Q4 2022 Lordstown Motors Corp Earnings Call
Speaker 2: Chris, I'll be your conference operator today. At this time, I'd like to welcome everyone to the Lordstown Motors Q4 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again.
Speaker 2: Thank you, Carter Driscoll. Head of Investor Relations, you may begin.
Speaker 3: Thank you, operator. Good morning, and thank you to all for joining Lordstown Motors' fourth quarter and Fiscal 22 earnings conference call.
Speaker 3: To supplement today's discussion, please go to our IR website, view our press release and investor deck.
Speaker 3: Before we begin, I want to call your attention to our Safe Harbor provision for forward looking statements that is posted on our website and is part of our quarterly update.
Speaker 3: The St. Harvard 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 we cite in our form 10K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes.
Speaker 3: Joining us today will be Lordstown Motor CEO and President Edward Hightower, CFO Adam Kroll and Executive Chairman Dan Inavaggio.
Speaker 3: With that, I'd like to turn the call over to Edward.
Speaker 4: Thank you, Carter, and welcome everyone. I would like to start today by giving you an update on the endurance temporary production pause to address post-launch quality concerns and the voluntary recall that we announced last week. Let me justkeeping to quickly statistical resources and then we'll hit five additional dimensions over time.
Speaker 4: As we shared throughout last year leading up to the launch, engineering readiness, quality, and part availability would govern the speed and ramp up of the endurance launch.
Speaker 4: Post-launch, the ongoing adherence to our part quality and vehicle quality standards is required to maintain or accelerate our production plan.
Speaker 4: Shortly after our January production update, we began to discover and experience several new performance and quality issues with the vehicles coming off the production line and vehicles
Speaker 4: The issue is affected several vehicle subsystems including propulsion, chassis and infotainment.
Speaker 4: At a high level, most of these issues could be attributed to supplier part quality, shortfalls, and software glitches.
Speaker 4: As our customers are our highest priority, we decided to temporarily pause production as we work with our supplier network to root cause the issues.
Speaker 4: conduct additional vehicle component and software testing, and as needed make updates to affected vehicle components
Speaker 4: Concurrent with this production pause, we recently discovered isolated incidences of endurances losing propulsion while driving.
Speaker 4: Root cause analysis by our engineering team, manufacturing partners, and supplier network identified a specific electrical connection as the driver of this issue.
Speaker 4: In this regard, we filed paperwork with the National Highway Traffic Safety Administration, NHTSA, to voluntarily recall the endurance to address this issue.
Speaker 4: The recall affects 19 vehicles that are either in the hands of customers or being used internally by LMC.
Speaker 4: We have worked with our supplier network to implement a part corrective action that we believe will address this issue and have begun to retrofit customer and internal vehicles with the updated parts.
Speaker 4: Subsequent to this filing,
Speaker 4: Our park brake supplier informed us that one of the source components in this system was not to specification.
Speaker 4: They have since supplied us with corrected parts, and we have filed a voluntary recall to address this issue as well.
Speaker 4: Vehicles waiting for shipment.
Speaker 4: vehicles in process at the manufacturing plant will also be retrofitted with both corrective actions once sufficient quantities of the components are
Speaker 4: Our team has also worked closely with our supplier network to root cause the other post-launch quality issues and develop and implement corrective actions.
Speaker 4: which have included part quality corrections, part design modifications, retrofits, and software updates. We now have line of sight to the resolution of the issues that resulted in the production pause and voluntary recalls.
Speaker 4: And in the coming weeks, expect to announce when we will resume production and deliveries.
Speaker 4: We recognize and understand that this news is disappointing to our stakeholders. It is to our team as well.
Speaker 4: However, please understand that the actions we have taken are consistent with our company values, in the best interest of our customers, and aligned with the long-term interests of Lordstown Motors.
Speaker 4: New vehicle launches require time, experience, and diligence.
Speaker 4: especially as vehicles transition towards electrification and the increased use of features, technologies, and attributes driven by software.
Speaker 4: Our experienced team has collectively been involved in hundreds of new vehicle launches across multiple OEMs around the world. We will continue to put our customers and values first.
Speaker 4: As we have discussed on previous earnings calls, we plan to build an initial batch of up to 500 endurance vehicles this year in order to seed the commercial fleet market rated.
Speaker 4: demonstrate the capabilities of the truck, and support our OEM partnership pursuits.
Speaker 4: which is critical to scaling production.
Speaker 4: To date, approximately 40 endurance vehicles have been completed or are in process.
Speaker 4: As you may recall, we decided to limit the size of the first batch of commercial production as the bomb cost of the endurance is materially higher than our selling price.
Speaker 4: Forming the right partnerships will create the business rationale to invest in the hard tooling and VAVE actions required to reduce its BOM costs and scale production of the industry.
Speaker 4: Lordstown Motors launch of the Endurance created the opportunity for other OEMs to access the platform and manufacturing capacity of a fully homologated and certified vehicle in the second most popular segment in the United States.
Speaker 4: Georgetown Motors launch of the Endurance created the opportunity for other OEMs to access the platform and manufacturing capacity of a fully homologated and certified vehicle in the second most popular segment in the United States, both sides pickup trucks.
Speaker 4: While we continue to pursue partnership opportunities, should we not identify a partner in the coming months, we may decide to pause commercial production of the endurance until the partner is identified.
Speaker 4: This week, we will be displaying the endurance at NTEA Work Truck Week in Indianapolis.
Speaker 4: We will also display an endurance with commercial fleet focus accessories from leading manufacturers and suppliers of aftermarket equipment.
Speaker 4: To provide our customers with aftermarket service and warranty support, we have entered into an agreement with a third-party provider under which we will jointly provide service and warranty for the endurance vehicles in key states where allowed by law.
Speaker 4: Technicians at these service locations will complete Lordstown's Vehicle Service Training Curriculum and our partner provider will provide service solutions including warranty and preventive and schedule maintenance.
Speaker 4: We will share more about on the strategic rollout with our service partner in the coming weeks.
Speaker 4: Switching to our future vehicle program.
Speaker 4: We continue to work collaboratively with VoxCon and the MIH consortium on the pre-development work and vehicle development process for VDP deliverables for our next platform and vehicle program.
