Loop Energy Inc

TSX:LPEN

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Loop Energy Q2 2022 Earnings Results Conference Call. [Operator Instructions]

I will now turn the call over to your host, Damian Towns, Chief Financial Officer. Mr. Towns, you may begin.

[Damian Towns, executive]

Thank you, Ross. Good morning, everyone. My name is Damian Towns, and I have the privilege of being the Chief Financial Officer and Corporate Secretary of Loop Energy. Joining me today for our Q2 2022 results conference call is Loop Energy President and CEO, Ben Nyland.

On August 3, 2022, yesterday after market close, the company filed an MD&A, financial statements and news release for the 3 and 6 months ended June 30, 2022, which can also be found on our website at www.loopenergy.com.

I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. By its nature is subject to risks and uncertainties that may cause stated outcomes to differ materially from the actual outcome.

Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information. Listeners are warned not to place undue reliance on forward-looking statements. Please refer to our 2021 annual information form dated March 23, 2022, for more information.

During today's call, there could also be references to product backlog. Product backlog is a non-IFRS measure intended to provide additional information and should not be considered as substitute for measures of performance prepared in according with IFRS. In addition, this measure does not have a standardized meaning under IFRS and, therefore, may not be comparable to similar measures presented by other companies. Please see our Q2 MD&A for the definition of and further information about product backlog.

I would also like to caution our listeners that any projections provided today regarding Loop's future financial performance are effective as of today's date, August 4. It is our policy not to comment or update this guidance between quarters.

I would now like to turn the call over to Loop's President and CEO, Mr. Ben Nyland, for his initial comments.

[Ben Nyland, executive]

Thank you, Damian, and good morning, everybody. It's a pleasure to be able to report to you today with the significant progress that we've made during the course of the second quarter. We've seen the momentum that started to build in 2021 and grow through the first quarter of this year continue into the second quarter with record orders and revenues.

During the course of the call today, there are a few key themes that I would like to really expand upon. The first is we continued successful execution of our business plan, which is resulting in us exceeding the targets that we had set for ourselves. The second is the ongoing growth in the zero-emission commercial mobility vehicle space, and specifically, the recognition of the critical role fuel cells are expected to play in this arena. Third, is the growing momentum in the macro environment for both hydrogen and fuel cells.

I'd like to also provide some insight into the ongoing success of our Customer Adoption Cycle and the way in which that is helping to accelerate orders. And then lastly, I'll talk about some of the advances that we're seeing in the adjacent markets because of continued work on extending our core technology.

So first and foremost, I would like to talk about the very strong start that we've had through the year from a sales perspective. We knew that we had a very good 2021 and that it had set us up well for a successful '22 and '23. Because of this, at the beginning of the year, we set expectations with investors that we felt we would be able to triple the number of units we receive purchase orders for in 2022 and then triple those purchase orders again in 2023.

Because of the increased pace of fuel cell adoption in the marketplace and, we believe, the success of our Customer Adoption Cycle, we have almost exceeded the 2022 target of 60 units in the first 6 months of this year. As a result, we're increasing our 2022 target to purchase orders for 100 units. This new target represents a fivefold increase over 2021's numbers.

In addition to this, because of the momentum that we're seeing in the market, we are revising our 2023 purchase order guidance from 180 units to 500 units. This again represents a fivefold increase in units for 2023 over 2022. This is exactly the kind of growth that we believe would be possible for Loop when customers began to recognize the value that we were able to deliver. We're very pleased to see that this growth is happening faster than we would have anticipated. We believe very strongly that we are closing the gap on more established players and are building a strong foundation to accelerate that growth and achieve our vision to be the engine driving zero emissions.

Our strategy to build capacity ahead of demand is paying dividends with this accelerating demand from our customers. This strategy has involved investing in the manufacturing capability and capacity in our Burnaby location as well as building out our initial manufacturing facility in Shanghai, China. Our facility in Burnaby continues to be our primary manufacturing facility today, while the commissioning of our facility in Shanghai affords us the opportunity to shift production to that location as our capacity needs grow. Planned production capacity at these 2 locations is sufficient to accommodate currently anticipated production levels through the end of 2023.

I would just like to acknowledge the tremendous effort of our operations teams on both sides of the Pacific. The last several months have been extremely challenging due to a wide range of issues from supply chain challenges to international shipping disruptions to COVID lockdowns in locations like Shanghai.

