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spk08: Greetings and welcome to EXOS, Inc's first quarter 2023 earnings call. At this time, all participant lines are in a listen-only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note that this conference is being recorded. At this time, I would like to turn the conference over to General Counsel of EXOS, Kristen Romero. Thank you.
spk09: You may please go ahead.
spk03: Thank you, operator, and thank you, everyone, for joining us today. Hosting the call with me today are Chief Executive Officer Dakota Simler, Chief Operating Officer Giordano Sordone, and Chief Financial Officer Kingsley Afamiki. Ahead of this call, EXIS issued its first quarter 2023 earnings press release which we will reference during this call. This can be found on the investor relations section of our website at investors.exostrucks.com. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements. If any of our key assumptions are incorrect because of factors discussed in today's earnings news release, during this conference call or in our latest reports and filings with the Securities and Exchange Commission. These documents can be found on our website at investors.exostrucks.com. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures and performance metrics. Please refer to the information contained in the company's first quarter 2023 earnings press release for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. Participants should be cautioned not to put undue reliance on forward-looking statements. With that, I'll turn it over to Dakota.
spk04: Thanks, Kristen, and thank you everyone for joining us today for our first quarter 2023 earnings call. On today's call, I will cover the quarterly business highlights and provide an update on our charging infrastructure deployments. Then, our COO, Gio Sordoni, will provide an update on our path to begin delivering gross margin positive units at the end of the second quarter. To wrap up, our CFO, Kingsley Afamiki, will share the company's first quarter financial performance. To begin, our focus remains on the three core tenants we outlined on our fourth quarter call. These tenants are growing demand and deliveries of our products, achieving positive gross margins at the unit level by mid-year, and maintaining ample liquidity and access to capital. Regarding the first tenant, we continue to experience strong demand for our vehicles, evidenced by additional orders and customer engagement. During the first quarter, we delivered a total of 31 units to customers such as ALSCO and multiple FedEx ground ISPs. deliveries were impacted by customer infrastructure installation delays that resulted in requests to postpone some scheduled deliveries. While infrastructure-related disruptions will likely remain a factor as utilities and permitting municipalities catch up with customer demand, we are taking actions to mitigate the impact on our deliveries. These include reprioritizing customers based on their infrastructure readiness, stricter enforcement of delivery terms, quoting Exos charging services alongside every step van, and launching new solutions like the Exos Hub to fill the gap between vehicle delivery and permanent charger installation. Though our first quarter deliveries fell short of expectations, we continue to maintain our forward-looking guidance for the year as Kingsley will cover. In addition to being a critical enabler for step van deliveries, charging infrastructure is also an important revenue driver for Exos. We continue to see growing demand for Exos Energy Solutions, or XES, our suite of comprehensive charging infrastructure and services. We are seeing more customers realize the importance of investing in charging infrastructure alongside vehicle purchases. As we noted last quarter, our Energy Solutions team has multiple installation projects in the works, and we just delivered new chargers to customers such as Loomis, Unifirst, and multiple FedEx ground ISPs. In addition to our permanent charging infrastructure projects, we formally revealed our second generation Exos Hub ahead of the Advanced Clean Transportation or ACT Expo last week. Customer interest in the hub was high at the ACT Expo. Our team held dozens of meetings with current and potential customers that solidified our beliefs that flexible methods of charging like the hub will play a key role in accelerating fleet electrification. The hub is capable of charging five vehicles at the same time from a single power connection, enabling fleet operators to transition to EVs ahead of installing permanent infrastructure. We expect the hub to begin scaling production in the third quarter of this year. Relatedly, as you may recall from the fourth quarter call, our first EXOS hub prototype was delivered to one of our Fortune 100 customers where it has been actively charging vehicles for a parcel delivery fleet and collecting real-world usage and reliability data. Turning to our second tenet, getting to positive gross margins at the unit level by mid-year, we made good progress, evidenced by significant gross margin improvement in the first quarter. Our gross margins improved to negative 19% in the first quarter of 2023 from negative 93% in the fourth quarter of 2022. This improvement was driven by better inventory management and continued growth in average selling prices that Kingsley will cover later in the call. In addition, we are excited by the launch of the 2023 step van as the next step in continuing that encouraging trend and progressing towards achieving consistent positive gross margins on a unit level. The new design is expected to reduce the direct material and labor costs by more than $15,000 per step van, with further savings anticipated and on our product roadmap for 2023 and 2024, which GEO will provide more detail on. As we transition away from the previous generation step vans and begin to deliver our 2023 model step van in the second quarter, those cost reductions are expected to become evident in our financials. Finally, before I wrap up, I would like to turn our attention to a management transition. Our CFO Kingsley Afamiki came to us and noted some professional and personal opportunities he'd like to pursue and will be leaving the team later this month. Kingsley has helped us build a deep finance organization over the last few years and onboarded several strong leaders for each of his critical finance functions. Kingsley has been a great partner for our management team And we would like to thank him for his service over these past three years. He'll remain in his role to help ensure a smooth transition over the next few weeks. And we expect the board to appoint our corporate controller Liana Pagosian as acting CFO while we complete our evaluation of internal and external candidates. Liana has made major contributions to the strengthening of the finance function during her time at Exos. and had a successful career prior to joining Exos in various finance and audit functions over the last 18 years. He has built a robust accounting team and will lead our finance organization as it grows and evolves to meet the needs of the organization. With that, I would now like to turn the call over to our COO, Gio Sordoni, who will share an operational update.
