Lordstown Motors Corp.

Ladies and gentlemen, thank you for standing by, and welcome to the Lordstown Motors second quarter 2021 earnings conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Carter Driscoll, head of capital markets and investor relations. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you to all for joining Lordstown Voters, the second quarter 2021 earnings conference call. To supplement today's discussion, please go to our IR website to view our press release and investor deck. Before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and is part of our quarterly update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our Form 10Q and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be Lordstown Motors Executive Chairwoman Angela Strand, President Rich Smith, and Interim CFO Becky Ruth. Angela will provide a strategic update on the business, followed by Rich will give a more detailed update on production, and then Becky will cover the financial results, followed by Angela will provide our outlook and closing remarks. With that, I'd like to turn the call over to Angela Strand.

Thank you, Carter, and to everyone for joining us today. Our strengthened leadership team has been in place now for less than two months, and has thoughtfully broadened our go-forward commercial strategy. We have identified five critical strategic priorities for Lordstown Motors that put us on our path to profitability. Today our goal is to tell you as much as we can about these strategic priorities, as we believe they will unlock the value of both our physical facilities and our technology. We will also provide you with the latest available information on the commercialization of the endurance, on our continuing efforts to raise additional capital, and on the other initiatives that our leadership team is undertaking. I want to start by highlighting how our key assets are moving us forward. Our deep and experienced team, our tremendously large and highly flexible plan, and the breadth of technologies we've developed. First, We have become more convinced than ever about our innovation and the inherent value of our technology. Lordstown's tremendous engineering team, with its close partner, Lafay, has expanded our unique hub motor design. Many of you on this call today are familiar with in-wheel hub motors, but since more and more people are now only hearing about us, I want to take a moment to explain. Our in-wheel drive puts a motor completely inside each wheel, and is controlled through integrated software to make them all work together safely, powerfully, and efficiently. Rather than replicating a gas engine powertrain with inefficient transfer cases, axles, and differentials, we have a motor in each wheel and a centralized mind that controls them, providing unrivaled all-wheel drive control with exceptional performance, torque, tow, turning, and TCO. So we at Lordstown take a clean sheet approach to where the power should really come from in an electric vehicle since we have no legacy mindset or assets tying us to the past. We believe that form should follow function and are relentless about meeting customer needs. We feel it's the way you'd build a work truck if you're starting from new. We are now redoubling our efforts to explain our hub motor technology to the market and to potential investors. We believe that the more our hub motors are proven out through continued testing, the more investors and customers will appreciate Lordstown's unique technological value proposition. Second, we are accelerating actions to unlock the full potential of our factory and our campus. Lordstown controls a 6.2 million square foot manufacturing plant on 650 acres of land in a great location in Ohio's Voltage Valley, with access to suppliers, rail, and a highly trained workforce. The plant itself was kept warm by its prior owner, and this year we have upgraded the factory such that it is completely vertically integrated with our commissioned battery and soon to be commissioned hub motor lines. As a result, we are now well positioned to produce our endurance truck. But even more than that, we have seen the multiple opportunities that our manufacturing facilities and our large surrounding campus present to other companies that are seeking ready-to-go manufacturing capabilities for their products. This is a significant market. Serious discussions are now underway with several potential partners, and we expect that many more will become attracted to the potential of our factory as word of our decision to unlock its full potential spreads through the marketplace. This is a critical strategic pivot for us, a decision that we believe will lead to significant new revenue opportunities for Lordstown at the same time as production of the endurance is ramping up in the endurance portion of the factory. Simply put, because of our factory and our campus, Lordstown is uniquely positioned to accelerate production both for our partners and for the endurance. Third, We have gained an even deeper understanding of the broader potential marketplace and are more convinced than ever about our ability to penetrate important opportunities in this space. We believe that Lordstown's endurance can address both the commercial and direct-to-consumer segments in the electric pickup truck marketplace. Initially, the commercial fleet segment is one where we have every reason to believe Lordstown's endurance can succeed in a big way. The opportunity is substantial, and it is just a subset of the overall $90 billion potential market for electric light duty pickup trucks. And while there are already competitors, including big brands, the EV pickup market is so underserved that there is plenty of room for all. With our particular focus initially on the commercial fleet market, as well as strategically targeting delivery trucks, military vehicle programs, and technology licensing of our batteries, hub motors, and skateboard platform, we believe Lordstown has a wide and clear road forward into a lucrative and expanding EV marketplace. Fourth, our strengthened leadership team is determined to build the endurance the right way. As everyone knows, the last months have been difficult for vehicle manufacturers generally. Shortages of semiconductors and vehicle parts of all kinds have created enormous production challenges for even the most established traditional OEMs. And we at Lordstown are not immune from these acute supply problems. Our team is adapting and will continue to adapt to these short-term challenges and to making the best decisions for our stakeholders. First and foremost is production readiness. We will be prudently ramping production to ensure a quality product and to accommodate supplier realities in the near term. We are on track to begin limited production at the end of September and complete vehicle validation and regulatory approvals in December to January. This will be followed by deployments with selected early customers in Q1, in advance of commercial deliveries in early Q2, with the ramps being the second half of next year. This responsible commercial plan is important for three reasons. One, to ensure that we provide our fleet customers with the time necessary to experience and then build out the required charging infrastructure for larger deployments. Two, to manage our supply chain challenges prudently, particularly as shortages and COVID impacts persist through the next few quarters. And three, to further fortify our capital position to fully support our commercial launch. Finally, our fifth strategic priority. Our experienced leadership team has embarked upon a comprehensive effort to raise the new capital that will be necessary to ensure Lordstown's ultimate success. We have already announced an equity purchase agreement for up to 400 million. The agreement was the first of what we believe will be several steps to ensure that the company has the financing it needs to succeed to profitability. We are now exploring a variety of other financing options, including non-dilutive private strategic investments and debt. We look forward to updating all of you as we reach agreements regarding these new financing options. I will now turn the call over to Rich.

