Q3 2022 Lordstown Motors Corp Earnings Call
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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 speakers' 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 as 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 to the most directly comparable GAAP measures appears in our press release on our website.
Joining us today will be Lordstown Motors executive Chairman, Dan and apology.
Owen President Edward High power and CFO , Adam Cole with that I'd like to turn the call over to Ed.
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 condemned by congratulating the team at Lordstown Motors, our partners at Fox Con 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 government the speed of production and the ramp up and timing of our first deliveries.
<unk> of our first batch of up to 500 units have been built at the box Con 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.
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 waiting the receipt of both EPA and carb certification.
As previously reported all F&B assess crash testing has been successfully completed and remaining <unk> noncash testing is ongoing.
As with any new vehicle launch our engineers will continue to drive and accumulate miles on test vehicles defined and resolve any potential issues and help ensure that we give our customers a great experience.
<unk> over the air update capability will allow us to complete the 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 Nat toy semi finalist evaluation or.
Our team is pleased and excited by the initial feedback from these and other journalists both during the drive and in their early articles or example, Eric Stafford from current driver noted our novel four wheel hub Motors and stated that the endurance is and I quote designed for easy maintenance.
And the tide, turning radius makes it feel more maneuverable and other trucks.
Steven Cole Smith from Hagen Hagrid immediate commented that the endurance is and I quote pretty much the ideal spec, but 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 winter in January .
The endurance was recently shown at the new Thema electrified exhibit at the Sema show in Las Vegas.
We invite you to see our truck now until November 11 at the fleet forward show in Santa Clara, California, and at the <unk> Booth at the upcoming Los Angeles Auto show from November 19 through the 28.
As we have previously discussed we are limiting production of our first bathroom endurance is 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 <unk> 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 all size all electric pickup trucks in the market.
<unk> 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 box com.
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 box con and the NIH consortium.
Yesterday, we announced that <unk> 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 LMS C convertible preferred stock and will be used to fund in three phases. Our team's work in developing future electric vehicles in collaboration with box Com and its partners.
This direct investment in LLC replaces the $100 million originally earmarked for the Fox Con LLC joint venture that we discussed on our last call.
The remainder of Fox Con 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 20, <unk> and will take box <unk> common stock ownership in <unk> to approximately nine 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 CPUC approval would take box <unk> ownership based on current shares outstanding to approximately 18, 3%.
Following the second tranche closing box Con we will also have the right to designate two members of our board of directors.
While <unk> will have the right to vote, both its preferred and common stock holdings its voting rights under the purchased 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.
Boxcars additional investment in LLC is a strong sign of confidence in our team's capabilities and will help accelerate the <unk> ambitions of both companies.
We continue to believe that deep collaboration with box con as its preferred North American vehicle development partner and.
And its ecosystem, including NIH is key to our company's long term success.
In closing I am proud of the accomplishments of the Lordstown and Fox Con EV technology teams and 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 Fox Con and the op.
Opportunities it provides beyond our first vehicle.
I will now turn the floor over to our CFO , Adam crawl to present, our Q3 performance and our financial outlook.
Thank you Edward and good morning, everyone and thank you for joining us preparing for the call are 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 Fox Con that has led us to where we are today.
Our flexible and less capital intensive automotive OEM with a strong strategic partner and Fox Com.
Given our capital constraints, we continue to execute our 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 Fox Con is an important step in addressing our capital needs.
As I turn to our results I want to call out that the path contraction as 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 pre announced just before the end of the quarter. Our cash position represents a decrease of $32 million from the second quarter of 2022, the changing 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 issuances.
As you are all aware there is 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 details 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 on RV litigation accruals and a PP&E impairment.
For <unk>, we reported a profit from operations of approximately $61 million that included a $102 million of P&L benefit from the gain on the sale of the plant a onetime reduction in R&D from Opex reimbursement from Fox Con under the IPA less are smaller than our recharge and a smaller litigation.
Sure.
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% or $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 MRV charge. It is important to note the litigation accrual as a charge based on our current view of the potential losses in certain cases. These are only estimates as of a point in <unk>.
And actual results could differ materially.
Our second quarter SG&A was $29 9 million inclusive of a $6 5 million in RV charge, and a $2 million litigation accrual.
So apples to apples <unk> 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 with the decline in professional fees as we reduce our reliance on outside consultants.
Turning to R&D, it's our first full quarter without the operating cost of the lordstown facility sold to Fox Con in May <unk>.
Total R&D for the third quarter of 2022 was $19 8 million.
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 of operating a plant, which were down $9 8 million and more than half of this decrease was personnel related.
