Canoo Inc. (NASDAQ:GOEV) Q1 2023 Earnings Conference Call May 15, 2023 5:00 PM ET
Company Participants:
Kunal Bhalla: Senior Vice President, Corporate Development and Capital Markets
Tony Aquila: Investor, Chairman, and Chief Executive Officer
Ken Manget: Chief Financial Officer
Ramesh Murthy: Chief Accounting Officer
Conference Call Participants:
Amit Dayal: H.C. Wainwright
Jaime Perez: R.F. Lafferty
Operator: Greetings and welcome to the Canoo First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Kunal Bhalla, Senior Vice President, Corporate Development and Capital Markets. Thank you. You may begin.
Kunal Bhalla: Thank you, and welcome, everyone, to Canoo's quarterly earnings conference call. With me today are Investor, Chairman, and CEO, Tony Aquila; CFO, Ken Manget; 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. 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, 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 10-Q and 10-K and other reports that we may file with the SEC, including Form 8-Ks.
All of our statements are made as of today and are based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we'll discuss non-GAAP financial measures. You can find the reconciliation of these non-GAAP financial measures to GAAP financial measures in today's earnings release, which can be found on the IR section of our website.
Now, please navigate to the webcast landing page and access the video link towards the bottom left of the page. We will pause briefly while we watch the video.
Over to you, Tony.
Tony Aquila: Thank you, Kunal, and thank you, everyone, for joining us for our Q1 2023 results. Last earnings, which was less than six weeks ago, we provided a comprehensive update, which included important legacy issues 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 the remaining legacy issues, some of which we will cover in this earnings release. 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. But a TEM, 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 banks, and unresolved debt limit discussions are continuing to create headwinds for U.S. and European economies, which directly affect the traditional automotive industry. This will be a challenging period for the traditional automotive industry.
We have all seen the numbers coming in from others with weakening demand for consumer vehicles, due to the rising cost of capital, continuing fears of inflation and the in-bound zero emission technologies. Medium to long term demand for zero emission technology driven vehicles will continue to grow rapidly. As we can see, the average age vehicle has reached an all-time high between 12 years and 14 years depending on the segment.
These numbers prove that the stage is set for zero emission technology driven vehicles, especially in the TAMs and geographies we are focused on, where there is current demand and high volume buyers. We also believe that we are focused on the geographies and segments where there 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 multi-year cycle. For the overall industry, weakening consumer demand and higher negative margins on early production units for many of the newcomers that chose to put in place large production facilities ahead of confirmed orders has been a challenge.
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 used cases, which is often 30% to 50% higher than the competition.
We remain focused on range and performance optimization by customer and by customer used case. In other words, you need to know exactly what range and the operating environment conditions that exist for that specific customer. Fewer parts drive lower complexity to manufacture that result in lower cost and we will start to share our clear path to cash flow positive.
We had gained strong support from our commercial customers on our roll-out 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. We are continuously focused on our extensive testing and customer validation programs, which is reflected in our order book because many of these customers have already run or are currently running advanced in-depth tests with our platform and we will have some additional announcements shortly.
Previously, we explained our early decision to onshore manufacturing and jobs to the U.S. While it may not have seemed like the right move at the time, this has positioned us well to benefit from the current environment. Our LDV is eligible for the EV commercial tax credit under the Inflation Reduction Act. 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 we believe will prove to be more prudent capital allocation and geographic expansion strategy.
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. We will share more in the coming quarters. Another benefit of our strategy is that we focused on launching a commercial product without incurring high costs and manufacturing risks associated with meeting consumer expectations for interior trim and infotainment systems. This approach allows us to require less capital. Additionally, as we scale our operations and reach breakeven margins faster, we expect to achieve positive cash flow at lower volumes. Our primary focus is on achieving these goals, and we are continuously working to refine our confidence in our ability to do so. The transition to manufacturing and the workforce transition in Oklahoma will enable us to ramp up our headcount more efficiently from a total cost perspective.
We are observing a significant labor arbitrage as we adjust the mix and headcount ratios between our Oklahoma and California workforces. As we continue to mature, it is crucial for us to enhance our ability to coordinate and optimize our cost structure.
In terms of manufacturing, we have secured a long-term lease for the OKC manufacturing facility. To reduce capital burden and dilution for the company, we structured a sale leaseback through my family office. As a committed long-term believer and shareholder, we designed the initial payment to include shares, enabling the company to redeploy the cash for other time-sensitive priorities.
Furthermore, on a diluted and non-dilutive basis, we raised and deployed the most capital in any quarter since the [de-SPACing]. While bringing manufacturing is a challenging task, we acknowledge the difficulties and are embracing them. We have assembled a great team with the experience and passion for continuous innovation. Our focus is on doing things right, better, and differently while reducing complexity in the advanced manufacturing process.