Thank you, Angela, and good afternoon to everyone on the call. I am Rich Schmidt, President of Loristown Motors, and I'm happy to provide an update on production, engineering, and quality. First, in terms of management changes, I want to reiterate a strong team we have always had in place in production and in engineering. Second, the endurance betas. We have completed our beta builds, and we are using the betas for our crash, durability, and other validation tests. We have passed multiple crash tests and are achieving the standard requirements to meet FBMSS and plan for a five-star crash rating for our vehicle. As someone who has over 30 years' experience building cars and trucks at many different plants and for many different OEMs around the world, I say that to be this far advanced in crash tests in the first pass using the beta vehicle is unique and a testimony to the team's innovative use of CAE and design innovation speed in our vehicle technologies. Third, we continue to refine the components for cost and quality in production validation and pre-production vehicles. We are launching a mix of soft and hard tools to protect these improvements. Once complete, we will lock in with hard tools, which are production equipment needed to build trucks and mass scale cost efficiently. We will use pre-production vehicles for NHTSA crash testing and validation once the final steps before we go to commercial production. Recall that PBBs will have a production process with battery and hub motors built in-house, as well as paint, sub-assembly, and frames, all completed here in our plant. We are retooling the plant to be flexible to ensure we build multiple vehicle platforms inexpensively from trucks to cars. We have made substantial progress on this since last May when we last spoke. The stamping, body, and paint shop reconditions are all complete. General assembly is also on track for September production readiness, and we have installed a new chassis marriage line. With the flexibility considered upfront in our retooling, our current footprint utilizes about 30% of the plant's 6.2 million square foot. So we have ample room for potential partners to build vehicles, for us to build vehicles for others, and for additional LMC vehicle platforms, as well as other opportunities, such as selling batteries, hub motors, and our complete skateboards to other companies. Shifting focus to propulsion. We started installing the first electric hub motor line on site and it is currently undergoing site commissioning in advance of limited production builds. The first battery pack module and pack assembly line are now fully commissioned. Finally, we continue to develop and refine our hub motors. We want to develop multiple motor sizes in different platforms and use cases, and broaden this involves increased torque, towing capacity, and energy efficiencies. Improvements to the motors were developed in-house in conjunction with our partners at Lafayette. We believe the performance improvements should open up our opportunities set within the commercial space. Our innovative technologies are leverageable in many different ways for Lordstown, including to power our unique truck skateboard and to expand our use of our revolutionary hub motor across many vehicle applications. Because of our technology, we have no doubt that we will be at the center of the discussion as fleet customers consumers look at electric pickup differently. And with that, I will hand over to Becky to take you through the financial results. Thank you.

