Earnings Call: Q2 2021

Aug 16, 2021

Good afternoon, and welcome to the Lightning E Motors Second Quarter 2021 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q and A. At this time, I would like to turn the conference over to Nick Bettis, 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 Lightning's Co Founder and CEO, Tim Reeser is Chief Revenue Officer, Kash Cepi and CFO, Theresa Covington. Ahead of this call, Lightning issued its Q2 2021 earnings press release and presentation, which we will reference today. These can be found on the Investor Relations section of our website at lightningemotors.com. 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 is recorded 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. And answer session. These documents can be found on our website atlightnewmotors.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 2nd quarter 2021 earnings press release for definitional information and reconciliations of historical non GAAP measures is expected to be a leading indicator of the comparable financial measures. With that, let me turn it over to Tim. Thank you very much, Nick, and good afternoon, everyone. For today's presentation, we will be referring to the slides that were posted to the Investor Relations section of our website earlier this afternoon. As this is our first earnings call since the closing of the business combination with Gig Capital 3 in May, I would like to start by thanking our employees for their contributions to LightLin's 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 expand capacity to address an estimated $67,000,000,000 is a total addressable worldwide market. Now turning to Slide 5 with today's agenda. 1st, for investors not familiar with the Lightning story, I'll start off by giving a brief introduction of the company and its market opportunities. 2nd, I will then highlight what differentiates us from other industry players and how we are adapting to challenges facing the industry and plan to execute on our vision. Is being recorded. 3rd, Kash will discuss our foundational agreement with Forest River and provide an update on our backlog and pipeline. Wrapping it up, Teresa will provide financial highlights from the Q2 and our 2021 financial outlook. We will then hold a question and answer session. Is now open. Moving to Slide 7, we founded Lightning in 2008 to address the lack of availability of hybrid and electric specialty commercial vehicles is available to urban medium duty fleets. Today, Lightning E Motors is the only full range manufacturer of Class 3 through 7 is the company's call for battery electric and fuel cell electric vehicles in the market, including ambulances, shuttle buses, utility trucks and motor coaches. Turning to Slide 8. What separates us from our peers is 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 Companies who install them in repower applications. Historically, our process began with is a record of record, Hino Isuzu or General Motors Chassis, which are produced at high volumes of low differentiation and are certified for our customers. As we announced in our earnings release, we have a path for addressing the industry chassis shortage with our 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. Is available on our website. Next, we customized the design and software to fit the vocational requirements of each vehicle, a process that requires specialized software, is a very strong quarter for the company's Q1 2019 guidance. This is a high level of software and hardware is something that legacy OEMs have not historically performed, are not well suited for and that is both of high value is 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 8 years developing and refining this industry leading technology. Our customers and our fleet service teams receive data about their vehicles in real time, is enabling actionable intelligence and helping to prevent or reduce downtime for their fleets. Further, our software includes key vocational attributes such as is proprietary compliance reporting for HVIP, LCFS, CARB and other grant and subsidy programs, as well as key efficiency and safety data. Our customers appreciate these software capabilities as evidenced by the 100% attach rate on every vehicle we have produced. Will be recorded in the Q2. We charge customers a fee for these services, which provides a high margin monthly recurring revenue stream. Is being recorded. Lightning offers a full suite of charging solutions to customers, including Level 2 and Level 3 chargers, installation, permitting, LCFS monetization, is a great example of software and support integration to complement their vehicle purchase. It's 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 is is being recorded. As a reminder, our customers make extensive use of financing for their legacy internal combustion fleets, there's limited financing options available for electric vocational vehicles is due to limited data on reliability and future residual values. We see bundling financing and charging with the vehicle is an enabler to the vehicle sale, providing customers with a single end to end solution that enables them to recognize the TCO savings on a monthly basis. Is now on Slide 9. 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 in high volumes and do not have a business model that supports is showing for the medium duty segment. Turning to Slide 10. Despite our efforts to highlight our niche position in the EV space, I've heard a lot of people say, hey, it's a crowded market with many EV players having recently gone public. 