Earnings Call Transcript - XOS Q2 2023

Operator, Operator

Greetings, and welcome to Xos, Inc.'s Second Quarter 2023 Earnings Call. At this time, all participants’ lines are in a listen-only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of Xos, Christen Romero. Thank you. You may begin.

Christen Romero, General Counsel

Thank you, everyone, for joining us today. Hosting the call with me today are Chief Executive Officer, Dakota Semler; Chief Operating Officer, Giordano Sordoni; and Acting Chief Financial Officer, Liana Pogosyan. Ahead of this call, Xos issued its second quarter 2023 earnings press release, which we will reference during this call. This can be found on the Investor Relations section of our website at investor.xostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect due to factors discussed in today's earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investors.xostrucks.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company's second quarter 2023 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements. With that, I'll turn it over to Dakota.

Dakota Semler, CEO

Thanks, Christen, and thank you, everyone, for joining us for our second quarter 2023 earnings call. On today's call, I will cover the quarterly business highlights, provide an update on our vehicles and Energy Solutions deliveries, and share the latest on the regulatory tailwinds supporting the industry. Then, our COO, Giordano Sordoni, will provide an update on our manufacturing efforts. To wrap up our Acting CFO, Liana Pogosyan will share the company's second quarter financial performance. I'll begin by discussing our deliveries and the growing demand we are seeing for our vehicles. During the second quarter, we delivered a total of 38 units, modestly higher than the first quarter. Deliveries in the quarter were negatively impacted by customer charging infrastructure delays that pushed some planned second quarter deliveries into the second half of this year and into 2024. In light of our deliveries in the first half of the year, we have elected to revise our full-year 2023 guidance to 250 to 350 units delivered and associated revenue and non-GAAP operating loss expectations, which Liana will cover later. The updated ranges reflect both slower than anticipated deliveries and higher than expected average selling prices driven largely by customer uptake of the long-range 200-mile step van variant. Our success in generating follow-on orders from large national accounts gives us confidence in achieving these targets. We're seeing the benefits of our sales approach focused on long-term customer relationships with orders like the 30 units per UniFirst that we announced last week as part of a 200 unit memorandum of understanding we signed in 2021. We also expect to deliver between 120 and 150 vehicles to repeat customer Loomis in the second half of this year. Additionally, we are seeing more customers bringing charging infrastructure online spurred on by the Inflation Reduction Act and Advanced Clean Fleets rules, many of our customers began investing in charging infrastructure at the beginning of 2023, and we expect these chargers to come online over the next 12 months. Turning back to the second quarter, we successfully produced and shipped our first gross margin positive units. These units are the first 2023 step vans shipped to customers, and we expect our financial performance to continue to improve as we scale production. This is an exciting milestone for both Xos and the industry as we are among the first OEMs to demonstrate that commercial EV trucks can be produced profitably. We do still have a number of previous generation trucks in inventory and on their way to customers that will have a negative impact on company gross margin performance through the rest of this year, even as we expect to deliver gross margin positive units throughout the second half of 2023. Moving now to Xos Energy Solutions and charging infrastructure. As a company, we underestimated the challenges for the EV truck industry in installing new charging infrastructure. However, the outlook is improving for last mile fleets we serve, both in growing demand for our suite of comprehensive charging services and in growing infrastructure investments by customers at the time of vehicle purchase. Though charging infrastructure will remain a constraint on EV truck adoption, we anticipate improvement through 2024; motivated by incentive capture and emissions mandate compliance. In addition to our permanent charging infrastructure projects, we are also seeing growing interest in the second generation Xos Hub. As you may recall, the hub is capable of charging five vehicles at the same time from a single power connection, enabling fleet operators to transition to EVs before installing permanent infrastructure. These capabilities are bringing a diverse set of customers to the table from fleet operators to utilities and construction companies looking for off-grid power solutions. Shifting to the regulatory environment, recent changes are driving demand for Xos’ vehicles. In California, the Advanced Clean Fleets or ACF rule requires medium-duty fleets, including step vans, to transition to zero emissions vehicles. By 2025, large fleet operators in California will be required to have 10% of their fleet be zero emissions vehicles. This means that thousands of step vans over the next two years will be required in order to comply in California alone. Outside of California, 14 other states have signed a pledge for 30% zero emissions fleets by 2030. The ACF rule is administered by the California Air Resources Board or CARB, which has a history of setting aggressive targets and strictly enforcing them. California fleets experienced a similar event in 2008 with the passage of CARB's California Statewide Truck and Bus Rule. At the time, the rule required all new trucks to comply with lower particular emission standards and eventually required the phase-out or retrofit of older engines. While most fleets anticipated this landmark legislation to be challenged or delayed, the implementation proceeded as planned with the final phase-out of older diesel engines having occurred in 2022. We expect CARB to enforce the ACF rule with the same rigor including fines for non-compliance. Our conversations with customers reflect the seriousness of the new zero emissions mandates. We have received orders and are delivering vehicles that will bring a number of California fleets into compliance. Where step van fleets are not yet on track to comply, the limiting factor is typically charging infrastructure, which is why Xos Energy Solutions remains such a focus for us. On the incentive front, we are seeing a strong uptake of the $40,000 IRA tax credit and additional incentives available in 11 states covering 42% of the U.S. population. In some cases, the stackable federal and state incentives bring the cost of an Xos step van meaningfully below the purchase price of a diesel alternative, providing a total cost of ownership advantage on day one. I would like to stress, however, that we do not need to and are not relying on these incentives to support customer purchasing decisions. Our vehicles already offer a compelling total cost of ownership advantage on an unsubsidized basis. Finally, before I wrap up, I would like to discuss our focus on cost efficiency. During the quarter, we set aggressive operational expenditure reduction targets and have made meaningful changes in order to achieve them. First, we reduced our spend on a range of overhead costs including subscription software, insurance, and professional services. Second, we made the difficult decision to reduce our headcount during the quarter. We remain committed to building a sustainable business with the appropriately sized workforce. This is never an easy decision to make, and I would like to thank every Xos employee for their support in achieving our mission. Finally, heading into the third quarter, we prepared to bring our manufacturing in-house, which Gio will cover shortly. We are confident that these actions have placed Xos on the right path to profitability without sacrificing our growth targets. With that, I would now like to turn the call over to our COO, Giordano Sordoni, who will share an operational update.