Speaker 4: The next platform and vehicle program are key to Lordstown Motors long-term business strategy and are becoming a greater portion of our company's focus.
Speaker 4: While we are not ready to announce the details yet, I can tell you that this vehicle will serve growing battery electric vehicle commercial fleet segments that are different from those targeted by the endurance.
Speaker 4: Also, the new vehicle will likely source key components and subsystems from Foxconn and MIH consortium members and be built in the Foxconn EV Ohio assembly plant.
Speaker 4: Discussions with potential anchor customers are also ongoing.
Speaker 4: Our asset-like business model, in collaboration with the Foxconn EV ecosystem, including MIH, will provide the opportunity for lower to town motors to create winning EVs that are tailored to the needs of our customers that use them for various work applications.
Speaker 4: while gaining the cost benefits of scale.
Speaker 4: We shared the story of Lordstown's future in collaboration with Foxconn and MIH earlier this year at CES.
Speaker 4: We also plan to discuss our role in the growing Foxconn EV ecosystem later this month at the upcoming South by Southwest event in Austin, Texas during their mobility, electrification, and innovation trade.
Speaker 4: Q4 2022 was a very busy and exciting quarter, and Q1 2023 has continued this trend.
Speaker 4: I will now turn the floor over to our CFO , Adam Kroll, to present our Q4 performance and financial outlook. Adam, you are PI run into a very difficult time getting through the 4-?
Speaker 4: turn the floor over to our CFO , Adam Kroll, to present our Q4 performance and financial outlook. Adam.
Speaker 5: Thank you, Edward. Good morning, everyone, and thank you for joining us.
Speaker 5: During 2022, we significantly reduced our cash burn, fixed costs and operating complexity, as well as raised $263 million in capital, of which $210 million was from Foxconn and the balance from common stock issuances into the market.
Speaker 5: The Foxconn funds included 157 million related to the plant sale that was received in 2022.
Speaker 5: plus another $53 million in November from the sale of common and preferred stock. You may recall the total proceeds from the plant sale were $257 million of which $100 million in down payments were received in 2021.
Speaker 5: Under the terms of the investment agreement, we entered into with Foxconn in November and subject to regulatory approval, other conditions and satisfaction of the program milestones.
Speaker 5: Foxconn is expected to purchase up to $117 million in additional common and preferred stock. As a reminder, the use of proceeds from the preferred stock investments may only be used to fund costs associated with developing the new vehicle program. There's more detail on the sources and timing of all the funds raised in our earnings deck on our IR site.
Speaker 5: Q1 of 2022 was our last full quarter with plant operating costs as the asset sale closed May 11th. In that quarter, our total operating costs were approximately 22M and were budgeted to rise to support launch and increase production.
Speaker 5: Thus, we shed roughly 100 million in annual operating costs in exchange for a contract manufacturing fee per vehicle and $257 million in asset sale proceeds.
Speaker 5: In addition, we benefit from substantially lower operating complexity and risk by putting manufacturing in the hands of Foxconn.
Speaker 5: And as I discussed, we advanced our long term vehicle development partnership with Foxconn and its ecosystem.
Speaker 5: I also want to point out that in every quarter of 2022, we outperformed our cash burn and liquidity targets through spending discipline well beyond the impact of the production and launch timing.
Speaker 5: Ending with almost $222 million in cash and short-term investments, the fourth quarter was our most significant beat at $57 million, or 34% above, the top end of the range in our outlook.
Speaker 5: As you're all aware, the transitional aspects of 2022 create a lot of noise, which I will call out as I walk you through our results. More detail can be found in our press release and the earnings deck on our IR site.
Speaker 5: Upon reaching certification in Q4, we began customer deliveries of the endurance, resulting in revenue recognition of three vehicles in the period.
Speaker 5: As I explained on our last earnings call with the start of commercial production and sales, we would begin reporting cost of sales in the 4th quarter. Some of which were reported in R and D, or for the 1st, 9 months of 2022.
Speaker 5: Fourth quarter and full year reported cost of sales totaled approximately $30 million. However, it's important to understand how that breaks down.
Speaker 5: Our production costs were $635,000, which included direct materials on the vehicle sold, manufacturing, warranty accrual, delivery, and launch related costs.
Speaker 5: The remaining $29.4 million of cost of sales included $8.3 million of depreciation on production equipment and tooling we continue to own, and $21 million of charges in connection with inventory write-down, primarily related to our NRV adjustment for inventory acquired during the period and another charge we took for excess inventory on hand. The NRV represents a charge we take to write down inventory to the net realign...
Speaker 5: More detail can be found in the notes to our financial statements in the 10-K.
Speaker 5: Our total SG&A and R&D costs for the fourth quarter were $37.8 million and for the year were $246.1 million.
Speaker 5: SG&A expenses were $22.2 million for the quarter, including $7.6 million in non-cash items for the write-off of a prepaid royalty and Accelerates.com and $1.2 million of litigation accruals.
Speaker 5: The remaining 13.3 million includes 8.3 million in personnel and professional fees, 3.2 million in legal fees and insurance premiums, and 1.9 million in other services software and marketing expenditures.
Speaker 5: Compared to the 4th quarter of 2021 personnel and professional fees were down 39%. Primarily due to a significant reduction in consulting support that has been trending down since the start of 2022.
Speaker 5: Outside legal costs continue to trend down as well compared to Q4 of 21. They were down almost 80% and a significant reduction in our annual insurance renewals in the quarter. This led to a 23% decrease in premiums, which will carry forward.
Speaker 5: Other costs, primarily marketing spend were 11% higher compared to the prior year as we ramped selling activity.
Speaker 5: For the fiscal year, SG&A expenses were $138.3 million. However, that includes $33.9 million in litigation accruals.
Speaker 5: $25.6 million in NRV charges for the first nine months of 2022 before reporting cost to sales.
Speaker 5: and 7.6 million for the write-off of the prepaid royalty and accelerated stack-ups.
Speaker 5: The remaining 71.1 million of SGA consisted of 40.5 million for personnel and professional people.
Speaker 5: $11.4 million of legal expenses, $11.8 million of insurance premiums, and $7.2 million for other services software and marketing expenditures.
