Good day and thank you for standing by. Welcome to the FTC Solar First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host today, Bill Michalek, Vice President, Investor Relations. You may begin.

Thank you, and welcome everyone to FTC Solar's First Quarter 2022 Earnings Conference Call. Prior to today's call, you’ve likely had an 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, Chief Commercial Officer. Before we begin, I remind everyone that today's discussion includes forward-looking statements based on our assumptions and beliefs in the current environment and speaks 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'll discuss 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 this metric is also included in our press release. With that, I'll turn it over to Sean.

Thanks, Bill, and good morning, everyone. Before I go into our highlights, I thought I'd address the topic on everyone's mind in our industry, and that's the current market environment with AD/CVD. Since our last update in mid-March, steel and freight are both off their highs, although still elevated. But those aren't the main drivers in the industry. Module availability is the key limiting factor to solar industry growth in the U.S. in the near term. Customers were already facing supply limitations due to the WRO, which had the effect of significantly limiting imports as producers either limited or stopped shipments and idled production as they worked to provide sufficient documentation to avoid detention at the ports. As WRO was appearing to show signs of improvement, the new AD/CVD investigation launched on March 25 with its risk of significant retroactive tariffs has now compounded customers' difficulties in procuring modules. Module makers would appear even less likely to restart production and unlikely to ship modules at all without buyers agreeing to absorb any potential tariff. This issue with module availability has made the near-term environment increasingly uncertain. As customers work to gain a line of sight on modules, construction timelines and decisions on new projects continue to be pushed out in time. So while we have a lot of business contracted and awarded, much of the construction has been delayed. This particularly impacts our second quarter profitability as most of the revenue that remains for Q2 is based on old contracts and higher steel content products that don't benefit from our significant advances with our design-to-value initiative. So with that backdrop of the environment, I'd like to note that there are several bright spots from our standpoint. We have made nice progress on our bookings with contracted and awarded now at $664 million with $112 million added in the past two months and no cancellations. The vast majority of our contracted and awarded moving forward will be at an attractive margin profile relative to historical. And I'll touch on that more in a moment. We have been able to grow our international business organically and almost half of our recent bookings have been international. Our pipeline is at record levels. This includes strong growth in the international pipeline, which has grown more than 20% this year alone and now stands at more than 32 gigawatts. And this excludes our pending acquisition of HX Tracker. We're excited about the addition of HX and believe it will enhance our growth and profit opportunities moving forward with incremental pipeline, complementary 1P technology and other benefits. We expect to close on that transaction in the current quarter and anticipate seeing tangible progress on bookings as we move through the year. Overall, there continues to be healthy activity in the U.S. with active bidding and developers working to find new sources of module supply. I think this really underscores what an incredible amount of demand is out there and how well the market can do if AD/CVD is resolved. In the near term, we'll continue to focus on what we can control. That includes executing incredibly well on the projects we have in flight while continuing to deepen and broaden our customer relationships; accelerating our international efforts, which include smoothly integrating HX Tracker and supporting their growth as we capitalize on our expanded addressable market; building our DG business, which has higher margins and for which we have already been awarded 12 projects since our January Business Update call; improving our operational efficiency, which includes automating processes and controlling costs to be most efficient; and continuing to drive our gross margin initiatives, including our design-to-value product cost reduction programs and strategic R&D efforts. Our design-to-value initiative has already driven significant costs out of our tracker. We've seen steel reductions roughly in the 20% range with additional reductions expected through year-end. Along with improved logistics costs and more disciplined pricing, the new projects we've been winning now have significantly higher product margins. As our lower-margin legacy projects complete and the newer projects begin, it will have a meaningful impact on our margins and results. As an illustration on the left side of this table, we show what an average margin profile of our legacy projects or those generally ordered prior to Q4 looks like at revenue levels of $100 and $150 million. In fact, last quarter, when we provided Q4 results, we mentioned that excluding a credit reserve and incremental logistics expense, we would have been in the negative 2.8% range. On the right side of the chart, it shows an illustration of average new projects and what the gross margin would look like. The vast majority of more than $600 million of our contracted and awarded takes advantage of our latest DTV advances. If there is one silver lining in projects being delayed, it's that we can continuously update those projects as we make progress in our cost reduction. Essentially, projects can become more profitable than originally designed. Overall, we believe we're well-positioned to make significant progress toward our stated long-term gross margins in the 20-plus percent range when project activity normalizes post AD/CVD. In conclusion, we believe the regulatory issues will be a near-term bump on a long-term road of strong growth. We have a record pipeline, our winning new business is accelerating internationally and in DG and has higher margin business poised to replace legacy projects. With the differentiated product, strong customer adoption, significant cost reduction initiatives and operational improvements, I believe FTC Solar is controlling what it can control and positioning itself incredibly well for the future. We significantly outgrew the overall market in the past few years and plan to be even more efficient and effective as we get increased visibility on the externalities or regulatory factors impacting the industry. With that, I'm pleased to turn the call over to our CFO, Phelps Morris.