Giordano Sordoni, COO

Thanks, Dakota. As was just mentioned, we made the decision to in-source our contract manufacturing activities within the Xos organization. This decision was made after the team identified opportunities to significantly lower our costs, improve quality control and simplify inventory management relative to the contract manufacturing agreement. As such, at the beginning of the third quarter 33 employees from our former contract manufacturer formerly joined Xos. All Xos vehicles continue to be manufactured in the same Tennessee facility using the same processes and by the same team. As many of you know, Xos' operational focus remains on delivering gross margin positive units, and as Dakota briefly mentioned earlier, we're happy to announce that we've successfully produced and shipped our first gross margin positive units. The team has taken meaningful steps in order to achieve this goal. Chief among them, the release of the 2023 step van in both 100 and 200-mile variants. The new vehicle, which began shipping to customers in the quarter, is yielding a cost of goods savings of over $15,000 per vehicle compared to the prior model. A significant portion of those savings comes from design improvements that simplify the assembly process and save time on the production line. We expect to continue rolling out cost-saving updates over the next year as further improvements are made and we work through the existing component inventories. At the same time, we're building a higher performance and higher quality product for our customers. On the quality front, our team is wrapping up a block of test track time, simulating a 300,000-mile real-world lifespan to validate durability. On the production line, we've made improvements to the vehicle design and assembly process that results in a quieter driving experience for the driver. These continuous improvements provide a competitive advantage for Xos in step van fleets where drivers are regularly subject to high noise levels. Elsewhere in the factory, we implemented a new incoming part inspection process. We ensure we accept quality parts from our supply base and avoid future inventory write-downs. In summary, we remain well-positioned to scale our business, expand margins, and look towards generating positive cash flow. I'll now turn the call over to our Acting CFO, Liana Pogosyan, who will cover our financial results for the quarter.

