Second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a 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 telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. At this time, I'll now turn the conference over to Vice President of Investor Relations, Mr. Bill Michalek. Please go ahead.
Thank you, and welcome everyone to FTC Solar's second quarter 2022 earnings conference call. Prior to today's call, you've likely had opportunity to review our earnings release, supplemental financial information, and slide presentation, which were posted earlier today. If you've not yet reviewed these documents, they are available on the investor relations section of our website at ftcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's President and Chief Executive Officer, Phelps Morris, the company's Chief Financial Officer, and Patrick Cook, the company's Chief Commercial Officer. Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations.
Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information except as required by law. As you'd expect, we will be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders, and our definition for that metric is also included in our press release. With that, I'll now turn the call over to Sean.
Thanks, Bill, and good morning, everyone. I'm going to start again this quarter with an update on the market environment as there's been a fair amount of activity. As you may recall, at the time of our last update in May, the antidumping/countervailing duties investigation or AD/CVD, with its risk of significant retroactive tariffs, was by far the biggest concern in the industry. That, along with some lingering WRO-related import concerns, had essentially halted U.S. imports of most solar modules, and module makers had idled their factories. As a result, U.S. solar project construction timelines and decisions on new projects were pushed to the right. Since then, the president issued an executive order in June that essentially removes the AD/CVD tariff risk for 24 months. The market cheered this news, and we have seen a marked increase in customer activity and discussion around projects since the executive order.
At the same time, however, the Uyghur Forced Labor Prevention Act, or UFLPA, became effective in June, resulting in new rules for module importers and reviews by Customs and Border Protection. There is still a bit of uncertainty in the market around achieving full compliance with UFLPA, whether related to sufficient mapping of materials or other factors. Once there is additional clarity around this and customers get line of sight to module deliveries, we believe the market will see a swift and substantial recovery. One other potential change that is on the table is the proposed Inflation Reduction Act, which includes incentives and an extension of the investment tax credit. While there are already many underlying drivers of growth in the solar industry, we believe this bill would serve to further bolster and extend future demand.
Based on our recent channel checks and customer discussions, we are hearing that many EPCs and developers are anticipating clarity on module supply within a late August, early September time frame. There is such a significant amount of pent-up demand in the market with both delayed 2022 projects and a strong funnel of new 2023 projects that some customers are worried about the availability of sufficient labor and materials to meet the demand. Our focus at FTC Solar during this regulatory-driven downturn has simply been to best position ourselves to capture that demand, to emerge even stronger when modules start flowing again, and to grow faster than the market once again with significant enhanced profitability. To that end, we have focused on a few key things. Gross margin improvement.
Through our Design to Value initiative, we continue to take costs out of our tracker systems, enabling future projects to be at higher margins than historical. Building our DG business, which has higher margins. Improving our operational efficiency and controlling costs. Building and strengthening customer relationships. Accelerating international growth. Finally, one that cuts across both growth and profitability is strategic R&D. We have an incredible R&D team. We have continued to invest in this area and are excited about our R&D pipeline of new products. We'll talk more about this in future calls. Those are our focus areas. Despite the recent industry environment and slowdown, we have made good progress and have several highlights from the quarter. We added a significant $141 million to customer bookings since our last update, bringing total contracted and awarded now to $774 million.
This includes the addition of a new top 10 utility customer and a new strategic EPC customer. It also includes an award for our first project in Thailand, continuing our international expansion and following the additions of Kenya, Malaysia, and South Africa last quarter. As we talked about last quarter, the vast majority of our contracted and awarded moving forward will be at a significantly improved margin profile relative to historical projects as we have taken costs out of our systems. As our old projects roll off in Q3 and new projects begin in Q4, we expect this improvement to become very apparent in Q4 margins, and Phelps will talk more about that shortly. We continue to believe that we're well-positioned to make significant progress toward our stated long-term target gross margins in the 20%+ range when project activity normalizes.
