Nikola Corporation

Good morning and welcome to the Nikola Corporation's third quarter 2022 earnings call. Currently, all participants are in a listen-only mode. We begin today's call with a short video presentation followed by management's prepared remarks. A brief question and answer session will follow the formal prepared remarks. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Nikola's Director of Investor Relations, Henry Kwan. Thank you, Henry. You may begin.

Thank you, operator, and good morning, everyone. Welcome to Nikola Corporation's third quarter 2022 earnings call. With me today are Mark Russell, Chief Executive Officer, Michael Loscheller, President of Nikola, and Kim Brady, Chief Financial Officer. The press release detailing our financial results was distributed shortly after 6 a.m. Pacific time this morning. The release can be found on the investor relations section of the company's website, along with presentation slides accompanying today's call. Today's discussions include references to non-GAAP measures. These measures are reconciled to the most comparable U.S. GAAP measures and can be found at the end of the Q3 earnings press release we issued today. Today's discussions also include forward-looking statements about our future expectations and plans. Actual results may differ materially, from those stated, and factors that could cause actual results to differ are also explained at the end of today's earnings press release and on page 2 of our earnings presentation. Forward-looking statements speak only as of the date on which they are made. You are cautioned not to put undue reliance on forward-looking statements. We will now begin a brief video presentation, followed by prepared remarks from Mark Russell, Michael Loschuller, and Kim Brady.

Our electric truck is here. The fuel cell truck is here next year. We are doing things. We are delivering trucks to dealers. We are selling trucks to end customers. So we are not talking about things. We are doing things.

Our actions are now being manifested in the products that are here. I can tell you all the specs. I can tell you how great it is. Anyone can say that. But when you experience it, you'll understand what the difference is of a Nikola product.

You have all of our competitors in this show. You have all of our suppliers in this show. You have customers coming here. In the middle of all of this, you have the Nikola booth. Very clean, white, blue. Stands for all of what we want to do and achieve. We want to make a cleaner transportation sector. And in the middle of all of these players been around forever, some call them dinosaurs, here we are creating the biggest excitement of the show. That's just a wonderful feeling.

Our partnership with Nikola continues to be the role model of successful collaboration.

Guten Morgen, herzlich willkommen, hello everyone, great to have you here. We are focused on creating an end-to-end ecosystem that is both better for our planet and better for our customers. The BEVs in operation are currently the only Class A fully electric semis working today. We have had 94% operational uptime. range of up to 530 kilometers, but today we want also to talk about our hydrogen trucks. The Alphas have been tested every day in real-world environments with customers like Anoisa Busch and TTSI at the Port of Los Angeles since January. We believe this truck will change the world as we know it today. So are we ready for this? Today it is my pleasure and honor to share with you and the rest of the world for the first time the final production design of the European Nikola hydrogen truck which will be launched next year.

It was just such a wonderful moment. Seeing this truck being unveiled to the world for the first time was just a fabulous moment for all of us. I mean, everyone was excited to see those trucks. Everyone was gathering around these trucks immediately after the press conference.

It was pretty amazing. And there's lots of energy. People were excited about what we're making, what we're doing. And this is the largest commercial show on earth. And the questions were about us, which is exciting. The speech from Michael Loescheller was awesome. So he really gave a lot of energy into his words. And then he really kind of got the crowd also with him. It was an amazing moment. It was really great, yeah.

I think it was a spectacular show of Nikola today. And the credit goes to everybody being part of it.

Coming in here this morning, cover page of the IAA official magazine is a picture of our unveiling. If that doesn't speak to what we're doing here and what we're creating here, I don't know why. Our battery electric truck was only the beginning. We brought out an awesome product that hits the needs of this market. But if you truly want to decarbonize the sector, it's not going to be enough. We need the fuel cell electric technology to address all of these long haul missions.

So now we had this great unveil of the truck and we are all very happy. And then the immediate questions we always get, okay, is it hydrogen? Or electric? Is it hydrogen or electric? And the answer is very easy. It's both. And we want to stand on two feet. That's our strategy and that's how we want to move on. What is important is that the diesel trucks are disappearing off the highways of the Autobahn. That is what matters.

We need this technology. And truly, we can only win in the combination of battery electric and fuel cell electric. But everyone else will follow suit. And we will need both of these technologies to successfully address the whole market and to make a greener future for all of us.

The fuel cell is the most well-integrated, well-executed fuel cell here, by far. Go look at any of the other products. And that's the feedback, again, we're getting from the other OEMs even directly.

It's pretty cool, huh? It was fantastic and very, very powerful. Amazing truck, it's the future.

Really, really impressive. If you want to climb Mount Everest, you're not going to do it by yourself. You have a team that goes up there. Everyone in that team has a task to do. And only if you work together well, you will reach the top. And that's what we're trying to do internally with our teams, but also externally with all of our partners. And everyone is very critical in a successful achievement of our goals.