In spite of these challenges, Loop's operations team, indeed, the entire Loop team have found ways to ensure that both production capacity build-out and product builds remain on schedule. I would like to specifically acknowledge the team at Loop Shanghai, who in spite of a 100-day lockdown, only missed the facility commissioning schedule by a mere few weeks. The commitment and work ethic demonstrated by the team in China in the midst of this adversity continues to give us confidence that the investment in the Chinese manufacturing facility is well placed and will lead to strong returns over time.

In addition to the work that the operations and manufacturing team are doing to supply customers with our existing products, we are also on track to launch our next-generation product towards the end of the third quarter as planned. This new platform will give us the ability to launch products between 60 and 300 kilowatts, addressing the needs of long-haul heavy-duty trucks, coach buses and when appropriate, marine and megawatt stationary power applications.

Continuing with our second theme of growth in the commercial mobility market. We believe the announcement of the contract with Tevva is one of the largest arm's length fuel cell supply agreements in the commercial vehicle market today. This agreement represents a minimum commitment for hundreds of fuel cell engines by the end of 2023.

While Tevva is not yet widely known, they have successfully cultivated relationships with some of the most recognizable fleets in the world. The management team is composed of seasoned executives from some of the largest automotive manufacturers in the world. And their fuel cell provider selection process, which ultimately resulted in a supply agreement with Loop, was one of the most thorough that we have seen from any customer.

This supply agreement with Tevva is the result of strong fleet customer demand for zero-emission delivery trucks. This demand is being driven by vehicle emissions regulations and municipal diesel emissions regulations that are being implemented and are anticipated to be implemented across various European markets.

Tevva is one of a new generation of electric vehicle manufacturers who are seizing the opportunity afforded by the transition to zero emissions in commercial vehicles and recognizing that they need to offer their customers both battery electric and fuel cell electric offerings.

This continuing market growth is being driven by several macroeconomic factors. In Europe, we continue to see the fallout of Russia's invasion in Ukraine in the energy sector. One of the accelerating trends is that hydrogen and as a result, fuel cells are becoming key strategic pillars to address the energy security concerns of removing dependency on Russian oil and gas. This is leading to a significant build-out of hydrogen production capacity to address not only transportation but various industrial processes as well.

This buildup of capacity is reducing the historical concerns about the chicken and egg problem of whether fuel cells or hydrogen production need to come first. Based on market activity, we believe both are now being built out in parallel. There is a growing belief and expectation that hydrogen will be available to fleets that use fuel cells. And this appears to be leading fleet operators to be more open to adopting fuel cell vehicles.

Although we are seeing the most rapid growth in Europe, we are also seeing movement in macro trends elsewhere. In the time since the shutdown in Shanghai, we have seen concrete evidence that the Chinese government is taking the necessary steps to stimulate the economy with hydrogen and fuel cells being a key part of that process.

In addition, the surprise announcement about the deal being reached in the United States that Joe mentioned is expected to lead to growth in the zero-emission commercial vehicle space in the United States as well. We will continue to watch the U.S. market closely as it does not yet have the level of stakeholder alignment around zero emissions that exists in Europe and China. However, the Manchin agreement is a strong signal that, that may be changing.

In 2021, we implemented our Customer Adoption Cycle as a mechanism to both understand our customers' plans and requirements and manage the deployment of our own resources to the areas where we could see the strongest returns.

As a quick overview, the Customer Adoption Cycle has 3 phases. The first, pilot phase, typically involves the deployment of a single vehicle, providing the vehicle manufacturer with the opportunity to validate Loop's product performance claims.

The second, the scale-up phase, typically involves the deployment of around 10 vehicles and will tend to involve one or more fleet operators in a broader deployment of vehicles. This is a deployment that is more typical of normal commercial operation into vehicles.

And then the third phase, full commercial, is a phase in which Loop's customer launches a vehicle product into the market and typically will involve the commitment to purchase hundreds or more of fuel cell systems as production begins to scale.

This Customer Adoption Cycle or system of sales funnel management is reaping rewards as we are seeing continually growing momentum in our customer orders and activity. We ended 2021 with 11 customers in total in our Customer Adoption Cycle. 6 months into 2022, we have 17 customers in the adoption cycle, and we are beginning to see customers move through the phases.

In the last few weeks, we announced that Tevva was the first customer to move into the full production phase of our Customer Adoption Cycle. We also announced just last week that Mobility & Innovation have moved into the scale-up phase.

Based on the activity in our sales funnel and in the market in general, we have a positive expectation the number of customers in the adoption cycle will continue to grow, and the number of customers transitioning into later stages will also continue to grow.

