the second quarter. We are excited to deliver the fifth consecutive quarter of positive growth margins.
Liana Pogosyan: Margin improvements were mainly driven by continued focus on reducing labor and overhead costs and improving our production processes.
Liana Pogosyan: Gap gross margin also benefits this quarter from a sale of clean energy credits. Excluding the sale, gap gross margin was 15%.
Liana Pogosyan: Turning to expenses, our third quarter operating expenses were $12.6 million compared to $13.4 million last quarter as we remain disciplined in managing our costs while continuing to support key growth initiatives.
Liana Pogosyan: Our operating profitability continued to follow a promising trajectory with non-gap operating loss for the third quarter of $6.6 million compared to non-gap operating loss of $9.7 million last quarter.
Liana Pogosyan: Turning to the balance sheet, we close the quarter with cash and cash equivalents and restricted cash totaling $9.2 million.
Liana Pogosyan: Operating cash flow less CapEx, or free cash flow, was negative $11.7 million for the quarter compared to a negative free cash flow of $26.1 million last quarter, which represents a significant improvement over the second quarter due to enhanced discipline with respect to working capital and cash management.
Liana Pogosyan: Inventory increased to $42.4 million in the current quarter from $41.4 million last quarter.
Liana Pogosyan: We are actively managing our liquidity position, and plan to improve our liquidity and working capital requirements, including reducing operating costs in order to preserve financial resources and improving accounts receivable collections.
Liana Pogosyan: We have taken several cost-cutting measures during the fourth quarter, which include reduction in our total workforce and temporary salary reductions for certain of our senior executives.
On the collection front, as Dakota mentioned,
Liana Pogosyan: Our accounts receivable from delivered incentives currently exceeds $25 million. We've developed streamlined processes to expedite the application, approval, and collection of these incentives, though we do not expect to collect the entire backlog this quarter.
Liana Pogosyan: We do anticipate the collection of these incentive payouts to accelerate, which will enhance our cash position and improve our access to working capital.
Liana Pogosyan: Now, turning to our outlook for the rest of 2024, we are updating our guidance. While our revenue and unit delivery outlooks have decreased, we are now expecting a narrower non-GAAP operating loss.
Liana Pogosyan: We anticipate revenue to fall within the range of $54.1 to $67.6 million, and our unit deliveries to be within the range of 320 to 400 units.
Liana Pogosyan: We have reduced our non-gap operating loss to a range of 42.2.
$233.7 million
Liana Pogosyan: This adjustment reflects some of the challenges we face with infrastructure and customer delays. However, it also reflects a higher average selling price and improved margins on our products along with tighter control over operating expenses.
Speaker Change: We expect Q4 to be an equally active quarter as we work diligently to deliver within these guidance ranges. With that, I'll turn the call back over to Dakota.
Thank you, Liana.
Speaker Change: While our industry is facing tremendous challenges, including delays from charging infrastructure and continued pressures from our customers to produce the most competitively priced, durable vehicles on the market, we aim to meet these challenges and delight our customers.
Speaker Change: We are proud to be the largest electric vehicle vendor for FedEx ground operators and the largest electric vehicle package car manufacturer for UPS's North American fleet.
Speaker Change: We continue to be the largest electric vehicle vendor for several leading uniform rental companies with more EV deliveries than any other OEM for companies such as Alsco, Sintas, and Unifirst.
Speaker Change: Our new product, the EXOS Hub, is gaining traction as well, with purchase orders from some of the largest and most respected investor-owned utilities in the country, along with many diverse Fortune 500 companies.
Speaker Change: From the point that we started this business eight years ago, we've demonstrated consistent leadership in our product development initiatives. We've adapted our operating cost model to ensure resilience in the near term, and we continue to see significant long-term potential.
Speaker Change: The commercial interest across the segments we serve is broad, and we believe that Exos is uniquely positioned to be a leading player in this industry, competing with the legacy diesel manufacturers that have dominated the market for decades.
Speaker Change: With that, we'll open up the queue for questions, and I'll turn over the call to the operator.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Speaker Change: The first question comes from Craig Irwin from Roth Capital Partners. Please go ahead.
Good evening. Thank you for taking my questions.
Speaker Change: Dakota, can you maybe talk a little bit about the opportunity on the drivetrain side? You know, it's a business that's, you know, shown that it's, you know, starting to take off a little bit, could offer some leverage back to the other side of the house where you've already been doing good volumes.
Speaker Change: Can you maybe sketch out for us the breadth of customers that have shown interest in potentially buying drivetrains and whether or not there are different vehicle sizes or different formats that might represent new opportunities?
Absolutely. Thanks for the question, Craig.
We believe there's an immense opportunity.
And as a reminder for everybody...