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, 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 individual segments between Class III and Class VIII are generally too small for major OEMs and are not targeted by most start ups building highly automated low customization production lines. Now moving to an overview of our supply chain partners and 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 constrictions and sell 37 vehicles and powertrain is being recorded. While we are 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. Major chassis OEMs have surprised the industry by shutting down in July for a week or more. It is important to note that although revenue is being pushed to future quarters, we have not lost any sales due to the delays. Integration and validation with 1 of the world's largest worldwide battery suppliers. We believe that our work with our battery suppliers may mitigate our supply chain constraints in 20 is expected to be in the Q2 and beyond. Further, with the design of our first purpose built chassis, we are working on addressing the industry chassis is being recorded with our own lightning branded strip chassis and cab chassis products that are not chip limited. While 2021 has 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 will drive substantial vehicle sales and revenue growth in the years ahead. Moving to Slide 14, I want to briefly mention our manufacturing capacities and plans. Lightning is in the unique position of having significant and capital efficient manufacturing capacity is online and running today with current facilities, flexible lines and flex tooling to support up to 1200 powertrain systems and complete vehicles per year. Required to grow our capacity to 3,000 powertrain systems and complete vehicles for 2022. Not only are we able to build this capacity with very light CapEx investment, is investments. We have first rights to the additional square footage needed on our 1,000,000 square foot campus to support a potential expansion of 20,000 powertrain systems includes the company's operating performance of our business. And now I'll turn it to Kash to provide an overview of recent customer wins and the order backlog and sales pipeline. Is being recorded. Thanks, Tim. I will begin on Slide 16. First, we are very excited to sign a foundational strategic partnership agreement last will be recorded with Forest River, a Berkshire Hathaway subsidiary and North America's largest shuttle bus manufacturer. Forrest Givers family of shuttle bus companies, including popular brands like StarCraft, Gloval, Eldorado and Champion have a dominant market position, is selling over 10,000 units per year in the Class 4 to 6 shuttle bus space. Under this agreement, which has a potential value of up to $850,000,000 Lightning expects to build up to 7,500 fully electric powertrains will provide charging products and services to Forest River over the next four and a half years. A factory installed all electric shuttle bus offerings from Forest River is a game changer as we will leverage their decades of experience, relationships and brand reputation in this space. For the Orion and the Orion Electric Shuttle Buses are being offered with various length and seating configurations, supporting ranges from 80 to 1 is 60 miles on a single charge with the capability to recharge over a lunch break using Lightning's DC fast charging solutions. Lighting 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 is 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 is 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 0 emissions future. Now I would like to turn to Slide 17 to discuss our backlog and pipeline. As of June 30, 2021, Lightning's order backlog included all electric commercial vehicles, all electric powertrain systems and charging systems of is approximately 1600 units, up 50 8 percent from the prior year period. To quantify that in dollars, that is $168,000,000 versus $26,000,000 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 $1,300,000,000 which represents more than 500% growth is 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 2021 due to successful pilot deployments validating our technology in the field is an 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 suggest 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 Biden 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 lightning's financial results and outlook. Thank you, Kash. I will now provide some commentary on our 2nd quarter results, followed by our 3rd quarter outlook. Beginning on Slide 19, for the Q2, we generated revenues of $5,900,000 is the Q2 of 2019. During the Q2, Lightning sold 36 vehicles and 1 powertrain is consistent compared to 9 vehicles in the prior year period. Cost of goods sold in the 2nd quarter was $7,000,000 compared to $1,400,000 during the prior year period, primarily due to an increase in revenues, partially offset is 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, improved battery supply terms and operational efficiency. Is being recorded. SG and A in the 2nd quarter was $16,000,000 compared to $2,000,000 in the prior year period. The increase was driven by non recurring professional cost of $9,100,000 related to our business combination, as well as planned increased headcount is to support our growing sales, backlog and production. Research and development expense in the second quarter was 740 is $3,000 compared with $212,000 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, expenses in the Q2 were $16,800,000 compared to $2,200,000 in the prior year period. The operating loss was $17,900,000 compared to $2,700,000 in the prior year period. The adjusted operating loss was $8,700,000 compared to $2,700,000 in the prior year period. Turning to our balance sheet, Recall, upon closing of the business combination in May, Lightning received approximately $217,000,000 in net proceeds. Is available on our website. As of June 30, 2021, we had cash and cash equivalents of $202,000,000 As Tim mentioned earlier, we have a capital efficient manufacturing process leading to lower capital needs relative to many of our peers. We ended the quarter with approximately 73,200,000 shares outstanding. If all outstanding warrants were converted today, We would have approximately 97,600,000 diluted shares outstanding, not counting employee stock options and the convertible note payable. Moving to our outlook, primarily because of unexpected chassis production disruptions and COVID related delays, we are withdrawing our prior guidance for 2021. Although we no longer expect to meet the full year guidance and are only providing guidance for 1 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 is through securing new drivetrain and battery suppliers, as well as 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, resulted in delays in return to work, which has pushed out orders for campus coach and shuttle buses. Now I want to say a few words about our outlook for the Q3. Please turn to Slide 20. 