Speaker 5: The year-over-year improvement was driven by a $23.9 million decrease in outside legal fees and $9.2 million in other professional consulting fees, net of an increase in personnel costs as we build capabilities in-house.
Speaker 5: Partially offsetting these items were higher expenditures for services and marketing as we prepared to launch the endurance, along with higher insurance premium representing the timing of a higher renewal late in 2021.
Speaker 5: R&D expenses were $15.6 million in the quarter, including $1.8 million of accelerates.com, $10.6 million in personnel and consulting costs, and $3.2 million in software, other services and overhead.
Speaker 5: This compares to non plant related personnel and consulting costs of 16.9Million in the 4th quarter of 2021 and 14.2Million in the 3rd quarter of 2022.
Speaker 5: Representing decreases of 38% and 26% respectively. As endurance development and testing expenditures trend down approaching the launch as previously discussed in our outlooks.
Speaker 5: For the same reason, break costs were also down 1.4 million versus Q4 of 2021 and relatively flat to the third quarter of 2022.
Speaker 5: For the full year, the headline number of 107.8 million in R&D compares to 284 million in 2021.
Speaker 5: However, these amounts include plant related costs of $33.3 million in 2022, incurred prior to the sale in May.
Speaker 5: And 57.1M in 2021.
Speaker 5: The amount in 2022 also reflects an 18.4 million reimbursement received from Foxconn as part of the sale.
Speaker 5: Prototype component expenses were $22.8 million in 2022, down 78% versus $105 million in 2021, due to the transition from parts testing to beta and ppb builds and ultimately launch.
Speaker 5: The remaining R&D expenditures in 2022 totaled $70 million compared to $122 million in 2021. In 2022, personnel and professional fees were $55.2 million, representing an almost 47% decrease from 2021. Freight was lower by $6 million, or 86%. Again, the trends are all tied to progression of endurance development to launch. And that's exactly why this year's annual 40 process goes wrong. Any contributions favour thehomeijk generateing's good
Speaker 5: Other operating items for the year totaled $111.4 million, representing a non-cash impairment on our long-lived assets.
Speaker 5: As highlighted last quarter, the move into commercial production triggered a review from the charge of approximately 75 million in Q3.
Speaker 5: The primary metric we use to evaluate fair value is our enterprise value.
Speaker 5: Which, of course, fluctuates with our stock price, cash position, and net assets or liabilities.
Speaker 5: The decline in our stock price during the fourth quarter was the primary contributor to the incremental impairment of approximately 21 million in Q4.
Speaker 5: We also wrote down the value of certain prepayments for inventory that are for quantities we do not anticipate being consumed by the endurance. Including assets related to the right to access General Motors parts. Which represents the balance of the total impairment.
Speaker 5: More detail on each of these can be found in the 10K footnote.
Speaker 5: At the end of 2022, cash and short-term investments were almost 222 million, approximately 18 million higher than the third quarter of 2022. The changing cash consists of 42.7 million in cash use for operations, inclusive of a 21.1 million dollar working capital investment.
2.9M in capital expenditures, net of 1.1M in asset sale proceeds, and 63.7M in cash proceeds from the issuance of common and preferred stock, including the 52M purchased by Foxconn.
The $57 million cash beat I mentioned earlier was due to cost containment, which represented approximately 13 million.
along with $12.4 million in stock sales under the ATM, $12 million in lower CapEx, and $13 million in working capital, excluding inventory.
Supply chain issues and a decision not to pull forward as much of the inventory purchases into the fourth quarter contributed to the outperformance.
The impact of lower endurance production and inventory buys was less than 3 million of the benefit.
The CAPEX benefit was almost entirely timing related and will shift into the first and second quarters of 2023.
Turning to our outlook, while our business model is more durable and operational execution has improved, we will continue to execute a capital constrained business plan. Making trade offs on what and when we spend the funds we have.
Scaling the endurance, even where we define a strategic OEM partner, will require substantial additional capital.
And while we expect 100M in preferred stock funding under the Foxconn investment agreement. Will cover the plan pre development work for the new vehicle program in 2023. Significantly more capital will need to be raised to reach certification, obligation and commercial sales. In addition, our litigation contingencies could be material.
With several moving parts and variables with the endurance program and the first joint EV program with Foxconn, we are confining our outlook to the first quarter of 2023. Moreover, we won't be providing production guidance as that is highly dependent upon the timing to resolve the matters that had discussed earlier and other factors. Thank you.
I will point out again that cost of sales now reflects essentially zero direct material margin, given the NRV is almost entirely taken prior to a sale due to advanced inventory virus.
However, we will have incremental production costs associated with warranty, recalls, delivery, manufacturing, and other costs. We also expect to take additional NRV charges on inventory acquired in future periods as well as depreciation.
We expect to end the first quarter of 2023 with $150 to $170 million in cash and short-term investments, excluding any additional Foxconn funding, other equity sales, or contingent liabilities.
Relative to Q4 of 2022, we anticipate aggregate SG&A and R&D to decline slightly without the accelerated stock compensation litigation accruals and asset write down. As R&D modestly increases with new program development activity, partially offsetting the larger decrease in SG&A. We expect CapEx to be modestly higher for the reasons I mentioned earlier.
and working capital is likely to consume less cash. The remaining $117 million of Foxconn investments discussed earlier are broken down as follows. Approximately $47 million from a second tranche of common stock following satisfaction of conditions under the investment agreement.
Fallen by tranches of 30 million and 40 million of preferred stock purchases that are each subject to achieving mutually agreed development milestones and satisfying other conditions. You cannot predict at this stage when or if those milestones will be achieved. As a reminder, the preferred stock investments will fund an increasing share of our costs as development of the new program advance.
With that, operator, please open the line for questions.
Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad.
The first question is from Tyler DeMatteo with BTIG. Your line is open. Yeah, thanks everyone. Appreciate you for taking the question. So my first one here is just on the initial endurance sales. Now that you're selling the vehicle, how has that changed the customer discussions?
and the dynamics and really trying to think about what other opportunities now that vehicles are rolling off the lines and in their hand. Any color there?
I would say the dynamic is there continues to be interest in the vehicle, Tyler. Obviously we're disappointed that we've had to take the pause in production to address the issues that
that I went through in my section. But we look forward to getting them back, getting back into production and resuming deliveries so we can continue to get more of them in the hands of customers. We have customers that are looking forward to their deliveries and we're looking forward to getting them to them.