We've grown our pipeline to a new record high at more than 86 gigawatts. The international growth has been exceptional, and now, for the first time, stands at more than half of our total pipeline. We also closed on the HX transaction during the quarter, and we believe it will provide many benefits, including further accelerating our international expansion, providing complementary 1P technology, and strengthening our capabilities. In DG, we've continued our progress, and just yesterday announced that AUI Partners will be our EPC partner. Our DG business is focused on providing rapid design through installation services for sites under 20 megawatts. The offering includes fast quotes and all the benefits of our differentiated tracker system and software with delivery lead times as short as 8 weeks. We're excited about the margin profile of this business and are off to a good start in terms of demand.
In summary, volumes are depressed at the moment in this module-constrained environment, but the pent-up demand is incredibly large. Our legacy projects roll off after Q3, and we now have a strong cost structure as we move forward. We're building backlog and pipeline, adding new customers, including in new countries. Simply put, we believe our actions during this industry slowdown have positioned us to outpace market growth once again when modules start to flow normally and to do so with significantly improved profitability. With that, I'll turn the call over to Phelps to provide more detail.
Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional color on the second quarter performance and our outlook. Beginning with the results in the second quarter, our results were generally in line with expectations, with adjusted EBITDA and gross margins coming ahead of our midpoint of our guidance range, while revenue was at the lower end. Specifically, second quarter revenue was $30.7 million, which was at the lower end of our guidance range and reflects the lower demand environment in the U.S. amidst the regulatory backdrop of AD/CVD, WRO, UFLPA that Sean talked about. This revenue represents a decrease of 38% compared to the prior quarter and a decrease of 39% year-over-year, driven by lower volumes and partially offset by higher ASPs.
GAAP gross loss was $6.5 million, or 21.2% of revenue compared to $9.3 million or 18.7% of revenue in the prior quarter. Non-GAAP gross loss was $5.4 million or 17.5% of revenue. The margin percentage was better than our guidance range as some of the lower margin logistics revenue shifted between quarters into Q3. On a sequential basis, the non-GAAP margin percentage was approximately flat as improved product and logistics direct margins were offset by reduced overhead cost absorption on the lower revenue levels. GAAP operating expense was $18.7 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expenses were $12.4 million compared to $8.3 million in the year ago quarter.
This was a bit higher than our guidance range due to a $1.1 million allowance for doubtful accounts and a small amount of HX Tracker operating expenses that were not included in our guidance. The year-over-year increase was driven primarily by the same items as well as the necessary growth in staffing and other costs related to becoming a public company last year. GAAP net loss is $25.7 million or $0.26 per share compared to a loss of $27.8 million or $0.28 per share in the prior quarter and compared to a net loss of $52.4 million or $0.61 per share a year-ago quarter.
Adjusted EBITDA loss, which excludes approximately $7.9 million of expenses such as stock-based compensation expense, certain consulting and legal fees, severance, and other non-cash items, was $17.7 million. This was better than the midpoint of our guidance range, and the results compare to an adjusted EBITDA loss of $20 million in the prior quarter and $16.7 million in the year ago quarter. Regarding liquidity, we generated positive cash flow in Q2 of $17 million and ended the quarter with a cash balance of $66 million. In addition, we amended our revolving credit facility during the quarter, which, among other modifications made, reduced the liquidity covenant from $125 million to $50 million through Q1 2023, providing enhanced liquidity for the company. With that, let's turn to our outlook.
We expect the third quarter to represent the low-water mark in terms of revenue and margin. Third quarter revenue consists primarily of in-flight legacy products, with new products largely being delayed beyond Q3 due to module supply issues. Our gross margin expectations reflect these low-margin legacy products being delivered, a higher percentage of logistics revenue compared to materials revenue, which come with lower margins, as well as the overhead cost absorption being spread across a relatively lower revenue base. Collectively, these factors flow down to adjusted EBITDA, offset to a degree by expense reduction initiatives we have implemented in light of the module uncertainty in the marketplace. Specifically, our targets for the third quarter call for revenue between $16.5 million and $19 million.