Good morning, and thanks for joining the call. What an incredible journey we're on. Most of you know that we announced my retirement earlier this year. Having been involved with Nikola either as an investor or as an executive from the beginning, I've been reflecting on the extraordinary challenges we've experienced and the truly amazing things we've accomplished over the years. I'm so grateful that I've been part of it all. and so thankful for the privilege of being part of this team. Nikola is an awesome team of truly incredible individuals, world-class people who are dedicated in their careers to pioneering sustainable zero-emission commercial transportation. These are the people that give me the confidence to be stepping back. In fact, since we announced this transition, things have gone so well that we are handing the reins over early and Michael Loscheller will become CEO effective today. That said, I won't be going very far. I'm still one of Nikola's largest shareholders and I'll remain on Nikola's board. I'll continue to do my best to support this team and our strategy in every way I can. But it is with deep confidence that I now hand the balance of this call and the CEO's baton Over to Michael Loscheller, who has been prepared over the course of his extraordinary and diverse career to now lead Nikola to the next level. Michael.

Thank you, Mark. And good morning, everyone. Thanks for joining us on this call. I am honored to succeed Mark Russell as CEO at Nikola and to drive forward the company's mission. Under Mark's leadership, Nikola has achieved many significant milestones and we look forward to his continued guidance as a member of our board. As I assume my new role as CEO at Nikola, I would like to share some thoughts on both immediate and long-term strategic goals and objectives. First, I will discuss my views on our immediate objectives and how we are tracking them. Then I will discuss how meeting our immediate objectives will set us up for our long-term aspirations. Kim will also address in greater detail additional current challenges in the commercial space. In production and manufacturing, we have made tremendous progress in increasing our daily production. Supply chain management has seen lots of improvements in the past quarter. We shifted from air freight to ocean freight on imported components. We localized purchases of many critical components during the quarter. We also started to diversify our supplier base. The results are beginning to show on our P&L, which Kim will discuss later in detail. In R&D, we are making good progress in our fuel cell truck development. This quarter, we started to produce the beta builds of our fuel cell trucks. The betas contain a number of improvements over the alphas based on customer input. From winter testing of the alphas, we have improved water management in our fuel cell and exhaust systems. We also improved the range, efficiency and torque of the betas. So I believe we are on a good path in R&D, supply chain management and production systems. Where we can improve is on the commercial side of the business. It's clear that there are macro headwinds right now that at some point will turn into macro tailwinds. We must take proactive steps to make sure that we have a commercial program in place that will allow us to fully benefit when the market dynamics become more favorable. I believe we can achieve this by increasing our dedicated sales efforts to better understand our customers and their needs. We need to become less dependent on dealers and instead lead them in our commercial management. To improve our distribution, we hired eight additional staff in Q3. We will continue to intensify our dedicated sales coverage in the coming quarters and believe this will strengthen us for the fuel cell truck market, where we anticipate greater growth opportunities will be in the future. This short and medium-term execution will lead us to our long-term aspirations. Our long-term strategic focus will be on growing our global presence in the hydrogen supply and infrastructure business. Our fuel cell trucks will enable us to accelerate the transition to clean energy, and we have made some important decisions on this front. As one of my first actions since becoming Nikola's president, I appointed Kerry Mendes as president of Nikola's energy business. Kerry has more than 20 years of operational experience in the energy industry. He spent 12 years at BP, where he played a key role in growing BP's renewable energy business. Since his appointment Kerry has begun to oversee all aspects of our energy business at Nikola. I'm also very excited to share with you that in the beginning of October we announced the appointment of Andrew VC to our board of directors. This signals another step towards executing our long-term goals. Andrew joins us with over 40 years of experience in the energy industry. He has been focused on the acceleration of a decarbonized energy future, and we are confident that his knowledge and insight will help us to execute on our strategy as we move forward. We closed on the Arizona Production Hub land purchase on September 30th, and now we are making progress on the permitting and zoning requirements. We have also made good progress on ordering electrolyzers and liquefaction equipment. Our hydrogen infrastructure will support our truck customers after we launch our fuel cell trucks in the second half of 2023. And this infrastructure will also help support third-party demand. The Arizona Hydrogen Production Hub's planned initial capacity will be 30 tons per day and expand to 150 tons per day once completed. By 2026, we are targeting to achieve at least 300 tons of hydrogen supply with 50 to 60 fueling stations nationwide. We are making progress on hydrogen refueling stations and building on our announcement last quarter of three locations. We also announced our collaboration with E.ON to form a joint venture. The joint venture will provide hydrogen supply and refueling infrastructure for our fuel cell trucks in Europe. As you may know, E.ON is one of Europe's largest operators of energy networks and energy infrastructure and we look forward to bringing an integrated mobility solution to our customers. We signed a term sheet with E.ON to solidify the collaboration and we are currently working to finalize the terms. Our European strategy will build on the asset-light partnership approach that we began in the U.S. with our U.S. strategic partners. As you saw in the video, our fuel cell trucks generated strong interest from potential customers at the IAA in Hannover, Germany in September. IAA is the largest and the most important transportation and logistics show in the world, and together with our European partner IVECO, we presented the European Treybath and FCV Beta on the Nikola and IVECO stand. The incredible level of interest for our fuel cell trucks once again validated our conviction on the critical role that Nikola plays in the global transition to a hydrogen economy. In this transition, we believe that our fuel cell trucks will stimulate demand for hydrogen and help accelerate the rate of hydrogen adoption in the greater economy. I now share a few opportunities that we are well positioned to capitalize on. The recently passed Inflation Reduction Act in the US provides a number of benefits to Nikola, and these will be additive as our business plans were created without assuming them. In Europe, the European Parliament's Transport and Tourism Committee has recently agreed to target one hydrogen refueling station per 100 km. along the Trans-European Transport Network core and comprehensive network by 2028. This new target is more ambitious than the original proposal, which had called for one refueling station every 150 kilometers. The European Union's Regulatory development will play an important role in speeding up hydrogen deployment there and provide Nikola with significant opportunities to replicate our US strategy in Europe. On to some details of what we have done on the vehicle front in Q3 now. On fuel cell vehicles, our TTSI pilot testing, which began in June, has logged over 9,700 miles to date. We began pilot testing with Walmart in August and it has logged over 5,500 miles to date. In Q3, we produced six beta trucks and expect to produce 17 beta trucks for the full year by the end of Q4. On our tray baths, we produced a total of 75 trucks in Coolidge during Q3 and delivered 63 to our dealers. We began pilot testing the tray baths with Sire in August and to date the trucks have logged over 1,600 miles. We also began pilot testing the tray baths with Walmart in September, and the trucks have also logged over 2,700 miles today. We are also very excited to share that we received a purchase order of 100 tray baths from Ziem Solutions, a leading provider of zero-emission EV fleet-as-a-service provider yesterday. The trucks will be delivered in 2023. We are still on track to complete phase two of our Coolidge Arizona manufacturing facility by the end of Q1 2023. The nameplate capacity of our Coolidge plant when phase two is completed will be approximately 20,000 units a year. The facility will be capable of assembling both baths and fuel cells on the same line. We also plan to establish a line for the assembly of our Bosch fuel cell power modules. Regarding phase three of our Coolidge expansion front, after assessing the macro uncertainties in the market, we have taken another look at our previous assumption on scaling in Q4 2022 and fiscal year 2023. As we discussed during our second quarter earnings call, we can now confirm that we are deferring our Phase 3 Coolidge expansion plan to 2024. Kim will provide details on the numbers, and with that, I will hand it over to Kim.

