Canoo Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 15, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Canoo First Quarter 2023 Earnings Call. Thank you. You may begin.

Speaker 1

Thank you, and welcome everyone to Canoo's quarterly earnings conference call. With me today are Investor, Chairman and CEO, Tony Opala session will be available on the call. CFO, Ken Mangat and CAO, Ramesh Murthy. Tony will provide an update on the business. Ken will then run through our capital raise strategy and Ramesh will share the financial results for the quarter.

Speaker 1

We will then open the call up for questions. Please be advised, we may make forward looking statements based on current expectations. These are subject to significant risks and uncertainties, session and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, Please refer to the disclosure in today's earnings release and on our most recent Form 10Q and 10 ks and other reports that we may file with the SEC, including Form 8ks. All of our statements are made as of today and are based on information currently available to us.

Speaker 1

Except as required by law, we assume no obligation to update any substatements. During this call, we'll discuss non GAAP financial measures. You can find the reconciliation of these non GAAP financial measures session will be recorded in today's earnings release, which can be found on the IR section of our website. Session. Now please navigate to the webcast landing page and access the video link towards the bottom left of the page.

Speaker 1

We will pause briefly

Speaker 2

Thank you, Kunal, and thank you everyone for joining us for our Q1 2023 results. Last earnings, which was less than 6 weeks ago, we provided a comprehensive update, which included important legacy issues session related to the company's past management. As disclosed in our Q4 2022 filing, we reached a settlement with the staff of the SEC and we continue to wait for the final approval of the settlement by the commission, which we hope to see in the coming quarter. We understand that the staff's investigation of former senior executives remains ongoing. The management team continues to focus on resolving session will be recorded in the Q1 of 2019.

Speaker 2

I encourage you to watch Warren Buffett and Charlie Munger's comments about the traditional automotive industry at Berkshire's recent shareholder meeting. The traditional auto manufacturing business is tough, which we completely agree. And that's why we are not trying to be a traditional OEM, session is now open. But at TEN, which we introduced with the re founding and we will cover more starting now and in the coming quarters as we go to market. Rapid rise in interest rates, uncertainty of future Fed policy, unstable regional session.

Speaker 2

Thanks. And unresolved debt limit discussions are continuing to create headwinds for U. S. And European Economies, session which directly affect the traditional automotive industry. This will be a challenging period for the traditional automotive industry.

Speaker 2

Session. We have all seen the numbers coming in from others with weakening demand for consumer vehicles due to the rising cost of capital, session is now open. Continuing fears of inflation and the inbound 0 emission technologies. Session. Medium to long term demand for 0 emission technology driven vehicles will continue to grow rapidly.

Speaker 2

As we can see, The average age vehicle has reached an all time high between 12 14 years depending on the segment. These numbers prove that the stage is set for 0 emission technology driven vehicles, especially in the TAMs and geographies we are focused on, session where there is current demand and high volume buyers. We also believe that we are focused on the geographies and segments session is available capital and favorable regulatory conditions. Our strategy to deliver a high return on capital platform, Starting with our commercial customers who order in volume and across multiyear cycle. Session.

Speaker 2

For the overall industry, weakening consumer demand and higher negative margins on early production units for many of the newcomers Our strategy is different and therefore has different challenges that we are focused on remediating as we raise very targeted milestone driven capital. We are starting to see improving pricing conditions for our platform. We have a multi year organically growing order book, 200 plus mile EPA confirmed range with our highly efficient configuration for last mile delivery session is on range and performance optimization by customer and by customer use case. In other words, session. You need to know exactly what range and the operating environment conditions that exist for that specific customer.

Speaker 2

Session. Fewer parts drive lower complexity to manufacture that result in lower cost and we will start to share our clear path session will be subject to cash flow positive. We have gained strong support from our commercial customers on our rollout and go to market strategy. We don't care what it is designed to do. We care about what it can do and must do for our customers to get a high return on capital.

Speaker 2

Session have already run or are currently running advanced in-depth tests with our platform and we will have some additional announcements Previously, we explained our early decision to onshore manufacturing and jobs to the U. S. Session. While it may not have seemed like the right move at the time, this has positioned us well to benefit from the current environment. Session is available for the EV commercial tax credit under the Inflation Reduction Act.

Speaker 2

Session currently this is not available to many others as discussed due to pricing and offshoring. As we said above, the OEMs have always focused on establishing large capacity upfront, But this has often been an anchor during tough economic conditions and radical changes in technology. Our decision to stage how we bring capacity online with the ability to expand at an incremental basis, session we believe will prove to be more prudent capital allocation and geographic expansion strategy. Session. We invested our capital on democratizing our IP and assets to address some voids and white spaces we anticipated in the existing and emerging TAMs for our technology.