Non-GAAP gross loss of $8.3 million-$3.8 million, or -50% to 20%. As you may expect, the percentage ranges vary more greatly at these lower revenue levels. Our non-GAAP operating expenses are expected to be between $10 million and $11 million, and the adjusted EBITDA loss between $18 million and $14 million. Finally, looking ahead to the fourth quarter, we're starting to see some light at the end of the tunnel. Based upon what we see today, we anticipate new wins to begin production, helping drive strong sequential revenue growth. Importantly, we expect significant gross margin improvements to be delivered in Q4, moving into positive territory as these new products will incorporate our latest DTV initiatives, coupled with having the lower margin legacy products behind us.
Specifically, our expected targets for the fourth quarter call for revenue between $75 million and $90 million, again, representing a significant rebound from Q3 as our new product wins begin production. Gross margins are anticipated between 9% and 14%, with our new products delivering enhanced margins relative to our historical norms. Finally, an adjusted EBITDA range of ±$3 million. With that, we'll conclude our prepared remarks, and I'll turn it over to the operator for questions. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Kashy Harrison of Piper Sandler. Please go ahead.
Good morning, everybody, and thank you for taking my questions. I wanted to maybe start on the cash management side of the equation. It looks like you managed working capital well this quarter. AR came down a bit. Can you just walk us through how you're thinking about changes in working capital and, you know, cash flow from ops as you think about, you know, the second half of the year?
Hey, Kashy, ths is Sean. Thanks for the question. Yeah. We're really happy with the company's performance in terms of cash management in the quarter. We saw really good progress by the team and a great level of focus. In addition, we were able to renegotiate the revolver as well, and so we feel good about the position of the company moving forward. Why don't I turn it over to Phelps to give you a little bit more color? Yeah, no, thanks. Good morning, Kashy. Yeah, no. We did a great job in terms of the working capital during the quarter. As you look to the future, we're not gonna provide guidance on cash, but the way I think you need to think about it is a couple ways.
Number one, you know, we'll continue to focus on collections and for the prior sales, bring down the accounts receivables. When you look at, obviously, the guidance for Q3, we'll burn some cash from an EBITDA perspective, but there's some potential offsets there in terms of new deposits being made on new sales on the customers as they're going forward. A big continued focus. I think one of the other things we're really, really happy about is PwC removed the substantial doubt language that was placed last quarter based upon all the activities that we put in place.
That's good to hear on the growing concern language. My second question, you know, you indicated bookings of $140 million, you know, that's up from what you said last quarter. You know, just doing the quick math here, your second half revenue guidance is about $100 million, and your backlog is about $774 million. You know, $774 million less $100 million gives us $674 million of backlog for 2023 and beyond. Can you maybe walk us through how much of that $674 million is scheduled for 2023 as opposed to 2024 and beyond?
We're really excited about the continued progress on the backlog. You know, we've seen, you know, frankly speaking, as we said in the prepared remarks as well, the entire customer base seems to be anticipating a very strong 2023. In fact, as we mentioned, you know, there's some concern about there being enough capacity, manpower capacity, materials capacity, et cetera, to be able to do what people wanna see happen in 2023. We're very excited about the continued growth of the backlog, and we think, you know, 2023 is going to be a very, very strong year.
Okay, fair enough. Maybe just one final one, if I could sneak it in. How are you thinking about the risks towards 4Q 2022 revenue guidance? Specifically, you know, what does it assume for module supplies? Are you effectively assuming that the market has, you know, sort of figured out UFLPA? Or are you still, you know, effectively assuming that it takes a little bit longer for that to sort itself out? That's it for me. Thank you.