Thanks, Michael, and good morning, everyone. Let me begin with the financial overview for the third quarter. Our Q3 revenues were in line with our expectations, and our gross loss was less than expected. In Q3, we reported revenues of $24.2 million on deliveries of 63 Treybefs and 1 MCT compared to deliveries of 48 Treybefs and 4 MCTs in Q2. Cost of revenues came in at $54.4 million, resulting in a gross loss of $30.2 million with a negative 124% gross margin in Q3 from negative 161% in Q2. Gross margin came in significantly better than our guidance of negative 240% to negative 250%. The gross loss improvement of 37% from Q2 is driven by lower material overhead expenses and improved overhead cost absorption on higher revenues during the quarter. Our material overhead expenses, which consists mainly of inbound inventory freight and duty, came in favorable as our dependence on air freight as a percentage of total freight came down to 33% in Q3 from 84% in Q2. We should also mention one item regarding our cost of sales in Q3. As we shared in our Q2 earnings call, Our acquisition of Romeo Power involved providing up to $20 million in a temporary price increase for each battery pack delivered through transaction close. This amount came to $11.9 million in Q3. This pack price increase was not recognized as a part of our cost of revenues for the quarter but was capitalized in prepaid expenses and other current assets on the balance sheet as a part of future purchase price consideration. Had this amount been recognized on the P&L, our Q3 gross margin would have been about negative 174%. We will share more on Romeo's impact on our cost structure later in the call when we discuss Q4 guidance. At the SG&A level, the most significant cost driver during Q3 was the change in our management compensation structure. On August 15th, our board of directors approved an amendment to executive employment agreements with our C-suite executives. Under the new scheme, Each of the affected executives had existing market-based stock awards with stock price milestones of $40 and $55 canceled, and the performance period applicable to the shares with a $25 stock price milestone was extended by 12 months from June 3rd, 23 to June 3rd, 24. Under U.S. GAAP, if a market-based stock award is canceled without the concurrent grant or offer of a replacement award, the cancellation is treated as a stock repurchase for no consideration. We recognize $55.8 million in market-based RSU awards for the cancellation of the $40 and $55 awards tranches for all executives, representing the remaining unamortized expense of this award as of the cancellation date. Key 3 EBITDA came to negative $221.7 million and adjusted EBITDA came to negative $105.9 million. Equity in net loss of affiliates. came to 2.0 million in Q3 from 1.3 million in Q2. The loss was driven by net losses at the Nikola Evaku Europe JV due to the expanded scope of the JV's product development vehicle engineering activities that we refer to in our Q2 earnings call. Our net loss for Q3 was $236.2 million and the loss per share came to negative 54 cents on a GAAP basis and negative 28 cents on a non GAAP basis on the balance sheet. We ended the third quarter with $403.8 million in cash and restricted cash from $529.2 million at the end of Q2. Regarding available liquidity, our existing ELAC facilities with TUMIM remain at $312.5 million. We also have entered into an equity distribution agreement or at-the-market facility where nicola may offer and sell up to four hundred million of common stock we received approximately hundred point five million of gross proceeds under the atm during the quarter if we consider cash elock and atm Our total access to liquidity stood at $1.01 billion as of the end of Q3, representing an improvement from $841.8 million at the end of Q2. We believe this liquidity access is more than sufficient to cover our spending and positions as well for the following 12 months. Next, we want to turn your attention to our working capital as we have now completed two quarters of TRIBEV deliveries. Our accounts receivable in Q3 came to $37.7 million from $16.7 million at the end of Q2. Our inventory increased from $52.1 million in Q2 to $81.1 million at the end of Q3, driven by purchases of components and raw materials to support tradeback production in Q4 2022 and 2023. Our typical vendor payment Terms to our vendors range from 30 to 45 days. Together with our dealers, we are working to reduce the number of days in our payment terms on future deliveries to minimize the working capital impact. As we aim to achieve a target of keeping 12 months of liquidity on hand, at the end of each quarter, we will continue to seek the right opportunities to replenish our liquidity on an ongoing basis while trying to minimize dilution to our shareholders. We are also considering how we can potentially reduce spending without compromising our critical programs for 2023. Regarding the Romeo Merge update, We completed our exchange offer to purchase all outstanding common shares of Romeo and subsequent acquisition. The transaction closed on October 14th and Romeo is now a sub-assembly plant for Coolidge. We are currently focused on post-acquisition integration including manufacturing line optimization and productivity improvements, addressing customer contracts, and aggressively reducing bomb enclosure costs and non-personnel costs. We anticipate recording a non-cash impairment charges on Romeo's assets as of September 30, 2022. Currently estimated in the range of $0 to $75 million, the such potential charge would decrease the amount of Nikola's bargain purchase price gain on the acquisition, which was previously estimated as $83 million based on Q2 pro forma financials. The actual amount of the impairment charge and its effect on any bargain purchase price gain is an estimate only at this point and not fully known at this time and will be based on financial purchase price counting reflected in Q4 financial statements. Moving on to Q4 and fiscal year 2022 full year guidance. As an early disruptor in zero-emission BEV trucks, we've learned many lessons this year. In the second and third quarters, we delivered 111 trucks to dealers, and while we are pleased with our progress on truck production and interest from our end customers, we will be