Loop is and will always be a company which focuses very tightly on specific markets and specific objectives. Today, this is manifested in our laser focus on developing products to the zero-emission commercial mobility space.

We also recognize that Loop's eFlow technology holds tremendous value for applications outside of the commercial mobility space. This includes fuel cell applications in markets such as stationary power and marine but also entirely new product spaces such as electrolyzers. As the demand for green hydrogen production continues to grow around the world, there's more and more focus on the efficiency and production capacity of electrolyzers.

As we have previously disclosed, our advanced technology team has been working with multiple external parties over the last several months to validate and begin to quantify the benefits of eFlow in electrolyzers. We are very pleased with the results of these collaborations, which we believe are showing eFlow can deliver significant improvement in bubble flow and heat management in electrolyzers.

In working with our partners, we've come to realize that more effective management of bubble flow and heat removal can materially improve the economic performance of electrolyzers and ultimately reduce the production cost of green hydrogen. We expect that in the coming months, we will be able to announce how we intend to bring the benefits of eFlow to market to address some of the most pressing challenges of green hydrogen production globally.

With that, I'd like to turn the call over to Loop's CFO, Damian Towns.

[Damian Towns, executive]

Thanks, Ben. I'm delighted to provide an overview of our 3- and 6-month results for the period ended June 30, 2022. It all starts with the customer and our focus on providing a best-in-class experience to our customers and making the adoption of our products as easy as possible.

We are delighted that this customer-first focus is now starting to manifest itself into purchase orders. We have built on our 24 purchase orders from Q1. And as of June 30, we have received 52 purchase orders year-to-date with 78% of these in the Europe.

We recognized record revenues for the 6 months of $1.2 million with the sales of 18 units, which exceeded our full 2021 year total of 14 units. 16 of these units were sold in the second quarter, which exceeds our previous best-ever quarter by 45%.

As expected, in the early stages of product commercialization, our gross margins remain negative with $2.5 million and $4.3 million in losses for the 3 and 6 months ended June 30. These losses are higher than previous periods due to the increased sales volumes. What is pleasing, however, is the trajectory we are seeing on our cost per unit sold. We are starting to see the benefits of economies of scale with our ramp-up in production and believe that we are well placed to capture further cost savings and leverage [indiscernible].

We have a stated objective of reducing our manufacturing cost per unit by 25% this year and look forward to reporting on this in future periods. Our operating expenses were $7.7 million and $13.8 million, respectively, for the 3 and 6 months ended June 30, which represents a 51% and a 28% increase, respectively, over the comparative periods.

We continue to invest in our product development, particularly our larger plates and 120-kilowatt fuel cell module that is scheduled to launch in September 2022. Our investment in ensuring a positive customer experience and ease of implementation through our business development initiatives are also starting to bear fruit with the increase in the customers in our Customer Adoption Cycle and their progression through the various phases, all the way up to full production.

We remain in a strong cash position with $43 million in cash and cash equivalents and a working capital of $51 million as of June 30. Our strong cash position will enable us to continue to deliver upon our 2022 objectives.

In the first quarter of 2022, we announced the Jobs and Growth Fund, $9.75 million interest-free loan, from Pacific Economic Development Canada and are in the process of submitting our first application under this loan in the third quarter.

We are now delivering at the top end of our projections, and our decision to build out capacity ahead of demand is paying dividends. The fuel cell market is growing, and we continue to build the foundation to capture this potential growth.

As part of wringing ourselves for this anticipated growth, we have taken the prudent step of filing a base shelf prospectus to ensure that we can take advantage of in-market opportunities that might present themselves.

For the 3 and 6 months ended June 30, we have invested $1.5 million and $4.8 million into capital expenditures as we continue to build out our future capacity and are pleased to announce that our Loop Shanghai facility has begun first article product inspection.

We are also -- we have also increased our footprint in our Burnaby facility and have also secured a lease on a service location in the U.K. We continue to forecast total capital expenditure of between $20 million to $30 million in 2022.

The commencement of our first article product inspection is a significant step for our Loop Shanghai facility, particularly given the shutdowns due to the dynamic zero-COVID policy in China that occurred in the second quarter.

As Ben alluded to earlier, we are revising our purchase order guidance for both 2022 and 2023 as the business delivers against not only its promise but also against its stated objectives. We started the year with the goal of tripling our 2021 purchase orders from 19 to 60 and then tripling that again in 2023.