Speaker 2

We will share more in the coming quarters. Another benefit to our strategy is we focused on launching a commercial product without the high cost session and manufacturing risk and complexity based on consumer expectations of interior trim and infotainment systems. Session will require less capital. While we scale and reach breakeven margins faster and achieve positive session will be available on our website. Cash flow at lower volumes, we are focused on achieving this, and we continue to do more work to refine our confidence in achieving the above.

Speaker 2

As we transition to manufacturing and go to market, the workforce transition to support manufacturing in Oklahoma will enable us to ramp headcount more efficiently from a total cost perspective. Session. We are seeing a material labor arbitrage as we shift our mix and headcount ratios between our Oklahoma and California workforces. As we start to mature, we must gain better ability to coordinate and optimize our cost structure. Session.

Speaker 2

Moving to manufacturing, we secured a long term lease for the OKC manufacturing facility. We were able to help reduce the session will be subject to capital burden and dilution for the company by structuring a sale leaseback via my family office. As a committed long term believer and shareholder, session will be recorded. We structured the initial payment to include shares so the company could redeploy the cash for other more time sensitive priorities. Another way to think about this, on a diluted and non dilutive basis, we raised and deployed the most capital in any quarter since the de SPAC.

Speaker 2

Session. Early manufacturing is hard. We recognize it. We are embracing it and we know we do not have all the answers. What we have focused on in the last few quarters is to put a great team together that has the experience and passion to continuously innovate, session will be focused on doing it right, better and different, while de risking complexity in the advanced manufacturing process.

Speaker 2

Session. We continue to learn from the struggles of those currently ramping production with too many off the shelf session will be recorded. And I'll now turn the call over to the operator for questions. Thank you, operator. Thank you.

Speaker 2

Thank you. Our first question comes from the line of Chris with Goldman Sachs. Please go ahead. Thank you. Thank you.

Speaker 2

Our first question comes from the line of Chris with Goldman Sachs. Please go ahead. Hi, good morning, everyone. Session of software integration issues across these independent parties. That said, we are still fighting some legacy matters primarily in the areas of harmonizing our supply chain for production, which is also being exacerbated session will be conducted by our just in time milestone driven capital discipline.

Speaker 2

This has put some fatigue, friction and capital leakage session will be recorded. While we get harmonized in getting better efficiency for production, our team is currently installing and has started working session is on setup and functional validation of the general assembly line at our Oklahoma City manufacturing facility. Session includes our Body in White mainline, which we recently shipped from Detroit to OKC. Session. We remain focused on exiting 2023 at a 20 ks run rate, which opens the ability for us to move session is to 40 ks run rate by 2024.

Speaker 2

This approach is based on our current order book and our focus on targeted just in time Capital expenditures and reaching our target gross margins. Many criticized us on a small NASA order. Now we will share a little of the reason why. NASA is an important partner and customer for us. Session because the first eight miles of an astronaut's journey starts in a canoe.

Speaker 2

Their investment has been invaluable session is helping us learn and innovate as we prepare to deliver unique interior configurations for our customers based on our session will be available on our website. In fact, as you have recently seen on social media posted by NASA, session. Our team hosted NASA's Artemis team led by Charlie Blackwell as part of an important milestone review. Session. On top of the above, it is an honor to be able to work with some of the most impressive American innovators at NASA.

Speaker 2

And we remain on track to deliver the vehicles in the coming quarter. As we said earlier, we have a strong resilient multiyear order book with improving pricing conditions. Our order book is now valued at $2,800,000,000 It grew 5% quarter over quarter session will be in Stage 2 and Stage 3 orders, and we will announce shortly the finalization of 2 important sales agreements, session will be recorded. This is further validation that our work ready platform meets session exceeds the needs of our targeted customers. In closing, we have to continue to do more with less.

Speaker 2

Session. This is an important and complex phase with many moving pieces. We know we have to prove ourselves session will give you a deeper view of our financial performance and our projections. Ken?

Speaker 3

Session. Thank you, Tony. As we discussed in last call, we have finalized our 2023, 2024 capital plan And are executing on moving from a chest in time capital raise strategy to what Tony described before, which is a more milestone driven strategy. Session. Our demand is multiyear, contractual and more certain.

Speaker 3

Our manufacturing processes session are easier to execute. Unlike others, our production matches our demand versus being merely potential sales. This means less capital expenditures required to achieve volume thresholds for positive gross margins. Our focus is to continue to achieve alignment of our capital formation and allocation with the ramp up of manufacturing. Session.

