Q4 2020 Canoo Inc Earnings Call
Greetings and welcome to the Canoe fourth quarter 2020, and full year earnings release Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the presentation.
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Please note that this conference is being recorded.
I will now turn the conference over to our host come all Hamad Vice President of Investor Relations. Thank you you may begin welcome to <unk> fourth quarter on full year 2020 earnings Conference call. My name is small Ahmed VP of Investor Relations.
With me today is Tony Hawk.
As executive Chairman and we're not <unk> news interim Chief Financial Officer, and principal Accounting Officer Bernardo has worked with Tony.
Company's CFO many years he brings more than 30 years of leadership experience with a proven track record and complex global organizations, where he was responsible for leading global teams supporting multibillion dollar operations. He will be invaluable to us as we built out our finance function back now.
During this call we may make forward looking statements based on current expectations. These are subject to a number of significant risks and uncertainties and our actual results may differ materially for a disc.
<unk> of factors that could affect our future financial results and business. Please refer to the disclosure in today's earnings release, our most recent forms 10-K, and 10-Q and the reports that we may file on form 8-K, with the Securities and Exchange Commission on.
All our statements are made as of today March 29, 2021 based on information that is currently available to us except as required by law, we assume no obligation to update any such statements.
For those of you who are new to the story our mission is to bring Evs to everyone and were led by our executive Chairman Tony Apple on Tony is a visionary entrepreneur and public market leader, who has consistently created significant value for shareholders.
Ignite is the important software would play in a connected auto ecosystem decades before anyone else. He built several marquee businesses in both the public and private domains from the ground up including and Sarah and Solaris.
Brings deep experience in building high growth companies that are focused on technology data and productivity.
With that I will turn the call over to Tony.
Come on I invested in can you because of the technology associated with the multipurpose platform and the market opportunity. It created enabling our mission to bring EDI to everyone. Since kinky gone on the role of executive Chairman working with the team and leading.
Street consultants, we've done a deep dive to determine how to optimize our growth opportunities and maximize our shareholder value.
First we built out a world class Board of directors and are now building out our C suite.
Shortly after I joined we brought on Pizza Biogen.
As our Chief Technology Officer automotive Pete has many years of experience in bringing <unk> to market and has been very valuable add to our team.
Today, we announced that Renato Gieger, who I have worked with and known for many years joined us as our interim CFO.
He along with rematch Murthy, our new Chief Accounting Officer, and Heck, you really is our new VP of global strategy tax counsel and Treasury will drive the necessary finance process infrastructure and systems to transition us from a price.
On a company to a public company or as we say moved from little P to P.
To guide our brand and develop our commercialization and go to market strategy, we have brought in Mark Aikman.
As our chief marketing Officer automotive.
Over the next four to six quarters, we will be focused on completing the build out of our executive team in a disciplined manner.
Second we have decided to shift our manufacturing into two phases.
Phase one.
As previously announced we will use contract manufacturing to launch production of the N. P. P. One L B day rented it.
We will announced the selection of our partner shortly.
Phase two.
We will move forward on our Mega Micro factory, where we will build our M. P. P. One and certain high volume derivatives.
We are in deep discussions with a number of governors.
And their teams and we will shortly down select to a final group of states. We have brought in an experienced world class team, who had negotiated billions of dollars in incentives for high tech companies, including automotive manufacturing, we issued an RFP.
I RFP focused on the areas of geography Labor force educational systems supporting infrastructure and their desire to build out and EV infrastructure in their states.
And third many investors have asked if we will be reporting on the industry impact of COVID-19, I E chips battery other shortages collaboration effects and design impacts.
Etc. The answer is simply yes, we will be reporting on this starting with our next quarterly report.
Due to the expansion of our derivatives and the best return on capital. It was decided by our board to deemphasize. The originally stated.
Contract Engineering services line. This will further accelerate the creation of IP and the launch of our derivatives, which enhance our opportunity for the highest return on capital.
Once this is complete this will allow us to commercialize the three vehicles, we have announced are pickup trucks or multi purpose delivery vehicle or M. P. D B, one and our lifestyle vehicle.
All of which fit on our multi purpose platform, which we call N P. P. One.
I'm excited about these enhancements to our business model.
And now let me tell you what attracted me to <unk>.
First as an investor and now as an executive chairman and the market opportunity, we see free from legacy thinking.
We took an inside out approach designing from the bottom up to deliver the full potential of an electric vehicle.
Our platform design gave us a tab for word vehicle that maximizes interior space and cargo capacity, while reducing part count and simplifying manufacturing.
Bifurcated, the mechanical propulsion elements of the vehicles from the Cabot gave us a blank canvas to create functional productivity solutions customized for use cases.
Industry wide today Oem's focus only on the first owner sales.
Which represents only a small profit potential associated with the entire lifecycle other vehicle.
Instead, we will focus on the 70% to 80% of profitability generated across the multiple owner lifecycle other vehicles.
We built in revenue touch points for all owners throughout the vehicle life cycle through the aftermarket and customization no other OEM, whether ice or EV has done or is doing that today.
