Lordstown Motors Corp.

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Lordstown Motors third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Carter Driscoll, VP of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining Lordstown Motors' third 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 10-K, our most recent Form 10-Q, and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. During this call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations of the most directly comparable GAAP measures appears in our press release on our website. Joining us today will be Lordstown Motors Executive Chairman, Dan Ninobagi, CEO and President, Edward Hightower, and CFO, Adam Kroll. With that, I'd like to turn the call over to Edward.

Thank you, Carter, and welcome, everyone. Q3 was a very busy and exciting quarter. I will review where we stand on our key priorities and Adam will provide an update on our financial performance. I would like to begin by congratulating the team at Lordstown Motors, our partners at Foxconn EV Technology, and all of our supplier partners around the world for bringing the Endurance into commercial production. Thank you for all of your hard work and diligence towards our mission of accelerating the adoption of electric vehicles. As confirmed in our announcement at the end of September, commercial production of our Endurance BEV pickup truck began in the third quarter at a very slow rate. Engineering readiness, quality, and part availability have and will continue to govern the speed of production and the ramp-up and timing of our first deliveries. Twelve of our first batch of up to 500 units have been built at the Foxconn EV Technology Plant in Lordstown, Ohio, to date. As we are able to close out the remaining supplier part pedigree and availability issues, we will increase the rate of production towards the end of this month. We estimate that approximately 30 commercial units will be built by the end of 2022, with the remainder built in the first half of 2023 subject to additional financing. We continue to expect to receive full homologation and certification this quarter, which is required to start shipping vehicles to our customers. Our paperwork has been filed, and we are awaiting the receipt of both EPA and CARB certification. As previously reported, all FMVSS crash testing has been successfully completed, and remaining FMVSS non-crash testing is ongoing. As with any new vehicle launch, our engineers will continue to drive and accumulate miles on test vehicles to find and resolve any potential issues and help ensure that we give our customers a great experience. The Endurance's over-the-air update capability will allow us to complete software updates and add improvements to the vehicle, even after it is in the hands of our commercial fleet customers. Three weeks ago, over 30 automotive journalists conducted extended drives of the Endurance and competitor vehicles as part of the North American Truck of the Year, or NACTOI, semifinalist evaluation. Our team is pleased and excited by the initial feedback from these and other journalists, both during the drives and in their early articles. For example, Eric Stafford from Car and Driver noted our novel four-wheel hub motors and stated that the Endurance is, and I quote, designed for easy maintenance, and the tight turning radius makes it feel more maneuverable than other trucks. Stephen Cole Smith from Hagerty Media commented that the Endurance is, and I quote, pretty much the ideal spec for what this rig is meant to be, a fleet vehicle. The Endurance is made to work and work hard. We look forward to the next phase of the competition and the announcement of the Truck of the Year winner in January. The endurance was recently shown at the new SEMA Electrified exhibit at the SEMA show in Las Vegas. We invite you to see our truck now until November 11th at the Fleet Forward show in Santa Clara, California, and at the NACTOY booth at the upcoming Los Angeles Auto Show from November 19th through the 28th. As we have previously discussed, we are limiting production of our first batch of endurances to up to 500 vehicles because our BOM cost is materially higher than our anticipated selling price. Investments in hard tooling, building scale with production suppliers, and VAVE initiatives would bring this cost down. However, we have held off on the larger hard tooling and other investments to manage our balance sheet and limit the amount of new capital needed to achieve our initial production targets. We continue to seek one or two OEM partners to help scale the Endurance. As one of the very few full-size all-electric pickup trucks in the market, the Endurance offers other OEMs the opportunity to enter the market quickly and at a relatively low cost. While launching the Endurance, we are also expanding our focus to the next vehicle program with Foxconn. In this regard, we continue to make progress in the planning and pre-development work on our next vehicle that we are co-creating with Foxconn and the MIH Consortium. Yesterday, we announced that Foxconn has agreed to make an additional investment in Lordstown Motors of approximately $170 million, subject to certain terms and conditions. $100 million of the investment will be in the form of LMC Convertible Preferred Stock, and will be used to fund, in three phases, our team's work in developing future electric vehicles in collaboration with Foxconn and its partners. This direct investment in LMC replaces the $100 million originally earmarked for the Foxconn-LMC joint venture that we discussed on our last call. The remainder of Foxconn investment will be a direct purchase of common stock of the company in two tranches. The first tranche is scheduled to close on or about November 22nd and will take Foxconn's common stock ownership in LMC to approximately 9.5%. The first preferred stock purchase of $30 million will also be funded at that time. The second common stock tranche, which is subject to CFIUS approval, would take Foxconn's ownership based on current shares outstanding to approximately 18.3%. Following the second tranche closing, Foxconn will also have the right to designate two members of our board of directors. While Foxconn will have the right to vote both its preferred and common stock holdings, its voting rights under the purchase securities are subject to a cap of 19.9%. A detailed summary of the transaction terms and conditions, as well as copies of the transaction documents, have been filed with the SEC. Foxconn's additional investment in LMC is a strong sign of confidence in our team's capabilities and will help accelerate the EV ambitions of both companies. We continue to believe that deep collaboration with Foxconn as its preferred North American vehicle development partner and its EV ecosystem, including MIH, is key to our company's long-term success. In closing, I'm proud of the accomplishments of the Lordstown and Foxconn EV technology teams in bringing the Endurance into commercial production. While we have more work to do, our entire team cannot wait to get the vehicle in the hands of our customers. We're also extremely excited by our expanding relationship with Foxconn and the opportunities it provides beyond our first vehicle. I will now turn the floor over to our CFO, Adam Kroll, to present our Q3 performance and our financial outlook.