spk06: Thanks, Dakota. XS's operational focus remains on beginning to deliver gross margin positive units during the second quarter. In order to achieve this goal, the team is taking steps to reduce costs and better leverage our manufacturing capacity. To that end, we've streamlined our manufacturing operations and focused production at our Tennessee facility. The Tennessee facility provides us with manufacturing capacity to meet our customers' expected needs for the foreseeable future. allowing us to focus on efficiency improvements. These efforts include improvements to the warehouse management systems and investing in our quality and supply chain teams with on-site senior leadership. Paul Sivaswamy, VP of Supply Chain, and Eric Purcell, VP of Quality, are on the ground in Tennessee and put into work their immense experience built over many years at Caterpillar and Tesla, respectively. We are pleased with the early results from these actions which include reduced freight charges and more accurate inventory counts. In addition to manufacturing process improvements, design changes included in the 2023 step van are expected to further reduce the cost of manufacturing. Compared with the previous generation step van, we've made changes designed to reduce costs and improve performance for fleet operators. These include centralized power electronics that shorten high-voltage cable runs, saving on copper costs. as well as switching to lithium iron phosphate or LFP battery chemistry, which reduces our need for expensive nickel and cobalt. These are just a couple of examples of the extensive updates made to the 2023 step-in. Looking forward, we've identified additional improvements that will integrate into the step-in over 2023 and 2024 as we look to move beyond gross margin goals and towards generating positive cash flow. In summary, We believe we are well positioned to scale our business and expand margins. We're very proud of what the engineering, supply chain, and manufacturing teams have been able to accomplish during the quarter and their dedication to reducing costs without sacrificing what makes our vehicles leaders in this sector. We're all motivated by the immense opportunity for clean fleet and logistics solutions, and we expect to benefit from a secular shift to a net zero carbon economy. I'll now turn the call over to our CFO, Kingsley Afamiki, who will cover our financial results for the quarter.
spk00: Thank you, Gio, and good afternoon, everyone. As previously noted, we continue to remain on track to deliver gross margin positive units by mid-2023, while also ensuring we meet the strong demand for our products and solutions. I'll now turn and review our financial performance for the first quarter of the year. For the first quarter, our revenue was $4.7 million compared to $7 million in the first quarter of 2022. This decrease in revenue was driven by the sequential decline in deliveries that Dakota covered earlier in the call. While revenues came in lower than desired, we were pleased to see a continued quarter-over-quarter growth in average selling prices. Relative to the fourth quarter of 2022, our first quarter average selling prices were up by 4%. Our cost of goods sold during the quarter decreased to $5.6 million compared to $13 million for the first quarter of 2022. Gross margin during the quarter was a loss of $.9 million compared to a net loss of $6 million in Q1 2022. This represents significant improvements from negative 85% to negative 19%. In addition to pricing, This improvement came primarily from the investments in our inventory management processes, which Gia mentioned earlier, that improved counter accuracy and drastically reduced write downs. These improvements give the team confidence in our ability to deliver gross margin positive units by the end of the second quarter. Turning now to expenses, our first quarter operating expenses decreased to $19.2 million from $20.3 million in the first quarter of 2022. And this is driven by lower research and development expenses of $5.7 million during the quarter compared to $6.9 million in the first quarter of 2022, and a decrease in sales and market expenses, which were $1.8 million compared to $2 million in the first quarter of 2022. These low expenses were partially offset by an increase in general administrative expenses to $11.6 million versus $11.3 million in the first quarter of 2022. Non-GAAP operating loss for the quarter was $18.9 million. Looking forward, as we prepare to move beyond gross margin targets and aim to position EXOs as a positive cash flow business, we have put in place a plan to drive efficiency in all our operating expenses. We will share more details in this effort next quarter. We closed the quarter with cash, cash equivalents, and marketable debt securities available for sale of $64 million. In addition to cash used in operating activities, we used $9.7 million in financing activities primarily related to payments on our convertible debentures with Yorkville Advisors. On a quarter-over-quarter basis, inventories declined from $57.5 million at the end of the fourth quarter of 2022 to $57 million in the first quarter. We expect inventory to remain roughly the same level or fall over the second quarter despite growing sales. Operating cash flow less capex or free cash flow cash used improved to $15.6 million for the quarter from $24.6 million last quarter. We believe that as we grow delivery volumes, build working capital, and progress towards positive gross margins, we'll have options to raise additional capital and we'll continue to maintain ample liquidity. To wrap up, we reiterate our 2023 outlook and continue to expect to deliver 450 to 600 units, generate between 58.5 and $84 million in revenue, and a non-GAAP operating loss of between $52.8 million and $18 million. As mentioned last quarter, we expect deliveries to be weighted towards the second half of 2023. In closing, And as this will be my last quarterly call as CFO of Exos, I would like to say it has been the privilege of my career to have worked with such a committed and talented team as Exos. I'm proud to have assembled and developed a team of capable leaders within our finance organization. As I depart, I wish the entire Exos team, all our customers, and our investors nothing but the very best in the continued journey. And I turn the call back to Dakota.