We are also learning from the challenges faced by those currently ramping up production. Our goal is to avoid using off-the-shelf third-party parts and assemblies that are not harmonized and can add complexity. We aim to streamline our supply chains and address software integration issues across multiple independent parties.
However, we are still dealing with legacy matters, particularly in harmonizing our supply chain for production. This challenge is compounded by our just-in-time milestone-driven capital discipline, which has caused some fatigue, friction, and capital leakage. Despite these obstacles, we are actively working to improve efficiency in production.
At present, our team is installing and working on the setup and functional validation of the general assembly line at our Oklahoma City Manufacturing Facility. This includes the Body-in-White mainline, which we recently shipped from Detroit to OKC. Our target is to exit 2023 at a 20,000 run rate, allowing us to reach a 40,000 run rate by 2024. This approach is based on our current order book and our emphasis on targeted just-in-time capital expenditures and achieving our target gross margins.
While some may have criticized our small NASA order, it is essential to understand the significance of our partnership with NASA. We are closely collaborating with NASA's team of scientists and engineers to optimize vehicle performance and functionality, particularly regarding interior behaviors, comfort, safety, and security. The first 8 miles of an astronaut's journey begin in a Canoo, which makes NASA a crucial partner and customer. Their investment has been invaluable, enabling us to learn and innovate as we prepare to deliver unique interior configurations based on our highly functional futuristic design.
In fact, NASA's Artemis team, led by Charlie Blackwell, recently visited our facilities as part of an important milestone review. This milestone was highlighted on social media by NASA, and we invite you to look it up if you haven't seen it yet. Working with the impressive innovators at NASA is an honor for us, and we are on track to deliver the vehicles in the upcoming quarter. As we said earlier, we have a strong resilient multi-year order book with improving pricing condition.
Our order book is now valued at 2.8 billion. It grew 5% quarter-over-quarter in Stage 2 and Stage 3 orders, and we will announce shortly the finalization of two important sales agreements, one with a Fortune 100 and another with a Fortune 500. This is further validation that our work-ready platform meets and exceeds the needs of our targeted customers. In closing, we have to continue to do more with less. This is an important and complex phase with many moving pieces. We know we have to prove ourselves and we are focused on doing just that.
Now, turning it over to Ken and Ramesh who will provide an update on our capital raise strategy and give you a deeper view of our financial performance and our projections. Ken?
Ken Manget
Thank you, Tony. As we discussed in the last call, we finalized our 2023, 2024 capital plan and are executing on moving from a just-in-time capital raise strategy. So, as Tony described before, which is a more milestone-driven strategy. Our demand is multi-year contractual and more certain. Our manufacturing processes are easier to execute.
Unlike others, our production matches our demand versus being nearly potential sales. This means less capital expenditure is required to achieve volume thresholds for positive gross margins. Our focus is to continue to achieve alignment of our capital formation and allocation with a ramp-up of manufacturing.
Among the most notable recent dilutive and non-dilutive capital initiatives, a 52.5 million registered direct offering in February 2023, 48 million convertible debenture which was issued in April of 2023 at a 1% coupon maturing on June 24, 2024. A 43 million sale leaseback for the Oklahoma City facility with tenant improvements. 15 million from the exercise of warrants held by Yorkville.
In addition, we have [circa] [ph] 300 million in total access to liquidity via each of the 149 million ATM and 149 million PPA facilities. 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.
Ramesh Murthy
Thank you, Ken. Turning to cash flow. We ended the quarter with 6.7 million of cash and cash equivalents. After giving effect to the issuance in sale of the convertible debentures of 48 million and the exercise of $15 million in warrants, our cash balance would have been 69.7 million on March 31, 2023. Cash used in operations for the quarter ended March 31, 2023, was 67.2 million, compared to 120.3 million in the prior year period.
Our capital expenditures of 18.4 million for the quarter-ended March 31, 2023, compared to 28.4 million 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 56.1 million, compared to net cash provided in financing activities for the 3 months ended March 31, 2022, of 9.5 million. 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.
Moving to the income statement. Our first quarter 2023 results are as follows: Research and development expenses, which include investing in manufacturing activities, totaled 47.1 million for the quarter, compared to 82.5 million in the prior year period, a 43% reduction from Q1 of 2022. SG&A expense was 29.8 million for the quarter, compared to 55.6 million in the prior year period, a 46% reduction from Q1 of 2022.
A 25% to 30% reduction in our annual operating expenses, compared to 2022, primarily resulting from increased focus on our objectives. Some of these reductions include a 40% to 50% reduction in professional fees, a 10% to 15% reduction in IT infrastructure, and 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 and 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 1.4 billion, which excludes the recently closed sale leaseback by Tony's family office.