Speaker Change: The Powered by Exos business takes and leverages a lot of the intellectual property that we've developed on our vehicles, including software, high-voltage distribution.
Speaker Change: and the engineering design that goes into that high-voltage powertrain system.
Speaker Change: And we then market it and provide it to other OEMs along with the engineering support services to help integrate those powertrains into their vehicle platforms.
Speaker Change: There's several what we call beachhead markets or early markets that have really embraced electrification. Some of these being, you know, more specific vocational vehicles.
Speaker Change: which have really embraced these products as they do a lot of idling, a lot of short-distance travel.
Speaker Change: where a zero-emissions vehicle is perfect because they can drive the short range that it takes to get to their destination and then ultimately idle for hours on end utilizing that powertrain system to power any house loads that are on that vehicle.
Speaker Change: In addition to the mobile command center market, school bus has been an incredibly fast-growing market for us, and we continue to see that market in the U.S. be strongly supported by EPA funding that's been afforded to many of the school bus manufacturers in North America.
Speaker Change: We've delivered our first powertrain system for this market segment and believe that that industry will continue to see growth as the vehicles become more cost competitive and as incentive applications are approved for some of the school districts around the country.
And then lastly is some of the off-highway vehicles.
Speaker Change: that we've been supporting for several years now with customers such as Wiggins List.
Kneejack, and other customers that we haven't announced yet.
in the off-highway heavy industrial equipment sector.
Speaker Change: where they're leveraging powertrain components and powertrain systems from us to fully electrify their vehicles.
Speaker Change: And many of these markets and applications have been very quickly forced to go electric either through emissions regulations or specific state or local port regulations requiring zero emissions adoption in those markets.
Speaker Change: So we think that will be a fast-growing market as well.
Speaker Change: Ultimately, with these customers, we are a supplier to our OEM partners.
Speaker Change: So, we don't control the direct sales of these end-user units into the fleets that they get adopted into. So, we have less control over the size and scale of how these markets ramp up.
Speaker Change: But we believe that these are all critical, strong markets that will continue to see growth in the electrification realm in the next two to three years, and certainly beyond that time frame too.
Speaker Change: in the range of 10 to 25% of our overall top-line revenue contributions. And it will vary across the unit mix because we have different ASPs for different kinds of products that we support with the Powered by Access business.
Speaker Change: Excellent, excellent. Thank you for that. So my second question is about your inventory. Can you maybe clarify for us what portion of the inventory right now should be considered finished goods or maybe finished vehicles or hubs?
Speaker Change: And then, can you maybe discuss the parts commonality between your different products? And, you know, as you receive incremental orders, your ability to liquidate inventory...
Speaker Change: into different markets, not being dependent on having batteries having batteries for one truck for one type but being able to sell things into variety of applications.
Thank you very much.
Absolutely.
Speaker Change: When it comes to the work in process versus finished goods,
Speaker Change: We really are building all of our products to order. So, we don't build inventory to sit on a dealer lot or to sit in an OEM lot. Most of the work in process or the finished goods that we have on our balance sheet is destined for a customer and is designed to be delivered shortly thereafter that it finishes the production process.
Speaker Change: Now, there are periodic delays in that process that can come about from infrastructure and charging. However, we really try to mitigate those. And before we go to production with most of our products, we clarify with the customer that they're ready to receive them and that they have an infrastructure plan in place.
Speaker Change: As a bit of a split, Raw Materials today accounts for about 70% of our total inventory, WIP is around 21%, and Finished Goods is around 9%.
Speaker Change: And raw materials, you'll note, we're a little bit heavier on the raw material side of things. That's as we work through some of that older inventory and parts inventory. That will continue to reduce, and we'll optimize those inventory flows in the quarters to come.
Speaker Change: But we really want to operate as leanly as possible, making sure that those finished goods get delivered to a customer as quickly as possible.
Speaker Change: And then your second question, do you remind me what that one was, Craig?
Craig Irwin: No, that basically captured it, Dakota. Last question, if I may, is...
Well, if we were to, um,
Craig Irwin: What do you see as the opportunity as far as cash generation out of inventory liquidation over the next couple of quarters? Is there potentially a lower level of inventory that you think would be steady state for the company at the current run rate?
Speaker Change: Yeah, it's a great question. From an inventory liquidation standpoint, most of the inventory we are in possession of today is relevant and applicable for the products that we're building today. So we do anticipate to be able to work through that in an ordinary course.
Speaker Change: and some of the steps that we highlighted in the call.
are helping us do that. So one, by delivering...
Speaker Change: Strip chassis instead of completed vehicles. It shortens that inventory turnover period. We're actually not carrying the balance of those bodies on our balance sheet, and that's something that the customer is working directly with the upfitter.