With 52 purchase orders already received in 2022, we are pleased to be significantly revising our purchase order guidance. We have increased our guidance for 2022 by 67% from 60 purchase orders to 100 purchase orders and our 2023 guidance by 178% from 180 purchase orders to 500 purchase orders.

These increases mean that we are forecasting to quintuple our purchase orders each year for the next 2 years, including 2022 as our sales funnel and customer forecasts are pointing to significantly higher volumes than the guidance provided. We have discounted our purchase order guidance to reflect the various demand side risks and, although maturing, a still relatively early stage of the fuel cell market.

As referenced on prior earnings calls, we recognize that our value proposition is not based on the 12- to 24-month revenue stream, but it does continue to validate our go-to-market strategy, demonstrate our ability to obtain market share and deliver into this exciting and developing market. The significant increases in near to midterm guidance does help illustrate the potential of our technology and our longer-term prospects.

We did not previously provided revenue guidance to the market. The lag between purchase order and revenue recognition can vary significantly based on customer orders, their development time frames and shipment terms. We would anticipate that 60% to 65% of the purchase orders in 2022 will be converted into revenue, and this percentage would likely increase in future years.

In terms of the realized price per unit, we would expect that the most recent 3 and 6 months realized price per unit would be a good measure going forward. As noted in our MD&A, we will be discontinuing to use the backlog -- of our backlog number as we believe this is a subjective measure, and the best way of measuring the success of our go-to-market strategy is by our purchase orders and recognized revenues.

Ross, those are now the end of our prepared remarks, and we would like to open the call up to the Q&A session.

[Operator]

[Operator Instructions] And our first question comes from Jeffrey Campbell from Alliance Global Partners.

[Jeffrey Campbell, analyst]

Congratulations on the upward guidance. I want to ask a few questions regarding that guidance. First, do those numbers include some of the next-generation units that you talked about coming online in addition to the legacy units?

[Ben Nyland, executive]

Jeff, that's a great question, and thank you for tuning into the call this morning. There are a few of the next-generation units in there, but the bulk of those unit orders are existing product.

[Jeffrey Campbell, analyst]

Okay. As you point to 500 units in 2023, should we see that as an upward limit regarding manufacturing capacity? Or could you deliver more units as demand materializes?

[Ben Nyland, executive]

So Jeff, I'll answer that question sort of qualitatively and then turn it over to Damian. We continue to see tremendous expectations in the marketplace. As Damian mentioned, the announcement of the Tevva agreement, the revenue number that we put out is, in fact, the minimum commitment. And there are forecast amounts that are higher than that. And so we obviously prepare our business for customer success. And so we would see the potential to go higher than that, and we would be preparing for that from a manufacturing perspective.

Damian, anything you'd like to add to that?

[Damian Towns, executive]

Thanks for the questions. Our Burnaby facility has the ability on a 3-shift basis to reach up to 1,000 modules per year as does our Shanghai facility once it's up and running. So the 500 is certainly not a limit in terms of our production capacity. It's really just the guidance that we're providing to the market at this time. And as I sort of alluded to in our prepared remarks, we have been quite conservative in our guidance estimate based on certainly the supply agreement with Tevva and also the sales projections that we're seeing from our other customers, particularly those in the Customer Adoption Cycle and even those outside of it. So I think we're well placed to be able to hit those targets of 500, and it's sort of a derisked conservative number to provide to the market.

[Jeffrey Campbell, analyst]

Great. Now I appreciate that color. Maybe it's a little early to ask this question, but I'll do it anyway. Will you start to see any scale benefits in your cost structure in 2023 as you're moving up to this 500 and maybe beyond 500 units per year?

[Ben Nyland, executive]

Yes. So Jeff, the quick answer to that is yes. And we're actually starting to see some of those benefits already. Damian alluded to some of them. And obviously, a big part of our strategy is to begin to drive those costs out through various mechanisms, but the most effective is scale.

Damian, any comments?

[Damian Towns, executive]

Yes. Look, I would just add to that, we're delighted with the trajectory that our cost structure is showing even in the first 6 months of the year. Because our sales are going to be a wee bit volatile in terms of on a quarter-to-quarter basis, we haven't directly commented on that. But I think you can see the cost per unit certainly trending in the right direction. The economies of scale and also the ability to leverage off price floors are clearly going to drive that cost out and get us towards our desired margins in the longer term.

[Jeffrey Campbell, analyst]

Right. And to add, I really was saying on a per unit basis. So that's great. And I guess you can get your trumpets ready now, but my last question is what aspects of your deal sales are winning the business in the competitive market, bearing in mind that there are some entrenched fuel cell producers that you're competing with.