Thanks, Sean, and good morning, everyone. As a follow-up to Sean's comments, I'd like to provide some additional detail on the first quarter performance and our outlook. Beginning with the first quarter, normalizing the effects for the credit reserve, our results for the quarter were generally in line with our expectations. Adjusted EBITDA would have been at the midpoint of our guidance range and non-GAAP gross margin revenue coming in at the low end. Specifically, first quarter revenue was $49.6 million, which includes a reserve associated with the potential customer credit that resulted in a $5 million reduction to our first quarter revenue and gross margin. Exclusive of this reserve, revenue was just shy at the low end of our target range. The difference relative to the midpoint of the range was slightly lower than expected production in the quarter as well as a bit of logistics revenue being pushed to the second quarter. This revenue level represents a decrease of 51% compared to the prior quarter on lower volume and a lower ASP and decreased 25% year-over-year driven by the inclusion of the reserve and lower volume. GAAP gross loss was $9.3 million or 18.7% of revenue compared to $8.6 million or 8.4% of revenue in the prior quarter. Non-GAAP gross loss was $8.8 million or 17.8% of revenue. Excluding the negative impact of the $5 million credit reserve, the improvement in dollars quarter-over-quarter was due to a reduction in warranty expense as well as improved product cost and logistics margin. The margin percentage declined on a lower sequential revenue level, which leads to less absorption of overhead costs. The results for this quarter compare to a gross profit of $0.1 million in the prior year period, with the difference driven primarily by the reserve and reduced production volume versus the prior year and an increase in employee count and other overhead expenses to support the Company's growth. GAAP operating expense was $18.5 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expense was $11.2 million, which compares to $6.9 million in the year ago quarter. The year-over-year increase is driven primarily by the necessary growth in staffing and other costs associated with being a public company. GAAP net loss was $27.8 million or $0.28 per share compared to a loss of $23.9 million or $0.25 per share in the prior quarter and compared to a net loss of $7.4 million or $0.11 per share in the year ago quarter. Adjusted EBITDA loss, which excludes $7.8 million of stock-based compensation, certain consulting and legal fees, severance and other non-cash items was $20 million. Net of the reserve, this was just above the midpoint of our guidance range. This result compares to an adjusted EBITDA loss of $16.4 million in the prior quarter and a $6.7 million in the year-ago quarter. As Sean mentioned, the HX transaction remains on track to close in the current quarter. We anticipate integration costs to be approximately $0.3 million, which is primarily composed of legal and administrative activities limited to 2022. With that, let's turn to our outlook. In light of the near-term regulatory uncertainties in the U.S. solar market associated with AD/CVD and WRO, the Company is withdrawing its prior annual guidance for the full year 2022 and instead is moving back to providing quarterly guidance and some qualitative discussion beyond that. Our revenue outlook for the second quarter of 2022 reflects this current U.S. uncertainty as our customers have delayed products until they're unable to secure modules. Our gross margin outlook is expected to step back given the lower revenue base of absorbing our overhead costs and more importantly, the delay of newer, higher-margin products that Sean spoke about previously. Unfortunately, as these projects have been postponed, it has left the quarter largely with lower margin legacy projects in Q2. These factors have slowed down the adjusted EBITDA, offset to a degree by certain expense reduction initiatives we're implementing as we await resolution of AD/CVD and WRO industry impacts. Specifically, our targets for the second quarter call for revenue between $30 million and $35 million, non-GAAP gross margin of negative 29% to negative 19%, non-GAAP operating expense between $10 million and $11 million, and finally, adjusted EBITDA loss between $19.7 million and $16.7 million. While regulatory factors remain the largest wildcard for the remainder of 2022, we do see some light as we move to the back half of the year as the lower margin projects will largely roll off in Q3 and newer, higher-margin products begin delivery. In addition, we've seen great growth in our international pipeline, which will remain a focus for us given the near-term U.S. uncertainties. Finally, we continue to make good progress on our bookings with contracted and awarded now standing at $664 million with $112 million added in the past two months. As Sean mentioned, one of the silver linings of the AD/CVD delays is products being pushed back will allow us to take advantage of further advances and become more profitable than may have been previously designed. We believe that the vast majority, over $600 million of the $664 million in contracted and awarded, will take advantage of our latest DTV initiatives. This should further aid us down the road towards our previously stated long-term gross margin target of 20-plus percent. Based on these factors and what we see today, we believe that revenue in the second half of the year will grow versus the first half, our gross margins will improve, and our non-GAAP operating expenses will decline in the second half relative to the first. It should be noted that all outlook figures and commentary include the pending acquisition of HX. In addition, should there be a favorable resolution to the current regulatory issues impacting the U.S. module supply, including AD/CVD and WRO, in the near term, we believe we will be well-positioned to quickly respond to the pent-up customer demand we are seeing in the U.S. In closing, while we experienced some short-term headwinds in the U.S. industry, we remain incredibly bullish on the long-term growth and outlook for the global solar markets.