Speaker Change: to carry. And going beyond that, most of those components share commonality. So this kind of addresses your initial question which is,
Speaker Change: When we look at our step-in platform, our powertrain platform, and even the hub platform, excluding the chassis components, really thinking more about the powertrain components, such as the battery modules, high-voltage power electronics, cables, software systems, vehicle control units, electronics.
We share about 90% commonality across those different product lines.
Speaker Change: So there may be slightly different SKUs or variations for different product configurations, but there is a lot of commonality that we've designed into the product.
Speaker Change: So that we can get to scale and build synergy, even as some of these markets are relatively small. We can build that scale across the total unit production that we're producing at the company.
Speaker Change: Excellent, and I'm sorry if I can just squeeze one more in. There's been some concern out there about the Buy in America compliance, the tariffs that have been put in place.
Speaker Change: But, you know, talking to some of the different vendors, I think maybe these fears are unfounded.
Speaker Change: Can you maybe update us on what you think the tariffs, the way they're written, would mean for...
Speaker Change: For battery costs, you know, if companies that you're working with were maybe to pursue some of the strategic options they have in front of them to bring out some of the cost of, you know, Asian production.
Speaker Change: Yeah, absolutely. It's actually a process that started several years ago as we were delivering vehicles before we went into the COVID-19 pandemic.
with the supply chain in 2020, 2021, and beyond.
Speaker Change: and that really forced us to focus on reshoring as much of our production as possible, really trying to find competent, capable suppliers that met our quality and cost and reliability targets in North America, particularly in the U.S.
Speaker Change: So, several components that we used to source abroad in Asia, whether it be in China or in India, we're now sourcing directly here from U.S. suppliers.
Speaker Change: of Tariff Changes or Trade Regulation Changes that will be coming in the year ahead.
Speaker Change: Beyond that, we still do have some components that we source from Asia.
Speaker Change: And we're actually actively having conversations with suppliers to understand what their plans are and to make sure that we can mitigate any potential disruption that may come as a result of changing tariff regulations or trade restrictions.
Speaker Change: that are going to ensue in 2025. I think we are very well positioned in that we are trying to multisource with suppliers across a range of different components.
Speaker Change: So for a single component, we'll try to have two or three suppliers that have a diverse source of producing those components.
Speaker Change: So we don't become too beholden to a particular geographic industry or to a particular geographic location or supplier that's concentrated in an area that might be subject to incremental terrorists.
Speaker Change: And beyond that, we're working with some advisors to help us manage those costs so that we can continue to deliver industry-leading costs to our customers in a way that isn't going to be disrupted by tariffs in the next administration.
Speaker Change: Great, well thank you for the update and congratulations on those strong margins this quarter.
Thanks.
Speaker Change: As a reminder, if you have a question, please press star 1.
Speaker Change: The next question comes from Ted Jackson from Northland Security. Please go ahead
Thank you. Good afternoon.
Thank you. Thank you.
Speaker Change: I'd like to just kind of drill into the balance sheet a little bit.
Speaker Change: Talk a bit about kind of working capital and the improvements that you think you can get out of there You know, so like can we talk about inventory with the last, you know set of questions?
Speaker Change: But if you look at it, depending on how you want to do the math, maybe up to 10 months of inventory, where do you think you could get that down to in terms of bringing it down to kind of, if you think about it in terms of how much...
Speaker Change: on hand, vis-a-vis, on a terms basis, how many days of coverage that you need. And then going over into the receivable side, do you think that with regards to that
twenty-five million of
Speaker Change: what I guess you would call it like credits that you'll bring some of that.
Speaker Change: that crossed the finish line in the fourth quarter, and then how do you see that playing out into 2025? So I guess, but what I'm really getting at is kind of the main leverage you have in terms of working capital improvement are gonna be really in inventory and on receivables, and I guess you could say on payables too, but kind of walk through how you're gonna bring these things down to levels and really take some cash out of the balance sheet.
Thank you.
Speaker Change: Yeah, absolutely, and thank you for the question. So first, we definitely are carrying a heavier set of inventory than is a typical industry turn. I think if you look at many stabilized manufacturers, it can be anywhere from four to eight turns per year, depending upon the product.
Speaker Change: Although, one thing that we'd like to call out, which I think is important, is
Speaker Change: Electric vehicles today, we still rely on a global supply chain and much of that global supply chain informs the amount of inventory turns and the inventory cycles and the supply chain lead times of many of our critical components.
Speaker Change: As of right now, our inventory turns are relatively low, as you mentioned, roughly 8 to 10 months of inventory.
Speaker Change: And we anticipate that over the coming quarters, that will step down slightly.
Speaker Change: And eventually our target is to get to the industry range of four to eight turns per year.
Speaker Change: But we haven't provided specific guidance as to when that will happen or whether it will occur next year.