As we see the market, Kashy, you know, it's really a single issue today, and that's module supply. Obviously we've been able to put WRO behind us as an industry. You know, with the executive order, we've put AD/CVD behind us, and now, you know, people are working through UFLPA. It seems that UFLPA has some of the same issues that WRO had and that the industry was able to work through in terms of just figuring out the regulatory environment, what exactly is required so modules can make their way into the U.S. and not be seized.
Our view is, you know, in talking to the customer base, is that the module is going to get itself worked out here in the coming months, and so that's what will enable Q4 to be our inflection point. Our assumption on Q4 revenue is based, again, on the module situation getting worked out by our customers.
The other thing too, Kashy, as we've talked about, this is Patrick, you know, the continued growth and expansion in the international market as well. You know, you saw last quarter, you know, we went out and have booked, you know, 340+ megawatts of international sales. We expect that to continue as well. There's an international component that is not affected by UFLPA, you know, that is gonna contribute to the strong Q4 that we see in front of us.
Thank you.
Our next question comes from Donovan Schafer at Northland Capital Markets. Please go ahead.
Hey, guys. Following up on kinda Kashy's question about Q4. I'm kinda thinking, I know, you know, I got to have the kinda pleasure of looking at you guys' trackers at your demonstration site out in Aurora, Colorado, and to kinda see all the different components. Coming away from that, as I understand it, the one piece that really you have to wait until you know exactly what module specifications, you know, what the final module is gonna be, it's the purlin or some people call it the rail. You know, it's kinda like, where are you gonna punch the holes in the rail or how long does the rail have to be?
There's little tweaks there, but the rest of the parts can be, you know, even the knowing what thicknesses or size, you know, piles and such are required. You can kinda know all that ahead of time. The orders that you're looking at in Q4, is this kind of a dynamic where you know you're in a position? Because, of course, we've had a constrained supply chain environment, also just in terms of sourcing materials. Are you in a position where you kinda have everything in place for what those deliveries would be in Q4, and you're just kinda waiting on knowing the final spec so that you can finalize, you know, what the purlins and the rest is kinda ready to go? Or is it more than that?
Donovan, thanks for the question. As you said, you know, our system, effectively, the Voyager tracker is agnostic to the module. We can accommodate any module. In order to do so, like you said, there is some, you know, adjustment on the rail itself. But we feel very good about, you know, once the module supply is resolved, that our view of if Q4 is sound based on everything we know today. Frankly speaking, you know, it's just a matter of the module issue itself getting resolved. In terms of the supply chain constraints, as you know, we use an asset-light model, so we have multiple suppliers around the world, including suppliers in the U.S.
That flexible supply chain, having multiple suppliers with multiple qualifications, yeah, it gives us confidence that any issues that might, you know, appear are absolutely resolvable simply because of the fact that we have multiple suppliers and have that flexibility by the design of our supply chain.
I'd say the other thing to tack on, you know, a lot of the customers that we're talking to and informed kind of by the increased contracts and the order that we've got, you know, with this earnings call, is they're really narrowing in on two or three different or one to two different module manufacturers. You've got a good sense of what the form factor is gonna be with those. To your point, Donovan, on the purlins and the module rails, we're able to really kinda narrow in to one or two versus we don't know, you know, when the modules are gonna come or who they're gonna come from. With the additional clarity, we've been able to kinda narrow that down with a lot of these awards.
Okay. Great. That's helpful. If I could ask about the project in Thailand, you know, it caught my attention because I know back in 2019, you also had some sales in Vietnam. I think that that may have been more of kind of engineering services. I can't remember if that was the AP90 tracker, if it was a different tracker. We don't necessarily need to get into that. It does make me curious, you know, do you have sort of a some kind of a presence or some good advocacy or, you know, sales presence in that kinda part of Southeast Asia, that sort of peninsula, Cambodia, Thailand, you know, Vietnam?