[Ben Nyland, executive]

Yes. Well, Jeff, look, this is something we continue to work on. There are technology aspects, and there are business aspects. And so as you know, you've been following us for a little while, our 16-90-10 value proposition of better fuel efficiency, better performance in a longer lifetime definitely gets us in the door. And as we prove that our products are capable of accomplishing those things, that is helping us win business. Probably the most significant is the fuel efficiency because in commercial vehicles, fuel costs are so high.

But I think in addition to having what we believe is a better mousetrap, we're also doing very well on the customer service side of things. We consistently hear from customers that the way in which we manage them, their expectations, meet their requirements sets us apart in the field of competitors. So we do everything we can to make it easy to buy Loop fuel cell systems, and that appears to be bearing rewards for us.

[Jeffrey Campbell, analyst]

Congratulations on the quarter and the guidance.

[Ben Nyland, executive]

Thank you, Jeff.

[Operator]

Our next question comes from Michael Glen from Raymond James.

[Michael Glen, analyst]

So just to come back to the margin question, like what do you think timing is -- like is there any way to give us some timing aspects when -- what volume would have to look like for -- to see an overall positive gross profit?

[Ben Nyland, executive]

I will push that to Damian. Go ahead, Damian.

[Damian Towns, executive]

Thanks, Ben. Michael, thanks for the question. Look, obviously, positive gross margin, as you know, is a factor of not only the price, but also the cost to produce. So based on the assumptions that sort of go into the underlying pricing and our cost out strategy, whilst we dictate when we potentially anticipate seeing positive margins. And saying that our internal projections is -- we're certainly going to have, say, in 2024 positive margins on some of our products based on our underlying assumptions. And in 2025, we'd expect the business to be cash flow positive based on our internal assumptions.

[Michael Glen, analyst]

Okay. And then can you just -- Ben, I know you made some macro-type comments regarding the initiatives to produce green hydrogen and why these are becoming increasingly necessary. I just want to take a look a little more near term, though. Like what are you seeing or what do you communicate to customers when they're looking at the product? And they obviously need to get their hands on hydrogen in the near term to operate these vehicles. What's the hydrogen supply situation look like in the near term?

[Ben Nyland, executive]

So we -- so Michael, it's a great question. It's important to note that when we're dealing with customers, we're typically dealing with the vehicle manufacturers and not the end fleet customers. The vehicle manufacturers are doing that work right now.

But we are seeing a tremendous number of companies coming forward that are providing hydrogen supply, especially in Europe. So within Tevva themselves, they have an entire department that helps fleet customers understand hydrogen supply and connect with various suppliers. And in fact, Tevva just made an announcement last week about partnering with a hydrogen supply company to bring that forward.

So what we're seeing is quite an entrepreneurial environment. And Loop has also announced partnerships with companies like BayoTech, who can supply hydrogen on a scale that allows fleets to get started, to start moving the ball forward.

So we expect to continue to see smaller companies moving in that direction. Then of course, large entities like Shell are moving in that direction as well, and we'll probably pick up the market as it really starts to scale.

[Michael Glen, analyst]

And that hydrogen supply that these smaller companies are bringing forward, is that green hydrogen? Or is that natural gas-generated hydrogen?

[Ben Nyland, executive]

It really depends vendor to vendor. I know in the U.K., a number of them are using green hydrogen that's being produced from wind energy and these sorts of applications. BayoTech uses natural gas supply, and there are some blue hydrogen companies coming forward. I think there's going to really be a mix in the near term, and the adage that I like to use is we need to get the industry moving, and the green hydrogen is going to come along as we go. And so it needs to be a rainbow approach to the hydrogen in the near years to get things moving.

[Michael Glen, analyst]

Okay. And then a complicated question for you, but I'm sure it's something that you think about. You have the facility in Shanghai. Obviously, you're very cognizant about what's been taking place in China over the past week or so. Can you just provide some commentary, like how you're thinking about that situation, how it impacts your outlook for growth expectations in China?

[Ben Nyland, executive]

So it is a very complicated question, Michael, and obviously, it's going to continue to develop over time, and we watch it quite closely. Our approach to the Chinese organization was recognizing that things might continue to be complicated, was to put a leadership structure in place that allowed that company to operate relatively independently. And so we did so earlier this year by appointing President of the Chinese organization who lives in Shanghai.