Speaker Change: There are several efforts that we're leading internally, including our cost-out effort to reduce cost of goods sold, but also to improve payment terms with those suppliers to make sure that we can reduce that number.
Speaker Change: There's also things that I mentioned before such as reshoring which will shorten that supply chain lead time and shorten the length of time that goods are in transit before they get incorporated into work in process or into a vehicle.
Speaker Change: So we're taking several steps to make those changes, but it is a gradual process as we make those transitions to suppliers.
Speaker Change: And then your second point about credits and accounts receivable balance.
Speaker Change: It's something that we've really been focused on for the last three to four months, quite intensely given the volume of these credits and the value that they provide to many of our customers.
We have already started to see significant progress.
Speaker Change: in the beginning of Q4 and how those credits have been paid out.
and we're making significant steps in...
shortening the length of time.
Speaker Change: to get those vouchers accepted and those vouchers paid out and collected from our perspective.
So, while we don't anticipate collecting the full $25 million,
Speaker Change: We do anticipate we're going to make a significant dent in that balance by the end of Q4, with the remaining to be collected in the first half of 2025.
Speaker Change: But something to keep in mind is as we deliver more vehicles that balance does grow as most of our customers Have the benefit of utilizing these incentives and purchasing their vehicles
Speaker Change: So, while we anticipate the volume or the balance to go down, there will still be increasing incentives as we increase deliveries and increase top-line revenue.
Speaker Change: Well, all else being equal, would it be fair, I think, that we'll see...
Speaker Change: You know, the reported receivables number on the balance sheet go down in the fourth quarter because of the credits.
being turned over.
Hello.
Speaker Change: Yes, we can definitely anticipate that that will happen in the fourth quarter. Our credit balances are expected to be reduced as well as our accounts receivable from our direct pay customers will also be reduced in the fourth quarter.
Speaker Change: Okay, great. And then shipping over to the convertible that is now in, you know, the
Speaker Change: current liabilities side of the balance sheet. Can you talk through how that's going to play out in coming quarters now that we have that, you know, move from long term to short term?
Speaker Change: Absolutely. The convertible note with Aljamai has been an important source of capital for us and continued to help us meet the growing needs of the business and afford us working capital to fund inventory.
Speaker Change: The maturation of that note occurs in the third quarter of next year, which is why it's moved into our current liabilities.
Speaker Change: As we continue to approach that maturity date, we've been in conversations to discuss what the intended plans for that convertible note facility is.
Speaker Change: We don't have any current news that we can share, but we are very, very pleased with Aljamea's support up until this point.
Speaker Change: as they've continued to be a strong equity investor holding a significant position within the company as well as continuing to fund our ongoing capital needs through this convertible note. And we anticipate they'll continue to support us well beyond 2025.
Speaker Change: So as we as we approach the maturity date, we think we'll have some solutions as to how to address that particular convertible note and hopefully continue to scale our access to capital beyond just that facility.
Speaker Change: Okay and then my my final question on this and I'll step by the line is on the the sale of you know energy credits that boosted the gross margin
Speaker Change: in the third quarter. Is there a chance that we would see some more activity on that front in the fourth quarter and beyond? I mean, I am kind of new to the name. Is that something that you've done in the past? Is that something that we would?
could count on seeing in future periods?
Speaker Change: Yeah, this is the first time that we've actually transacted credits, so this is actually a bit of a new process for us, but it is a process that we've been closely monitoring and banking those credits over the past several years as we've delivered vehicles across the country.
Speaker Change: We don't anticipate that there will be regularity to these credits every single quarter.
Speaker Change: But there will be periodic transactions like this one that will continue to improve margins and also be very cash accretive as they have no marginal cost to us when we transact these credits to other OEMs or other potential consumers.
Speaker Change: And it really depends on the credit type. They vary pretty significantly, but we do anticipate that this will happen more frequently in the future.
Speaker Change: And where are those, I mean, do you have these things on your balance sheet and what line item are they in and kind of what, you know, I mean, could you kind of bird dog, you know, the value that you have sitting there?
Speaker Change: Yeah, they're not on our balance sheet, or they are on our balance sheet, but they aren't fully accounted for in all of the value of all of the different credits.
So right now
We anticipate that this...
Speaker Change: Small payment that we received in Q3, that's in our AR.
Speaker Change: But any of the future credits that we anticipate transacting are not on the balance sheet in a substantial form. And the reason for that is because of the uncertain value and the kind of nascent markets for a lot of these credits, it's very hard to place a valuation on them that can be clearly relied upon.
Interesting.
It will actually be filed tomorrow morning.
Speaker Change: No, okay. All right. I'll step out of line. Thank you very much
Thanks, Ted. I appreciate the question.