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 $4,000,000 to $6,000,000 operating loss to be in the range of is $12,500,000 to $13,600,000 and adjusted operating loss to be in the range of $12,000,000 to $13,000,000 A reconciliation of GAAP operating loss to the adjusted operating loss can be found on Slide 21. Is now available. Now I will turn it back over to Tim for closing remarks. Thank you, Teresa. Before Before I wrap it up, I would like to summarize why we are so excited about the opportunities we have ahead of us. Number 1, 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 2, operating in multiple large niche markets requiring significant customization and multi stage go to market approaches, lightning has a meaningful head start and few competitors in the areas where it operates. 3, We believe new federal and state regulations, including the Biden infrastructure plan, corporate mandates focused on 0 emissions and rapidly falling total cost of ownership for commercial EVs provide significant tailwinds 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, is 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. And a confirmation tone will indicate that your line is in 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. Is being recorded. Our first question is from Colin Rusch with Oppenheimer. Please proceed. Thanks so much, as you're looking at your customer conversations and obviously the Forest River announcement was a big one, could you speak to The advantage you guys have or how important it is that you're on your 3rd generation of vehicles and the drivability 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 weight on the fact that the customers have driven the vehicles, seen the vehicles and the impact that as and I think most people in the electric vehicle space today would say that driving is believing is one of the statements you see a lot and the reason why is they obviously are quieter and smoother, but in the fleet vehicle space where customers are very concerned about reliability, is a very important question. Hi, good morning, everyone. I'm very pleased with the have the opportunity to build faith in what we've done to get used to it, to understand and to know that we've serviced those vehicles process we've been through with customers that certainly gives us a significant leg up. And I think that the validation of that is when customers place repeat orders. And 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 it is to customers 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 these supply chain issues, which even having the balance sheet where you're putting deposits down, is there securing things, what are the most effective levers you're finding in terms of being able to procure components, get to Your leverage from a purchasing perspective that is actually functioning and working right now to get components in. Yes, Collyn, 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 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 the risk if you think of yourself in any one of our suppliers standpoint of placing their product with somebody who doesn't have the engineering prowess or experience to integrate the software correctly, to integrate the hardware correctly, is to service that product correctly in the field and ensure everybody has a successful launch of these products. So part of what we're finding is giving us a leg up right now is our engineering reputation, the fact that we've integrated these products for quite a while. We know the way they work. We already have is prewritten software and that's 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 in them. Then secondly, obviously, the second part to that is, yes, now for the last 3 months being a public company, so really only very recently have we had the balance sheet to take advantage of being able to place larger orders. But now as you point out, the third thing is having the anchor customers that these suppliers believe in understand that indeed we're selling the product to a quality customer who is going to use the product in an expected way 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 is giving us 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. Is being recorded. Our next question is from Mike Schliske with D. A. Davidson. Please proceed. Hey, good afternoon guys. Can you hear me okay? Can you 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 DA. Thank you so much. I want to ask a question first on the Forrest Gutter deal. Can you give us some sense as to how you arrived at the $850,000,000 Was it some back and forth as to how much How much margin were thought they could sell? Is it their best estimate to what they can sell or is there some inventory that has to get picked up first before you can start Shipping in large quantities there. Kash, do you want to take this one? Yes, absolutely. So we've as far as Shiver has been in this space, they understand what the demand is out there for electric shuttle buses. They've been engaging with the market for a few years, so have we. So yes, we came together and determined how many units will the market need in the short term and the long term, what kind of adoption can we drive by committing to higher volumes to our suppliers getting the price down and making the total cost of ownership attractive 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 chassis that's coming up here. Can Can you give us some details, what size or class vehicle is it? What the use case might be, passenger or 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 is in the room with me, Bill Kelly. Most of you know him, but I know he 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 Yes, we see the thank you, Tim. We see the purpose built chassis expanding across 2 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 purpose built chassis, we should be able to serve a fairly broad market With a very simple design, simple and elegant design. And that process, as Tim mentioned, it's been ongoing now for quite some time and we We're very excited to see IFRS prototypes before the end of this year. Okay. If I could throw one more in there is about your outlook for this quarter. Do you have the ability to do any additional beyond this quantity next quarter in the 4th quarter Or is the 28 to I guess 20 to 40 vehicle range you've got this quarter kind of this constrained level that might just be stuck for a while? So we still expect