Liana Pogosyan, Acting CFO

Thank you, Gio, and good afternoon, everyone. For the second quarter, our revenue was $4.8 million compared to $4.7 million in the first quarter of 2023. Our cost of goods sold during the quarter increased to $8.5 million compared to $5.6 million from the first quarter of 2023. Gross margin during the quarter was a loss of $3.7 million compared to a loss of $0.9 million in the first quarter. This was driven by a lower average selling price due to channel mix, additional reserves recorded during the second quarter and physical inventory and other adjustments. Turning to expenses, our second quarter operating expenses decreased to $16.8 million from $19.2 million in the first quarter of 2023 and was largely driven by lower general and administrative expenses of $9.8 million during the quarter compared to $11.6 million in the first quarter of 2023. Non-GAAP operating loss for the second quarter was $17 million. As mentioned earlier in the call, we made additional cost-cutting changes during the second quarter, including bringing our manufacturing in-house, reducing our subscription software spend, and the reduction of headcount. The outcome of these changes is a more streamlined organization with Xos resources focused on our top priorities of delivering more units, expanding margins, and preserving a healthy liquidity profile. We closed the quarter with cash, cash equivalents and investments of $41.1 million. In addition to cash used in operating activities, we used $7.8 million during the second quarter in financing activities, primarily related to payments on our convertible debentures and other short-term insurance financing notes. Operating cash flow less CapEx or free cash flow was negative $15.8 million for the quarter, which was in line with negative $15.6 million last quarter. We believe that as we grow delivery volume, build working capital and progress towards positive gross margin, we'll have options to raise additional capital and we'll continue to maintain sufficient liquidity. Looking forward, we're revising our full-year 2023 guidance to 250 to 350 units delivered, revenue to be in the range of $36.3 million to $54.7 million, and a non-GAAP operating loss of between $50.5 million to $61 million. The change in our outlook reflects lower deliveries in the first half of the year and a more conservative forecast based on our current backlog orders for the second half of the year as our customers continue to work through infrastructure permitting and delays. Our revised revenue range is supported by stronger than initially anticipated average selling prices, and we expect our non-GAAP operating loss to improve compared to our original expectations, reflecting the cost efficiency progress we have achieved over the year. I'll now turn the call back over to Dakota.

Dakota Semler, CEO

Thanks, Liana. We are encouraged by our position at the forefront of the industry with established customer relationships, the second generation vehicle in production, and gross margin positive units in customer fleets. The challenges remain, we are focused on maximizing our advantage over our competition, most of whom remain in the development phase of a first generation product. Beyond complete trucks, the maturity of our vehicle technology is reflected in renewed interest in Xos powertrains for use in specialty and off-highway vehicles that we hope to share more on soon. As we look towards the second half of this year, our internal strengths and direct benefits from emission mandates and incentives have Xos on track for long-term success. We look forward to sharing that success with you in the coming quarters and remain committed to cost efficiency and maximizing Xos' ability to deliver value to both our customers and shareholders. With that, let's open up the line for questions.

Operator, Operator

We will now start the question-and-answer session. The first question comes from Donovan Schafer with Northland Capital. Please proceed.

Donovan Schafer, Analyst

Hi everyone, thank you for taking my questions. I want to start with the guidance; you've lowered it slightly, but it's still quite high considering the relatively low deliveries in the first half of the year. I'm curious about the visibility you have regarding this and your confidence level. Dakota, could you confirm whether you mentioned there are around 120 Loomis vehicles that you're committed to delivering in the second half of the year? If so, that could be a significant factor, along with the UniFirst 30. I'm interested in understanding what elements contribute to your confidence in this guidance.

Dakota Semler, CEO

Yes, absolutely. Happy to provide more context, Donovan. So for our revised guidance, we really wanted to make sure that we had 100% confidence in achieving the bottom end of that range. So just as you noted, we have several deliveries that are going to be made to Loomis in the range of 120 to 150 vehicles for the second half of the year. Many of those vehicles are actually already in production and are going to be shipping very soon from our facility. We've actually shipped some of them already. And then we have several national accounts like UniFirst and others that are also going to be shipping in the very near future from the facility that we are basically finalizing pre-delivery inspections on and expect to go to customers, including folks like Canada Post. But really, we do have strong conviction about being able to achieve those numbers. The other really important dynamic here is that large national fleets, many of them have been planning for infrastructure for some time now. So while infrastructure continues to be a hurdle in the quarters that we've seen, many of these customers have been installing infrastructure proactively, that we know as these trucks come off the line, they're going to have a home and we can get them into service as quickly as possible.

Donovan Schafer, Analyst

That's helpful. You actually addressed my follow-up question. I was going to ask what allows a company like Loomis to commit to so many vehicles given the infrastructure challenges. Instead, I'd like to know if there are updates on the EV infrastructure challenges you're observing. Are there equipment shortages, such as switchgear and disconnect cabinets needed for higher voltages? Is it a supply chain issue where larger fleets have managed to get ahead or developed better vendor relationships? Are utilities causing delays, or is it a combination of factors? Any insights into the trends or developments would be appreciated, particularly on why large national fleets are navigating these challenges effectively.