Thank you, Edward. Good morning, everyone, and thank you for joining us. Preparing for the call, I reflected on my first year with Lordstown, which has been one of incredible transformation for the company. I started right after we announced the agreement in principle with Foxconn that has led us to where we are today, a more flexible and less capital-intensive automotive OEM with a strong strategic partner in Foxconn. Given our capital constraints, we continue to execute a playbook of prudence and discipline. The actions we took over the course of this year have enabled us to exceed our cash flow expectations. In addition to a strong show of confidence in our team, yesterday's announcement regarding the capital injection from Foxconn is an important step in addressing our capital needs. As I turn to our results, I want to call out that the Foxconn transaction is a fourth quarter event and therefore not in any of our Q3 numbers. We ended the quarter with approximately $204 million in cash and short-term investments, which is $9 million above what we preannounced just before the end of the quarter. Our cash position represents a decrease of $32 million from the second quarter of 2022. The change in cash includes $49.6 million in cash used for operations, including an $8.6 million working capital benefit, $10.5 million in capital expenditures, and $26.7 million in cash proceeds from equity issuance. As you're all aware, there's a lot of noise in our operating results over the last year, which I will call out as I walk you through the results. More detail can be found in our non-GAAP reconciliations in our press release or the earnings deck on our IR site. Our loss from operations in the third quarter totaled almost $155 million, which included $121 million of charges for our inventory NRV, litigation accruals, and a PP&E impairment. For 2Q, we reported a profit from operations of approximately $61 million that included $102 million of P&L benefit from the gain on the sale of the plant, a one-time reduction in R&D from OPEX reimbursement from Foxconn under the APA, less a smaller NRV charge and a smaller litigation expense. Removing these items, our adjusted operating loss in the third quarter was $33.8 million, compared to $50.3 million in the second quarter of 2022, an improvement of almost 33% for $16.5 million. Focusing on the third quarter of 2022, SG&A totaled $60 million, which included $30 million litigation accrual and a $16.2 million NRV charge. It's important to note that litigation accrual is a charge based on our current view of the potential losses in certain cases, These are only estimates as of a point in time, and actual results could differ materially. Our second quarter SG&A was $29.9 million, inclusive of a $6.5 million NRV charge and a $2 million litigation accrual. So apples to apples, 3Q as adjusted SG&A was $13.9 million versus $21.4 million in the prior quarter, representing a 35% decrease, a large share of which was the timing of certain personnel-related accruals and a quarter of it was a decline in professional fees as we reduced our reliance on outside consultants. Turning to R&D, it's our first full quarter without the operating costs of the Lordstown facility sold to Foxconn in May. Total R&D for the third quarter of 2022 was $19.8 million. The second quarter R&D totaled $10.5 million, including an $18.4 million OPEX reimbursement as part of the plant sale. Again, the apples-to-apples way of looking at R&D is to compare the costs excluding the impact of the plant sale, which on an as-adjusted basis was $28.9 million in the second quarter. The $9 million decrease was entirely related to eliminating the cost to operating the plant, which were down $9.8 million, and more than half of this decrease was personnel-related. The remaining $18.9 million of 3Q R&D costs consisted of $9.4 million in personnel, an increase of $1.7 million over the second quarter, $4.8 million in engineering and testing services, and $4.7 million in other costs, which were slightly lower versus Q2. The increase in personnel reflects additional full-time engineering staff. Lastly, a quick explanation of the impairment. Prior to commencing commercial production, our tooling, machinery, equipment, and other assets were all held in construction and process at cost in accordance with GAAP. As we exited the R&D phase and entered commercial production in Q3, we reviewed the book value of our PP&E. Based on our analysis, we determined a $75 million non-cash impairment was needed. Turning to our outlook and liquidity, the new capital from Foxconn does not change our near-term focus on tightly managing cash and spending. As it relates to the P&L, I'll remind you that once we start selling vehicles, we will begin reporting cost of goods sold. POGs will then reflect essentially a zero direct material margin given the NRV already taken. However, there will be additional NRV to take on newly acquired inventory in the quarter, along with modest other costs related to manufacturing and expected sales of endurance vehicles produced, as well as depreciation. Despite our slow production ramp, we anticipate funding a majority of the inventory prior to year-end to execute our plan for the initial batch of endurance vehicles. our operating expenses and CapEx will uptick versus the third quarter, some of which is timing of certain costs pushing into the fourth quarter. As we ended the third quarter with more cash and short-term investments than previously guided, I anticipate that beat to flow through to a higher fourth quarter ending cash and short-term investments. Together with roughly $53 million to be provided from the first tranche of the Foxconn investment, we expect year-end cash of $150 to $165 million excluding any contingent liabilities or incremental capital raises. It should be noted, however, the proceeds from the preferred stock investment is specifically earmarked for new EV program development, which will likely ramp up as we enter the first quarter. On our fourth quarter earnings call, we'll share an outlook for 2023. In closing, I want to express my sincere appreciation for all our hardworking colleagues, along with the engaged potential customers and our valued supplier partners who are supporting us all in this journey to bring a great work truck to market and accelerate EV adoption. Thank you. Operator, we'll now take questions.