The Tech first industry second company, our software and hardware.
Our connected platform that can capitalize on the full multi owner lifecycle of the vehicle.
Let me give you some context about our addressable market.
Big picture today, there are about $1 5 billion light vehicles on the road globally, we believe that 80% of those will be replaced by E. B over the next four to five car generations, which means the market will add more than 1 billion, new EV and efficient fuel.
Sell technology, driven vehicles over that time period.
Driven by climate concerns governments are legislating, the phase out of sales of ice vehicles in the coming decades.
14 countries have set to phase out the sale of new ice vehicles from 2025 to 2050.
As part of the ESG Fortune 500, and other companies around the world are increasingly laying out aggressive goals of carbon reduction some all the way to being carbon neutral.
Given that within the U S. The transportation sector contributes 28% of all greenhouse gases switching to <unk> is the quickest most impactful way to achieve their carbon reduction goals, providing a further tailwind to bite net.
Ministration has announced plans to put the United States on a path to achieve net zero emissions by no later than 2050.
Just as major innovations in the auto industry, such as mass production safety updates and the quest for improved fuel economy represents major turning points. We believe that we are at a super pivot point today expected.
Growth and adoption in the EBITDA market will drive billions of dollars in private and public investment with a multiplier of four to seven new jobs for every new easy job.
And these jobs will carry higher than average salaries due to the advanced manufacturing nature of the beats.
Beyond that there will be educational investments workforce development and additional opportunities to the broader economy.
Globally EV sales are expected to grow at a 32% compound annual growth rate for CAGR in the next 10 years.
By 2030, it is estimated that Evs will account for 25% of new car sales for 28 million annual vehicle sales, bringing the DS two 8% of the global car Park.
Yeah.
We don't have to wait for EV technology to become economics for consumers. It already is and we are doing it which is why our business model and our design is the EV for the trade and delivery class professionals.
Mobility working people the people who rely on their vehicles for work in fact it is these trades people who are putting on the mileage that makes the total cost of ownership of an electric vehicle favorable compared to an ice vehicle.
The average commercial vehicle travels 23000 miles per year. According to our estimates after 9000 miles of driving and EDI breaks even compared to an ice vehicle on a TCE basis.
Total cost of ownership, our MP DB, one provides over 35% TCE savings on a volume metric capacity basis over eight years, when compared to a leading commercial ice vehicle or similar cargo capacity directly benefiting.
The return on capital to the mobility working people.
There are 123 million commercial and mobility working people vehicles on the road today that would have economic benefit from switching to an EV.
And of course, we are focused on.
On fleets with our low Tcl and high volume metric to our footprint.
Given the imperative to reduce greenhouse gas emissions and the need to lower per mile cost of delivery in the bring it to me market. It is clear that the market opportunity is huge.
It is not surprising that Oems EV players and others such as technology companies are positioning themselves to compete in the massive shift to EPS.
In our view many of the competitors have drawbacks that we do not.
Cause of the large capital investments legacy automotive companies have already incurred.
Will first focus on modifying existing ice platforms, which puts pressure on the bill of materials or as we call Bom cost.
And the total cost of ownership.
TCE up leading to suboptimal design performance and user experience and therefore, leaving the long term residual value of the vehicle at great risk and volatility.
Where our competitors have experienced inefficiencies with the proliferation of models and platforms that often don't meet the market needs. We have a streamlined approach to meeting all use cases with our multi purpose platform or MPP.
So far we have announced three derivatives from our NPP our pickup truck.
Our multi purpose delivery vehicle.
N P D D and our lifestyle vehicle.
Our MPP approach lets us provide choice and optionality to all owners, allowing us to target use cases, instead of segments, we designed and engineered a true native EV platform without legacy baggage paving the way.
For our expansive 20 million Tam.
<unk> business model with multiple revenue pillars.
This resulted in over 300 miles and estimated range over 13% greater power density in our E motor compared to leading competitors.
<unk> to 65% common parts across products larger cargo space equaling nearly 30% greater cargo space than leading competitor commercial vehicles, which means we are not b to b.
Not b to C. But we are be to all setting us apart from any other OEM.
Just like the pickup truck redefine the U S auto market.
Fact, doubling in sales from 2010 to two two and 2020.
We will redefine the EV market with a single pickup truck that meets the needs of multiple use cases with the turning radius of a prius the size of a Ford Ranger and a payload of a full size pickup our vehicles cater to a variety of markets and use cases and are designed to.
<unk> benefit that driving enthusiasts and the trade and delivery professionals.
Our unique design and ability to satisfy specific use cases has resulted in significant customer interest and press coverage highlighting our vehicles as the future of the delivery van and the Swiss Army knife pickups.
We take the modular concept to the next level and beyond the initial vehicle sale.
With revenue and value to customers across all generations of owners through customization and upsetting.
To meet the new owners use case in this example, you can see how a delivery vehicle can be repurposed as it refrigerated truck.