Dakota Semler, CEO

Yes, that's a significant question. When we begin the deployment of charging infrastructure, we start as soon as we receive a purchase order from the customer. Often, we engage in discussions with our returning customers to plan for more chargers than the truck orders we currently have from them. This is because they are aware that the timeline for installing infrastructure can take considerably longer than manufacturing a vehicle. The two main challenges in the deployment process are getting approvals and permits for specific sites, and securing additional power from the utility if the existing power on site is insufficient. Whenever we collaborate with Xos Energy Solutions to deploy charging infrastructure for customers, we conduct site assessments at several of their fleet locations. This process includes consulting with utilities, inspecting the sites, evaluating existing power availability, and creating a plan that maximizes vehicle deployment at concentrated depots while optimizing incentives and minimizing deployment time. With several customers, particularly Loomis, we are actively supporting this infrastructure process, working through multiple iterations to identify the best sites for quick deployment. In situations where challenges arise, we have been providing hubs to some customers. The Xos Hub, which we previously discussed, is now being deployed to customers. This hub can be installed on-site within about a week, and it can support up to five chargers for the vehicles already present. While the necessary permitting and utility power enhancements are in progress, this hub serves as a temporary solution for smaller depots or those with adequate power to utilize multiple hubs. It is a valuable tool as we start deploying more vehicles to customers in these concentrated areas.

Donovan Schafer, Analyst

Thank you. That's helpful. If I could ask one more question regarding the guidance, do you have any insight on whether it will lean more towards the third quarter or the fourth quarter? With some push-outs from the second quarter to the third quarter, one might think that the third quarter could be significant. However, given your rapid growth and the tendencies that may favor the fourth quarter, could you provide some clarity? Is it too early to determine if we should expect stronger performance in the third quarter or the fourth quarter for the second half of the year?

Dakota Semler, CEO

Yes. I think it in looking at both of these quarters is going to be a significant uptick from the previous two quarters for both of them. While there is still some seasonality because of the peak shipping season in October, November, and December in Q4, we expect deliveries to carry over into Q4 and potentially be a little bit higher than Q3. That being said, we're taking every possible opportunity to accelerate deliveries before the busy season. And so there's a chance that Q3 could come in a little bit higher if we're able to pull in some of those delivery dates or charging infrastructure commissioning.

Mike Shlisky, Analyst

Hi, good afternoon, and thanks for taking my questions. We want to touch first on some of the comments you made, Dakota on the ACF rules. We're 4.5 months away from this becoming something that people are starting to have to follow. I guess I'm curious, I'm not sending any sort of urgency out there amongst states to actually trying to meet these rules. Can you give us a sense as to how your customer conversations and actual orders and your backlog increased over the last month or two? It just seems like we're not seeing a lot of backlog change, even though they're going to start ordering only a few months.

Dakota Semler, CEO

Yes, absolutely. Happy to provide more context, Mike, and thank you for the question. We have seen an uptick, and just to clarify the phase in milestone for the ACF rule is actually at the end of 2024. So the requirement date will be January 1, 2025. But for large fleets, that still means they need to start planning now at least one purchasing cycle in advance of the phase-in date to ensure that they're going to be compliant. And we have started to see an uptick, particularly for those fleets that are going to be subject to the regulations. There's some recurring purchases as well as some new customer purchases that we've seen lately that have been driving additional demand for the vehicles. It's to be determined when those vehicles will actually get delivered, if they're going to be a part of the end of Q4 or if they would be a part of deliveries early next year, but we are seeing an uptick in order demand.

Mike Shlisky, Analyst

And just a little bit about the penalties, if someone doesn't meet the rules, I mean, if someone has ordered a charging station and the PG&E is just so backed up, they can't install it, they don't have a transformer nearby, I mean, it's not the fleets fault. So I guess are there exemptions for those that just don't get the infrastructure where things are out of their control?

Dakota Semler, CEO

We haven't seen any guidance on that from CARB and from the regulatory agencies, but we are remaining on top of it and trying to monitor the situation to make sure we can best inform our customers. If nothing does change, we have solutions like the hub that obviously can be a good stopgap in the short-term at least until customers are able to get the approval from utilities and the permanent infrastructure completely commissioned.

Mike Shlisky, Analyst

Okay. And you had mentioned there's potential for thousands of units of volume here, and I'm trying to figure out if any other company or the Xos on the step van side can fulfill that volume. I mentioned it last quarter, but now we had a major supplier of batteries, Proterra, potentially this week. I think the only other player I can think of in step vans uses Proterra as a battery supplier today. Another step van that's about to be launched also has Proterra as expected into their battery. So I mean, not that they're going away anytime soon, but if any other companies are having challenges with getting step vans out the door, what's your ability to step in and meet whatever demand they've got out of your factory?