unable to deliver 300 trucks to dealers by the end of 2022. We would like to share some of our observations. and the reasons why we are revising our fiscal year 2022 delivery guidance. First, as discussed on the Q2 earnings call, while our mobile charging trailers and e-skids can help customers get started on electrification, continuing to scale up to fleet-level charging infrastructure remains a hurdle and often involves a lengthy process. which usually requires regulatory approval and support from the local power provider and municipality. This is further impacted by uncertainties over macroeconomic conditions resulting in end customers' reluctance to make significant capital investments in the necessary charging infrastructure. We anticipate these headwinds will continue to be a significant limiting factor in the customer uptake rate for the trade buffs, especially for the remainder of this year and likely through 2023. This dynamic appears to be more about customer investments in charging infrastructure, timing, and less about their willingness to transition to zero-emission trucks. Second, the Q4 gross margin will deteriorate from Q3 once we start consolidating roadway power into our financials. When we announced the acquisition on August 1, we summarized the potential long-term benefits from the merger to be approximately a 30% cost reduction in non-cell-related battery pack costs by the end of 2023. However, our BOM costs for the battery pack enclosures will increase temporarily for the next five quarters as Romeo Power was subsidizing Nikola's battery packs by approximately $110,000 per truck. We are converting from machine battery pack enclosures to casted enclosures, which we expect to lower the BAM costs significantly. This requires validation and testing once the first article is produced. This effectively means we will not see the benefits of significant battery pack cost savings until the end of 2023. But we have a clear line of sight, and when our cost savings initiatives are complete, we expect battery pack cost to drop by at least $110,000 per truck. Third, at this point, the trade back truck cost per unit is meaningfully higher than the average selling price per unit. This is expected for a new technology product, at an early stage of adoption. As we continue to scale our business, we anticipate production costs to decrease. However, in light of current macroeconomic conditions, we are evaluating the rate of scaling production in Q4 2022 and 2023 to minimize a situation where the more trade-back trucks we sell, the greater the gross loss in the short term. Ultimately, we need to scale at the right level to further decrease trade-back truck costs per unit and achieve greater operating leverage in direct and indirect labor and manufacturing overhead. With that backdrop, our Q4 consolidated financials will include Romeo's cost structure. Throughout Q4 and 2023, we plan to include supplemental information in our earnings stack to provide visibility to the ongoing cost structure of Romeo's operation. We plan to produce approximately 120 to 170 trucks in Q4 as we currently hold enough inventory in Coolidge to meet that production target. Due to a high level of uncertainty surrounding the timing of our Q4 delivery, we've decided not to provide volume or revenue guidance. However, whatever we produce in Q4, we believe we will be able to recognize as revenue in Q4 and 2023. We anticipate our gross margin being between negative 240% and negative 280%. R&D expenses should be in the range of 82.5 to 87.5 million, including approximately 5 million for Romeo. and SG&A expenses will likely be in the range of $85 to $90 million, including approximately $25.5 million for Romeo. The stock-based compensation will be roughly $58 million, including approximately $16 million for Romeo due to the acceleration of RSUs and PSUs as part of the merger agreement for former executive officers. CapEx for Q4 should be in the range of 30 to 40 million. Michael mentioned that the main plate building capacity for Coolidge is about 20,000 units per year, including BEV and fuel cell electric vehicles. upon completion of phase two in first quarter 2023. This capacity should be sufficient to achieve our internal production targets for 2023, 2024, and 2025, which we have yet to disclose. Accordingly, we can confirm that Phase III build-out will be deferred, reducing our anticipated cash burn by $345 million in 2023. Furthermore, As we adjust to the current macro environment of inflation, rising interest rates, and increased commodity prices, we made the difficult decision to reduce headcount by 7% this month or approximately 100 employees. I, along with the full management team, express our gratitude to these impacted individuals and are working hard to support them through this transition. Though it was not easy, this decision allows us to better align our headcount with strategic priorities that will improve productivity and reduce BOM with greater focus and discipline regarding 2023 expectations. As previously alluded to, we are operating in a highly unusual and challenging environment. especially for early EV OEMs and H2 infrastructure providers. After carefully considering and weighing the above factors, we have determined that we are better off delivering fewer BEV trucks and preserving cash until the visibility becomes more apparent and the planned BOM cost savings are achieved in 2023. Accordingly, We are proactively reducing volume expectations for trade BEV trucks in Q4 2022 and 2023. We will provide you with more details on our 2023 projected BEV truck deliveries when we announce our fourth quarter results. During this time, we will be prudent stewards of capital while improving efficiency and negative gross margins. Furthermore, we are also looking to significantly reduce our OPEX and CAPEX spending in 2023 by 20% to 30% from the 2022 level. To be clear, we are running at full speed to ensure the tray FCEV truck schedule is not compromised and we can achieve the start of production in the second half of 2023. This concludes our prepared remarks. We will use the remainder of the time to address your questions. But before we open the line to analyst questions, we would like to take this opportunity to answer some questions from our retail shareholders. Henry.