Thank you. Our first question comes from Philip Shen from ROTH Capital.

Good job on the strong bookings there. It looks like half was international. I wanted to see if you expect that trend to continue. So when you think about bookings in Q2 and Q3, can you talk about how they're evolving? Do you expect this line or level to maintain? And then do you also expect that international mix to sustain?

Yes, we are very enthusiastic about the advancements we've made with our international projects. The pipeline now stands at 32 gigawatts of international projects, not including the HX acquisition, which we believe will contribute to this figure, and we anticipate closing that by the end of the quarter. We expect this positive trend to persist. We've made significant progress and highlighted three countries where we are launching new projects that we had not engaged with previously, and we are confident that these trends will continue. There is considerable excitement surrounding the Voyager 2P Tracker system internationally, and we are optimistic about the ongoing growth of international opportunities.

Shifting back to the U.S. here; when you look at your Q2 guide, can you talk about how many of those projects that you're serving in Q2 are being installed without modules? And then what do you expect that mix to be in Q3 and Q4? I've heard of projects for you guys being installed with all the tracker but with no modules. Just want to get a sense for how pervasive that might be.

Yes, Phil, this is Patrick. I mean for all the projects that we have in Q2, those are legacy projects that were really in flight and ultimately being delivered in Q4 and Q1 of this year with the vast majority of those being finalized deliveries here in Q2 and those have modules associated with them.

Okay. And then as it relates to working capital, it looks like you guys consumed some cash with the working capital increasing meaningfully to 240 days with our calculation from about less than 100 in Q4. I'm guessing some of that's seasonal, but I was wondering if you could talk through how you expect working capital cash consumption to trend in the coming quarters and with the $49 million on balance sheet, just talk through liquidity and what you see there.