Dakota Semler, CEO

Yes, it's a really important context, and you're right in that several of the or the only other real competitor building step van chassis, an electrified step van chassis, was utilizing a Proterra battery system. So that'll definitely impact their ability to continue to deliver products. We can obviously ramp production pretty flexibly to support incremental growth and demand. The biggest thing we want to ensure for customers for their own success as they deploy these vehicles is that they've got that charging infrastructure ready to roll and ready to go. And while we don't like to see any failures within this industry, the fact that we are going to be one of the few vendors that are going to be able to provide solutions for step van fleets obviously bodes well for us as the demand and regulations continue to advance the need for our vehicles. It also is a potential expansion for us as we think about our powertrain business powered by Xos. We've been continuing to grow that business and actually are selling into some off-highway specialty vehicle applications now as well that could supplement and continue to build out our growth in the powered by Xos business too.

Mike Shlisky, Analyst

Okay. Maybe one last one for me. Can you maybe put some brackets around where you think your cash burn is going to be over the next 12 months? Just trying to get a sense obviously for when and if you may have to access any additional capital or whether you're okay for the foreseeable future.

Liana Pogosyan, Acting CFO

Thank you for the question. Happy to provide additional context. As we previously mentioned in our prepared remarks, we do have sufficient capital to go into 2024, and we also have made various cost reductions that we continue to evaluate and are also pursuing additional funding opportunities in the quarters to come.

Jerry Revich, Analyst

Good afternoon, and good evening, everyone. Dakota, in terms of your cost of goods sold, that was up sequentially more than unit shipments. I am wondering, can you just talk about what proportion of that is overhead and any moving pieces from here, because it looks like the COGS per unit was up sequentially.

Liana Pogosyan, Acting CFO

Happy to provide additional context on that. So the primary drivers of why cost of goods sold was up sequentially this quarter was just overall lower average selling price as well as additional inventory write-downs and reserves that we took this quarter that were more a part of standard course of business and specific to this quarter.

Jerry Revich, Analyst

And thank you for the context. How much was the write-down?

Liana Pogosyan, Acting CFO

The write-down for the quarter was approximately $1.1 million.

Jerry Revich, Analyst

Okay. Okay. Thank you. And then in terms of the transition to new truck production in the back half of the year out of the guidance for back half deliveries, what proportion are going to be the new truck where you expect positive gross profit contribution versus the previously priced first generation truck?

Dakota Semler, CEO

Yes. We don't have a specific split between older inventory and the newer inventory, but the majority of vehicles will be the newer inventory that is positive gross margin. And the other thing that we noted, which is really important as we look at the back half of the year and is part of the revised guidance is we're delivering a significantly larger proportion of our long-range vehicles, including the long-range strip chassis for specialty vocational applications, as well as long-range step vans. And those actually are higher average selling price vehicles because of the larger battery size. They're double the battery that's onboard 100-mile range vehicle. So it drives higher average selling prices and it helps also lower our inventory levels for the tail end of the year. Those platforms are also higher gross margins than our typical 100-mile range vehicle.

Jerry Revich, Analyst

Okay. And I'm wondering if you folks wouldn't mind just expanding on your prepared remarks, comments on transitioning production in-house, what exactly the timeline looks like and what are the steps in that process and just a few more words on what's driving the change in the profile. Thanks.

Giordano Sordoni, COO

Hey Jerry, this is Gio. I appreciate the question. The transition has been complete as of the end of Q2 start of Q3, and so that's just taking the employees that were previously on our contract manufacturer's payroll over to Xos payroll and assuming that responsibility.

Jerry Revich, Analyst

And Gio, okay, can you just say more about the rationale? Just expand on what's driving the change, please.

Giordano Sordoni, COO

Yes. So we've been working with them for a few years now, and I think we just got to a place where the Xos team was deeply involved in the factory and the operation already. We had our own quality folks on site, our own manufacturing engineering folks on site, and it just made sense to streamline and simplify by bringing those folks onto the Xos team rather than having that sort of arm's-length contract manufacturing relationship in place. And it's made things run a bit more smoothly and it's also an opportunity to reduce costs as well.

Jerry Revich, Analyst

Okay. And the magnitude of cost reduction that you're anticipating 3Q versus 2Q as a result?