And so that group can continue to move forward on its own and supply the Chinese market, which we see growing well. So that's the first part of it, is we want to make sure, as the Chinese market grows, that we're participating in that.

We've also seen that although there is quite a bit of geopolitical challenge associated with China, there is an element of China that is quite pragmatic, recognizing that they need to be supportive of the business over the long term to make their economy work, and they're seeing fuel cells and hydrogen as being a strategic factor.

And so we expect that there will be -- there will continue to be these sorts of near-term disruptions. Hopefully, they remain sort of political sabre-rattling. And in those scenarios, we're quite confident that the Chinese organization will continue to operate well.

So I believe in the end, pragmatism will win out, but there may be some short-term jostles. The way we structured things allows us to deal with those well.

[Operator]

Our next question comes from Rupert Merer from National Bank Financial.

[Rupert Merer, analyst]

Congratulations on the progress in the quarter. So I'm going to ask a little bit of clarification on some questions you've already answered. But on the gross margin question, so I understand that it's complicated to try to forecast gross margins out a couple of years. On the price side of the equation, do you sense that your prices will be relatively fixed out for a couple of years from here? Or do you give some of that cost savings to your customer?

[Ben Nyland, executive]

Rupert, that's an excellent question. Again, I'll answer it sort of qualitatively and then -- and turn it over to Damian. Right now in the market, we're seeing pricing amongst competitors fall into a fairly defined range. Over time and with the volume, there is an expectation on the customer side that those prices will start to come down. Again, there's some consistency between competitors in the marketplace as to what that pricing should be over time.

What we are seeing with Loop, we believe that as we continue to establish ourselves and as the market adopts Loop's products and recognizes the value proposition, that we will be in a good position to exert a premium pricing model in the market. That's our expectation. And that's certainly what we're working towards.

We do not intend to participate in a pricing war in the market. And so far, our interactions with our customers seem to be indicating that with the recognition of the value we're bringing, that, that should be possible. So we'll see prices come down over time and with volume, but we think that's manageable based on what we're looking at.

Damian, anything you'd add to that?

[Damian Towns, executive]

Yes. I think I'd just add to that in terms of perhaps pointing to our pricing structure in the quarter. If you back out the math, we probably sold just over 900 kilowatts worth of units, which equates to about just over CAD 1,300, which if you turn then into U.S. dollars, which the market tends to price at, it's around $1,000 per module.

Now Ben alluded in his prepared remarks that we're very focused on making sure that the customer has all the solutions required and parts required. So we are selling in cooling systems and other things to make sure that it's really a plug-and-play and that user interface is as easy as possible. So that's probably why you're seeing that USD 1,000 per kilowatt, which is probably a wee bit higher than perhaps a straight module cost would be.

As the volumes obviously increase, the customers can start to probably demand some better volume discounts. So we certainly anticipate that coming down. I think the market is generally pointing to sort USD 600 per kilowatt, sort of getting into 2025, 2026 and probably even in sort of 5 years there afterwards, down to sort of USD 300, USD 350 per kilowatt.

So we've certainly got our -- very focused on our cost structure to make sure that we can effectively continue to drive out costs to achieve our overall desired margins. And longer term, we're looking at a more stabilized margin of around 30% from a gross margin on a product basis. Hopefully, that helps provide a wee bit more color, Rupert.

[Rupert Merer, analyst]

Yes. That's great color. And then on the purchase order forecast, how much visibility do you have on converting units from your backlog to purchase orders? And maybe if you could give some color on the details around the contract minimums that you have and also, how much visibility you think you're your end customers may have on vehicle demand for the next couple of years.

[Ben Nyland, executive]

Sure, Rupert. I'll answer a couple of those. So we're, at this point, not going to be speaking to quantities on a customer-by-customer basis. We're only going to speak to quantities on a consolidated basis. But specifically, in terms of visibility, on converting the backlog, the contract with Tevva, as we've alluded to, has a minimum order amount specified.

There's also a structure within that contract for Tevva to revise those numbers up with specific advanced notice over time. And we've designed the time lines for those adjustments to give us confidence that we'll be able to ensure the supply chain can react and our manufacturing capacity can react accordingly.

So we feel confident that, that's been structured well. And as the customers make commitments to increase those volumes, we'll look at them. The backlog is really based on forecasts of what the customers think they should be able to do, and that's based on their discussions with their own customers. But we will not revise the PO numbers until we've actually received orders against those.

Damian, anything you'd add to that?