The remaining $18 9 million of <unk> 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 and other costs, which were slightly lower versus Q2.
The increase in personnel reflects additional fulltime 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 in 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 PPD based on our analysis, we determined it to $75 million noncash impairment was needed.
Turning to our outlook and liquidity the.
The new capital from Fox Con does not change our near term focus on tightly managing cash and spending.
It relates to the P&L I'll remind you that once we start selling vehicles, where we will we will begin reporting cost of goods sold.
Hogs will then reflect essentially at zero direct material margin given the <unk> already taken however, there will be additional MRV 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 vehicle.
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 and previously guidance 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 Fox <unk> investment, we expect year end cash of $150 million 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 the first quarter.
On our fourth quarter earnings call, we'll share an outlook for 2023 and.
In closing I want to express my sincere appreciation for all our hardworking colleagues along with the engage potential customers and our value supplier valued supplier partners, who are supporting US all in this journey to bring a great work truck to market and accelerate adoption.
Operator, we'll now take questions.
Yes.
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 will pause for a moment to compile the Q&A roster.
Your first question is from the line of Mark <unk> with Goldman Sachs. Please go ahead.
Yes, good morning, and thank you very much for taking the questions. The first was around the way. The next TV program will be developing my understanding previously was.
One would be into a joint venture and now as you were mentioning there is a 100 million potential.
Potentially of the preferred investment that will go to worse, how motors. So maybe you can talk us through how the mechanics, what will work going forward.
Is there still a joint venture just Laura so I'll have to take on more of the spend and given the investment being put into towards town.
More color that would be helpful.
Thank you Mark this is Edward so yes, the investment will be into lordstown and it will focus on the.
The first product that we will do in combination or in collaboration with Fox Con 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 box gun and the investment will be in three tranches to lordstown.
Yes.
Joint venture to standard <unk> is being disbanded and we kind of think the direct investment in <unk>, a better simpler easier structure. So I think that's very favorable.
Okay.
That's helpful. And then my second question just trying to understand the.
The bridge from the prior cash balance at year end to the to the new guidance. So it's 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 <unk> investments.
Well as the equity issuance done I think that gets most of the way there. It looks like there is maybe $10 million to $20 million of additional cash to Bridget.
Is that the right the right amount to be thinking of in terms of the upside.
From less less underlying cash use in the core businesses, so something like $10 million to $20 million. So I'm trying to get to sort of the bridge from the.
140 to 152 H losses that were previously communicated which seems like it's maybe 10 to 20 million last if I'm.
I'm sort of thinking right around the cash balance.
Yes, that's about right Mark.
Got it Okay I'll turn it over thank you.
Once again, if you would like to ask a question simply press Star then the number one the entre telephone keypad.
Okay.
You have a follow up question from the line of March Lenny with Goldman Sachs. Please go ahead.
Yes, thanks for taking the follow up questions.
Maybe just a couple more for me if there aren't other analysts in the queue.
In terms of the.
<unk> 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 four or 500 units.
I mean, it's subject mark to a bunch of variables in terms of.
The timing the ramp up 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 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 from me you mentioned seeking interest from other Oems to potentially partner to build the endurance. Maybe you can elaborate on the degree of interest youre seeing from from Oems to extent, you're able to comment on that thank you.
We're not going to comment on that there are discussions but.
We're not going to comment on that.
Got it okay. Thank you.
Thank you.
Your next question is from the line of Emmanuel Rosner with Deutsche Bank. Please go ahead.
Alright, Thank you very much good morning.
Good morning, Chris.
First question is.
Anyway could you dimension for us.
Expected volume progression either production or delivery.
Between now and year end and the expectations for 2023.
Well Emmanuel what we said was we're focused on the first batch of up to 500, we expect that we started production at a very slow rate.
And as we resolve the remaining part panic pedigree and availability issues.
We expect to.
Increase that slow 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 spoke about some of the.
Issues with parts and tooling group could you just give a little bit more color onto what is the constraints on parts.
What is the situation on the supply chain side.
Well they are all issues that we're actively managing Emmanuel.
So.
I'm not going to get too much into the into more detail about that but they are all issues that.
You hear about throughout the industry and but we have a very strong and capable team that is working through them.
Yes, I mean, obviously you can't you can't produce a vehicle or sell a vehicle with one missing part so a handful of part availability issues can slow it down and Thats what were 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 ahead of us with our growing relationship with Fox Con and I look forward to our team executing and realizing them.
<unk>.
Thank you for joining today's conference call you may now disconnect.
Please.
Sure.
Yes.
Okay.
Okay.
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