Lordstown Motors Corp.

Good day and welcome to the Lordstown Motor's first quarter 2022 earnings conference call. All participants will be in listen-only mode. To give you assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Carter Driscoll, Vice President, Corporate Development, Capital Markets, and Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning and thank you to all for joining Lordstown Motors' first quarter 2022 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 and uncertainties 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 CEO, Dan Inovagi. President Edward Hightower and CFO Adam Kroll. With that, I'd like to turn the call over to Dan.

Thank you, Carter, and welcome, everyone. To begin, I'd like to thank the entire Lordstown team for their extraordinary efforts in Q1. I'm pleased with the progress we've made towards launching the Endurance, particularly in light of the unprecedented supply chain challenges the industry has faced. Our number one priority, of course, remains the successful launch of the Endurance full-size pickup truck. While we've experienced some delays in building our pre-production vehicles or PPVs, I am pleased to report that final engineering design validation and testing are underway, and we continue to target start of commercial production beginning in the third quarter of 2022. Edward will provide more detail on where we are and what remains to be done to achieve full homologation and commercial deliveries. In terms of customer demand, We continue to see strong interest in the commercial fleet market for electric vehicles of all types, including pickup trucks. We believe the market will be underserved for the foreseeable future and that demand will be particularly strong among commercial fleet customers given their focus on total cost of ownership and specific work requirements. The North American BEV full-size pickup truck and van segments are expected to grow at 30% CAGR over the next 10 years. The Endurance will be one of the few full-size EV pickup trucks in the market over the next few years. With its in-wheel hub motor design, the Endurance is truly unique, and we believe will offer a superior combination of handling, traction control, torque, and turning radius. With fewer moving parts than more conventional propulsion systems, we also believe the Endurance will have advantages in overall maintenance costs. A commercial sales plan will be driven primarily by our expected production volumes. As Edward and Adam will discuss later in the presentation, our bill of material costs at launch will be significantly higher than our anticipated selling price. We have a plan to reduce our BOM costs over time through investments in hard tooling, moving from prototype to production suppliers, VAVE initiatives, and realizing the benefits of the Foxconn transactions. However, at least for the time being, we plan to hold off on the larger hard tooling and other investments in order to manage our balance sheet and limit the amount of new capital needed to achieve our initial production targets. As a result, over the next 12 months or so, we'll be focused on selling vehicles to a relatively small number of strategic fleet partners who offer the best opportunities for long-term relationships. On our last call, we forecasted an initial production run of approximately 500 units in the back half of 2022. We continue to expect to produce the 500 units although some deliveries are likely to occur in the early part of 2023. Following the closing of our transaction, we expect to jointly evaluate with Foxconn the ramp-up plan for the endurance, the scope and timing of our BOM cost reduction actions, potential supply chain initiatives, and other opportunities to scale production, including through strategic OEM partnerships. As Adam will discuss in more detail, ramping production will be capital dependent, but we will be prepared. Now turning to our long-term strategy. As I mentioned on our last call, the conversion to electrified powertrains presents OEM startups like LMC with a very unusual opportunity to penetrate the automotive market and gain meaningful share, particularly in certain underserved segments. But success requires that we deliver scale, a differentiated commercial plan, an innovative product, a competitive cost structure, and a vehicle development platform that brings products quickly and efficiently to market. I believe a partnership with Foxconn can help us achieve each of these objectives. Foxconn has ambitions to capture a significant share of the global EV market, not just in contract manufacturing, but in key components as well. In addition to other strategic benefits, the Foxconn partnership would unlock the full potential of the Lordstown plant by getting it to scale faster. At 6.2 million square feet and 640 acres, The Lordstown complex is one of the largest internal combustion automotive plants in North America that is being converted to a state of the art EV manufacturing facility. Foxconn has an excellent opportunity to fill the plant. LMC and all OEMs whose vehicles are built at the plant will benefit from the increased capacity utilization, use of common components, and lower overhead costs. Scale in automotive manufacturing matters. Use of shared space together with the mobility and harmony or MIH open source platform that Foxconn has developed provides smaller, more specialized OEMs the opportunity to achieve the benefits of scale without being a large, fully integrated automaker. A partnership with Foxconn also should significantly reduce our raw material component and other input costs over time. As the largest contract manufacturer in the world, Foxconn has significantly better purchasing power than we would on our own, as well as a global integrated supply chain network and the logistics capabilities necessary to help us reduce vehicle production costs and minimize our supply chain risks. We also stand to benefit from Foxconn's expertise in hardware and software integration, critical to EVs, given their expertise as a multinational electronics manufacturer. As we grow together, these benefits should only improve over time. Finally, a partnership with Foxconn would likely extend beyond a contract manufacturing agreement. When we announced the transaction, we stated that Foxconn and LMC would explore a joint venture arrangement for the development of new electric vehicles utilizing Foxconn's MIH common platform. This was an important part of the deal because in our view, LMC requires a scalable vehicle development platform for future vehicles that will allow us to compete with much larger vertically integrated OEMs. The use of common architecture systems and components off MIH would provide us that opportunity. Since our last earnings call, we have made progress on the terms of a contract manufacturing agreement and an agreement under which we would develop new vehicles in collaboration with Foxconn off of the MIH platform. While definitive agreements have not been reached and may not be reached, I believe we're close, and our relationship with Foxconn remains very solid. This past weekend, Foxconn agreed to extend the down payment repayment deadline under the APA from May 14th until May 18th, the day before our annual shareholders meeting, to provide a little more time to conclude our transactions. In closing, I'm pleased with the progress we've made on moving the Endurance towards launch readiness and building our relationship with Foxconn. We have a very unique vehicle, and notwithstanding tremendous challenges, we're very close to achieving very important milestones. With that, I'll turn the call over to our president, Edward Hightower.