Thank you, Kim. The first question was combined from two separate questions asked by two investors that address what we feel are identical issues. When will Nicholas products be in production and when will Nicholas start delivering the vehicles?

We began commercial deliveries of our tray bath to dealers in Q2. End customer deliveries of these electric trucks are currently being made by our dealers and have mainly gone to end customers in Southern California. To be clear, these are not demo deliveries, but trucks used by our customers in their day-to-day business in their fleets. These deliveries have been made for two quarters now. On our fuel cell trucks, we are currently producing the beta version of our demo trucks and are on schedule to make commercial deliveries to customers in the second half of 2023 in the US and the first half of 2024 in Europe.

The next question is, is there any chance of salvaging the GM deal or striking a new deal with an existing auto manufacturer to start production of the Badger?

Understandably, there is much confusion around the Badger, since we never formally announced that we would be dropping it. To make it clear here, we are no longer developing the Badger because our commercial truck and energy infrastructure business is our strategic focus. As an early stage growth company, we cannot divert capital to the Badger, a light truck that aligns more with passenger vehicles.

The next question is, what is the plan for the company to get out of the red and instill confidence back in investors?

As discussed, current macroeconomic headwinds create some uncertainty, which affects both our top line growth and cost. We are working hard to increase sales to our end customers by strengthening our sales capabilities. We are also taking steps to reduce our BOM cost and cost burden at the cost of goods sold level by improving operating leverage as we scale. However, This will be challenging in an environment of high inflation and higher commodity prices since the end customers are reluctant to increase their costs. Accordingly, we cannot provide guidance on when we expect to reach profitability, but we will share our thoughts with you as things stabilize in the coming quarters.

The next question is, investors need complete transparency after recent events involving the company. What is your plan to bring investors back on your side?

We are committed to open and transparent communications with all of our investors. This platform to ask questions being an example of that commitment. We aim to always communicate clearly about our progress and milestones. and are receiving some positive feedback from investors. We have seen a significant increase in institutional investor ownership in our stock versus six quarters ago. So we see that as a positive trend. Market conditions lie outside of our control, but we will continue to take steps to ensure that you are well informed about our progress on a timely basis.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment, please, while we poll for questions. Thank you. Our first question is from Douglas Dutton with Evercore ISI. Please proceed with your question.