Pop up retail shop, and then a food truck as it goes from one owner to the next this makes our vehicles field, new and customized to each U owner.
Use case, regardless of the vehicle age or mileage.
Diving deeper into our strategy, we recognize that our core value proposition is techno electro mechanical innovations.
We will capitalize on our addressable market in three ways, one our engineering IP enables our broader Tam to our software IP will fundamentally alter the value proposition across of vehicles lifecycle three our aftermarket.
And customization strategy will drive revenue streams across generations of owners of the vehicle with accessories add ons for upgrades.
Going into our engineering IP further our NPP one was designed to support as much as 75% of the most popular vehicles on the road today and provide improved manufacture ability. We are excited that <unk> will be the first to market with.
Many innovations, including steer by wire, our proprietary leaf spring technology, our patented battery performance and thermal performance management.
And the most intelligent truck debt.
Coupled with a deep focus on worker and driver ergonomics.
We develop our software in house, which allows us to rapidly develop and integrate new vehicle features and performance enhancements security updates and respond to issues on an individual vehicle or on a fleet wide basis, allowing us to future.
For our vehicles.
We designed our electrical and network architecture to support the power and communication requirements necessary for advanced sensors and processing for autonomous driving and the solutions are brought to market.
All of our proprietary electronic control units support over the year updating and data collection via our hardware and software stack.
As we continue to be validated both internally and externally by third parties to date, our test vehicles have accumulated almost 500000 testing and validation miles providing us with important data for.
For our gamma built.
By targeting use cases and customers across all generations of owners, we continue to build throughout the lifecycle of the vehicle across multiple owners for.
For example, our recently revealed pickup could include a front gate.
And extendable bet step storage solutions and more.
Which could all be added with the second third and fourth owner, we demonstrated the effectiveness of this approach by recently, revealing to new models in Q4, we announced our M. P. D D.
Our multi purpose delivery vehicle and then shortly after in Q1, we revealed our pickup truck.
With the lifestyle vehicle previously announced this brings us to three derivatives on our a M. P. P. One this ethos applies to all of our vehicles and will help us drive strong brand equity.
With that I'll turn the call over to Renato.
Bernardo.
Yeah.
Thank you Tony.
I'm very pleased to be here today on <unk> first earnings call as a public company.
Starting with <unk>.
Fourth quarter 2020 results.
Research and development expense was $90 million in the fourth quarter of 2020 compared to $28 6 million in the prior year period.
Excluding $58 7 million of stock based compensation in the fourth quarter of 2020 research and development expense was $31 3 million.
SG&A expense was $35 7 million in the fourth quarter of 2020 compared to $7 1 million in the prior year period excluding.
Excluding $24 5 million of stock based compensation in the fourth quarter of 2020, SG&A expense was $11 2 million.
GAAP net loss was $12 3 million in the fourth quarter of 2020 compared to a GAAP net loss of $42 7 million in the prior year period.
GAAP net loss in the fourth quarter of 2020 included a $115 4 million non cash gain on the fair value change of earn out shares liability related to the periodic remeasurement of the fair value of our contingent earn out shares liabilities.
Fourth quarter 2020, adjusted EBITDA was minus $42 5 million compared to adjusted EBITDA of minus $35 3 million in the prior year period.
Turning to our results for full year 2020 revenue for the full year of 2020 was $2 6 million up $2 6 million compared to the prior year.
Research and development expense was $140 9 million compared to 137 4 million in the prior year.
Excluding $59 4 million and <unk> 9 million of stock based compensation in 2020, and 2019, respectively Research and development expense was $83 5 million and $136 5 million respectively.
SG&A expense was 51 6 million in the full year 2020, compared to 31 6 million in the prior year.
Excluding $24 9 million and 1 million of stock based compensation in 2020 and 2019, respectively.
G&A expense was $26 7 million and $30 5 million respectively.
GAAP net loss was $89 8 million in 2020 compared to a GAAP net loss of $182 4 million in the prior year period.
GAAP net loss in 2020 included a $115 4 million non cash gain on the fair value change of earn out share liability related to the periodic remeasurement of the fair value of our contingent earn out liabilities.
2020, adjusted EBITDA was minus $108 3 million compared to an adjusted EBITDA of minus $167 1 million in the prior year period.
Turning to our balance sheet on cash flow. We ended the year with $702 4 million of cash on our balance sheet cash used in operations for the three months ended December 31, 2020 was $42 <unk> million.
Compared to $43 7 million in the prior year period.
Capital expenditures for $6 3 million for the fourth quarter of 2020, compared with $3 9 million in the prior year periods.
Cash used in operations for the year ended December 31, 2020 was $107 1 million compared to $171 5 million in the prior year period capital expenditures for the year ended December 31, 2020, or $7 6 million compared with $22 1 million.
In the prior year.
Now, let me turn to our guidance for Q1 2021.
We anticipate the following expenditures approximately $45 million to $50 million for operating expenses, excluding depreciation and stock based compensation.
And approximately $10 million to $12 million for capital expenditures.
Let me turn it over now to Tony for his closing remarks Tony.