spk04: Thanks Kingsley. Though the commercial EV sector remains impacted by the rollout of charging infrastructure, we remain confident that Exos is on track for long-term success. We're actively taking steps to sustain our growth, unblock the charging difficulties of our customers, and deliver gross margin positive units. Our superior products, strong customer relationships, and the supportive regulatory tailwinds position us well to achieve our goal of electrifying commercial fleets. Finally, I want to thank our extremely talented and committed team here at Exos for their ongoing efforts in pursuit of our vision for the company, as well as our valued customers and stakeholders for their continued support. With that, we'd now like to open the line for questions.
spk08: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
spk09: The first question comes from Mike Schliske with DA Please go ahead. I'm sorry.
spk08: The first question comes from Donovan Schaefer with Northland Capital Markets. Please go ahead.
spk01: So I want to focus on the infrastructure part of things. And, you know, it's great to see you guys reiterate your guidance, you know, even though there are some of these bottlenecks or challenges. So I'm curious if you could elaborate on kind of maybe almost thinking of it in terms of like trends in timelines to getting infrastructure built. And a lot of, I think I've seen this a lot in solar and some other places where, you know, you go through, because the industry itself grows so much, You could have utilities trying to catch up. And even if they're doing that well, if they don't go as fast as the industry, it could still persist as a bottleneck. So is the trend improving? Are you seeing them staff up? Or are there other things, like you mentioned, getting chargers delivered to Loomis and some other customers maybe? What are the green shoots and what are the things you're seeing on the infrastructure side that gives you that kind of visibility? and confidence in the guidance.
spk04: Yeah, absolutely. Happy to provide more context on that, Donovan. There's really three things that I'll touch on that I think are trends that we see that we're undergoing and experiencing right now within the industry and things that we think we can do to address each of those trends. So the three things are right now bottlenecks in permitting and construction. The second one really being long-term planning, particularly on the tails of the ACF rule that just passed. And then the third one is mobile solutions, and I'll talk a little bit about the hub. So first and foremost, a lot of folks ask us what we mean by charging infrastructure bottlenecks. And I think that sometimes people conflate that there are not enough chargers available or we can't get access to the actual physical chargers themselves. That's really not the case anymore. We saw a little bit of that during the supply chain crunch last year, but the vast majority of delays that we experience are in the actual permitting, planning, and construction phases of deploying charging infrastructure projects. So this is working with local building authorities and regional planning organizations to get approvals to deploy charging infrastructure. This is also working with utilities to get additional power delivered on site to actually support the sizes of the chargers that we're deploying. And it's ultimately also the actual scheduling of construction contractors to actually do the work and install the charging infrastructure. So those phases are inherently long processes, but due to the demand in this industry right now, we're seeing that there's just a bottleneck of the permitting phases, the planning phases, and then ultimately the construction phases. We're getting better internally within Exos Energy Solutions in responding to those delays and bottlenecks. We're testing out some new methods on how to streamline permit submissions and our procurement processes. And I think that will continue to improve over time, but this isn't a trend that we expect to alleviate in the next year or so. We expect because of some of the regulatory tailwinds, like the advanced clean fleet rule, which is requiring fleets to electrify 10% of their vehicle population in California and 14 other states by the end of 2024, we expect that these trends will continue. You know, a lot of these regulatory changes have phased in rollouts. So in 2024, it's 10%. In 2026, I believe it's 25%. 2028, subsequent requirements. So there's going to be demand to deploy charging infrastructure for the next decade. But we do expect planning organizations, construction groups to become more proficient and deploying infrastructure and lessening that bottleneck. The next area I'll talk about is mobile charging solutions. So we just actually announced and launched our Exos Hub second generation model. right before the ACT Expo or ACT Expo here in Southern California last week. And it was launched to significant amount of fanfare and demand for that product. And what that product is is really a temporary charging solution to help fleets manage the delay that they're seeing right now in that permitting bottleneck and construction bottleneck phase. So the hub can be delivered to a site, installed within a day, start charging up to five vehicles at a time, and then when permanent infrastructure gets completed at a site, we take the hub and we roll it to another customer location where it can be used to manage the time between a truck being ready and rolled off the production line and when permanent infrastructure is deployed. So that's a really, really valuable tool in our quiver of responding to tools to respond to the charging infrastructure bottlenecks. And I want to pause there and make sure I'm addressing the question in the way you expected.