Is that kind of something like that behind that? The other would be, you know, if you are willing to kinda disclose the size of the project, you know, was it a Voyager tracker or an HX 1P tracker? Since that's kind of, you know, starting to get into that kinda Asian, you know, territory, maybe I thought it could be the HX tracker. If you can talk at all, if there was, if specific site conditions there in Thailand, you know, if it was something to do with soils or what may have caused the win of FTCI versus, you know, other trackers they could have gone with.
Thanks, Donovan. The project in Thailand is relatively small, it's 2 megawatts. I'm really excited about it because we're following the path in Thailand that we've seen in other countries as well, that we've seen in South Africa, that we've seen in Australia, where we get a proof of concept basically on the ground that people can come and see in country that leads to additional business and the growth of the business in that country. I'm absolutely confident. We have a team in Southeast Asia of five people who call on Thailand and other countries as well. They've been making really good progress. As you know, we announced our first project in Malaysia recently as well.
On top of that, the other thing that I'm excited about is with the acquisition of HX, we now have the Helios 1P tracker in our product roadmap, and so we're able to sell that product as well. This particular sale in Thailand is the Voyager 2P tracker, and I think it's going to lead to other opportunities there as well as it has in other countries. Thanks for the question.
Well, actually, the other question about were there certain things on the site in Thailand that you know made the fewer piles or maybe odd-shaped lot or anything like that that kind of plays to the 2P tracker design you have?
Yeah. I mean, I think it fit well for a 2P solution, you know, oddly shaped parcel with some land challenge and ultimate undulation. You know, this is a developer that has really kind of taken a long-term view on FTC, and there's, you know, we expect. This is what we've seen in other geographies, additional project wins that augment and fit our 2P solution very well. That's kind of the tie-in with this 2-megawatt project. It's really a start.
Okay
to future business.
Then my last question, just 'cause every, you know, people are looking at Europe, with the energy security concerns, with Russia's invasion of Ukraine. Just, as my last question, just if you can talk about if there's any maybe like, you know, demonstration projects you're kind of looking at doing there, if you've seen an uptick in interest, whether, you know, Spain has historically had a decent amount of 2P trackers, with some of the legacy Spanish companies. Germany has had a lot of solar penetration, so, you know, maybe they're in a situation like the U.S. where, you know, fewer sites are available that are large block acreage. You might have more odd lot shapes. Curious if you're seeing any developments kind of in the European area.
Yeah, no, great question, Donovan. I mean, certainly energy independence in Europe has been a big focus over the last several months. In terms of just kind of uptick in activity, obviously there's gonna be some policy changes that are gonna be rolled out here in Europe over the next several quarters. We have seen internally an uptick in the amount of kind of bidding activity as you look out into 2023 and beyond. We've had a team on the ground there for about 12 months, engaged with the developers and EPCs in the region, have a very good sense and pulse on, you know, ultimately where that market's going.
It's a focus point for us, and feel confident that, you know, we'll be able to capture that market and with these policy changes.
Thanks, Donovan.
Yeah. Thank you, guys. I'll take the rest offline.
Our next question comes from Pavel Molchanov of Raymond James. Please go ahead.
Thanks for taking the question. Can you clarify, in the Inflation Reduction Act, there are references to the advanced manufacturing credit in relation to solar trackers, but it's a bit confusing on kind of what the amount of subsidy is. Have you looked at that already?
Hey, Pavel, this is Sean. We've been studying this for some time and are waiting for the bill to pass. We think, you know, in general, this is very much a net positive. As you said, we're studying the bill. We have our folks internally as well as some folks externally studying the bill so that we, you know, best understand how with our supply chain to take advantage of it. We'll share some more details in future calls on what our approach is. Again, we continue to study the bill, and we see it as as absolutely a net positive for the industry.
Okay. Let me ask about what's happening with steel. You know, spot price of just benchmark steel futures is down 30% from its peak of last October. How much of that is being reflected in your cost of goods directly?
We're excited about the improvement in steel costs as well as logistics. You know, while both are down and the trend is that way, they're still above historical highs. We see it as definitely a net positive moving forward.
