Canoo Inc.

Greetings and welcome to the Canoe First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Kunal Bala, Senior Vice President, Corporate Development and Capital Markets. Thank you. You may begin.

Thank you, and welcome everyone to Canoe's quarterly earnings conference call. With me today are investor, chairman, and CEO, Tony Acala, CFO, Ken Mangat, and CAO, Romesh Murthy. Tony will provide an update on the business. Ken will then run through our capital raise strategy, and Romesh 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 in business, please refer to the disclosure in today's earnings release and on our most recent form 10Q and 10K and other reports that we may file with the SEC, including form 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 you watch the video. Over to you, Tony.

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 refounding 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 US 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 inbound 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 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 use cases, which is often 30 to 50% higher than the competition. We remain focused on range and performance optimization by customer and by customer use 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 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. 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 US. While it may not have seemed like the right move at the time, this has positioned us well to benefit from the current environment. 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 up front 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 break-even 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 competence 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 coordinate 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 the capital burden and dilution for the company by structuring a sale lease back 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-diluted basis, we raised and deployed the most capital in any quarter since the de-SPACing. 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, 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, deharmonized, 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 and white main line which we recently shipped from Detroit to OKC. We remain focused on exiting 2023 at a 20K run rate, which opens the ability for us to move to 40K 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 80 miles of an astronaut's journey starts in a canoe. 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 conditions. 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? Thank you, Tony. As we discussed in the last call, we have finalized our 2023-2024 capital plan and are executing on moving from a just-in-time capital rate strategy to what 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 merely 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 24th, 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 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.

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 and 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 31st, 2023. Cash used in operations for the quarter ended March 31st, 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 31st, 2023 compared to 28.4 million for the three months ended March 31st, 2022 is impacted by the migration to Oklahoma City. Net cash provided by financing activities for the three months ended March 31st, 2023 was 56.1 million compared to net cash provided in financing activities for the three months ended March 31st, 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 total 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 costs 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 20K 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 40K 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 gap 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. $40 million to $60 million excluding stock compensation and depreciation, TAPEX of $10 to $20 million. We are targeting next quarter to release the full year guidance. Turning it back to the operator for questions.

Thank you. And ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you would like to remove your question from the queue. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Amit Dayal with HC Wainwright. Please state your question.

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?

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.

Okay, understood. And then, you know, with respect to the activity going on to set up production lines, et cetera, right now, Are you thinking, are you looking at the visibility you have? I mean, do you see some initial production getting underway by the end of 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?

Yeah, so as we said, you know, 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'll be the beginning of us in the coming quarter of starting to generate some revenue as well. So it'll 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 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 20K run rate.

Okay, thank you. And just maybe last one, the 40 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?

Yeah, I mean, it's going to change a bit. You know, 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, you know, I think Warren Buffett and Charlie Munger said it well, the traditional model is very, very tough. And every 15 to 20 years, it has a terrible cycle, right? Three car generation. 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, you know, we'll step into that. We'll raise capital accordingly, and we'll give guidance more and more in depth. And, you know, as we talked about earlier, you know, our plan is to give full year guidance in the next quarter.

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

Thank you, Ahmed.

Our next question comes from Jamie Perez with RF Lafferty. Please state your questions.

Hey, good afternoon, everybody. Thanks for taking my question. As far as capital equipment, do you have everything you need and the cash that you generated and raised, 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?

Yeah, so there's a dual path we had to do, right, Jamie? Otherwise, we have to raise a lot more capital and in the you know current valuations which we believe are below par you know 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 uh have you know, everything you possibly need. But this is really the key areas that matter is really your body in white, your paint, your GA, and your tooling.

Now, we're hearing from other EVs that, you know, the supply chain issues for the EVs, OEMs, has been solved, but they've been having problems with the suppliers. I mean, do you foresee that problem with you know, your third-party suppliers not delivering through supply constraints or logistics problem?

So, look, I think that, you know, the uniqueness of our design and the reduction of parts and increase of assemblies and taking a more technology-driven approach, our issues have been with suppliers is, you know, from the legacy matters where they were more focused on a traditional large volume outsource model. And in the refounding, 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 than with the exception of at any given day, there are 20 parts that are just on a general industry concern.

All right, and my final question, do you have any updates on the Walmart order for us? How's that program going?

We will, yeah, 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 You know, things continue.

All right, that's all I have for tonight. Thanks. Thank you. Great, thank you, Gene.

That's all the questions we have today. I'll turn it back to Tony Akula for closing remarks.

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, 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, you know, 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.

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