Dakota Semler, CEO

From a manufacturing standpoint, our manufacturing costs, we'll see savings of fees that are around 5% to 10%. But there's probably additional operational savings that come from improved communications and improved timeline to get vehicles assembled and delivered.

Sherif El-Sabbahy, Analyst

Hi, good afternoon. So just staying with the change in bringing production in-house, have you begun to produce packs internally or are all the packs on the new vehicles still coming from CATL as a supplier?

Dakota Semler, CEO

We are producing both packs, so we're producing the Xos packs for our vehicles as well as utilizing packs from CATL.

Sherif El-Sabbahy, Analyst

Understood. And are you able to get a sense of, are the CATL packs covering the majority of the new product platform versus the legacy, if you can give a breakout there?

Dakota Semler, CEO

Yes. We don't have existing breakdowns of how many are utilizing for our packs or how many utilizing the LFP packs. But we're continuing to utilize both of the systems, and we're seeing strong performance across different applications and use cases that are more suitable to the different chemistries NMC or LFP.

Sherif El-Sabbahy, Analyst

Understood. And just with vehicles that have been produced but not delivered, are you able to give us a sense of the scale of how much you've produced year-to-date?

Dakota Semler, CEO

We don't actually guide to that, but we have been moving through inventory and continuing to move into our 2023 step van model, which is going to be the positive gross margin model. That will be the majority of shipments for the second half of the year.

Mike Shlisky, Analyst

Yes. Hi, thanks for taking my follow-ups here. Just got two, one in the transition to in-house manufacturing, confirm there's no additional CapEx or other costs that have to take place. It's just where they get their paycheck from. Is that basically the idea?

Dakota Semler, CEO

There was an incremental CapEx investment that was made in Q1 and Q2, a very nominal amount. We bought some fixtures and equipment associated with the facility, but I believe it was less than $1 million in incremental CapEx.

Mike Shlisky, Analyst

Okay. Got it. I just wanted to ask the folks who have actually received the 2023 truck model, have you gotten any feedback as to how they're performing compared to the previous year's model as far as range, reliability, et cetera? Any feedback you can give us on how different the product is in the field would be appreciated?

Dakota Semler, CEO

Yes. We have made several improvements, the first of which is the increase in range. We added an additional 20 kilowatt hours of energy storage, along with a new software package and a different sub-ranging for the battery system, resulting in a longer-range vehicle. This enhancement is particularly significant for extreme climates. In parcel delivery, where vehicles usually operate under 100 miles a day, we've noticed that in regions with harsh climates, such as Northern Canada, drivers are using their heating systems throughout their routes. This adds extra weight to the battery, but we are still able to maintain the 100-mile range with the new battery pack. Other improvements focus on enhancing driver comfort and the overall drivability of the vehicle. Our updated cooling system features a more robust HVAC, which drivers have already begun to notice. Additionally, we have introduced a new cluster and software package that drivers appreciate. With the capability for over-the-air updates and new software releases on this platform, we expect to continually enhance both the software and efficiency of the vehicle, as well as roll out several additional hardware improvements over time that will benefit customers. Ultimately, this will lead to a reduced total cost of ownership for drivers and fleet operators.

Giordano Sordoni, COO

I would like to emphasize what Dakota mentioned regarding over-the-air updates, which are extremely important for our customers. This capability allows them to monitor their fleet remotely and implement software updates as necessary. It is a distinctive feature in the commercial vehicle sector, and we may be the only commercial truck manufacturer providing this functionality in our vehicles. Additionally, customer feedback has been positive about the new platform, and these vehicles have undergone rigorous testing in both thermal chambers and durability assessments. We've completed thousands of miles of real-world durability testing, and the technicians and drivers who regularly evaluate commercial vehicles have noted that this is the highest quality electric vehicle they have seen in terms of build quality and performance during durability evaluations.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference over to Dakota Semler for any closing remarks.

Dakota Semler, CEO

Thank you, operator, and thank you, everybody for joining us today. We appreciate all of these insightful questions and inputs. And as we continue to deliver vehicles through the second half of the year, we want to reiterate the three core tenants that we've been focused on over the last year, which is growing the demand and the deliveries of our products, we expect to see that in the third and fourth quarter, improving gross margins, which we also expect to see as we launch the new platform of our 2023 step van and strip chassis into customer hands and maintaining healthy access to capital to ensure we are strongly positioned to fund and scale the business, which we see into 2024 and continue to work with the capital markets to find other sources of capital to help grow the opportunities that we have within Xos. Thank you, everybody for your questions and your time today. Looking forward to catching up with you on our next earnings call.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.