Got it. Just a quick, kind of statistical question. What percentage of this year's revenue do you expect to be non-US?
In terms of revenue, we talked about the pipeline. The pipeline is now about 50-50. In terms of revenue, likely in the 20%-30% range.
Very clear. Thank you, guys.
Thank you.
Thanks.
Our next question comes from Jeff Osborne of Cowen & Company. Please go ahead.
Yeah. Good morning. Just a couple on my end. I was wondering, Phelps, if we should use the EBITDA loss as a proxy for cash. Just going back to Kashy's question around the new covenants. It seems like you'll be pretty close to breaking that $50 million. So I just wanted to think about how we think about the third quarter being the bottom and the cash needs.
Yeah. The way you gotta think about, number one, on the liquidity covenant is unused revolver capacity plus cash, right? When you think about liquidity covenants, you gotta factor that in. You know, we don't have any borrowings on the revolver other than a couple million dollars of LCs. There's no borrowings. We don't have any intentions to borrow that. As a consequence, yes, if the cash goes down and you don't, you know, from an EBITDA burn for next quarter, again, what I talked about earlier is there's potential offsets. We'll continue to collect and really focus on the collections of the prior sales. In addition, the cash can be further supplemented by deposits or capacity deposits that we received during the quarter for future capacity.
Got it. On, are those deposits? It's the first I've heard you mention those. Is there a rule of thumb as, you know, if you bought $100 worth of trackers, do you get 5% upfront or is every deal different?
Yeah. No. Generally, at the time the PO is placed, you're getting roughly 20% down upfront. There's also talk within the industry, just given capacity constraints for next year, as we look forward to even getting higher amounts.
Got it. A couple other quick ones for you. On the allowance for doubtful accounts, was that a U.S. customer, or international? Was that on one of the loans that you had made for developments, or was that on actual trackers delivered?
This is actually on trackers delivered. It's a U.S. project.
Got it. Lastly, just the going back to Pavel's question, the 20%-30% international. Are all those deals denominated in U.S. dollars, or how do we think about your FX exposure given now half your pipeline is in the international markets?
Yeah, they're all in USD.
All right. Great to hear. That's all I had. Thank you.
Okay. Thanks.
Our next question comes from Maheep Mandloi of Credit Suisse. Please go ahead.
Hey, thanks for taking the questions. Maybe just on the guidance side, could you talk about how much of the guidance for Q4 specifically is dependent on getting modules for UFLPA? And you kind of talked about 20-30% international. Are most of that 70% dependent on that UFLPA getting settled in early Q4?
The way I would think about it is like you said, the international doesn't so much, you know, there really aren't restrictions on the international, and we're super excited about the continued growth internationally. You know, the number of countries that we've added recently this quarter, last quarter, you know, it continues to grow. As we've seen in other international countries, as we start with a small project, you know, it eventually leads to bigger and bigger projects. You know, one of the things that we've seen during this period of a lull in the U.S. market is that it's been a real opportunity for us to really dig deep with the customers in the global market, and we've seen progress as a consequence.
Then the U.S. market, so we've talked to multiple customers. We said in the prepared remarks that many of our customers are indicating they'll get their module situation resolved, which includes anything related to modules. Today, obviously, is UFLPA. Our assumption is that, you know, as we've heard from the customers, that the module situation is resolved and that will allow things to move forward. We also hear that with the concern with 2023 being such a strong year, that people are wanting to, you know, look at opportunities to pull things in. The sooner they can get the module issue resolved, I think the better it will be for Q4. You know, as we said today, we're seeing that as an inflection point for us.
One other comment just on the Q4 result, you know, Q4 guidance. You know, specifically that it's gonna be more equally weighted between U.S. and international projects based upon our current rollout.
Yeah. The 20%-30% was on the aggregate.
It's on the full year.
Yeah. It was on the full year 2022.
Okay.
Is that clear?
Just to confirm. Yes, it's almost, like, 50%, and the Q4 you're saying is U.S. and international, right?