Hi, team. I'm just curious if you have any more insight now that Romeo is acquired. You know, what is the exit rate or one-half run rate in 23 we could look at for deliveries?

Doug, thank you for the question. As you know, we're making a very good progress with Romeo. We are very much focused on post acquisition integration. And we have been able to actually meet target and what Romeo committed prior to acquisition they have delivered. And so right now we have the ability to manufacture approximately three trucks and have a capacity to increase that to five trucks. So we feel pleased in terms of targets and we expect additional manufacturing improvements, including greater yield, greater efficiency, and so we anticipate that we can improve on what Romwe has achieved to date, and we'll be able to share that with you more in Q4 earnings call.

Okay, great. And then do you think the 2K truck run rate is still feasible, or the 2K truck total deliveries in 23 is still feasible? You know, you mentioned previously that you had the cell and pack capacity for that. It sounds like it's not a production issue, and it might be more of a cost issue now on the pack side. So, you know, what needs to happen on the cost side for us to reach that 2,000 total delivery number for the TreBev in 23?

And, you know, we talked a fair amount about our cost challenges, especially with temporary price increase for battery pack enclosures. As you know, that increased our cost for cost that we sold per unit. by $110,000. And so we have a significant gap between average ASP and cost per unit. So we are losing money, as you know. And so as we think about 2023, very challenging environment. And we are more concerned about, especially with respect to our BEV trucks, reducing that loss. We think that's prudent. We think that's what a wise word of capital would do. And so we have debated about this internally, and we think it's important that at least for the next five quarters that we're very thoughtful about this. And so we're not prepared to provide any guidance at this point. We will provide greater visibility in our Q4 earnings call, but we want to make sure that we are well prepared as we think through 2023, it's still a bit unclear. We know that market could get worse, and so we are trying to be prudent.

Okay. Thanks, Dean.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Our next question is from Bill Peterson with J.P. Morgan. Please proceed with your question.

Yeah. Hi, good morning, guys. Mark, good luck in your transition to retirement. And Michael, welcome on board and good luck navigating these challenging times. My question is for you, Michael, on strategy. In the video, you discussed the importance of both having BEVs and fuel cells as part of the portfolio. However, given the cash position, I mean, taking into consideration the margins that Kim outlined, I mean, these could be challenging beyond 23. And then not only that, the learnings from the BEVs have likely already been designed in the fuel cells. And then you talked about all the challenges around infrastructure and lead times. I mean, there's impacts in a grid with BEVs. And then there's competition, right? Competition from other newcomers as well as even established players. Ultimately, I'm not really sure if Nikola is going to have a different period of product. I guess the question is kind of twofold. I guess why at this stage are BEVs even important in the portfolio? And if things don't improve, Like, what would the company consider in terms of just, I guess, you know, part of metaphor, but like pulling the plug, as it were, on the BEV program? I mean, you already said you're going to be losing more money every time you ship a product. I mean, why should this be considered to be one of the two important legs of the company? And I guess, you know, even in a press release, you're kind of highlighting more and more about hydrogen. I think a lot of people that

know own the stock for the long term believe that's kind of the right thing to think about so why why why have the bet program at this stage looking forward great thank you thanks thanks for the question and um well i mean very straightforward um first of all i mean zero emission mobility is our strategy and we feel good that we have two legs to to stand on as i said in in the video because at the end of the day customer will decide right um and what we see is in terms of customer feedback Some customers really like the BEV. In particular, once they have the infrastructure set up, they like the range, they look at the total cost of ownership. At the same time, there are customers, they prefer a longer range with the fuel cell. In terms of learnings from the BEV, I think it's obvious. I mean, you need to have really an integrated mobility solution for customers, so meaning you need to provide the truck and the infrastructure for the BEV and for the fuel cell, obviously, including the hydrogen. I also want to put a lot of emphasis on the hydrogen piece of our business because I feel it's very much an entry into our business. So, for example, when I was in Europe at IAA, a lot of energy customers came to us and talked to us and also asked for the truck. So, in summary, I think we feel very good about these two offers. Customers will decide. I mean, if you look at our data in terms of BEV and fuel cell also in terms of LOIs, MOUs, fuel cell is higher, right? So, I think there is a lot of opportunity for the fuel cell, but I feel very good that we have these both alternatives because let the customer at the end decide.

Okay. Certainly follow the progress on that. Thanks for the comment there. I mean, shifting to hydrogen. Again, it looks like you highlighted a lot of this in the press release, and it's understandable. For the initial tranche of the 30 tons per day, when would you expect to achieve that? And I guess how should we, as the investor community, how should we think about the ramp to 300 tons per day? And maybe more importantly, as it relates to Nikola, what is Nikola's contribution in terms of the capital expenditures? And maybe you can give some color on what kind of capex is required for a given sort of output. I guess what kind of cost structure should we assume by around the 26th time frame?