Speaker 3

Among the most notable recent dilutive and non dilutive capital initiatives, the $52,500,000 registered direct offering session is expected to be in February 2023. Dollars 48,000,000 convertible debenture, which was issued in April of 2023 session. At a 1% coupon maturing on June 24, 2024, a $43,000,000 sale leaseback for the Oklahoma City facility session with tenant improvements, dollars 15,000,000 from the exercise of warrants held by Yorkville. In addition, session will be recorded. We have circa $300,000,000 in total access to liquidity via each of the $149,000,000 ATM session and $149,000,000 PPA facilities.

Speaker 3

We are focused on managing our cash and improving our synchronization of capital allocation as we move to production. Ramesh will now walk through the results.

Speaker 4

Thank you, Ken. Turning to cash flow. We ended the quarter with $6,700,000 of cash and cash equivalents. After giving effect to the issuance and sale of the convertible debentures of $48,000,000 and the exercise of $15,000,000 in warrants, Our cash balance would have been $69,700,000 on March 31, 2023. Cash used in operations for the quarter ended March 31, 2023 was $67,200,000 compared to $120,300,000 in the prior year period.

Speaker 4

Our capital expenditures of $18,400,000 for the quarter ended March 31, 2023, compared to $28,400,000 for the 3 months ended March 31, 2022 is impacted by the migration to Oklahoma City. Net cash provided by financing activities for the 3 months ended March 31, 2023 was $56,100,000 Our cash outflow in Q1 2023 was approximately 30% lower than our average cash outflow per month in 2022. We continue to optimize cash as we move into Q2 of 2023. Session. Moving to the income statement.

Speaker 4

Our Q1 2023 results are as follows: Research and development expenses, which include investing and manufacturing activities, totaled $47,100,000 for the quarter, session is expected to be $82,500,000 in the prior year period, a 43% reduction from Q1 of 2022. SG and A expense was $29,800,000 for the quarter compared to $55,600,000 in the prior year period, session will be recorded for Q1 of 2022. As we progress in 2023 beyond, session. We expect the following: a 25% to 30% reduction in our annual operating expenses session is expected to be in the range of 20 22, primarily resulting from increased focus on our objectives. Some of these reductions include session will be recorded.

Speaker 4

A 40% to 50% reduction in professional fees, a 10% to 15% reduction in IT infrastructure and session will be recorded. A 20% to 30% reduction in human capital cost from workforce transition to support manufacturing in Oklahoma, Labor arbitrage benefits and change in labor mix that Tony has mentioned. Our focus on confirmed multi year Commercial orders with less manufacturing complexity allows us to achieve positive margins sooner session requires lower capital expenditures and working capital needs compared to others in the industry. We have a dual path manufacturing investment strategy, which adjusts for the amount of capital we access in the short term. Our total investment to date has been approximately $1,400,000,000 which excludes the recently closed sale leaseback session by Tony's family office.

Speaker 4

Our entrepreneurial approach will leverage our total investment to date session will be recorded through a combination of in house outsourced along with a phased ramp approach, which is session will be comprised of $329,000,000 of total invested capital expenditures to date and acquiring session will be recorded. $140,000,000 to $200,000,000 in additional capital expenditures to reach the 20 ks run rate in manufacturing readiness, session, which we continue to refine across our partners and long term shareholders. Further, based on our current models, We believe a 40 ks run rate in manufacturing readiness is achievable by 2024 with an incremental capital expenditure of session will be recorded. Only $90,000,000 to $120,000,000 thereby allowing us to target gross margin positive in 2025 session based on our current pricing. GAAP net loss was $90,700,000 for the quarter compared to GAAP net loss of 125 $400,000 in the prior year period.

Speaker 4

Adjusted EBITDA was negative $67,100,000 for the quarter session compared to negative $117,400,000 in the prior year period. Moving to our guidance. Our guidance for Q2 2023 is as follows. OpEx, dollars 40,000,000 to $60,000,000 session, CapEx of $10,000,000 to $20,000,000 We are targeting next session will be recorded. Turning it back to the operator for questions.

Operator

Our first question comes from Amit Dayal with H. C. Wainwright. Please state your question.

Speaker 5

Thank you. Good afternoon everyone. Tony, just to begin with maybe on these SEC related comments you made, Is there any impact from what is happening on that side with respect to the operational side of things and your ability to deliver Or start shipments by the end of this year?

Speaker 2

No. As we stated, The company's activity has been concluded while they continue to session will be more around former employees, but we're just waiting for the commission to sign off and give us set approval.