Thank you, Dan. As we discussed in February, our two immediate objectives at Lordstown Motors are to launch the Endurance in Q3 and to build our product development relationship with Foxconn. I will start by giving you an update on the endurance launch. Over the last quarter, we have continued to make progress with our endurance pre-production vehicles or PPP builds on the Lordstown production line. We have also made progress with vehicle testing and manufacturing facility preparations at the plant. Under our Lordstown production system and launch governance structure, engineering readiness quality and part availability are governing the speed of the endurance launch. We experienced some supply chain disruptions over the quarter that impacted the rate and completion timing of our PPV bills. The commodities having the greatest impact including steel and aluminum for our frames, body and battery enclosure, and chips for the various computing modules in the endurance. Despite these disruptions, As planned, we have completed sufficient vehicles to begin our engineering and validation testing. The performance of the endurance in these tests to date has correlated well with the performance predicted by our computer-aided engineering, or CAE, analyses. For example, our FMVSS frontal, side, and rear crash test results have been positive, and we are still predicting five-star NCAP crash performance for the vehicle. We are currently in the process of building endurance PPVs for homologation and certification, including tests for the EPA, CARB, and FMVSS. Our experienced team of purchasing professionals are working tirelessly to mitigate the impact of supply chain disruptions on our build rate and timing. Finding and resolving issues is normal business for any vehicle launch. Any issues uncovered during the builds or testing are being addressed by our highly capable and motivated engineering and launch teams. We are pleased to reaffirm our plans to start commercial release production, CRP, in Q3 of this year. Given our expected timeline for certification completion, we anticipate that commercial fleet customer deliveries will start in Q4. Endurance PPVs have been displayed recently at NTEA Work Truck Week in Indianapolis and NAFA in Columbus, Ohio. We look forward to participating in the Advanced Clean Transportation Act Expo this week in Long Beach, California. The Lordstown engineering and leadership teams can be regularly found conducting evaluation drives of the latest endurance PPVs and software updates near our Farmington Hills R&D Center. You might also encounter an endurance at one of the many public level 2 charging and DC fast charging stations in the area. With its low center of gravity and in-wheel hub motors, the endurance continues to show itself to be agile, responsive, and maneuverable, all without compromising capability. We cannot wait to get the endurance in the hands of our customers, as we expect that they will love it. Post-launch, our future plans for the endurance will focus on reducing our bill of materials, BOM costs, as Dan previously explained, is significantly higher than our anticipated selling price. Following raising the necessary capital, we have a series of hard tooling investments and value analysis, value engineering projects planned with the intent to significantly reduce our BOM costs. Our timing decision around scaling the production of the endurance will be tied to the implementation of these projects and realization of the expected savings. Switching to our product development relationship with Foxconn, as Dan mentioned earlier, we have been working on an agreement with Foxconn to jointly design, engineer, develop, industrialize, and launch battery electric vehicle programs using Foxconn's MIH Mobility and Harmony open platform. Co-developing EV programs is aligned with the EV market ambitions of both companies. We have an experienced and motivated team with the capability to develop new vehicles from concept through launch. If reached, this agreement would create an innovative business model where we would develop new vehicles for ourselves and potentially other OEM customers globally. These new vehicles would be built for North America at the Lordstown, Ohio plant, and at other Foxconn contract manufacturing locations around the world. The objective is for OEM users of this flexible MIH platform, manufacturing footprint, and supply chain to achieve production scale at lower volumes with a shorter time to market. For LMC in particular, this agreement with Foxconn will provide a scalable vehicle development platform, reduce our product development costs, and increase the breadth of our product portfolio. As Dan stated, while our discussions with Foxconn have been constructive, at this stage a definitive agreement has not been reached. Thank you, and I will now turn the call over to Adam.