Yeah. Roughly equal U.S. and international in Q4.
Gotcha. Just from the previous comment on just, you know, this potential visibility improving in Q4 as UFLPA gets resolved late in either, you know, the later Q3 or later Q4. Can you just help us understand, like, when do you recognize revenues? Is it on shipments from the factories, or is it on-site delivery? Are you seeing some of, you know, demand pull-in and, like, people just installing these trackers and just waiting for modules to come in whenever they come in December or January or February?
Generally speaking, when, you know, someone places a contract with us, they'll have the modules identified. Because of the, you know, needing to understand that just to get the design completed. We aren't seeing too many situations where people are asking, you know, for a tracker in advance of the module situation getting resolved. We see that, you know, the, again, the module situation is the key area. Then in terms of revenue recognition, we follow the standard rules. Yeah. Specifically on the materials revenue, that's generally gonna be recognized through the manufacturing process. Then if you look at the service revenue breakdown, that's really tied to the logistics, and that would be once the underlying materials is delivered to the final destination.
Gotcha. All right, that's really helpful. Just on the OpEx side, I think the guidance kind of implies you're expecting almost $9 million of OpEx in Q4, too sharp, you know, from a steady decline from Q2. Could you talk about the drivers to that? Is it something you're expecting in the near term? Obviously, as the sales come back in 2023, do we expect to go back to the historical OpEx run rate, or how should we think about that? Thanks.
Yeah. We've been really mindful on the OpEx, obviously, given the near-term challenges within the marketplace, given all the regulatory issues. We've really cut out discretionary spend, taken a look at across the organization for the overall spend. You know, as you look towards 2023, obviously, we're not providing guidance at this point, but, you know, we would expect with the projected industry growth that we would start to scale up some of the OpEx just to support the delivery of the online projects. In the near term, again, we've taken a across the organization view on OpEx and really curtailed that significantly.
Gotcha. I appreciate taking the questions. Thanks a lot.
Thank you.
As a reminder, if you have a question, please press star then one. Next question comes from Philip Shen of ROTH Capital Partners. Please go ahead.
First one is a follow-up on the Inflation Reduction Act. The incentive in there is for $0.87 per kilogram of incentive for the torque tube supplier. My sense is you guys don't manufacture your own torque tubes. Was wondering how you might share that incentive with your supplier and how those economics might work. Thanks.
Phil, we're super excited about the Inflation Reduction Act and the prospect of it fully passing. You know, we've been studying it back to the time of Build Back Better before it. As you know, we have multiple partners in our supply chain, and we've been studying it, we've been in discussions, and we'll have further comments on this in the future. It's absolutely a positive for the industry and something that we definitely plan to take advantage of.
Great. Thank you, Sean. As it relates to... You know, I have a follow-up here in terms of, does it need to be U.S. steel? It seems like it might be. If so, how do you think the U.S. steel is to be defined? You know, for example, iron ore and coking coal mined in the U.S., steel produced in a U.S. blast furnace, or could it be scrap melted in a U.S. furnace? You know, how would you look at the requirements there? Over what time do you think that might become clearer for us? Thanks.
We're looking at it very closely. It appears to be the latter in terms of definition for U.S. steel, but again, that's something that we're working through very closely and we'll follow very closely in terms of how it is interpreted. We tend to see it as the latter.
Okay. Thanks, Sean. As it relates to the Q4 guide, can you talk through the skew of deliveries between October through December?
Say again, Phil? I'm sorry. That broke up.
Can you talk about the revenue recognition that you expect by month in the quarter? For example, is it back-end weighted for Q4, or do you think it's more evenly weighted as we get through the quarter between October, November and-
You know, typically, Phil, we don't give guidance by month. You know, as I said before, I feel very confident about our performance and, you know, I think Q4 is definitely an opportunity for the inflection point. You know, our expectation is a solid Q4, you know, again, under the assumption that the module situation is resolved. I'm very excited about the prospect of Q4.