Thank you Renato to wrap it up I'd like to first start by thanking all of the great people that can do for their hard work and determination in building one of the most innovative vehicles on the market and coming to market today.
We believe.
Our multipurpose platform in vehicle derivative based on our use case combined with our three pronged revenue model will make us a top player in the global EV market and now I'd like to open it up to questions.
Thank you.
At this time, we will be conducting a question and answer session.
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Okay.
Once they can ask a question press star one on your telephone keypad.
Our first question comes from Craig Irwin with Roth Capital Partners. Please state your question.
Good evening and thanks for taking my questions. So it looks like there is there's been some fairly significant hiring in a bit of a ramp in R&D. This was always expected.
After you are.
Pleated the spec IPO can you talk about sort of where you are in the process of hiring.
How many more people when you aim for higher over the course of 2021.
What is the what is the potential growth in operating expenses look like because of that and the 45 to 50 on Opex is good it's a very healthy number.
Do you have maybe an update on stock comp number two years with that.
Yes.
Hi, Craig.
Tony.
So.
So on the hiring perspective, I'll answer that Youre not a net.
Remiss.
Two the stock comp piece.
But from a hiring perspective, we're targeting about another hundred F.
Ftes that will be adding in as we move through the <unk> phase.
Of course, it is a talent war out there.
<unk> done pretty well all things considering that it's been a spin.
Hard.
Market, so to speak and we will continue to use aggressive tactics to find the right people for to meet our plan.
Okay.
Yeah.
Correct.
And also when it comes to the company's compensation, we are not forecasting that because of that it depends.
On the share price.
Going up or down and therefore, we are now forecasted net number one number two because it has no cash impact.
It's not that relevant as of today.
Okay.
What I would add to that Craig is we are targeting 75th percentile on a buzz to ensure we're hiring the best day, both Ian that's.
That's what I referred to in the aggressive tactics.
Okay.
Okay.
The second question there is a little bit of a contradiction in your prepared remarks, So Tony you talked about how engineering IP broadens your Tam, but then you announced that you are deemphasizing. Your engineering services can you help us resolve that and maybe give us a little bit more color about why you would deemphasize engineering given the given that the.
<unk> story was it would subsidize the development and broaden the.
Partner opportunity with potentially multiple hats on for license.
Yeah, So look I would say that from a.
Perspective, it was a contradiction it hasnt been a contradiction from my statements.
Look as I over.
As I said in the remarks, we looked into this.
On a goes to your first question too with the channel or and everything just the $25 million that would yield us we at the board really feel like the best thing to do is to accelerate our derivatives and focus our talent on.
On creating IP for the company.
You also have a lot of IP leakage when you do this work.
And from my perspective, if I had.
Been more involved earlier on.
Certainly once I start I invested in and I took the chairmanship. We started the analysis I had concerns about this if you study all OEM.
You can find a partnership or something like that it can make sense.
And we will continue to look at things, but to be a contract engineering house is just really not going to drive the best shareholder value.
Okay and then.
This is a tough question, but all the institutions are going on going to ask this question tomorrow right. So.
First Alex Marsans Koski has gone now Paul about Chinas. These are the two gentlemen that sold the pipe a lot of people are met.
Met with them on Ooley for your day spec process.
That's a fairly heavy turnover and we didn't have early on the call today.
Which appears like I'm missing.
Can you maybe talk about the.
The high turnover and what's going on here and is really still chief Executive officer.
Yes, so look as we've kind of been navigating through going public. We're obviously, bringing in people with with extreme public company experience, we're making the call today from Dallas, Texas.
Not in California, due to the California still in a bit of a lockdown.
<unk> is being wide open.
Yes.
It really is still currently the CEO of the company and as far as with respect to your comment about turnover. It's true there's been some turnover in these positions, but we've been bringing in people that one we know and they have worked together as I mentioned in my comments and this will stabilize.
I think a lot of specs on a lot of companies as they go through this migration will be we'll be bringing in people with experience in the public markets. So I just think we're a bit ahead of it and we will stay ahead of it as we navigate this.
On a step by step quarter by quarter.
Yes.
Last question, if I may here, obviously, deemphasizing engineering and engineering services, so that seems to imply that the original spec model is no longer guidance going forward is that accurate.
We will be giving we're not going to give at.
At this point it doesn't make sense to give guidance until we complete the work.
That we have started and with all of that has gone on in the stack world in the pre revenue side, we want to be very conservative. If you look back at the history of the team that is now more and more coming into play they've been net.
Ever missed consensus and so doing this at a high public company standard I think is important for all specs and certainly we're going to do our best to lead the way here.
And so we will be step by step building this and we will be delivering information as it as it is known and contracted not based on light revenue.
Reservation models I think that's dangerous.
I think it could be somewhat misleading and so typical of any leadership change different standard comes in and we will guide you through that tomorrow will be following up with you on a regular basis certainly do acknowledge your point Craig that you.
You got so to speak as you mentioned.