Thank you, Rich. Good afternoon, and I also want to thank everyone for joining today's call. I am Becky Roof, Interim Chief Financial Officer, and I will review our second quarter 2021 results and mention other items as well. But before I do that, let me note some of the actions I am taking to both bolster our team and address our auditor's concerns. First, we are adding several experienced financial personnel in accounting, treasury, and controller functions. Second, we are implementing additional financial software tools to enhance our reporting and control processes that will also support our SOX compliance testing that will be taking place over the balance of the year. Our financials are presented in accordance with GAAP. In the second quarter of 2021, we recorded a net operating loss of $108.2 million versus $125.2 million in Q1. Our expenses consisted of $33.8 million in SG&A versus $14.4 million in Q1, or an increase of $19.4 million. Our R&D expenses were $76.5 million compared to $91.8 million in Q1, or a decrease of $15.3 million. Included in the Q2 amounts is $3.9 million of stock compensation expense. The quarter-over-quarter increase in SG&A expenses is principally driven by higher legal, consulting, and payroll expenses. Our legal expenses were $9 million higher in Q2 than in Q1, largely due to the special committee and SEC investigations. Consulting fees were $6.2 million higher, largely due for the same reasons, and vehicle development expenses. We believe that much of the increase in legal and consulting expenses is non-recurring in nature. For Q2, we believe that as much as $13 million is non-recurring. Payroll expenses were $2.8 million higher as a result of adding team members as we head to limited production. The quarter-over-quarter decrease in R&D expenses was driven principally by lower prototype components expense of $28.9 million related to the completion of purchases for our betas and a decline in purchases of pre-production vehicle components as many of those purchases were made in prior quarters. We also experienced lower supplier services fees in the amount of 1.4 million. These reductions were offset by higher total payroll costs of 7.3 million for increased headcount as we ramp up our manufacturing teams, and also by increased operating expenses, including utilities, building maintenance and supplies, and shipping, totaling 4.8 million. We anticipate that quarter over quarter, R&D expense should continue to trend downwards over time as our external service activities in vehicle development are concluded. Turning to the balance sheet, we ended the second quarter of 2021 with a total cash position of $367 million. We have total assets of $687 million, largely consisting of our cash position plus $286 million in PP&E and construction in progress. On the liabilities and equity side, we have $88 million in total liabilities, mainly accounts payable in accrued expenses, and $599 million in shareholders' equity. From a cash flow perspective, we used $98.8 million in cash from operations used $121.3 million in investing activities from purchases of capital assets and generated $0.05 million from financing activities. Our combined cash used in operations and investments was $220.1 million. We ended the quarter with approximately 177 million shares outstanding. If all outstanding warrants were converted today, we would have approximately 180 million diluted shares outstanding, not counting employee stock options. As Angela mentioned, we are pleased to have recently announced an equity line of credit with a notional amount of $400 million. This gives us the flexibility to raise capital quickly and at our discretion. We recognize there is dilution from utilizing this instrument, and we want to balance our future capital needs using less dilutive instruments. We are in discussions with multiple parties in exploring access to other types of capital, including public instruments such as debt, strategic partnerships, and we are continuing our discussions with the Department of Energy Loan Program Office regarding our obtaining an ATVM, or Advanced Technologies Vehicle Manufacturing Loan. Angela mentioned unlocking our value. We have a large and strategically located campus, the plant of the past making vehicles of the future. We are reporting a book value for our land, buildings, machinery, and equipment and vehicles in an amount of $45.5 million. We have invested an additional $240.1 million in construction and progress assets, as we continue our plant readiness preparation. We believe that when coupled with billions of dollars that the former owner invested before Lordstown Motors acquired the facility, that the fair market value far exceeds what we are reporting on a GAAP basis. We are in the process of engaging third-party appraisers to opine on this valuation. Finally, and in connection with the delivery and placement into commercial service of our zero emission vehicles, or ZEVs, under various federal and state rules and standards, we will earn tradable credits that can be sold to other OEMs. We intend to take advantage of these regulatory frameworks by registering and selling these credits. In addition, we have entered into an emissions credit agreement with GM pursuant to which and subject to the terms of which, during the first three annual production model years when we produce vehicles at least 10 months out of the production model year, GM will have the option to purchase such emission credits at a purchase price equal to 75% of the fair market value of such credits. Please see our 10-KA for a detailed description of additional terms related to these ZEV credits. Thank you. And I now turn the call back over to Angela, who will provide our outlook and closing remarks and guidance.