Okay, great. And then my follow-up here. On the new vehicle and the strategy and how you're thinking about incorporating it into the portfolio, I know you said it will have different end markets than the endurance. Just any other color there about how you're thinking about bringing that vehicle to market? I know you said you'll give some details.
pickups in the commercial fleet space that could benefit from an electric vehicle that's targeted towards their needs. We're assessing the market, we're looking at those different segments and the opportunities and taking that into consideration in our pre-development work of the next platform and vehicle program.
And then with regard to scale, that's really where our opportunity is.
with us as Foxconn's preferred vehicle development partner, we plan to leverage common components, common subsystems, and share them across, you know, that's the plan is for them to be shared across multiple OEMs. That will allow smaller OEMs to gain scale. So we're thinking about how we meet those growing market opportunity needs.
with a vehicle that has the benefits of scale because we implement a strategy where common high-value components need to be engineered just once and can be reused and that a common bill of process or common manufacturing process out of Ohio can be used to build multiple vehicles.
So that's what we're thinking, market opportunity and a drive towards scale. Okay, great. Thank you. I'll turn it back to the Q.
Thank you Tyler. The next question is from Winnie Dong with Georgia Bank. Your line is open. Hi I think for a technical question. I was wondering if you can maybe comment based on the line of sight on issues that we can identify with the suppliers.
Should we anticipate the six to be like an end of Q1 event or something that will take longer to address?
No, thank you for the question Winnie. I think you know vehicle launches essentially have issues and really the key steps are identifying the issue, determining a root cause, determining what the corrective action is, and then
determining when that corrective action or actions can be implemented into the vehicle so that you can get the vehicle back in the hands of your customers.
When I say we have line of sight, the positive thing is we've identified the issue, we've identified the root causes and potential collective actions or corrective actions. But you're not done until you're done. So we're following a very disciplined and rigorous process that many of us have worked on.
worked with throughout other OEMs. And we don't want to announce that we're done, until we're done, but we are following the key steps of the path. And as I said, we have line-of-site, meaning we know the root causes of the issue and the corrective actions. We don't have all of the details on when every corrective action will be available to us.
So that's why we have it not giving guidance today, but in the coming weeks, we expect to be able to give guidance on when we'll resume production and delivery.
Okay, got it. That's very helpful. Thank you. And then a follow up. Thank you. A follow up on the commentary of looking for it, sort of like a strategic OEM partnership as it relates to the endurance.
A longer we can maybe remind us and elaborate with on that because if I hear correctly you mention it the partner is not identified and essentially you pause the production or did I do that correctly?
Yes, yes, Wendy, you heard that, that correctly. And it, and it goes back to, um, the guidance we gave, uh, last year in one of our previous earnings call, in that because the bond costs of the endurance is significantly higher than its selling price, uh, materially higher than its, uh, selling price, I believe is what we said.
It is a, you know, upside down margin on each one. The good thing is we know how to bring that cost down significantly through investments in hard tooling or high volume tooling, if you will, said another way, and various VAVE projects, value engineering and value analysis projects, that would bring the BOM cost down.
However, as I alluded to and as Adam alluded to, and as we said in the previous calls, it would be a significant investment to implement the hard tooling for those projects.
So we believe that the most prudent business decision would be to bring on another partner whose volume opportunity combined with our commercial fleet volume opportunity is Lordstown.
would make more business sense to spend that additional investment for the hard tooling and the VAVE projects. So our discussions with potential partners are ongoing. We think it's an attractive proposition.
Not only because the vehicle is in the second most popular segment in the United States, which is full-size pickups. It's one of the few full-size battery electric pickup trucks on the market today. Another OEM could enter the market much faster by partnering with us than doing a vehicle and plant from the ground up.
So, it's not only that market opportunity is attractive, but the vehicle is fully homologated, it's fully certified, it has been launched, and it's in the marketplace, so we see that as an attractive and shorter path for another OEM who wants to get into this attractive market.
And if we don't find that partner, we don't see it making business rationale for us to spend that investment, significant investment ourselves. So we would likely pause production until that partner is identified. Got it. That's very helpful. If I can squeeze one last question.
that will decline and you've seen it each quarter sequentially, the capex numbers are coming down. It just continues along that same development path. Whereas you launch the vehicle, there's less obviously to invest in the equipment. Obviously, we also no longer own the plant, which early in the year that also had its share of capex. So it's not going to be material amount of capex in the very, very near term.
But as the program advances with Foxconn, then obviously it would ramp up after that.
the program advances with Foxconn then obviously it would it would ramp up after that. Thank you so much.
Again, that's star one. If you'd like to ask a question, the next question is from Mark Delaney with Goldman Sachs. Your line is open. Good morning and thank you for taking the questions. The first was about the future vehicle with Foxconn. You spoke a little bit around the cost to commercialize that. Could you elaborate a bit more on the magnitude of costs? Yes.
So what we laid out is that approximately 100 million, well 100 million dollars of the preferred investment that Foxconn is making that we announced back in November will go towards the pre-development work.
for the future platform and new program. This program, you know, it fits with the ambitions of both Foxconn and us. Foxconn has ambitions to become a greater part of the EV supply chain through their growing EV ecosystem. And as their preferred vehicle development partner, we will be doing all of the design, engineering, development, testing, homologation.
certification of these vehicles that leverage those components and then build them in the Foxconn EVOhio plant. But however, as you know, 100 million dollars is not sufficient to take a vehicle from concept all the way into production. So we do anticipate
needing to raise additional capital once we have a well-defined program with the business case, the markets, the customers, the architecture identified, the cost structure. And then we will be in collaboration going back to the market to raise the additional capital to take that vehicle into production. And that will be
We'll be sharing more with you on that process as it progresses throughout the year.
Okay, I'm going to get it. Yeah. Hey, Mark. I think part of what I'd add to that is it doesn't have to all come from us. It doesn't have to all come from equity. There's a number of different avenues we can and would expect to pursue. We're not certainly at a point where we can talk more specifically.
But we want to make sure obviously people are aware more capital will need to come to to bring the program to market. But there's there's numerous alternatives that we've we've considered and will continue to pursue.