Bill, great question. So let's think about this. We have been very clear to the market that our focus and our strategy when it comes to hydrogen infrastructure is capital efficient and asset life. That means we are going to seek partners, both strategic and financial partners for hydrogen production hub, as well as dispensing locations. That means we may have small piece of ownership. What we are focused on is making sure that we control hydrogen molecules. That's really important for us. So coming back to our Arizona hub, 30 tons per day for phase one. Likely, this will be available sometime towards the end of 2024, possibly early 2025. We understand in late 2023, as we actually have our fuel cell truck being delivered to customers, as you know, California will be our first market. And we have worked with potential hydrogen providers, as well as we will have mobile trailers to meet the needs of our customers in late 2023.

Thanks.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. Our next question is from Chris McNally with Evercore. Please proceed with your question.

Thanks so much, Tim, and just jumping on midway through the call. I just wanted to do a follow-up on the comments around Romeo and some of the subsidies that you're now learning about post-acquisition. Can you just remind us, for your original 2023, how much of the PAC capacity was coming from Romeo as opposed to the more recent deal with Proterra or internal PAC?

In terms of the way we are thinking about this is that especially for U.S. BEV truck, we anticipate all of our battery modules and packs will be coming from Romeo. What we have discussed with Proterra is that they will focus on providing modules and packs for BEV trucks as well as fuel cell trucks in Europe. And so we have a very clear delineation and we're very much focused on improving manufacturing operations, increasing yield, and making sure that we improve execution so that ultimately we are able to significantly improve output and delivery of modules and packs from Romeo.

And then, Kim, is there not an ability to sort of increase the scope of the Proterra relationship because it just – Quick math on 110,000 would essentially, it sounds like, you know, Romeo was on a cost basis sort of well out of the bounds of industry numbers on a dollar per kilowatt basis for PAC. Is it just not something that's feasible in the short term to increase for North American deliveries, the use of Proterra?

You know, as you know, it takes time for validation and testing. And so when it comes to Proterra, it's their design of packs and modules. And so it's really the timing that we're concerned about. And as you know, Romeo, really, this was a small company. It did not have that scale to be able to reduce their cost in terms of manufacturing efficiency. And when we, as we suspected, we knew that most of the Romeo contracts or existing contracts were essentially loss leaders. We have been able to address a lot of those contracts so that we are very much focused on simply supplying battery models and packs to Nikola.

And then I guess the final follow-up. I mean, now that internal, can you talk about the steps? Because, I mean, some of the cost figures – It could be almost $300 per kilowatt to reduce that number to something that's more market standard to get you back to your point. Maybe it's at some point at 23 or 24 into a gross margin positive position. What specifically would Nikola be doing to the Romeo process?

Great question. When you think about models and PACs, the biggest cost component here is what we call PAC enclosures. Currently, that's being machined. We are converting that to casting. We believe we can drop approximately 90% of our cost. And there are about 15 other components that we know that we'll be able to drop. So we have a very detailed plan, component by component. But the biggest contributor in terms of dropping costs will be pack enclosures. So I've alluded that right now packed enclosure cost increase in the short term for the next five quarters will likely be around $106,000. We believe we can drop about 85% of that just in terms of addressing junction box as well as the enclosure.

And timeframe for that, for the 80%? Is that sort of a target by the end of the year, 23?

End of 2023, obviously, we're going to push hard. We're going to be aggressive. But once again, it requires validation and testing. So it's really the validation and testing that takes so long. Now, we're going to try to optimize that as much as possible, and we'll keep you posted. But right now, our anticipation is that by Q4 2023, we'll be able to achieve those costs, and we'll provide the transparency.

And just to add what Kim just said, I mean, The Romeo acquisition is such a big benefit because you think about this. We do supply chain now together. We do engineering together. We do manufacturing together. So we have line of sight of several cost reductions. And the most prominent one was the one Kim was highlighting. But I mean, strategically, it's such a big benefit having such an important component as a battery in-house. And we integrate every function, right? And therefore, we see good line of sight for cost reduction. Of course, we'll try to do as fast as we can here.

OK, thank you. Thank you.

Our next question comes from Jeff Ogborn with Cowen and Company. Please proceed with your question.

Good morning. Most of my questions have been asked already. I wanted to dig a bit into the European factory as well as what's your battery strategy there? Will you be making those same battery packs that you just described earlier or buying those from a third party?

Yeah, I mean, thanks for the question, Jeff. And Europe is obviously an important business for us. I mean, everything going on in Europe indicates, like, probably the pressure on CO2 is even higher than here. So for us, it's a very important business. And the setup together with EVICOR is really strong because we have a joint venture with them in Ulm, where we have a factory together. We have all the learnings from the BEV and also the FUSER, which we transfer now from here to Europe. We have a dealer network with the Iveco dealers. So I think this is good. And in Europe, we will use the Proterra battery going forward, right? And also try to localize as many elements as possible so that we have a real competitive setup in Europe. But I feel very good about Europe and also opportunities going forward.