Showed a different model, but this model is better from a return on capital basis, and I think as you work through it you'll like it, especially the areas in the margins.
On the areas, we plan to operate on here so.
Let's kind of table that in.
Discuss through it.
So I will acknowledge that these are significant surprises on the call today and thats not ideal after a spec.
IPO process. So I just wanted to underline that thank you.
Fully understand your perspective, obviously, you know I wasn't here.
When they did the original model, but certainly wanted to get ahead of this and explain to you. How this really is going to work and how to build a profitable company, which we've done in the past.
And we intend to do here, but hey, you know we understand.
The situation. It puts you in and work closely to rectify that so you can understand very clearly where we're going and I think once you do you will understand why we made these changes.
Thank you good luck.
Our next question comes from Jamie Perez with RF Lafferty <unk> company. Please state your question.
Hey, everybody how are you doing thanks for taking my call.
A quick question on these.
You mentioned you have several prototypes on the Mark out there on the road any feedback on data and all these prototypes with free customers.
Yeah.
I'm sorry, Jamie can you can you repeat that please it broke up a little bit on this oh sure yeah sure. So yeah, you're on the press release, you mentioned you have about 13 drivable prototypes.
These prototypes with free customers and could you tell us how far.
A long way these prototypes are in on.
When we could see maybe a beta model out there.
Yes, So obviously, we've released a video footage for.
The.
Truck and the MTBE.
So.
As soon as the World opens up we will have a proper analyst day, and we will bring you you guys and so you can see it in writing the vehicles, but we've got 500000 tested miles coming through so we have these vehicles in all kinds of different terrain conditions typical of what you do in testing so look forward to.
And by the way.
When we do have the prototypes in Texas, which we currently do right now due to some meetings we had.
On.
We're happy to entertain if you'd like to come down and see them.
Yeah, that'd be great no. These prototypes have you.
And especially on the pickup trucks have you tested it for.
For us way capacity for towing capacity I mean, I'm, just trying to get a read out on.
How much it could compete with somebody like the F 150.
Yeah, So look the <unk>.
<unk> of the vehicle.
The pickup truck.
We've got it.
Kind of focused on around the same 2000 pounds.
Payload capacity range 1800 for 2000 pounds.
And thats kind of aerodynamically somewhere in the 200 plus mile range.
On.
On a 600 horsepower 500 pounds of torque setup drivetrain and again when you come down we're happy to show you.
The vehicle in more detail and we will continue to engineer that we'd like to get that those numbers up a little bit, but right now thats everything what we can and as far as on.
Towing capacity days.
We're currently.
Looking at about 2500 pounds, depending on again.
Depending on the range effect. So you can get up a little higher depending on the.
On the range.
And my follow up question.
As far as outsourcing and matter of fact, our contract manufacturing have you how far we are progressing or have you identified.
Any one particular, what's the scope of the project.
And do you need to lay any capital upfront for like a JV, maybe give us a little bit detail on the outsourcing.
We have a couple of finalists right now where we're in that phase obviously with the leadership change we wanted to look into those into the detail.
Brought in some of the new hires that were brought in or manufacturing experts.
We launched a two pronged approach.
Contract manufacturing as well as with the especially with the tailwind from the bitumen administration, there's a lot of subsidies and creating a state deal. So.
<unk> been announcing and we'll be looking to wrap that up in the in the.
Coming weeks to months and we'll announce those people are with respect to capital goes the capital range is a little bit different because of the geography.
Between the finalists and of course the.
The new model that will introduce the Mega Micro factory approach is designed so that since we do have our own other since we do have a lot of our own design and component tree as we internationalize the platform a lot of us have a lot of experience and internationalization.
You can.
<unk> element is you can take your engine component part of the factory and you can plop it somewhere else and make your engine so kind of similar best in class activities.
But what's the rationale growth from an outsourced manufacturer to take them doing the manufacturer in Europe on plant yes.
So good question.
You think about the weighted best Internationalize your platform and to address low volume units on a.
On a top hat basis, because the MPP platform is common across the vehicles, we've announced so so that component we want a manufacturer long term on our own.
In the short term, we have to deal with demand, while we get that part of the factory up and running once we announced the state.
In addition to that on the geographic side it would be very wise without taking too much of our hand at this time is to think about if you have a contract manufacturer similar to best in class again.
Can use that for your low volume and your geographic expansion. If it's located in the right place. So obviously in North America, we want to produce here deliver here and all of that but in the interim we want to be able to have the ability to also because we are getting a lot of demand.
<unk> opportunities coming in from Europe, and beyond so we need to have something so that we can get through that pretty quickly and then you don't have any real leakage of your capital cost.
Now as far as the man U S versus Europe.
On one particular, any particular market opened towards more to consumer side or the fleet.
Hum.
Customer.
So Europe shows a lot of strength.
Our strength in there.
The option speed wise on the multipurpose delivery vehicles, especially because of our turning radius and the size of it didn't go on enrolment roads that can go on American roads. It can go on on Latin American roads, which is very important part of the equation. In addition to that those countries have already.