We want to make sure obviously people are aware more capital will need to come to, to bring the program to market. But there's, there's numerous alternatives that we've, we've considered and will continue to pursue when the time is right.
Okay, that's a helpful caller, thank you. And then on the quality issues that you're working through for the endurance, you spoke a bit on timeline and some of the things you're doing. Any cost criteria and numbers you can share as you're starting to get line of sight, what might the cost per unit be for
be component design modifications that will not materially change the cost of those components. So the good thing is we have line of sight of those issues and it's implementing, completing the implementation of the plan to get all the changes we need.
Into production any vehicles retrofit needed done Any customer updates needed done and then we'll give guidance on what that time. It looks like Hey mark, we we don't expect it to be material. I mean as that said it's night. It's affected 19 vehicles
Thank you. We have no further questions at this time. I will turn it over to the presenters for any closing remarks. In closing, I would like to thank our team for their resilience and attention to detail on both the endurance and the performance of the
and the vehicle development process deliverables for our next platform and vehicle program. I would also like to thank our shareholders for their continued support. Thank you for all of you who joined the call today. Thank you. www. pursuitof vehicle development programs Ally Spy
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Lord's Stem Motors Q4 2022 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If you'd like to ask a question during this time simply press star then the number one on your telephone keypad To withdraw your question, please press star one again Thank You Carter Driscoll head of investor relations. You may begin Thank You operator good morning And thank you to all for joining the Lordstown Motors fourth quarter and fiscal 22 earnings conference call To supplement today's discussion. Please go to our IR website
view our press release and investor deck. Before we begin, I want to call your attention to our Safe Harbor Provision for forward-looking statements that is posted on our website and is part of our quarterly update. The Safe Harbor Provision identifies risk factors and uncertainties that may cause actual results to differ materially from the content of our forward-looking statements for the reasons we cite in our Form 10-K and other SEC filings.
including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be Lordstown Motor CEO and President Edward Hightower, CFO Adam Kroll, and Executive Chairman Dan Inavaggio. With that, I'd like to turn the call over to Edward.
Thank you, Carter, and welcome everyone. I would like to start today by giving you an update on the endurance temporary production pause to address post-launch quality concerns and the voluntary recall that we announced last week. As we shared throughout last year leading up to the launch, engineering readiness, quality, and part availability would govern the speed and ramp up of the endurance launch.
Post-launch, the ongoing adherence to our part quality and vehicle quality standards is required to maintain or accelerate our production plan. Shortly after our January production update, we began to discover and experience several new performance and quality issues with the vehicles coming off the production line and vehicles in process.
The issues affected several vehicle subsystems including propulsion, chassis, and infotainment. At a high level, most of these issues could be attributed to supplier part quality shortfalls and software glitches. To save you time, visitMaybe.What stories and ideas how can Alleg re. Del fact I City Body milesERUN AND
As our customers are our highest priority, we decided to temporarily pause production as we worked with our supplier network to root cause the issues, conduct additional vehicle component and software testing, and as needed make updates to affected vehicle components and software.
Concurrent with this production pause, we recently discovered isolated incidences of endorances losing propulsion while driving. Root cause analysis by our engineering team, manufacturing partners, and supplier network identified a specific electrical connection as the driver of this issue.
In this regard, we filed paperwork with a National Highway Traffic Safety Administration, NITSA, to voluntarily recall the endurance to address this issue. The recall affects 19 vehicles that are either in the hands of customers or being used internally by LMC. We have worked with our supplier network to implement a part corrective action that we believe will address. The recall affects 19 vehicles that are either in the hands of customers or being used internally by LMC.
and we have filed a voluntary recall to address this issue as well. Vehicles waiting for shipment.
vehicles in process at the manufacturing plant will also be retrofitted with both corrective actions once sufficient quantities of the components are
Our team has also worked closely with our supplier network to root cause the other post-launch quality issues and develop and implement corrective actions.
which have included part quality corrections, part design modifications, retrofits, and software updates.
We now have line of sight to the resolution of the issues that resulted in the production pause and voluntary recalls.
and in the coming weeks, expect to announce when we will resume production and deliveries. We recognize and understand that this news is disappointing to our stakeholders. It is to our team as well.
However, please understand that the actions we have taken are consistent with our company values, in the best interest of our customers, and aligned with the long-term interests of Lord's Town Motors. New vehicle launches require time, experience, and diligence.
especially as vehicles transition towards electrification and the increased use of features, technologies, and attributes driven by software. Our experience team has collectively been involved in hundreds of new vehicle launches across multiple OEMs around the world. We will continue to put our customers and values first. As we have discussed on previous earnings calls, we will continue to put our customers and values first.
We plan to build an initial batch of up to 500 endorns vehicles this year in order to see the commercial fleet market, demonstrate the capabilities of the truck, and support our OEM partnership pursuits, which is critical to scaling production.
Today, approximately 40 endurance vehicles have been completed or in process. As you may recall, we decided to limit the size of the first batch of commercial production as the bomb cost of the endurance is materially higher than our selling price.
Forming the right partnerships will create the business rationale to invest in the hard-tooling and VAVE actions required to reduce its bomb cost and scale production of the truck.
Lordstown Motors launched of the endurance created the opportunity for other OEMs to access the platform and manufacturing capacity of a fully homologated and certified vehicle in the second most popular segment in the United States both sides pickup trucks While we continue to pursue partnership opportunities
Should we not identify a partner in the coming months, we may decide to pause commercial production of the endurance until the partner is identified. This week we will be displaying the endurance at NTEA Worktruck Week in Indianapolis. We will also display an endurance with commercial fleet focus accessories from leading manufacturers, manufacturers, and manufacturers.
and suppliers of aftermarket equipment. To provide our customers with aftermarket service and warranty support, we have entered into an agreement with a third party provider under which we will jointly provide service and warranty for the endurance vehicles in key states were allowed by law.
Technicians at these service locations will complete Lordstown's Vehicle Service Training Curriculum and our partner provider will provide service solutions including warranty and preventive and scheduled maintenance.
We will share more about on the strategic rollout with our service partner in the coming weeks. Switching to our future vehicle program.