Great. Thanks, Sean. I'll pass it on.
Thanks, Phil.
As a final reminder, if you have a question, please press star then one. Our next question comes from Julien Dumoulin-Smith, Bank of America. Please go ahead.
Hey, good morning, team. Thanks for the time and the opportunity. Can you guys hear me?
Yeah. We can hear you.
Hey. Excellent. Thank you, guys. Just following up on where we started the call here a little bit. Can you talk a little bit about the gross margin implied in your backlog here, especially as you think about 2023? Obviously, you talk about this inflection for 4Q. What do you see as implied by what you know today on pricing of your cost structure relative to what you've locked in otherwise here, heading into 2023? If we can just talk about this a little bit. Like, how much of a structural uplift in gross margin are we seeing from 4Q here? I got a follow-up.
We're very optimistic in terms of gross margin. You know, despite the focus on OpEx and spend, we've continued to invest in R&D. Our R&D team has done some pretty phenomenal things in terms of looking at the steel content, you know, about our DTV initiative. In addition, we further strengthened our partnerships with our suppliers in our asset-light model. Those things have really helped us in terms of reducing costs, and that's why we feel good about the inflection point. We also feel that, you know, we feel good about the long-term gross margins that we talked about during the IPO as well, and seeing that happen in the 2023 timeframe.
Okay. All right, fair enough. I just wanna come back to the liquidity conversation in brief here. Can you talk about, you know, again, relative to the Q here, the $50 million described here for the credit facility, what is the latitude relative to the minimum that you have today, just under the definition, number one? Related to that, can you talk about, especially considering the deposit dynamic that you just alluded to, how that might trend here into the back half of the year, and ultimately how you think about, you know, extending that for versus the 3/31/2023 maturity?
Yeah.
You know, what options do you have as you think about it?
Hey, Julien, it's Phelps. Let me just reconfirm how the covenant works, right? Today, the way the liquidity covenant is calculated is cash plus unutilized credit facility. Prior to the amendment, the revolver amendment was $125 million, which meant you needed cash plus unused revolver of $125 million or greater. By reducing the liquidity covenant to $50 million, effectively you'd have the entire credit facility of $100 million utilized minus a couple million dollars of LCs, plus your cash balance, that needs to be above $50 million. Effectively, your total liquidity at quarter end that we calculated was about $164 million versus the new liquidity covenant of $50 million, right?
You had $98 million of revolver capacity plus $66 million of cash, gives you a total liquidity of $164 million quarter end. That gives you a lot of significant runway, even in the light of some cash burn, that you're not gonna run afoul of that liquidity covenant. Does that make sense?
No, 100%. Absolutely. I just wanted to establish that at the outset, and then pivot here into how you think about this trending, you know, through the back half and into 2023 here, and ultimately how you think about your refinance options here. I know you alluded to this deposit dynamic to the extent to which that you see orders come in, you know, how much could that actually contribute to your liquidity profile here, for instance?
It's obviously upside. If you look at overall cash for the quarter, right? We're not providing cash guidance for the quarter. However, as we've talked about, you have the EBITDA, which is a potential cash usage, but we'll continue to focus on the collection efforts on the AR for prior sales. We've done a really good job on that. Secondarily, I think you look at deposits of upside to the cash balances, as the orders come in, as people try to lock in capacity for 2023, if they're willing to put down deposits, that's an upside for the cash on a go-forward basis.
Yeah, the way we structure our customer contracts is, as Phelps alluded to at the onset here, you know, get about a 20% down payment from our customers, and then really maintain cash flow positive through the life of these projects. As capacity is kind of constrained, and we've seen that with the uptick in contracts and awards, you know, folks are more willing to put down larger down payments, which will, you know, potentially improve that cash flow profile as well.
Got it. All right, fair enough. I will leave it there. Thank you, guys.
Thanks.
Thank you.
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