At this time, I would like to remind everyone, in order to ask a question, simply press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question is from the line of Mark Timlady with Goldman Sachs. Please go ahead.

Yes, good morning. Thank you very much for taking the questions. The first was around the way the next EV program will be developing. My understanding previously was the investment would be into a joint venture, and now, as you were mentioning, there's $100 million potentially of the preferred investment that will go to Lordstown Motors. So maybe you can talk us through how the mechanics will work going forward. Is there still a joint venture? Does Lordstown have to take on more of the spending given the investment being put into Lordstown? Again, any more Colorado, that would be helpful.

Thank you, Mark. This is Edward. So, yes, the investment will be into Lordstown, and it will focus on the first product that we will do in combination or in collaboration with Foxconn. So it will replace what was going to be funding of the JV, and the work will be by the Lordstown team in collaboration with Voxconn, and the investment will be in three tranches to Lordstown.

And the joint venture is being disbanded, and we kind of think that direct investment in Lordstown is a better, simpler, easier structure. So I think it's very favorable.

Okay. That's helpful. And then my second question, just trying to understand the – the bridge from the prior cash balance year-end to the new guidance. So I think it was $50 to $75 million. Now it's $150 to $165 by the end of the year. I think, Adam, as you said, the first tranche of the FOSCON investments, as well as the equity issuance done, I think that gets most of the way there. It looks like there's maybe $10 to $20 million of additional cash to bridge it. Is that the right amount to be thinking of in terms of the upside policy? from less underlying cash use in the core businesses, you know, so something like $10 to $20 million. And so I'm trying to get to sort of the bridge from the $140 to $150 of 2H losses that were previously communicated, which seems like it's maybe $10 to $20 million less if, you know, I'm sort of thinking right around the new cash balance. Thanks.

Yeah, that's about right, Mark. Got it. Okay, I'll turn it over. Thank you. Once again, if you would like to ask any questions, simply press star, then the number one on your telephone keypad. You have a follow-up question from the line of Mark Tulaney with Goldman Sachs.

Please go ahead.

Yeah, thanks for taking the follow-up questions. Maybe just a couple more from me if there are other analysts in the queue. In terms of the 500 units planned for the first batch, I believe in order to do all of that, there was additional capital raising needed. Maybe you can remind us how much you think you need to raise in order to go ahead with that full 500 units.

I mean, it's subject, Mark, to a bunch of variables in terms of the timing, the ramp of all of our other activities and so forth, right? So we're planning on having the majority of the inventory on hand for the 500 by the end of the year. So It's not a huge amount of incremental capital, but it all depends on kind of the other elements of the business.

Okay. And then just finally for me, you mentioned seeking interest from other OEMs to potentially partner to build the endurance. Maybe you could elaborate on the degree of interest you're seeing from OEMs to the extent you're able to comment on that. Thank you.

Yeah, we're not going to comment on that. There are discussions, but we're not going to comment on that.

Okay. All right. Thank you. Thank you. Your next question is from the line of Emmanuel Rosner with Deutsche Bank. Please go ahead.

Thank you very much. Good morning. Good morning. First question is, anyway, could I mention for us the expected volume progression, either production or delivery between now and year-end, and then any expectations for 2023?

But, Manuel, what we said was we're focused on the first batch of up to 500. We expect we started production at a very slow rate. And as we resolve the remaining, you know, part pedigree and availability issues, we expect to increase that slow rate, but still of that first batch of 500. So, we expect 30 will be completed by the end of this year with the remainder in the first half of 2023.

Understood. Thanks. And then, you know, you spoke about some of the issues with parts and tooling. Could you just give a little bit more color around what is the constraints on parts? What is the situation on the supply chain side?

Well, they're all issues that we're actively managing, Emmanuel. So not going to get too much into more detail about that, but they're all issues that, you know, are You hear about throughout the industry, but we have a very strong and capable team that is working through them.

Yeah, I mean, obviously, you can't produce a vehicle or sell a vehicle with one missing part. So a handful of part availability issues, you know, can slow it down, and that's what we're essentially dealing with.

Okay. Thank you very much.

Thanks, Emmanuel.

And at this time, there are no further questions. Please continue with any closing remarks.

Thank you, Operator. In summary, I would like to again thank the team for their tireless work and accomplishments. I would also like to thank our shareholders for their continued support. I believe we have great potential opportunities ahead of us with our growing relationship with Foxconn, and I look forward to our team executing and realizing them. Thank you.

Thank you for joining today's conference call. You may now disconnect.