Yes. Thanks for a good question, Phil. So as you mentioned, we ended the quarter with a cash balance of $49 million, but we also have $100 million in the undrawn revolver and $130 million in receivables. Timing-wise, we just ended up with a bunch of receivables at the end of the quarter. Since then, we've made a fair amount of progress in terms of collections of the receivables. We definitely expect Q2 to end with a higher cash balance. So we definitely expect to see some good progress there and are seeing it in the quarter as the receivables are getting paid.

And our next question comes from Maheep Mandloi from Credit Suisse.

So one, just on following up on Phil's question on international. Can you just talk about like the ASPs or gross margins in these markets? How should we think about them versus probably what we're seeing in the U.S. markets today?

We're observing significant progress and interest in the Voyager 2P system internationally, having added three new countries and essentially half the pipeline. Historically, we have noted that international margins haven't reached the same level as domestic but are gradually improving. Currently, the margins we are experiencing with these international projects are positive. As we move forward, we anticipate continued growth in gross margins throughout the year, driven in part by the expansion of international projects.

It’s encouraging to see significant growth in backlog and bookings. Regarding your customer interactions, are you experiencing any cancellations this month? I'm trying to understand the situation with customers—are they just postponing until 2023, or are there any issues related to force majeures?

One of our key highlights, even with the AD/CVD situation, is that the contracted and awarded amount has actually increased by $112 million over the past two months, bringing the total to $664 million. Most of this is expected to occur in 2023. We are noticing a trend where projects are being pushed to next year in anticipation of resolving the AD/CVD issues and ensuring module supply. However, we aren't seeing any cancellations; customers are simply delaying projects. The buildup signifies a strong year ahead in 2023. While we are observing some shifts, there are no cancellations at this time.

And then just one last one for me. In terms of the gross margins here, to get back to your target or even those high teens kind of gross margins, what scale do you think we need? Is it like the prior Q3, Q4 run rate or do you expect a faster catch up with that, just given these cost reductions? Just any clarity on that would be helpful.

Let me provide a brief comment before asking Phelps Morris, our CFO, to share his thoughts. In Slide 6 of our presentation, we aimed to offer some indicative information because we are quite optimistic about aspects we can influence, such as the steel content in our system and the relationships we are developing with our suppliers in steel and logistics. Unfortunately, much of our progress is being overshadowed by antidumping and countervailing duties, especially since most of our current projects, as we indicated for this quarter, are legacy projects that do not benefit from the significant reduction in steel content. We mentioned a 20% reduction in steel content, and we continue to make substantial progress, as we have over the last few quarters and throughout this year. We anticipate that as the mix shifts with the easing of antidumping and countervailing duties and as new projects begin, there will be numerous opportunities, and we are definitely observing improvements in gross margins. We intended to present different revenue levels and what we view as indicative figures for gross margins later this year. Phil, do you have anything to add?

Yes. No, thanks, Sean. I mean, I think Sean hit it on the nail in terms of where the margins are. The new projects we are signing up today are at a higher level. What we did on Slide 6 is really just showing an illustration of where we think the margins are going to be here on a go-forward basis. Clearly, if you look at the Q2 guide on a lower revenue target of $30 million to $35 million there's an overhead burden there that's going to bring that down. But as we get up to the higher levels as we exit the year with the new products that are taking advantage of the DTV initiatives as well as the improved logistics environment and steel content, that's where we're going to exit with the margins that we shared there on slide 6.

And our next question comes from Pavel Molchanov from Raymond James.

Last year, 75% of the modules installed in the United States came from Southeast Asia. If those modules are not making their way into the U.S. market this year because of the AD/CVD risk, where are they going? And will that diverted supply to other parts of the world accelerate installations outside the U.S.?

