Canoo Inc. (NASDAQ:GOEV) Q1 2023 Earnings Call Transcript May 15, 2023

Canoo Inc. beats earnings expectations. Reported EPS is $-0.17, expectations were $-0.19.

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 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 to our strategy is, we focused on launching a commercial product without the high cost and manufacturing risk and complexity based on consumer expectations of interior trim and infotainment systems. This will require less capital. While we scale and reach breakeven margins faster and achieve positive 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. 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. 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 co-ordinate and optimize our cost structure. Moving to manufacturing, we secured a long-term lease for the OKC manufacturing facility. We were able to help reduce capital burden and dilution for the company by structuring a sale leaseback via my family office. As a committed long-term believer and shareholder, 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-SPACing] [ph]. Bringing 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, focused on doing it right, better, and different, while de-risking complexity in the advanced manufacturing process. We continue to learn from the struggles of those currently ramping production with too many off the shelf third-party, de-harmonized, and sometimes complex parts and assemblies, while dealing with diverse supply chains and high barriers 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 by our just in time milestone driven capital discipline.

This has put some fatigue, friction, and capital leakage, while we get harmonized in getting better efficiency for production. Our team is currently installing and has started working on setup and functional validation of the general assembly line at our Oklahoma City Manufacturing Facility. This also includes our [Body-in-White mainline] [ph], which we recently shipped from Detroit to OKC. We remain focused on exiting 2023 at a 20,000 run rate, which opens the ability for us to move to 40,000 run rate by 2024. 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. We are deeply engaged with NASA’s team of scientists and engineers on the vehicle’s performance and functionality, especially around interior behaviors, comfort, safety, and security that is uniquely configurable because the first 8 miles of an astronaut’s journey starts in a [Canoo] [ph]. Their investment has been invaluable and is helping us learn and innovate as we prepare to deliver unique interior configurations for our customers based on our highly functional futuristic design. In fact, as you have recently seen on social media posted by NASA, our team hosted NASA’s Artemis team led by Charlie Blackwell as part of an important milestone review. If you haven’t seen it, please feel free to look it up.

On top of the above, it is an honor to be able to work with some of the most impressive American innovators at NASA. And we remain on-track to deliver the vehicles in the coming 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. As we progress in 2023 and beyond, we expect the following: 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. Further, 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.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright. Please state your question.

Operator: Our next question comes from Jaime Perez with R.F. Lafferty. Please state your question.

Operator: Thank you. That’s all the questions we have today. I’ll turn it back to Tony Aquila for closing remarks.

Tony Aquila: 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 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.

Operator: Thank you. And this concludes today’s conference. All parties may disconnect. Have a good evening.