and have been all year is I think the terminology we've used is we're very Q4 is weighted and historically Q4 has always been when we've manufactured the most also when we 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 is primarily the chassis constraint. So several of our chassis providers have pulled their 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 already to build the vehicles and in fact we'll partially build everything we can build. So the assembly line is still will be moving at full pace. Many of the things we're 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 are concerned about is constrained on its 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 Therese is is here to provide the appropriate financial balance to what I say, but I'm hopeful that our chassis 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 our is our next question is from Steven Fox with Fox Advisors. Please proceed. Thanks. Good afternoon. Tim, can you maybe give us some sort of roadmap on how you're thinking about supply constraints easing for you over, say, a longer period? Maybe not just for Q4 getting a little bit better, but how things normalize, say, over, let's call it, 12 to 24 months. What happens first? What happens second to starts 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 alleviated 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 is our own Lightning e chassis to also provide additional supply of e chassis into mid and second half of twenty twenty two. We look at the other major constrained item in batteries in the same way. We are working with additional battery suppliers and each of our battery suppliers has made real progress in now guaranteeing or pulling down some of their is a very strong quarter for the quarter, and we're certainly doing not only working with those suppliers to help them do the right things, but also adding additional suppliers and adding as 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 is we get into 2022 in a much better position, certainly by the second half of twenty twenty two in much better position. Is that going to free up in Q2 of 2022? I think we could all debate that quite lively. And I don't know the answer on that today, but certainly my belief is, it will begin to get better into Q4 and then again into Q1 and Q2, Assuming as well, we'll all put out the we all thought COVID was going away and we could not have to talk about it during the summer and then we've We've seen the delta variant kick back up and it impacts some of our suppliers. So those kind of risks aside, we feel very good 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 E 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 mention that, it would not be impacted by the current chip constraints and I was wondering if you could just be more specific on that. Thank you. Yes. So I'll answer the first one, then I'll ask Bill to help me with the second one on some of the things. One thing to keep in mind with straight strip chassis different from the many of the chassis we buy today 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 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's important to note that 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 the e 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 e 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. Yes. The Probably the most intriguing aspect of the e chassis to me 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 out, I think, quite nicely. But we just see a lot more opportunity now because the vocational vehicles have very unique requirements and the shape and size of this will be highly aligned with their business interests. Great. That's helpful. Thank you. Our next question is from Subash Chandra is with Northland Securities. Please proceed. Hi, Tim. I just want to apologize ahead of time. I did jump on late. So if you covered Never mind. But a couple of questions just on, I guess, the sales channel as it exists today. First, where's the leasing program now? I'm assuming there wasn't much of that accounted for 2nd quarter sales and then the HVIP II, what you saw coming out of that at least the first half of the HVIP program, how influential that is? And just tying into that the new chassis, is there I guess we're going to see a breakpoint where these Forest River type deals drive the business versus the HVIP program, which has historically has driven the business. I'm curious if with the new chassis, if that has to be if your HVIP offerings have to be is updated for that. Certainly, Subash. Great to hear from you. I'm excited to hear. I think it's been a month or 2 since you were here, so excited to have a chance to chat with you a bit. 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 HVIP 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 is off balance sheet to do leasing, partially for the reason you point out that 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 analyst job 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 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 market it, how do we package it, what do customers really need and require. And 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 value is 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's is fairly simple in that sense. With HVIP, I very much like your thought there because we see it the same way that is subject to make compelling purchases and so therefore get rid of some of the odd behavior that occurs when things enter weird government subsidy lines. So that said, obviously, we've been an HVIP participant for quite some time. And I'll let Kash speak a little bit to how we see the industry changing around HVIP. Sure. So for For anybody in the audience who doesn't have the background, Atrium has 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 ACHIB this summer was is actually the 2020 2021 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 rehauling revamping their complete software system that we use to secure vouchers. So it's been a really exciting summer for HVIP. Demand has outgrown supply of funds, which is a clear signal that technology is working in the field. Fleets are feeling comfortable, not just buying 305, they want to buy 10, 30, 50, 100. So as a result of that, There was more demand for funds that was available in both