Thank you, Edward. Good morning to everyone, and thank you for joining us. I share both Dan and Edward's enthusiasm for our progress in the first quarter and the real potential of Lordstown. I'm also quite focused on our challenges. As Dan and Ed discussed, our progress was in the midst of strong macro and supply chain headwinds. Our number one priority is launching commercial production of the Endurance, as we believe that getting the vehicle into customers' hands will serve as the key catalyst to driving sales and the success of the program. I'm hyper-focused on managing our cash position and evaluating the tradeoffs required to get there. On our last call, I guided that our business plan required in the area of 250 million of new capital this year, of which a large share was needed in advance of starting commercial production in Q3. As you all well know, the capital markets have not been open for the sector. Notwithstanding, we continue to work with our advisors on available financing alternatives. However, with our options limited at the moment, we are taking a balanced and disciplined approach to allocating our current capital. For now, we are pursuing a business plan that will give us the best opportunity to launch the Endurance and hit our initial production target. As a result, we believe that the new capital required this year is around $150 million, including our minimum year-end cash target. This is in addition to the remaining proceeds from the sale of the plant to Foxconn. We will primarily hold off on the hard tooling investments originally planned for this year along with other investments in operating costs that we will defer until we raise sufficient capital. The principal trade-off is a delay in the bill of materials cost reductions resulting from the move to hard tools. Late last year and in Q1, we kicked off some of the tooling, but as we discussed on the last call, hard tooling generally has long lead times. So other than relatively modest inflation, our BOM cost for 2022 is not meaningfully impacted by the deferral. To be clear, we are not stopping the work we're doing on hard tooling or VAVE. We will have a detailed plan in place to execute if and when we raise sufficient capital. Now I'll turn to our first quarter results. Starting with cash, we ended the quarter with $203.6 million in cash, representing a decrease of $40.5 million from 12-31. The high-level cash walk is approximately $81 million lost from operations excluding non-cash items of $6.8 million and almost $22 million in CapEx, offset by the $50 million down payment from Foxconn under the APA and slightly more than $12 million in working capital benefits. With respect to operating costs, we incurred a total of $87.9 million in the first quarter, a modest $3.2 million increase from Q4 and down from each of the first three quarters in 2021. However, the mix of our spend has changed. Headline total R&D generated the increase as SG&A was essentially flat to Q4. To address many of your prior questions, for the first time, we are breaking out costs and R&D associated with manufacturing in the Lordstown facility from engineering expenditures. Our plant costs, which includes about two-thirds of our total headcount, along with facility, freight, and manufacturing costs, were 21.9 million in the quarter. Just under half of that is personnel, and about a quarter represents freight, largely associated with obtaining parts. This compares to our Q4 plant costs of $18.6 million when our employee costs were about 26% higher due to some Q4 year-end accruals and higher stock comp, offset by significantly lower freight and utilities. Directionally, if we continue to own the plant, the operating costs would be increasing as we get into production from more personnel and the indirect costs rising with activity levels. The engineering, testing, and other related activities within R&D total 20.2 million. As I suggested last time, these costs are expected to increase through launch as we ramp up testing activities, particularly specialty outside engineering services, along with other variable costs, and decreased thereafter. For comparison, these costs were approximately $36 million, $29 million, and $21 million in quarters two, three, and four, respectively, last year. The last major category of R&D spend are the vehicle component costs, totaling $19.7 million in the first quarter, compared to $22 million in Q2 2021, $12.3 million in Q3, and $19.6 million in Q4. Over the course of the last 12 months, there has been a shift in how these components are used. For example, in early 2021, the vast majority of the spend was for design and early testing of those designs. The amounts then shifted toward components for the beta and then prototype vehicles. Whereas in 2022, the vast majority of the spend went into pre-production vehicles as we focus on certification and homologation. After launch, these costs should dramatically decrease to a normalized level for ongoing basic engineering and new vehicle options, etc. With respect to cash flow, we invested $21.9 million in the business during the quarter, consisting primarily of $10.7 million in the plant to get ready for production and $10.2 million on tooling for the endurance. The last thing I wanted to touch on are the cash flows associated with the APA with Foxconn. To date, since executing the initial agreement in principle last September, we have received a total of $250 million from Foxconn, consisting of the initial $50 million in common stock and purchase price down payments of $100 million in November, $50 million in January, followed by $50 million in April this year. The $30 million purchase price remaining is to be paid at closing, along with an estimated $27 million reimbursement of certain operating expenses and CapEx. So if the transaction closes, our pro forma cash balance as of 3-31 would have been over $300 million. With the endurance on the verge of commercial production, we are all very excited. We have almost 700 Lordstown colleagues working tirelessly facing macro headwinds and the daily challenges that come with designing and delivering an entirely new purpose-built vehicle. I believe in our team and I'm eager for all our outside stakeholders to see the results of our passion and commitment to achieve our mission. With that, I'll ask the operator to open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question is from John Murphy of Bank of America, Maryland. Please go ahead.