So good question. So many of those Southeast Asian countries have factories that specifically build for the North American market, and that's our understanding. In checking with folks we know in the module business, many of those factories have, in fact, been idle. They are sourcing projects going on in Europe and other parts of Asia out of other factories. Some of those manufacturers are building in China. Part of resolving AD/CVD is getting to a point where those folks have confidence to start those factories back up again and fill the supply chain back up, including the logistics of getting those modules from Southeast Asia to North America.

Right. So what would it take for those fabs to be reactivated and simply deliver their product elsewhere?

I believe the module manufacturers need the right motivation to operate their factories and distribute their products. The positive aspect is that I've spent considerable time in wafer cell and module production facilities. Once they decide to resume operations, the process is relatively simple. As long as they can reinstate their workforce, the requalification and startup time is not extensive. These factories could potentially pivot to serve other markets, should the manufacturers choose to do so. If the AD/CVD measures are lifted, they can quickly resume operations and replenish the supply chain for North American projects. Therefore, it largely hinges on the removal of AD/CVD. The supply chain could replenish rapidly afterward. Manufacturing modules and their components is not particularly complex, so I believe they can all restart fairly quickly.

Okay. Maybe just moving to steel. Shanghai Futures down about 20% from six months ago. Has that worked its way through the value chain where you're seeing lower bill of materials in your manufacturing?

So we talked a little bit about the factor we're seeing right now in terms of the steel market in general. The ongoing war in Ukraine has had some impact in the fuel supply chain, causing some disruption and not necessarily the cost down we've been hoping for. We're watching the market closely. One of the new management initiatives is to source 100% out of China. We have strong relationships there with some of the same suppliers and different suppliers. We think that will help us take advantage of the Chinese supply team if that ends up offering below-cost steel. We're watching it very closely.

And our next question comes from Julien Dumoulin-Smith from Bank of America.

Hey Sean and team, can you guys hear me okay?

Yes, yes. Obviously, there are some technical issues on the line, but you're coming through loud and clear, Julien.

In fact, actually, since we're talking about it, can you talk a little bit about sort of European opportunities given the obvious developments there, relative to emerging markets focus that we've seen some of the latest awards? Geographically, where are you thinking some of these international awards could continue to trend, especially given the focus that you have here on growing international backlog while the U.S. takes time to recover?

We certainly see the opportunities in Europe for sure. We see opportunities in Southeast Asia, Africa, and pretty much all around the globe, where we have boots on the ground. In addition, because of the HX acquisition, we think it's going to help really open up the market in China as well. It's also going to help us in other markets to have a really high quality 1P Tracker from HX as well. We're really, frankly speaking, excited about the opportunities around the globe. The new opportunities that we talked about came from Southeast Asia and Africa. Our pipeline is now up to 64 gigawatts, and half of that now is international, with 20% growth internationally so far this year. We're quite excited about that. Let me also have Patrick Cook, our Chief Commercial Officer, comment.

Yes, from our perspective, what we're seeing, I'd say, in the last three to four months, is definitely an uptick in activity in the European market. We’ve had a team on the ground there for about a year developing relationships and partnerships with folks in that region, similar to what we did in Southeast Asia, sub-Saharan Africa, and Australia. We’ve definitely seen an uptick in the level of activity in terms of bidding in that region, and we hope to be able to take advantage of that activity in terms of project wins because we have those relationships with the EPCs and developers.

And then maybe can we talk a little bit about just the EBITDA trend here and balance sheet a little bit further? Just how are you thinking about the cash burn rate? Obviously, in the quarter, you saw some working capital outflow contribute alongside EBITDA burn. Can you talk about how you see that trending in 2Q and 3Q? Obviously, you're talking about an improvement here in the third quarter timeframe, obviously pulling back guidance in the context of having a little bit less clarity in the near-term. So I appreciate the opacity to the situation, but how are you thinking about sort of managing the liquidity side of this? Obviously, 2Q will have an EBITDA burn; how do you think about AR in 2Q? And how do you think about the levers that you have as you think about Q3 even?