[Damian Towns, executive]

Yes. Look, I just perhaps would like to add to that a wee bit, Rupert, and that's a good question. So backlog is -- as you're aware, it's a very -- lacks a bit of scientific justification. And I think every customer does it a wee bit differently. Our backlog has grown significantly. And as we referenced in our MD&A, it's sort of over $200 million. Now that takes into account all our customers' forecasts that are in our Customer Adoption Cycle, what they think they're going to up to, et cetera. And it really becomes a pretty subjective measure.

So obviously, the number is large. And what we're really trying to do is sort of point towards purchase orders as the better way of looking at our future sales potential. And that's why we provided that guidance out to 2023 of 500 purchase orders.

As I alluded to in the prepared remarks, we anticipate the 100 purchase orders that we're providing guidance to in 2022, probably about 60% to 65% of those being delivered against. I think in 2023, that number should increase as we can start to ramp up production and have better visibility to delivering into those orders.

But I'd just like to reiterate what Ben said. The numbers, the USD 12 million sales that we sort of announced in the Tevva contract, that's a minimum contracted commitment. Their forecasts are significantly higher than that. We don't intend to share that. But as I said, when providing guidance, it's important to realize the stage of the industry. We are prepared to deliver into the higher volumes, and we're confident in our underlying customers, but we also need to make sure we're derisking those numbers, hence, why we've sort of gone with 500 purchase orders for 2023.

[Operator]

Next question comes from Mac Whale from Cormark Securities.

[MacMurray Whale, analyst]

When you look at the guidance you just talked about, Damian, on that sort of 2/3 of the POs you deliver this year, does that imply sort of a 6-month delivery? Because your sort of -- your current level is around 60 and you're thinking you'll get 100. Is that the right way to think of that?

[Damian Towns, executive]

It is and it isn't. You can certainly -- if I get to the same number -- I think, look, our customers have different development time lines. They also have different lead times when they put the orders in. So I certainly wouldn't say that we're delivering 6 months out. I think of the 100 purchase orders, we're expecting some of them to come in towards the end of Q4.

So again, that's probably unlikely to be delivered against by the time you pull your accounting rules and revenue recognition that it has to be in the hands of the customer. And we ship it, that can take up to 4 to 6 weeks. So I think you get to the same place, Mac, but I think fundamentally it's quicker than that. But we are trying to encourage our customers to order in advance so that we can manage our supply chain appropriately because as you're aware, I guess, supply chains around the world are starting to see lead times stretching out.

[MacMurray Whale, analyst]

Okay. So on -- if we think of 2023 and the 500 that you've revised, we should be -- to get to 2/3 of that delivered in '23, we want to be seeing those orders fairly early in 2023 and obviously 2022 as well?

[Damian Towns, executive]

Yes. I think there's a couple of aspects there. I think you can anticipate that as the company matures and we ramp up our production, we will be able to reduce our time between purchase order and delivery. So I think as I provided guidance of between 60% and 65% for 2022, I would expect a number closer to 80% in 2023 would be the right way of looking at how the purchase orders are going to convert into units sold.

[MacMurray Whale, analyst]

And how do you -- how is the 2023 guidance established versus the 2022? I mean do you have -- like what constitutes -- like what do you put in your guidance, I guess, is what -- what are the metrics you use to sort of shift that higher?

[Damian Towns, executive]

Again, perhaps I'll continue. Yes, I guess, look, obviously, we look at our Customer Adoption Cycle. We look at the customers in the various phases. We've got 2 in the scale-up phase now. We've got 14 in the pilot phase, and we've got 1, being Tevva, in full production. Now we obviously look at the likes of what Tevva's commitments are through the supply agreement with them. We derisk that, and we'd take a slightly conservative approach on that, although we're fully prepared to deliver into their full forecast.

And then we look at our other customers and we look at their forecast, and we effectively derisk that or we try to make an assessment of what we're -- what we think they're going to deliver against as well. So as I said, it's certainly risk adjusted. The fuel cell market, Mac, as you know a lot better than I do, is maturing. It's still in the early stages. So we want to make sure that we can hit our guidance, hence, the number of 500 rather than something larger.

[MacMurray Whale, analyst]

Okay. And when Tevva moved into being your first production customer, did you realize you need to go back to the metrics you were using and up those numbers? So in other words, I guess, what I'm asking really is, how much of the revised guidance was because of an increase in what you feel customers will do once they move? And how much would just be macro?

[Ben Nyland, executive]

Maybe I'll jump in there, Damian. It's really a combination of both of those, Mac. So I think the revised number, as Damian outlined, is a probability-adjusted view of our Customer Adoption Cycle and what's in it.