Made the phase out statements for for IC vehicles to EDI.
So that's that's in part driving this two pronged approach I think I think a lot of people are going to get themselves into a into a bit of a quandary. If they don't have the ability to do a hybrid especially for those of us that are bringing vehicles moving to market. This will ensure a delivery schedule. We may have some cost in shipping but we.
We won't have any long term leakage.
Our capex and these other things so.
Of it as being somewhere in the European Theater.
Alright, that's all the questions for him I'll pass it along thanks.
Thank you.
Our next question comes from John Murphy with Bank of America. Please state your question.
Good afternoon.
Moving to ask a follow on for that contract manufacturing line of questioning.
Forget somebody a company that is really going to be just on assembler.
For how much help I mean, you're pretty far along on the process on the on the platform itself, but I mean somebody would help on design and engineering. In addition to be on a contract manufacturer as a lot of the contract manufacturers have a lot of capability, our sort of on Magnum magnifier. If you will just curious how integrated youll get with them.
Yes, so look I mean, I think from a to your point about on an MPP.
As the market talks about it has escaped board.
We're pretty much one of the most advanced.
At least we can so far as we can see and we've already crash tested we've done a lot of stuff.
We released the videos are driving the chassis.
Out in the desert so.
From our perspective, most likely one of the one of the components of that would be you know.
Some kind of partnership with them to manufacture that part while we're getting our own factory up and running in addition to that we have our own engines. We have are.
A lot other components we're targeting.
Around 80% of the components to be to be ours and located in the U S.
North America.
So we're not trying to be an assembler of parts, we're creating IP, which goes to the reason why the return on capital wasn't as good to have our engineers doing contract engineering work for another brand versus creating our own IP.
Which we think gives us a very tangible asset that we have today that is very leverages bolt as we build out our delivery strategy state by state country by country.
So maybe that's more succinctly. This is a contract manufacturer an interim contract manufacturer that you may use for niche.
<unk> over time, but you are you yourself want to be the ultimate manufacturer overtime and this is a a stepping stone to getting there is that a fair way of characterizing it.
I think to be.
It's not a it's not a one dimensional thing on this is it's multi dimensional two years. So one of those dimensions is you obviously want to use your contract manufacturers just like.
Best in class ones do on your lower volume units.
And are your specialty units, but in addition to that we are adding another dimension to it which is to help with our geographic expansion because remember the three derivatives are on the same MPP.
Got it Okay and then just a second question I mean, when you look at the competitive landscape a tremendous.
The amount of money is obviously made in the truck business and certainly for a lot a lot of that is coming on the commercial side. So I'm just curious when you look at the competitive response, you're getting from the likes of companies like GM and Ford, who would have products that would be.
Theoretically can certainly debate this somewhat similar.
I mean, I'll ask sort of a GM bright drop I mean, there are other.
Opportunity or other sort of substitutes that are starting to bubble up here that are different in the way. They traditionally operated so what do you think about the competitive response.
What you're going to be looking at for some of the legacy folks that have relationships from the customers youre going to be going after.
So look I think a lot of these guys are going to be doing what I'll call electro model, they're going to be putting battery systems in ice platforms that is sub optimal from a <unk> basis.
As you probably know our background. We're the aftermarket guys every nut bolt from every car for the last 50 years and its performance all the way to the recognized.
And when you when you start to put different weight distributions in power sources, you just fatigue frames and so this is a pure design as we showed you again in the video on led to host you as well come down and see it touch it and feel it.
And drive it and you'll see that.
He is a very uniquely designed platform and so.
I think on a pure basis, we've got to jump, but competition is here in the ratio in 2010 was kind of.
10 vehicles to every truck right 10 cars to every truck it's now five to one.
Our design is very different when you get a tight turning radius of a small compact and you can do it on the size of a Ford Ranger that can stretch the bed to an F. 150, if you will just staying with that particular.
Line.
That's that's very different and on top of that you have a multi functional intelligent bed system, which for though this is a design that is really designed for the people that we use their vehicles and EV will give them a great return on capital and so look I mean.
Theres no doubt theres going to be.
Competition in a fight out there, but it's also the area of the industry, where all the margin is.
And so.
We're trying to be smart about this leveraging everything we have and time will tell where we place, but we intend to place just like we have on our previous lives.
Then just lastly lots of real quick I mean, you've tweak the business model, a little bit, but I'm just curious on the sort of the retailer to the consumer.
Syed.
How youre thinking about that going for us, they're just too much opportunity on the commercial side and you're kind of putting that for the back burner or is the subscription model still in play cause I know that was part of the story before.
Is that changing in any way or is that.
Just sort of later dated or is it just the same as before.
So great question Jonathan.
So look if you.
You know the industry well, if you think about our membership model.
When I came in and took my my role and we spent a lot of money analyzing the weight.
This will have on the balance sheet and I think to the point that Craig was talking about the changes I mean, we wanted to bring in people that have a lot of experience on residual value balance sheet management.
And how to build a company at scale.
So you can only have a certain percentage of your business on.