So we're definitely seeing progress in AR. I mentioned before that at the end of Q1, we had $130 million in receivables, and we've made good progress in terms of collections on those receivables. I expect to see continued improvement in cash. Honestly speaking, I feel good about the improvement we've made even so far in the current quarter, and I expect it to continue. In addition, we also have the $100 million revolver; it's completely undrawn, so we have that as well. Again, I feel good about the progress we've made in terms of cash and will continue to make. Let me let our CFO, Phelps Morris, comment on that as well.

Yes. As Sean mentioned, we had some timing issues at the end of Q1, where a number of invoices were due. We've done a good job at collecting those as we moved into this quarter. We anticipate for this quarter, Q2, that we will have a net increase in terms of cash despite the guide in terms of the negative EBITDA. As we talk about the second half, just ranges in terms of margins, we anticipate margins to increase sequentially throughout the year. We do have multiple levers, as Sean mentioned, untapped revolver, etc. that will help us manage through any liquidity issues.

The other thing I would add, Julien, is that we obviously have a lot of focus on OpEx and COGS overhead right now. So on spending, given the AD/CVD environment, we're carefully managing that very tightly, especially in areas like discretionary spending. However, we also recognize the need to continue to invest. We see a lot of opportunity in the long term in this business. While in the current AD/CVD climate, we need to carefully manage our spend, we also want to continue investing in areas like the DTV initiatives for reducing steel content and growing and developing our supply chain, as well as automating processes and similar efforts. We're striking a balance there, recognizing the current AD/CVD environment.

And our next question comes from Donovan Schafer from Northland Capital.

I want to ask about the international projects. It's exciting to see them, but I think they present challenges. Companies that succeed in the U.S. often focus on minimizing labor hours per megawatt, which is key in high-wage markets like the U.S. However, this doesn't always work the same way in lower-wage markets. I'm particularly interested in countries like South Africa and Kenya, and possibly Indonesia or Malaysia. I'm wondering if there are specific features, perhaps related to the two-part aspect, that align well with agriculture or other elements in these lower-wage markets, making the Voyager Tracker attractive in those contexts.

Donovan, hey, it's Patrick. The biggest attribute that you see, obviously, man-hours per megawatt has been continuously driven down, which is a big focus for us, especially in high labor cost countries. Given our ability to now get very terrain-challenged sites in terms of undulation and slow tolerance, we've been able to participate at very healthy margins indicative of what we showed on Page 6 in these international markets for these types of projects. However, with the acquisition of HX, we're also going to be able to compete in these lower wage markets where the 1P solution fits a little better on a more flat, less constrained site. Because of our ability to adapt to the rugged terrain, it's allowed us to participate in some of these projects at very high and healthy margins.

Can you comment on the size of these projects? I mean, everybody kind of likes to bring down a mammoth and have some giant projects, but there's also strength. I know your design architecture plays well to these kind of odd-shaped lots, DG, more DG-type stuff or fragmented acreage or whatnot. So on these international markets or some of these projects you've had, are they kind of larger or smaller or fragmented, or what’s the nature of them from a size standpoint?

Donovan, this is Sean. Thanks for the question. Yes, the three new countries we mentioned, those three projects total 350 megawatts. There's one very large project and two smaller projects. The thing we experience time and time again in these countries is that once someone looks at the Voyager system and chooses to use it, that one project seems to be the tipping point where they experience the great benefits of the project, whether it's in a terrain-challenged environment, irregularly shaped lots, or just the sheer constructability advantage that we have. In these markets, once they use it once, they keep coming back for it. We're really excited in particular that these three new projects in new countries total 350 megawatts. Hope that answers your question.