We continue to work collaboratively with Foxconn and the MIH consortium on the pre-development work and vehicle development process for VDP deliverables for our next platform and vehicle program. The next platform and vehicle program are key to Lordstown Motors long-term business strategy and are becoming a greater portion of our company's focus.
While we are not ready to announce the details yet, I can tell you that this vehicle will serve growing battery electric vehicle commercial fleet segments that are different from those targeted by the endurance.
Also, the new vehicle will likely source key components and sub-systems from Foxconn and MIH Consortium members and be built in the Foxconn EV Ohio assembly plan. Discussions with potential anchors customers are also ongoing. Our asset light business model.
and collaboration with the Foxcon EV ecosystem, including NIH, will provide the opportunity for large town motors to create winning EVs that are tailored to the needs of our customers that use them for various work applications.
while gaining the cost benefits of scale. We shared the story of Lord Sound Future and collaboration with BoxCon and MIH earlier this year at CES.
We also plan to discuss our role in the growing Foxconn EV ecosystem later this month at the upcoming South by Southwest event in Austin, Texas during their mobility, electrification and innovation trade. Q4 2022 was a very busy and exciting quarter and Q1 2023 has continued this trend. I will now turn the floor over to our CFO , Adam Crowell.
to present our Q4 performance and financial outlook. Adam. Thank you, Edward. Good morning, everyone, and thank you for joining us.
During 2022, we significantly reduced our cash burn, fixed costs and operating complexity, as well as raised 263 million in capital, of which 210 million was from Foxconn and the balance from common stock issuances into the market.
The Foxconn funds included 157 million related to the plant sale that was received in 2022, plus another 53 million in November from the sale of common and preferred sites. You may recall the total proceeds from the plant sale were 257 million, of which 100 million and down payments were received in 2021.
Under the terms of the investment agreement, we entered into with Foxconn in November and subject to regulatory approval, other conditions and satisfaction of the program milestone.
BoxCon is expected to purchase up to $170 million in additional common and preferred stock. As a reminder, the use of proceeds from the preferred stock investments may only be used to fund costs associated with developing the new vehicle program. There's more detail on the sources and timing of all the funds raised in our earnings deck on our IR site. Thank you.
Q1 of 2022 was our last full quarter with plant operating costs as the asset sale closed May 11th. In that quarter, our total operating costs were approximately $22 million and were budgeted to rise to support launch and increase production. Thus, we shed roughly $100 million in annual operating costs in exchange for a contract manufacturing fee per vehicle and $257 million in asset sale proceeds. In addition, we benefit from substantially lower operating complexity and risk by putting manufacturing in the hands of Foxconn.
And as Ed discussed, we advanced our long-term vehicle development partnership with Foxconn and its EV ecosystem. I also want to point out that in every quarter of 2022, we outperformed our cash burn and liquidity targets through spending discipline well beyond the impact of the production and launch timing. Ending with almost 222 million in cash and short-term investments. Ending with $1.5 million in cash and short-term investments.
The fourth quarter was our most significant beat at 57 million, or 34% above, the top end of the range in our outlook. As you're all aware, the transitional aspects of 2022 create a lot of noise, which I will call out as I walk you through our results. More detail can be found in our press release and the earnings deck on our IR site. Upon reaching certification in Q4, we began customer deliveries of the endurance, resulting in revenue recog... Ok?
However, it's important to understand how that breaks down.
Our production costs were 635,000, which included direct materials on the vehicle's sold, manufacturing, warranty accrual, delivery, and launch-related costs.
The remaining 29.4 million of cost of sales included 8.3 million of depreciation on production equipment and tooling we continue to own and 21 million of charges in connection with inventory write down primarily related to our NRB adjustment for inventory acquired during the period and another charge we took for access inventory on hand.
The NRV represents a charge we take to write down inventory to the net realizable value, which equates to the sales price of the endurance. The result is that what goes through cost of sales and production costs represents a 0 direct material margin because it is after the NRV.
The excess inventory charge was a small amount taken to address purchases related to supplier minimum part order quantities that are in excess of our anticipated consumption. More detail can be found in the notes to our financial statements in the 10-K . Our total costs for the 4th quarter were 37.8Million and for the year were 246.1Million.
As GNA expenses were 22.2 million for the quarter, including 7.6 million in non-cash items for the right off of a prepaid royalty and accelerated stock cup and 1.2 million of litigation across.
The remaining $13.3 million includes $8.3 million in personnel and professional fees, $3.2 million in legal fees and insurance premiums, and $1.9 million in other services, software, and marketing expenditures.
Compared to the fourth quarter of 2021, personnel and professional fees were down 39 percent, primarily due to a significant reduction in consulting support that has been trending down since the start of 2022. Outside legal costs continue to trend down as well, compared to Q4 of 21, they were down almost 80 percent. And a significant reduction in our annual insurance renewals in the quarter.
led to a 23% decrease in premiums, which will carry forward. Other costs, primarily in marketing spend, were 11% higher compared to the prior year as we ramped selling activity. For the fiscal year, SGNA expenses were 138.3 million. However, that includes 33.9 million in litigation of rules.
25.6 million in NRV charges for the first nine months of 2022 before reporting costs to sales, and 7.6 million for the write-off of the prepaid royalty and accelerated check-up. The remaining 71.1 million of SGNA consisted of 40.5 million for personnel and professional
11.4 million of legal expenses, 11.8 million of insurance premiums, and 7.2 million for other services software and marketing expenditures. The year-over-year improvement was driven by a 23.9 million decrease in outside legal fees and 9.2 million in other professional consulting fees, net of an increase in personnel costs as we build capabilities in our home.
Partially offsetting these items were higher expenditures for services and marketing as we prepared to launch the endurance, along with higher insurance premium, representing the timing of a higher renewal late in 2021.
R&D expenses were 15.6 million in the quarter, including 1.8 million of accelerated.com, 10.6 million in personnel in consulting costs and 3.2 million in software, other services and overhead.
This compares to non-plant related personnel and consulting costs of 16.9 million in the fourth quarter of 2021 and 14.2 million in the third quarter of 2022. Representing decreases of 38% and 26% respectively as endurance development and testing expenditures trend down approaching the launch as previously discussed in our outlooks.