On membership otherwise you've got a big cash at that starts to develop on you know as you can probably imagine so it would be doing that on an appropriate basis had I been here from day one.
I can tell you I wouldn't change anything on that MPT is amazing design, which is why I complement engineering team incredible what I have changed the sequence of top hats and use cases I would've went after based on my experience without a doubt as you can see the modifications we're doing.
And to your point when you really think about it on a financial burden basis on the balance sheet, yes, there's probably 80% change, but its to the mathematical positive.
As far as the sequence of changing.
The things, we're really on the top hat side, which is less right you're in the 20% to 40% range. So.
I like the model I believe in the model I know the model it holds up mathematically.
We'll walk you through this and again I apologize to anybody you know as a leader you'll always on in the past before the present or the future and so you know.
I'd take everyone's comments.
In all three categories.
I'm, sorry to keep going but I mean this is definitely so then youre seeing a tilt away from the consumer much more commercial and away from something that was sort of more balance sheet heavy to something that will be more on.
On the fleets on owning the vehicles. So it just it just seems like the ROI goes up and there's a little bit less risk because that is that.
A fair, we're definitely taking data that the risk factors down, but what I would tell you is we are concentrating on commercial and if you will kind of the mobility professional user.
That key.
Market is something which is kind of a hybrid of consumer and commercial.
And so that's where we're focusing our efforts on first and if you really study at the deepest value where the Lv was it was really going after the people moving side of the world Covid just hit it punched in the nose a bit.
And people don't want to be that close to each other so.
We've optimized it but yes, absolutely from a financial perspective. This is a much more positive trend, it's just math.
That's incredibly helpful. Thank you.
Our next question comes from total Petroff with toll brothers. Please state your question.
Hi, guys.
For taking my questions. Some of them were answered, but I was sure to two new ones.
Go back to the product validation.
And I appreciate the debt you have 13 drivable prototype started to better properties, but there were the same number in August of last year. So so so no new <unk>.
<unk> car for having built in the fourth quarter.
You did some crash tests, but the total validation phase so important for us. So he sits on explain the pickup truck for example, I assume that was built in Q4.
But the prototypes number did not increase so so no.
Yeah Yeah.
Thank you.
Yeah. Good question. So look we've increased our driving miles obviously in testing.
We tested more seasonality and we will continue to.
Do the testing Covid stood a little bit of.
Pressure on that which is why we said starting next quarter we will.
Report exactly where the COVID-19 impacts work.
And then with respect to crash testing for example has gone up you're reusing.
At the end, the MPP and where then putting it on modified or regenerated top hat on it. So we can crash test it again.
The recycling some of the MPP until we get some of the low volume manufacturing and tooling in place. So we can accelerate the number of chassis.
But that's our current constraint right now for chassis driven.
So for the pickup truck was it really drove you said it's on it's in the parking lot. If we can drive it if it wasn't for call it but the number of prototypes did not increase so it was just really.
Something that we could that we could try.
Yes, so yes, it is on RMP debt.
For pickup truck is on top of RMP.
So we just took another chassis.
And we rejuvenated debt and we put it back to work that's kind of how it's done here. That's how you get a lot of mileage.
If you will and use cases like a vehicle that gets wrecked it gets repaired.
On the line.
That makes sense.
That sounds great. That's a good test for your second third fourth owner a philosophy.
That is correct that is part of the way we're carrying it we want it to be payable for and so you have a good view on your total cost of ownership as well as your insurance costs.
Great. Thank you and my second question is you you introduced for the lifestyle vehicle than the delivery trucks than the pickup truck has the timeline of launching vehicles changed due to where the market is going you said you're focused more on commercial so should we still expect the lifestyle too low.
First or has it has the timeline changed thank you.
Yes, we're still going to launch the lifestyle vehicle will bring it with a few more configuration upgrades.
We're working through now so it can it can mean.
The need for some other customers, but yes, we're going to stay on with DLD first and then the MTV and then the pickup truck.
Great. Thank you guys.
Thank you.
Our next question comes from Joseph Spak with RBC capital markets. Please for your questions.
Thanks, everyone. Thanks, so much.
Lots of adjusted I guess I just wanted to.
Clarify a couple of things first on back to the subscription model.
Just to be clear is that still a per.
Possibility just at a later point in time or is that something you think you are completely abandoned.
No. It's a ratio issue, Joe we're going to focus on something sub 20% of our sales will be in category.
Otherwise, we got to have to raise a lot more capital as you know because youre going to have to see this on your books and then youre going to have all this accounting on mark to market.
And I just think it was.
Like any innovative idea and you can see the industry is struggling with the whole membership model as it is so there's no reason for it to be over weighted it would be appropriately weighted in our market. In addition to that you get into the areas of it doesn't positively impact incentives you got there.
There's a whole bunch of factors tax accelerated tax depreciation for the class.
So we're looking at it in a much more detailed and.
Return on capital perspective, not only for us, but for the owners of the vehicle and or those.
Those in the membership so membership is not going away, it's just being appropriately managed on our balance sheet that makes sense yeah.