Thank you, Becky. As we made everyone aware during Lordstown Week, we are committed to our values of teamwork, technology, and transparency. Now on to guidance. As we have already indicated, our expenses have exceeded prior management's expectations for the reasons laid out earlier, and the pace of our commercial production ramp will depend on multiple factors. We are updating the outlook for full year 2021 that was provided last quarter. First, we have chosen to build a limited number of early production vehicles in the fourth quarter for validation and regulatory clearance, as well as gaining real-world experience with customer pilots and demonstrations. This prudence will allow us to mitigate supply chain ramp-up risk and expense, and achieve more favorable cost of goods targets prior to moving into commercial production and launching Q2. Second, for full-year guidance, we expect between $375 and $400 million in capital expenditures, up from $250 to $275 million, largely due to prepayments for hard tool purchases. On the operating front, We now forecast $95 to $105 million in SG&A, up from $55 to $60 million, of which $8 million is stock compensation expense, $310 to $320 million in R&D, up from $280 to $290 million, of which $12 million is stock compensation expense. Third, for our liquidity position, We expect our cash at the end of the third quarter to be in a range of $225 to $275 million before giving effect to any financing. As noted above, the equity line gives us flexibility to access capital and will do so as needed while we also continue to explore other financing and strategic options. We remain in discussions for multiple strategic and financing opportunities In addition, we also remain in due diligence for an application for an ATVM loan, and we continue to seek and pursue opportunities for other tax credits and grants across multiple jurisdictions. We want to thank all of our talented employees for their hard work and dedication across our offices in Lordstown, Ohio, Farmington Hills, Michigan, and Irvine, California. We are proud to be part of the Voltage Valley Renaissance in Ohio, creating good jobs that help address climate change and sustainability issues. In summary, our mission to bring to market the first full-sized all-electric pickup truck is reinforced by our five strategic priorities stated previously. Our technology, our plant, our commercialization plan, our production capabilities, and importantly, our team. We see numerous paths to unlock the value of our business, with additional vehicle platforms, contract manufacturing opportunities, and multiple and diverse revenue streams. Lordstown is a company with heart that is building a real truck with real people in a real plan, and our future is very bright. Thank you for your time, and we very much look forward to talking with you again in November.

Operator, we will now take questions.

Thank you. As a reminder, to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Murphy with Bank of America. Your line is now open.

Good afternoon, everyone. This is Aileen Smith on for John. First question on the increase of the CapEx outlook for this year. When we compare it to the outlook that was provided a few months ago, is it fair to interpret the 1Q outlook as perhaps encompassing a more conservative budget as the team was focused on maintaining appropriate liquidity levels and therefore this new outlook reflects what would have been in your internal expectations now that you've lined up incremental capital with the equity purchase agreement? Or is there something more operational in the CapEx Outlook that reflects a significantly higher level of spending than what you assumed a few months ago?

Thanks, Aileen. Appreciate the question. Yeah, I think you're on the right track in terms of this, the ordering of the hard tools and the prepayments were along the lines of the budget before, you know, the increased expenses. So we're really back to what the plan was in the first quarter.

Okay, got it. And then I wanted to dig in a little bit into the strategy with the strategic partners that you referenced a couple times and get a little clarification. Is that more of an effort by Lordstown to get into contract manufacturing or rather opening up the significant capacity within the facilities for your partners to use as they see fit? And is either offering more or less ideal for Lordstown and how do you think about the economics of working with those partners?

Thanks for the question. We are exploring multiple partnership constructs. That includes contract manufacturing. That includes licensing, in addition to producing our own vehicles. And so, of course, you understand I can't disclose partnerships that are in discussion. But broadly, we're discussing with multiple OEMs who are interested in exploring how they can leverage the assets that we have today.

Okay, understood. And then a final one, if I may, in some of the recent management changes and resignations, can you talk about some of the customer or partner feedback you've received with the C-suite development? And in terms of the search process for a new CEO and CFO, do you have a thought process on some of the priorities on candidates that you want to bring into the company, meaning those with more automotive experience or technology experience?

Thank you for the question. I'll take the second part first. So we are in an active recruitment process