Thank you for your question. My last query revolves around the ongoing focus on the AD/CVD Auxin solar case. We often refer to it humorously as the solar coaster, where challenges arise one after another. Looking ahead, whether we reach a resolution regarding AD/CVD or not, we have the Uyghur Forced Labor Prevention Act coming into effect in just over a month. Additionally, there are discussions in Congress regarding the potential extension of tax credits. Beyond AD/CVD, are you hearing any insights? Are companies beginning to prepare for the implementation of the Uyghur Act in June? Has there been any conversation about safe harbor purchases at the end of the year if Congress fails to act? While that might seem like a worst-case scenario, it could still result in significant cash flow at year-end. Any thoughts on this would be appreciated.

We've been addressing the WRO concerning panel supply related to a specific polysilicon plant associated with forced labor issues. This has given the supply chain some time to get ready for the Forced Labor Act you mentioned. We are hopeful that the preparations made by our suppliers regarding WRO will help avoid significant disruptions in the market. Looking at the long term, I am very optimistic. Conversations with our customers, including EPCs, investors, and energy companies, reveal a strong belief that the North American market could reach 75 gigawatts a year. We are fully committed to preparing ourselves for that growth. The initiatives we're implementing, like reducing steel content and bolstering our supply chain and internal processes, make me confident about our future prospects. The current AD/CVD situation will be resolved, and I remind my team to focus on what we can control to strengthen our company, ensuring we are ready to be the preferred choice for our customers when that time comes.

And our next question comes from Kashy Harrison from Piper Sandler.

So my first one, first off, thanks for the sensitivity surrounding margins on Slide 6. I was wondering if you'd maybe just help us widen that sensitivity a bit. If you brought that the bottom end of that range to $50 million and you took the top end of that range to $200 million, can you maybe help us think through how those gross margins would evolve under those cases under $50 million and $200 million?

We wanted to convey how the delay in projects, the shift in projects, is affecting us. It’s basically the law of averages. The projects we’re dealing with are legacy projects that frankly won’t roll off generally until about Q3 and those projects come with the higher steel content and lower margins. We tried to provide a couple of numbers to give you some indicative range of where we think we would end up. We feel really good about the work that the team has done and we feel really good about the long-term outlook on gross margin.

Yes, Kashy, this is Phelps. The other thing I’d mention is that as revenue goes up, you intend to get operating leverage on your overhead and vice versa, right? So the lower revenue levels, the overhead burden will be much higher on a relative basis. So when you think of modeling that out, consider that as you model that out.

The other part I’d put, Kashy, is that we took the subset; Phelps mentioned in his remarks that north of $600 million of the contracts and awarded fit the profile we showed on Slide 6. That’s how we ultimately model that. That's indicative of what we’re seeing on projects that either have a PO or that we’ve ultimately awarded.

It looked like there was a big jump in service revenues in 1Q. Can you maybe walk us through what's driving that big uptick? Was there a one-time item and you would expect the services to come down from there or is that indicative of the break bulk shipping approach that you guys had talked about in prior quarters?

Yes, Kashy, great question. Really, that's more tied to logistics revenue associated with that particular quarter. So we recognized more logistics revenue in that particular quarter. It really comes down to the timing. As you recall, the materials revenue is ultimately caught in the total revenue line while logistics revenue along with our software revenue are kind of broken out in the services piece. So that will fluctuate with as logistics revenue ultimately gets recognized.

And I'm showing no further questions. I would now like to turn the call back over to management for closing remarks.

Hey, well, thanks, everyone, for joining us today. While there's uncertainty in the U.S. market right now, we continue to feel good about many factors under our control. This includes driving our cost reduction roadmap, advancing our strong R&D pipeline, accelerating our international focus, and reducing expenses in an uncertain environment. We also remain well-positioned with a well-regarded product set, strong customer adoption, and record pipeline levels. We look forward to continuing to update you on our progress. Thanks very much for joining.

This concludes today's conference call. Thank you for participating. You may now disconnect.