spk01: Yeah. So just my one follow-up would just be with respect to the full year guidance, do you have – I mean, I know this is like super – it's super hard, you know, with the utilities and other stuff. And so – but do you kind of have like a visibility there with – It sounds like you're supporting customers some more internally with going through the permitting process. So maybe with a certain number of customers, you have some timelines of when service, the ability to charge is supposed to be turned on at their depots, or maybe there's a certain amount of customers you've talked to where they are prepared and ready or decided they'll go the excess hub route. I guess, you know, how far into the future can you see, you know, three months, six months to understand that, yeah, yeah, okay, those chargers are going to get in where they need to go for us from a guidance standpoint.
spk04: Yeah, we do have a lot of visibility in our customer order book, and we work to update that and revise that really proactively so that we know we have an expectation on what we're going to deliver in the second half of the year. There still are some sites that are at risk for delays, and those are the ones that we're obviously monitoring most closely. But that's a big part of how we're able to reiterate guidance is having a degree of confidence in the infrastructure being ready for the orders that are in our production plan. And it's not just really taking place for this year. We're trying to make sure that the third thing I was going to mention is we're making sure we're putting together long-term plans with each of our customers so that as they procure vehicles over the next three to five years, there is a plan in place for infrastructure so that we don't continue to make the same mistakes in having trucks ready before charging infrastructure is ready to receive them.
spk01: Makes perfect sense. Okay, thanks for the clarification there. I'll take the rest of my questions offline.
spk08: The next question is from Mike Schliske with DA Davidson. Please go ahead.
spk05: Yes, hi, good afternoon, and thanks for taking my questions. To follow up on the last few questions there, Dakota, you had mentioned in your prepared remarks something about enforcing delivery times. What does that mean exactly? Are folks asking you to hold off and you're saying, hey, we have a date on this contract, or is there some color as to what you're actually doing when you say you're enforcing delivery times?
spk04: Yeah, that's a good question, Mike. One of the things we're trying to do is align production schedules with the deployment of charging infrastructure. However, even if we build the truck on time and continue to get a truck out per our production schedule, you do continue to experience unforeseen delays all the way up to the final day of commissioning of a charger. In some cases, customers have requested that we hold vehicles until that charger is finally commissioned. And so we've really updated and tried to evolve our terms and conditions and our contracts with our customers to really have a set delivery date so that when the truck comes off the line, we can deliver the truck even if the charging infrastructure is not ready. Ideally, we're going to be working with our customer to ensure their success and ensure that we can deliver vehicles as quickly as possible. But really, for the most part, we're trying to align the charging infrastructure with the production schedule so that we don't ever have to take a vehicle that's slated for a particular customer and sell it to another customer that might be ready.
spk05: Okay. Great. Thanks for that. Then I wanted to just ask about the effort to get to gross margin positive here. It sounds like things are on the right track. I guess I kind of want to just ask flat out, Gio, is the 2023 step van Is it essentially gross margin positive just right off the bat when you're very first one you'll be making? So in 3Q, 4Q, once your mix is mainly that, you're automatically going to be gross margin positive at that point?
spk06: Yeah, we're really confident in the changes that we've made to reduce costs, and that was a big focus of the design of the 2023 new step-band platform, consolidating high-voltage power electronics as an example to shorten the amount of high-voltage cable runs we have on the vehicle. In terms of whether or not each of those vehicles will be gross margin positive from the start, it's hard to say just because there are different customers have different pricing in some cases. There will be multiple battery configurations, and of course, those first vehicles off the line as we're getting production ramps, there will be more effort and hours into those initial vehicles. But that is the idea, and that's the You know, part of the whole focus of the new 2023 Step N is to reduce the cost and improve the performance and continue to deliver a valuable product to our customers.