For the same reason, freight costs were also down 1.4 million versus Q4 of 2021 and relatively flat to the third quarter of 22. For the full year, the headline number of 107.8 million in R&D compares to 284 million in 2021.
However, these amounts include plant-related costs of $33.3 million in 2022, incurred prior to the sale in May, and $57.1 million in 2021.
The amount in 2022 also reflects an 18.4 million reimbursement received from Foxconn as part of the sale.
Prototype component expenses were $22.8 million in 2022, down 78% versus $105 million in 2021, due to the transition from parts testing to beta and PPD builds and ultimately launch. The remaining R&D expenditures in 2022 totaled $70 million compared to $122 million in 2021.
In 2022, personnel and professional fees were 55.2 million, representing an almost 47% decrease from 2021. Freight was lower by 6 million or 86%. Again, the trends are all tied to progression of endurance development to launch.
Other operating items for the year total 111.4 million, representing a non-cash impairment on our long-legged assets, is highlighted last quarter to move into commercial production triggered a review from impairment and a charge of approximately 75 million in Q3. The primary metric we used to evaluate fair value is our enterprise value.
which of course fluctuates with our stock price, cash position, and net assets or liabilities. The decline in our stock price during the fourth quarter was the primary contributor to the incremental impairment of approximately 21 million in Q4.
We also wrote down the value of certain prepayments for inventory that are for quantities we do not anticipate being consumed by the endurance, including assets related to the right to access general motor parts, which represents the balance of the total impairment. More detail in each of these can be found in the 10-Kit footnote.
At the end of 2022, cash and short-term investments were almost 222 million, approximately 18 million higher than the third quarter of 2022.
The change in cash consists of 42.7 million in cash used for operations, inclusive of a 21.1 million dollar working capital investment. 2.9 million in capital expenditures, net of 1.1 million in asset sale proceeds, and 63.7 million in cash proceeds from the issuance of common and preferred stock.
including the 52 million purchased by Foxconn. The 57 million dollar cash beat I mentioned earlier was due to cost containment, which represented approximately 13 million, along with 12.4 million in stock sales under the ATM, 12 million in lower cap-ax, and 13 million in working capital excluding inventory.
Supply chain issues in a decision not to pull forward as much of the inventory purchases into the fourth quarter contributed to the outperformance The impact of lower endurance production and inventory rise was less than 3 million of the benefit the cap-back benefit was almost entirely timing related and will shift into the first and second quarters of 2023
Turning to our outlook. While our business model is more durable and operational execution has improved, we will continue to execute a capital-constrained business plan, making trade-offs on what and when we spend the funds we have.
Galing the endurance, even where we define a strategic OEM partner, will require substantial additional capital. And while we expect 100 million in preferred stock funding under the Foxconn Investment Agreement, we'll cover the planned pre-development work for the new vehicle program in 2023. Significantly more capital will need to be raised to reach certification, amoligation, and commercial sales.
In addition, our litigation contingencies could be material. With several moving parts and variables with the endurance program and the first joint EV program with Foxconn, we are confining our outlook to the first quarter of 2023.
Moreover, we won't be providing production guidance as that is highly dependent upon the timing to resolve the matters that had discussed earlier and other factors. I will point out again that cost of sales now reflects essentially zero direct material margin given the NRB is almost entirely taken prior to a sale due to advanced inventory
However, we will have incremental production costs associated with warranty, recalls, delivery, manufacturing, and other costs. We also expect to take additional NRV charges on inventory acquired in future periods as well as depreciation. We expect to end the first quarter of 2023 with $150 to $170 million in cash and short-term investments, excluding any additional Foxconn funding, other equity sales, or contingent liabilities.
Relative to Q4 of 2022, we anticipate aggregate SG&A and R&D to decline slightly without the accelerated stock compensation, litigation accruals, and asset write-down. As R&D modestly increases with new program development activity, partially offsetting the larger decrease in SG&A. We expect CapEx to be modestly higher for the reasons I mentioned earlier, and working capital is likely to consume less cash.
The remaining $117 million of Foxconn investments discussed earlier are broken down as follows. Approximately $47 million from a second tranche of common stock following satisfaction of conditions under the investment agreement. Followed by tranches of $30 million and $40 million of preferred stock purchases.
that are each subject to achieving mutually agreed development milestones and satisfying other conditions. You cannot predict at this stage when or if those milestones will be achieved. As a reminder, the preferred stock investments will fund an increasing share of our costs as development of the new program advances.
Lastly, the investment agreement limits the use of proceeds from the preferred stocks solely for the new program.
Our team is highly focused on resuming endurance production and deliveries and developing the new program with our lower cost structure and in collaboration with Fox County V ecosystem. With that, operator please open the line for questions.
Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. The first question is from Tyler DiMateo with BTIG. Your line is open. Thank you.
Yeah, thanks everyone. Appreciate you for taking the question. So my first one here is just on the initial endurance sale. You know, now that you're selling the vehicle, how has that changed, I guess, the customer discussions and the dynamics and really...
trying to think about what other opportunities now that vehicles are rolling off the lines and in their hands. Any color there? I would say the dynamic is there continues to be interest in the vehicle, Tyler. Obviously, we're disappointed that we've had to take the pause in production to address the issues that
that I went through in my section, but we look forward to getting them back, getting back into production and resuming deliveries. So we can continue to get more of them in the hands of customers. So we have customers that are looking forward to their deliveries, and we're looking forward to getting them to them. And then my follow up here on the new vehicle and the strategy and how you're thinking about incorporating it into the point.
scale. If you think about the market opportunity, their other segments, besides full-size pickups in the commercial fleet space, that could benefit from a electric vehicle that's targeted towards their needs. We're assessing the market, we're looking at those different segments and the opportunities and taking that into consideration in our pre-development work of the next platform and vehicle program.
And then with regard to a scale, you know, that's really where our opportunity is. With us as FoxGon's preferred vehicle development partner, we plan to leverage common components, common subsystems and share them across, you know, that's the plan is for them to be shared across multiple OEMs. That will allow smaller OEMs to gain scale. So we're thinking about how we meet those growing market opportunity needs.
with a vehicle that has the benefits of scale because we implement a strategy where common high-value components need to be engineered just once and can be reused and then that a common bill of process or common manufacturing process out of Ohio can be used to build multiple vehicles. So that's what we're thinking, market opportunity and a drive towards scale.