The momentum in the macro market certainly impacts the risk adjustments or the probability adjustments that we're making as we see more momentum going forward. So everything sort of factors in. But I think Damian's point and what we really want to make clear is that, that 500 number is a number that we are quite confident in being able to hit next year.

[MacMurray Whale, analyst]

Okay. And then my last question, just on the OpEx, the various components of that. Any -- where you're running now, is that a good sort of estimate for the next 6 months? Or is there something that we should be aware of with scale higher or as you start to see this higher level of order?

[Damian Towns, executive]

I think, Mac, we sort of alluded to on the call the fact that we've got that 25% cost out target probably on the cost of sales. I think your question is more designed towards the OpEx for the G&A, engineer and business development and advanced development. I think probably the G&A is probably running at about where it should be running. From an engineering perspective, we do have initiatives such as the larger place and also the launch of our 120-kilowatt unit. So you could probably expect that to be slightly up.

Our business development, I think, is a key differentiator, as Ben alluded to in terms of why we're winning and supporting the customer. So if anything, I think you can probably see continued spend in that area. And starting to see some promising results from the technology side, particularly in the cross over to perhaps the electrolyzer space with the modified geometry of the eFlow. So perhaps a wee bit higher in that area as well.

[MacMurray Whale, analyst]

Okay. I guess I had one more, if I may. And it was just about the other customers in your pipeline. Can you contrast them or compare them to Tevva, like in terms of size or the nature of their business? Can you just give us some insight into how different or how similar the other customers are?

[Ben Nyland, executive]

Sure. A little bit, although we -- there's -- there is variety, for sure, in the pipeline. In my comments, I described Tevva as being part of the new generation of vehicle manufacturers that are very focused on electric-only solutions.

And we're seeing all sorts of companies like that, and the front-runners would be companies like Rivian and Lightning Systems in North America that people may have heard of, and there's a rival in the U.K. and of course, Tevva as well.

I think the common factor across most of these customers is a recognition that this market is beginning to scale, but there's a mix within our pipeline. And some of them are companies like Tevva that are all-in battery electric vehicle manufacturers, and we're seeing strong movement. Mobility & Innovation is definitely one of those companies as well as is Skywell in China with their bus fleet. Skywell is electric vehicle only. And so they're moving quite quickly into this space.

But we're also seeing some traditional players, bus and truck manufacturers who have existing product lines in the internal combustion space that are starting to move in this direction as well. And we're seeing that movement accelerate more and more.

So I would say there's a good mix. There are some others that would look very much like Tevva in the funnel. And then there are some companies that would look like more traditional vehicle manufacturers who are wanting to diversify.

[Operator]

Our next question comes from Robert Littlehale from JPMorgan Chase.

[Robert Littlehale, analyst]

In July, you signed a new lease for additional space in Burnaby. How is that space going to be used?

[Ben Nyland, executive]

We've expanded our manufacturing capability, and that space is designed to take on some of the processes that we're going to need to deliver on these larger orders. Specifically, we've talked about bringing the plate manufacturing process in-house for this next generation of products that we're launching. And that space will be used primarily for that manufacturing process of the plates.

[Robert Littlehale, analyst]

And is your management team where you wanted or you're looking for -- to fill additional positions? So on your...

[Ben Nyland, executive]

Yes, we're very happy with where our executive team sits today. We feel that the strength of execution we've experienced over the last several months is a testament to the quality of the executive team. We are actually in a process right now of making some additions to the second level of management. We recently hired a VP of manufacturing with strong background in the automotive industry with Magna. We're in the process of bringing in a VP of engineering. Both of those VPs will report into Daryl Musselman as COO.

So we're quite pleased with the executive team. And as a growing company, we will certainly be adding to the leadership over time, but we're not looking to fill any gaps that we feel are really significant.

[Robert Littlehale, analyst]

And what is your total headcount now?

[Ben Nyland, executive]

We are approaching 120 people worldwide.

[Operator]

And at this time, there are no further questions. I would like to turn it back to Ben for closing remarks.

[Ben Nyland, executive]

Excellent. Well, thank you, everybody. We really appreciate you taking the time to learn more about what we're doing. Obviously, we're very excited about the progress that we've been making, and we're looking forward to a strong second half of 2022 moving into 2023.

So we look forward to connecting with all of you again in approximately 3 months. Thank you.

[Operator]

This concludes today's conference call. Thank you for attending.