spk05: Okay, great. I also wanted to ask about, it sounds like after that, you're going to be making a huge kind of company-wide project. push to go to cash flow positive after you get to gross margin positive. That sounds exciting. I guess I'm curious, yes, there might be some cost cuts you can do there on a run rate basis, but is it really just a volume question from that point on? And do you have any unusual initiatives or maybe you'll have the MDHT, HDXT, MDXT, HDXT up and running to help you with those volumes or are there other things that I'm thinking about that would push you truly towards cash flow positives?
spk04: Yeah, it's a good question, Mike. And I think one of the things we're doing is taking manufacturing and we are consolidating it all in Tennessee. So as we've really established a good footprint in Tennessee, building trucks there and delivering them to customers, we've also migrated our battery operations there and are installing some of the battery systems on the vehicles and doing battery work in Tennessee as well. That saves us on things like overhead and freight logistics. as well as in personnel and our ability to reduce overheads that are associated with each of the vehicles delivered. Obviously, you mentioned volume. Volume is a large factor that helps us in our ability to get to generating free cash flow. And that's something that we like to balance with the infrastructure world and the readiness of our customer available charging infrastructure. The last thing is really focusing on the step-in this year. As we talked about, the MD and HD platforms will allow us to grow volumes, but we believe that the step-in business in itself is a very profitable and lucrative product portfolio and product platform, and we're going to continue to improve those margins over time. So the first indications and guidance of the 2023 step-in being profitable is just the first step But we expect continued savings to come out of that vehicle platform in this year as well as in 2024 as we introduce some new technology changes that we've been working on. So it's really a combination of consolidating manufacturing, increasing the volumes, as well as additional technology changes that we're making to the platform that will yield direct material cost savings that get us to that point where we can start to generate positive cash flows.
spk05: Okay, got it. Thanks for the information. I will leave it there. And Kingsley, thanks for all the information over the years and best of luck to you.
spk10: Thank you. Thank you so much.
spk08: Again, if you have a question, please press star then one. The next question comes from Sharif El-Sabeh with Bank of America. Please go ahead.
spk07: Hi, good afternoon. I was just wondering, given the unit deliveries, are you able to give us an idea of unit production in the quarter and if there was a variance between that and the deliveries reported?
spk04: No, we haven't ever guided to units of production in the quarter, Sharif, but we can tell you the consolidating of operations in Tennessee has made our production operations a lot more streamlined. We're getting more efficient at building vehicles and reducing the
spk07: total hours going into those vehicles so it is continuing to improve even as we're we're making transitions to the new platform on the line understood and you've spoken about quite a few technology changes and introduction of liquid cooled packs just looking through some of the filings it looks like cattle is now a provider of battery packs so my question would be is are these new packs that are liquid cooled coming from cattle or are they exos proprietary products and if it's a mix, what that mix looks like?
spk04: Yeah, so we have multiple different battery solutions, and it really depends on what the customer profile looks like. When you're looking at some of the powertrain applications or some of the lower C-rate applications, we'll tend to use an NMC solution, which will include one of our excess packs. If we're looking at a higher density or a longer life pack or something that requires more charge intensity and higher C rates, looking at LFP solutions, both Exos internal pack solutions as well as other solutions that come from some of our suppliers, like modules from some of the primary battery suppliers. Over time, I think as we get more vehicles out there on the road, we will have a diversity of packs really depending upon what that customer feedback is and what they're going to be using the vehicle for.
spk07: And just so far for the plans for the new 2023 steps then, are you able to give us a sense of how many of these packs would be sourced from cattle versus what your ability to produce internally if it's Gerald's?
spk04: So the Tennessee production facility has the capability on the line of producing up to about 5,000 vehicles worth of pack systems. We don't have a split of what's going to be in-house, what's going to be any of our supplier-oriented solutions. and what's going to be any of our NMC solutions. So that's something that over time we'll have more data on, but we don't have a guide to a split between those products right now.
spk07: Understood. And do you expect to qualify for the Inflation Reduction Act's battery production credit?
spk04: So there are some of our PAC systems that will qualify for the IRA battery production credit. It's an analysis based upon what the total domestic content goes into those PAC systems. And depending upon what we're building, which PAC we're building, it can qualify for the credit.
spk10: Understood. Thank you. Thanks, Sheree.
spk08: At this time, there are no other questions in the queue. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your
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