Speaker 5

Okay, understood. And then with respect to The activity going on to set up production lines, etcetera, right now, are you thinking are you looking The visibility you have, I mean, do you see some initial production getting underway by the end of Q2 or early Q3 and then you ramp from there? Could you just give us a little bit of a timeline on how this will play out?

Speaker 2

Yes. So as we said, we've done some limited production, session. We got NASA, we did 15 LDBs and we're using them for extensive testing and activities with customers, as well as we'll be delivering the NASA vehicles in the quarter. Session. So it will be the beginning of us in the coming quarter starting to generate some revenue as well.

Speaker 2

So it will be limited. We're being a little wider on things just because we don't want to disappoint people. In fact, we want to session will be answered. And you can see in this quarter release, we gave a lot more detailed information, session. Right.

Speaker 2

So you can double check it to your models and you can see. Session will be delivering vehicles and the focus is very heavily on exiting at a 20 ks run rate.

Speaker 5

Session. Okay. Thank you. And just maybe last one, the $40,000,000 to $60,000,000 OpEx guidance for 2Q, will that session. Will you be at a similar range for 3Q and 4Q or should we expect some ramp to take place as

Speaker 2

session Yes, I mean it's going to change a bit. So it'll go up and down. I think what you're seeing with us In the approach we have taken, which is to figure out how to be as I said, I think Warren Buffett and Sterling Munger said it well, the traditional model is very, very tough. And every 15 to 20 years, it has a terrible cycle, right, 3 car generations. And we focused on something that was more technology driven, which allowed us to have an expandable format as well as the geographical expansion strategy and then where appropriate, when appropriate to have mass production, session which we secured in the prior site for the long term.

Speaker 2

So we'll step into that. We'll raise capital accordingly And we'll give guidance more and more in-depth. And as we talked about earlier, session. Our plan is to give full year guidance in the next quarter.

Speaker 5

Okay. Thank you, Tony. That's all I have.

Speaker 2

Session. Thank you, Amit.

Operator

Our next question comes from Jamie Peroz with R. F. Lafferty. Please state your question.

Speaker 6

Session. Hey, good afternoon, everybody. Thanks for taking my question. As far as capital equipment, it's for equipment, do you have everything you need? And the CapEx and I mean the session.

Speaker 6

Cash that you generated and you raised, is that just used for working capital? I mean, what we need what is it what else do we need to get to the 20,000 run rate and then maybe 200,000 to 40,000 run rate as far as Yes.

Speaker 2

So there's a dual path session we had to do, right, Jamie? Otherwise, we have to raise a lot more capital and in the current valuations, which we believe are below par, We're going to be very conservative about the way we do it. So that's why we really dug deep and developed a dual path. That DualPath has an in source, outsource model, right? As we shift it more to in source over time, that will session will be as we have more visibility, more of the things we do in house If you think of the insourceoutsource model, we have pretty much everything.

Speaker 2

There's still some stuff. I don't think you can really say you'll ever session have everything you possibly need. But this is really the key areas

Speaker 6

session. Now we're hearing from other EVs that the supply chain issues for the EVs, set OEMs, it's been solved, but they've been having problems with the suppliers. I mean, do you foresee that problem with your 3rd party suppliers not delivering through

Speaker 2

session So look, I think that the uniqueness of our design and the reduction of parts and increase of assemblies and taking a more technology driven approach. Session. Our issues have been with suppliers is from the legacy matters where they were more focused on a traditional large volume And we've been in the refounding, obviously, we fatigued quite a few of session is going to be a ramping model. And session. The friction we have in the supply chain, I'd say, is more self inflicted with the exception of at any given day, there are 20 parts that are just on a

Speaker 6

session. And my final question, do you have any updates on the Walmart order for us? Session, how does that work, Rampro?

Speaker 2

Yes. So I think if you see some of the comments in the script, you'll see we'll have some announcements session will be recorded in the coming quarter, but things continue.

Speaker 6

Session.

Speaker 2

Thank you. Great. Thank you, James.

Operator

Thank you. Thank you. I'll turn it back to Tony Akyla for closing remarks.

Speaker 2

Thank you, operator. Look, I just want to give a big shout out to all the people who have been helping us while we have done the refounding to our suppliers, to our partners, session to our customers, to our investors and the hardworking associates that have had to innovate in a very different way and we're seeing a very good future. We got a lot to prove. We intend to prove it. And we have experience in building companies from scratch.

Speaker 2

And we know that Every deal is a new deal and these are tough times and we've got to execute and optimize the way we use cash and build shareholder value. Session. I want to give a big shout out to everybody who's supporting us. Thank you.

Operator

Session. Thank you. And this concludes today's conference. All parties may disconnect. Have a good evening.

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Canoo Q1 2023
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