Our entrepreneurial approach will leverage our total investment to date through a combination of in-house outsourced, along with a phased ramp approach, which is comprised of 329 million of total invested capital expenditures to date and requiring 140 million to 200 million in additional capital expenditures to reach the 20,000 run rate in manufacturing readiness, which we continue to refine across our partners and long-term shareholders.
Based on our current models, we believe a 40,000 run rate in manufacturing readiness is achievable by 2024 with an incremental capital expenditure of only $90 million to $120 million. Thereby allowing us to target gross margin positive in 2025 based on our current pricing.
GAAP net loss was 90.7 million for the quarter, compared to GAAP net loss of 125.4 million in the prior year period. Adjusted EBITDA was negative 67.1 million for the quarter, compared to negative 117.4 million in the prior year period.
Moving to our guidance. Our guidance for Q2 2023 is as follows: OpEx, $40 million to $60 million, excluding stock compensation and depreciation. CapEx of $10 million to $20 million. We are targeting next quarter to release the full-year guidance.
Turning it back to the operator for questions.
Question-and-Answer Session
Operator: Thank you. [Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright. Please state your question.
Amit Dayal: 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?
Tony Aquila: No. As we stated, the company's activity has been concluded while they continue to do more around former employees, but we're just waiting for the commission to sign-off and give us their approval.
Amit Dayal: Okay, understood. And then with respect to the activity going on to set-up production lines, etc., 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 the second quarter or early third quarter? And then you ramp from there, could you just give us a little bit of a timeline on how this will play out?
Tony Aquila: Yeah. So, as we said, we've done some limited production, right? We got NASA. We did 15 LDVs 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. So, it would be the beginning of us in the coming quarter starting to generate some revenue as well. 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 exceed expectations. And you can see in this quarter release we gave a lot more detailed information, right? So, you can double check it to your models and you can see. We'll be delivering vehicles and the focus is very heavily on exiting at a 20,000 run rate.
Amit Dayal: Okay. Thank you. And just maybe last one, the 40 million to 60 million OpEx guidance for 2Q, will that – will you be at a similar range for, you know, 3Q and 4Q, or should we expect some ramp to take place as [production increases] ?
Tony Aquila: 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, you know as I said, I think Warren Buffett and Charlie Munger said it well. The traditional model is very, very tough. And every 15 years to 20 years, it has a terrible cycle, right, [3 car generation] [ph]. And we focused on something that was more technology-driven, which allowed us to have an expandable format, as well as a geographical expansion strategy and then where appropriate, when appropriate to have mass production, which we secured in the prior site for the long-term. 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, our plan is to get full-year guidance in the next quarter.
Amit Dayal: Okay. Thank you, Tony. That's all I have.
Tony Aquila: Thank you, Amit.
Jaime Perez: Hey, good afternoon, everybody. Thanks for taking my question. As far as capital equipment is [focused] [ph], do you have everything you need and the CapEx, and I mean the cash that you generated and let me raise – is that just used for working capital? I mean, what else do we need to get to the 20,000 run rate and then maybe to the 40,000 run rate as far as capital equipment?
Tony Aquila: Yes. So, there's a dual path we had to do, right, Jaime? 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 dual path has an in-source outsource model, right? As we shift it more to in-source over time, that will be as we have more visibility, more of the things we do in-house at our standards and as we scale. So, then the answer is no, we don't have everything if you think of the in-source model. If you think of the in-source, outsource model, we have pretty much everything. There's still some stuff. I don't think you can really say you'll ever have everything you possibly need, but these are the key areas that matter, like your Body-in-White, your paint, your GA, and your tooling.
Jaime Perez: Now, we're hearing from other EVs that the supply chain issues for the EVs OEM has been solved, but they've been having problems with the suppliers. I mean, did you foresee that problem with your third-party suppliers not delivering through supply constraints or logistics problem?
Tony Aquila: "So, look, I think the uniqueness of our design and the reduction of parts and increase of assemblies and taking a more technology-driven approach, our issues with suppliers have been from the legacy matters where they were more focused on a traditional large volume outsource model. And we've been – in the re-founding, obviously, we fatigued quite a few of our suppliers because we had to get them to change to the model that we want to go, which is a ramping model. And so, the friction we have in the supply chain, I'd say is more self-inflicted with the exception of any given day there are 20 parts that are just on a general industry concern.
Jaime Perez: And my final question, do you have any updates on the Walmart order for us? [indiscernible].
Tony Aquila: Yes. So, I think if you see some of the comments in the script, you'll see we'll have some announcements in the coming quarter, but things continue.
Jaime Perez: That's all I have for tonight. Thanks.
Tony Aquila: Look, I just want to give a big shout out to all the people who have been helping us while we have done the re-founding to our suppliers, to our partners, 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. 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. I want to give a big shout out to everybody who's supporting us.
Thank you.