the June and the August rounds. The good news is that this year's HVAC program, which is the '21, 'twenty two program is supposed to come out this fall with more than $200,000,000 accounted for itself. Some of that is still being finalized at the state level. Broadly speaking, Subhash, what we're seeing is, there is many of the programs popping up across the country. As you know, HVIP is only in California. Will provide significant funding to accelerate adoption across the country and not have this be just the California business. And lastly, as a result of deals like Forest River, where we are moving much more volume, as we mentioned, the cost and price is coming down to a level where we won't need incentives in a few years. So a lot of progress happening in that regard. Yes, just as a follow-up. So, was the HVIP a material driver for revenues or will it be a material driver for revenues in the second half of the year For 4Q? Kash, do you want to follow-up on that as well? Yes, absolutely. Yes, we expect that to be the case. So some of it comes down to how long the program takes to review new 8th voucher applications and assign them voucher amounts. Sometimes takes a couple of weeks, sometimes it takes a couple of months. So based on how fast the system works and grants get approved, will determine whether we build those units in Q4 or Q1 and obviously the other pieces being when those projects are green lighted, we've got We got to look at supply chain again to see how those two pieces align and whether that becomes a Q4 activity or Q1 activity. Okay, got it. A couple of steps there. Got it. Okay. Thanks, guys. Is now open. Our next question is from Maurice El Shabaugh with Bank of America. Please proceed. Hi, good afternoon everyone. I just had a quick question. Looking at your slides, it seems like you have about 1200 unit annual capacity for production, which is a bit ahead of schedule from the Analyst Day projections. Then we on the old projections, we'd expected positive gross margin in the 4th 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 in production capacity. So I'll ask Theresa to answer that one. Hi, Theresa. How are you? We provided guidance for Q3 is at $4,000,000 to $6,000,000 with the adjusted operating loss of $12,000,000 to 13,000,000 As we think about gross margin, as we ramp production, we expect to generate is operating leverage as we benefit from higher volumes, fixed cost leverage on labor, our 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. Understood. It was more of a comment on volumes rather than actual quarter. But also just as a clarification, for the orders in backlog, What portion of orders of that 1600 units are binding orders versus non binding? Good question, Sherif. I don't think we know off the top of our head. I do 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 and 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 is you could define purchase orders in a variety of ways. Some purchase orders are cancelable, some are not. Some purchase orders have a contingency like HVIP or first article confirmation, so there's a variety of things that a purchase order a commercial purchase order with a major fleet, may terms that it may have. And our purchase orders kind of have all of the above. So we do have some that are what might come under the terminology of binding because they is cancelable, but most have some form of cancellation opportunity. Obviously, that has those are two way streets if prices were if something were to happen and we didn't want to go forward 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 is we go back and look at what's in our backlog, we'll 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 certainly constantly managing and obviously always trying to work to have More binding purchase orders and fewer places for cancellations, but like I said, that also has is a two way street that often comes with that as well. Understandable, Narayan. Sherif, 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. And although they does not constitute a legal obligation, we believe that the amounts included in backlog are firm, even though As Tim mentioned, these non binding orders may be canceled or delayed by customers without penalty. Understandable and appreciate the color on that. If I could just one more question. Just on the work with the supply base, I understand you've been adding a lot of is the best supplier to help fill in some of the shortages and working on the e chassis. When you're talking of customers who have tried the product and driven and so forth. Are they looking for specific components or are they saying I want a Transit with a Proterra battery and so forth, are they flexible in terms of what you're delivering and what the components are from a supplier standpoint? I would say all of the above. So, we do have some customers who say, hey, 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 certainly happens on the battery front. Many of the other components less so, most customers don't aren't aware of what brand somebody may be using for their heating, air conditioning systems or their other aspects of the vehicle, the thermal management aspects of the vehicle or the charging systems. But When you think of major components, especially batteries and chassis, 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 their vocational needs and do they trust are engineering and when they've 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 our team's job when we think about business development is steering that to at some level when there's an opportunity to steer it. So particular need, use case, etcetera. But then I'll kind of give a 3rd category and that is 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 in a specific vehicle. So there are certainly Some cases like that that are dictated at a higher level or dictated by a 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 color. Thanks. Appreciate that. Is being recorded. Thank you. At this time, this will conclude the question and answer session. And I would like to turn the call back to Tim Reeser is for closing remarks. Thank you very much. And I'd like to close by thanking all of our employees for their contributions to Lightning's success, concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation and have a great day.