Good morning, guys. If I could start with the Foxconn relationship here. You guys alluded to a payment that was going to be made on 5-14 that got delayed to 5-18 prior to the shareholder meeting. What is the amount of that payment? What's the nature of that payment? and what gets triggered if that doesn't get made? I'm trying to understand that.

Yeah, John, it's Adam. The 5-14 date is the date that required us to repay the down payments to Foxconn for the transaction. So that was the date, again, if we didn't close by then, but as Dan said in his remarks, that date has now been extended to the 18th. So it's just that was the date at which, you know, Again, the payments had to be repaid, but we've extended it. Does that make sense?

Okay, so that means the $250 million that's been paid by them so far would need to be repaid if you didn't close the deal? Not all $250. What's $200?

Yeah, so when I said $250, the $250 was $50 of common that they bought last October. So down payments on the deal have been 200.

Okay, so I'm confused. So why would it be delayed for days, and what happens if for some reason it's not consummated?

Well, the delay is a complex deal. We've been working on it hard with that. So when we originally signed the deal in November, that was the date that we had set to try to get everything done, and we just haven't gotten everything done.

Gotcha. Okay. But I mean, if you had to make that, if you had, it's basically chicken or the egg, right? If you make the payment, the deal goes, I mean, if the deal goes through and you make the payments, then you have the $300 million. If it doesn't, you've got the cash on hand and are walking through the rest of this year and raising the incremental $150 million. I think you mentioned, is that viable?

No, no, no, no. So, John, we've said in our public filings, right? If the loan comes due or the down payments come due because we haven't closed the deal, we wouldn't have the cash to fund it. So we do have to close the deal in order to avoid that. And we expect, you know, like I said, we've had constructive discussions with Foxconn. complicated deal. It's not just a simple contract manufacturing agreement. The joint product development agreement is fairly complicated, so it's taken a little bit longer than we expected. But again, I would say we're in good constructive dialogue, and I think the fact that Foxconn agreed to extend the repayment deadline is a good sign.

Okay. And then if we think about the cost greater than the price or the bond cost greater than the price at the initial I mean, I guess that's, you know, given everything that's going on with cost inflation and the cost of ramping up, that's probably not too surprising. But, you know, as you think about, you know, one, two, three years out, when do we kind of reach that crossover point, or when do you sort of project to reach that crossover point? Do you actually, on a per-unit basis, you know, start to turn to break even to profitability?

Hi, John. This is Edward. Thanks for the question. It's really capital dependent. As we said, we have a plan to bring down the BOM costs through the hard tooling investments and our VAVE projects. We'll continue to work on those, but we have a plan to get there as we raise the capital to invest towards those hard tools and those projects.

And with the hard tools, the lead time varies. So it would come in on a graduated kind of basis. But in general, it's what, 12 months?

Yes, 12 to 18 months is when we expect all of the projects that we have in our plan to be implemented.

Got it. And is that constrained by, I mean, obviously it's constrained by capital at the moment. If you were completely unconstrained and handcuffed and had all the liquidity you could possibly want at the moment, could that be sped up, or is that just a function of the way things work on hard tooling?

You know, some of the longer lead items, as Dan was just saying, have a timeline of about 12 months, 12 to 18 months, but there are some of the projects that we could speed up. Again, it's capital dependent.

Okay, and other than Foxconn, are you having any discussions directly with any other automakers on contract manufacturing? I mean, obviously, it's been rumored that Fisker, much more than rumor, that Fisker would potentially be contract manufacturing with Foxconn at the Lordstown facility. Can you confirm that? Are there other automakers that you've had discussions with that have interest?

Yeah, we wouldn't comment on that now. I mean, the focus is getting the endurance into launch and getting the deal done with Foxconn. After that, I think then we'll pursue some of those other opportunities, as I alluded to in my comments.

Okay, great. Thank you very much, guys.

Thanks, John.

Thanks, John.

And ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then 1 at this time.

We'll pause momentarily to assemble our roster. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for the final remarks.

Thanks to all those who participated in the call. I'd like to close by thanking in particular our shareholders for their support. And I'd also like to thank again the LMC and Foxconn teams for all the hard work that has us to where we are today. I'm very proud of the fact that our core team, manufacturing, engineering, and corporate, has never let the challenges and distractions overwhelm us. In fact, our program management and business processes have never been better and continue to improve every day. With that, thank you and look forward to speaking with you next quarter, if not sooner.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.