That's great. And I got the OPEX and CAPEX commentary for 23. I wanted to better appreciate, is there an ability to potentially also defer the fuel cell facility from Bosch and just import those from Germany themselves as opposed to making them? Like, what would be the cost ramifications if you were to do something like that?

Hey, Jeff, we don't actually make our fuel cell power module. As you know, we assemble them, so we buy components from Bosch. So the investment that we make at Coolidge is really the assembly line with respect to fuel cell power module.

Got it.

All right. Appreciate it. Thank you. Thank you.

Our next question is from Bill Peterson with J.P. Morgan. Please proceed with your question.

Yeah. Thanks for taking that follow-up. I actually wanted to come back to – you had some comments earlier about trying to It seems like you're pivoting more towards direct sale versus dealers. I guess I'm wondering, of all the products you've delivered so far, are they still all at dealers at the moment, waiting for delivered end customers? What percentage has kind of gone to end customers? And I guess, can you tie it back to the focus on, I guess, the end customers as opposed to the dealer network? Can you just expand on the strategy, please?

Yeah, thanks, Bill, for the question. So a few remarks on the dealer network. I mean, first of all, I think it's a very big benefit that we have a good dealer network, in particular in terms of the service element, right? Because in the truck business, it's all about uptime. If you have an issue with a truck, you want to have service immediately. So I think it's a very important element that Nikola was able to set up this dealer network, right? Now, of course, now we want to speed up and make sure like this is going as fast as possible. But I'm also pushing hard on like, okay, direct contacts to customers, in particular, big fleet customers, right? And we were very pleased that we announced yesterday the order with Zim. I mean, 100 ref trucks, I think is a very important proof point for us that we are on the right path here and to deliver them in 2023. But I think the dealer network is important. We will continue like this, but I want to push harder on direct sales customers. direct contact to the customer, and then manage that in the best possible way. In terms of dealer inventory and also deliveries to customer. So we made good progress as indicated in terms of production, supply chain, all that is fine. And now obviously most of our trucks are with dealers, but we also have or dealers have delivered also trucks to end customers. Overall, we have around 97 trucks in dealer inventory and 14 have gone to end customers. And that's obviously a process, right? So I think we ramp up very well on production side. Inventory now is dealers. And now the next step is to end customers. And we delivered already 14 to end customers in the third quarter.

So Bill, just add some additional insights You know, as you know, this is progression. First, we've got to build trucks. Second, we've got to deliver to our dealers, and they've got to make sure that they have inventory. And then ultimately, dealer delivers to customers and customers. Some of the challenges that we talked about is that end customers, especially for certain customers, they lack charging infrastructure. So we are working with them. Clearly, that takes time. And so that's one of the biggest challenges that we are coordinating and working directly with our customers and dealers to make sure that we're providing solutions. In addition to that, there's also HVIP reimbursement process, which is somewhat complex and it also is fairly lengthy. And so we just want you to recognize the timing aspect, which is really important. And that's the reason why. when we think about our key four and when we have not provided guidance, because there's significant timing here that's really not certain. And then obviously with cost, we are thinking about how many best should we really sell? That's a big question. So we're working both sides and addressing that. But clearly, as Michael talked about, we have added additional sales staff so that we can provide force amplification to our dealers as well as interacting with our customers, especially for what we call strategic corporate accounts. In addition to that, dealers are now getting up, they are adding sales staff on their side. So this all has taken time in terms of process.

No, I think that's well understood. I think, you know, ultimately, I guess, related to the cost, lack of infrastructure, lack of readiness. I mean, is it prudent for us to assume just pretty low shipments to the orders given they probably have the channels filled, right? I mean, I don't know what kind of orders you need to fill or what the backlog is at this stage, but should we just assume a low run rate for the reason all of what you said, cost, readiness, and so forth?

I would say it's still premature. As you know, typically in automotive industry, the wholesale inventory at dealers, you know, typically around 30% of wholesale revenue or even 35%. Right now we have so few units that's still out there and we're building out our dealership. And so 90 units is not pretty low inventory, 97 units end of Q3. And so we just want you to recognize that it's just right now, That's a very low unit. And as we talked about, we'll move those units in Q4N in 2023.

Okay. Thanks again for the additional color.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Michael Loschelle for any closing comments.

Thank you, everyone, for joining us today. I'm excited to begin the next phase of Nikola's journey. While there are macro uncertainties and headwinds facing us in the short term, we remain disciplined and are committed to focusing on the following. Continuously improving our production systems and supply chain management. As I indicated before, we are making good progress here. R&D on our trucks. We are also making good advancements in developing our fuel cell trucks, and improving our electric trucks. Commercial engagement on vehicle sales. We plan to intensify our focus here to take more control over our distribution strategy. Our hirings will begin this intensification process. These short and medium-term executions will lead us to achieve our long-term objectives in the energy business, which is also making good progress. Thanks again for joining us today. We look forward to seeing you next quarter.