Okay.
So then with respect to the lifestyle vehicle on you mentioned a couple of times mobility working people.
I'm curious have you had conversations with either the tncs directly or maybe for.
Leasing companies because it does seem like a vehicle that obviously aligns itself towards <unk>.
Towards the tncs.
Pretty well in.
And obviously you mentioned some of the electric benefit. So curious if you could mention any any plans or any conversations you've had.
And obviously, if youre sort of selling it either directly or to a.
Our free at least for that that absolves, the subscription ratio problem as well so they're not interested in subscription right. It just doesn't work for them all.
What what what they are what they are interested in some kind of a variable lease mechanism that works for their balance sheet as well.
But yes, we are.
We're moving into the commercialization phase, we have international sales coming up online.
We're looking at large.
Entities' debt or have already made the decision to make this migration.
The next two car generations and Thats the pipeline activity we're focused on.
And so the answer to your question is yes, and we see a lot of opportunity I mean, you know in.
Inbound calls as of today as well as outbound.
Okay.
Last one for me just going back to the decision to deemphasize engineering.
With the Hyundai.
Arrangement, the original on which I'm, assuming that that's now off the table, but if you go back for that or at least could say Hyundai gains.
Access to technology, you mentioned IP leakage is one of the potential problems with that what that arrangement can you just talk about like how do you unwind that sort of I.
I guess, a memorandum of understanding what work was done.
Do you think there was any IP league for obviously, a hundreds coming out with her on electric vehicle platforms as well.
I think I think what happened is pretty kind of case in point right. So I think the company just like any adolescent company as its learning its way.
All of US go through it but.
It factored in contract manufacturing based on the labor of engineers not based on the value of IP, which would change the value of that contract significantly.
And look we have experienced in this area and we're very focused on if we do work one we can protect our IP and we can get the residual value of that in addition to so it's kind of caused us to say hey, let's put that on hold we have so much demand for our three derivatives, let's get all that work done.
And then let's look at if there is partnerships partnerships can work in this industry.
But contract manufacturing work is as you know is not is not the best business line to be in and so was there some leakage well I'll leave it to you to make that decision, but obviously I'm not a big fan of doing that type of business.
Okay. Thanks very much.
Thank you Joe.
Our next question comes from Steven <unk> with Kronos capital. Please state your question.
Hi.
Last year during the.
Of course of the year you stated a couple of times that you have under discussion.
With some Oems and possibly the contract manufactured you said that they're going to be some announcements by the end of Q4 I'm just wondering what happened debt that.
That changed all that.
Right. So youre again owning the past as much as the present and the future.
Look I can only speak to what I know about this I think that.
They were.
They were focused on.
Maybe a little more aggressive than I would be.
In their statements I think.
And more maturity of this team would not would not be that presumptuous, we only announce what is contracted.
But yes, I think they had the opportunities, but they werent at our standard of representation to the public market. So.
That's all I can really say about that because I don't know much more.
But it also didn't really matter that much because you know obviously I wanted to go with it.
In a different direction based on the study we did in and with the boards.
Help and observations also kind of solidified that so I think we will.
Well certainly worked our way past this commentary and then with respect to contract manufacturing again, we wouldnt, making announced I mean again this comes back to having an experienced per.
Company team you have to be careful of statements you make.
So.
You know again I think it was a little premature although the reset caused us to look at all the negotiations and we're actually in a much better place.
So all things considering they're trending in the right direction.
<unk> got a follow up question.
But I think it will.
Off after that.
Okay.
With respect to the coming six months or year.
What can you say on your major milestones that Youre looking at.
Yes.
Yes, So look we'll continue to progress our gamma for the L. B.
<unk> really focused on how we will report reservations versus orders.
In addition to that locking in our geographic and con.
Contract manufacturing partner for the long term it won't be a short term decision. So we can get the return on capital it will fit into our long term strategy. In addition to that announcing who we partner with at the state level.
To bill.
Build and release in addition to that will start in Q2, taking defined reservations that again will be in alignment with the way. We report and so you have absolute clarity into these reservations and orders. So those are going to be just a few of the things that I would say it would be very <unk>.
Important if I was looking at it from your side.
Okay.
Thank you very much I just have one comment not a question.
Your Investor Relations team.
Not return email.
I don't know if it's the other gentleman on the call how did your success with that but I would suggest that your your investor relations team.
Get up to.
Gear.
<unk>.
Answer emails and be more forthcoming.
So we look at.
It's a great comment and he has been a little overwhelmed with.
People asking for responses and we're building out the team step by step we just brought in a few more people. So I think this quarter will do a much better job, but certainly feel free to call me anytime directly.
If you're not getting any responses in a timely manner, that's acceptable to you.
Okay very well thank you so much.
Thank you.
Thanks, everybody. Thanks, so much for joining us today and reach out if you have any follow up questions.
Or come on down to Texas, if you'd like to visit and see the products in California, when it opens back up.
That does conclude today's conference all parties may disconnect have a good evening.