Okay, great. Thank you. I'll turn it back to Nikhil.
Thank you. I'll turn it back to the Kiel. Thank you, Tyler.
The next question is from Winnie Dong with Doorsha Bank. Your line is open. Hi, thanks for taking the question. I was wondering if you can maybe comment just based on the line of sight on issues that we've identified with the suppliers. Should we anticipate?
the fixed sort of to be like an end of Q1 event or something that will take longer to address. No, thank you for the question, Winnie. I think vehicle launches.
Essentially have issues. And really the key steps are identifying the issue, determining a root cause, determining what the corrective action is, and then setting a timeline for determining when that corrective action or action.
can be implemented into the vehicle so that you could get the vehicle back to in the hands of their customers. When I say we have line of sight, the positive thing is we've identified the issue, we've identified the root causes and potential collective actions or corrective actions. But you're not done until you're done.
So, you know, we're following a very disciplined and rigorous process that many of us have worked with throughout other OEMs. And we don't want to announce that we're done until we're done. But we are following the key steps of the path.
And as I said, we have line of sight, meaning we know the root causes of the issue and the corrective actions. We don't have all of the details on when every corrective action will be available to us. So that's why we are not giving guidance today. But in the coming weeks, we expect to be able to give guidance on when we'll resume production and deliveries. Kids, keep different positions!
Okay, Ghana, that's very helpful. Thank you. Thank you. Thank you. I'll follow up on the commentary of looking for a strategic OEM partnership as it relates to the endoren.
A long time ago we can maybe remind us and elaborate with our dad because if I hear correctly you mentioned if the partner is not identified and essentially you pause the production or did I do that correctly?
Yes, yes, when you heard that correctly. And it goes back to the guidance we gave last year in one of our previous earnings call in that because the bomb cost of the endurance is significantly higher than its selling price.
materially higher than its selling price, I believe is what we said. It is a, you know, upside down margin on each one. The good thing is we know how to bring that cost down significantly through investments in hard tooling or high volume tooling, if you will, said another way, and various VAVE projects, value engineering and value analysis projects.
that would bring the BOM cost down. However, as I alluded to and as Adam alluded to, and as we said in the previous calls, it would be a significant investment to implement the hard tooling for those projects.
So we believe that the most prudent business decision would be to bring on another partner whose volume opportunity combined with our commercial fleet volume opportunity is Lort's Town.
would make more business sense to spend that additional investment for the hard tooling and the VAVE projects. So we, you know, our discussions with potential partners are ongoing. We think it's an attractive proposition not only because the vehicle is in the most, you know, the second most popular position.
from the ground up. But, you know, so it's not only that market opportunity is attractive, but, you know, the vehicle is fully homologated, it's fully certified, it is, it has been launched and is in the marketplace. So we see that as a an attractive and shorter path for another OEM who wants to get into this this attractive market.
And if we don't find that partner, we don't see it making business rationale for us to spend that investment, significant investment ourselves. So we would likely pause production until that partner is identified. Got it. That's very helpful. All right.
related to endurance activity that will decline. And you've seen it each quarter sequentially, the CAPEX numbers are coming down. It just continues along that same development path, whereas you launch the vehicle, there's less obviously to invest in the equipment. Obviously, we also no longer own a plant, which early in the year, that also added share of CAPEX.
It's not going to be material amount of cat bikes in the very, very near term, but as the program advances with Foxconn, then obviously it would ramp up after that. Thank you so much. Again, that's star one. If you'd like to ask a question, the next question is from Mark Delaney with Goldman Sachs. Your line is open. Yes, good morning, and thank you for taking the questions. The first was about the future vehicle with Foxconn.
You spoke a little bit around the cost to commercialize that. Could you elaborate a bit more on the magnitude of cost to potentially commercialize your next vehicle and also speak to potential sources of funding? Is your expectation that a FOSCON would fund most of all of that or do you need other significant sources of capital? Well Mark, thank you for the question.
So what we laid out is that approximately 100 million, well, $100 million of the preferred investment that Foxconn is making that we announced back in November will go towards the pre-development work for the future platform and new program. This program, you know, it fits with the ambitions of both Foxconn and us.
You know, FoxGone has ambitions to become a greater part of the EV supply chain through the EV through their growing EV ecosystem. And as their preferred vehicle development partner, we will be doing all of the design, engineering, development, testing, commodification, certification of these vehicles that leverage those components and then build them in the...
in the Foxconn EVOhio plant. So, but however, as you know, $100 million is not sufficient to take a vehicle from concept all the way into production. So we do anticipate needing to raise additional capital once we have a well-defined program with the business case, the markets, the customers, the architecture identified the cost.
structure, and then we will be in collaboration going back to the market to raise the additional capital to take that vehicle into production. And that will be sharing more with you on that process as it progresses throughout the year. Okay, I think part of what I'd add to that is, it doesn't have to all come from us, it doesn't have to all come from equity.
There's a number of different avenues we can and would expect to pursue. We're not certainly at a point where we can talk more specifically, but we want to make sure obviously people are aware. For more capital, we'll need to bring the program to market. But there's numerous alternatives that we've considered and will continue to pursue when the time is right. Okay. That's a helpful caller. Thank you. And on the.
Quality issues that you're working through for the endurance, you spoke a bit on timeline and some of the things you're doing. Any cost criteria and numbers you can share as you're starting to get line of sight, what might the cost per unit be for repair? What does that do to the ongoing bill of materials as well? Thanks. We don't expect it to be a material change to the bill of materials.
implementing, you know, completing the implementation of the plan to get all the changes we need into production. Any vehicles retrofit needed, done? Any customer updates needed, done? And then we'll give guidance on what that timing looks like.
Mark, we don't expect it to be material. I mean, as Ed said, it's affected 19 vehicles. Thank you. We have no further questions. At this time, I'll turn it over to the presenters for any closing remarks. Well, in closing, I would just like to thank our team for their resilience and attention to detail on both the endurance and the vehicle development process deliverables for our next platform.
and vehicle program. I would also like to thank our shareholders for their continued support. Thank you for all of you who joined the call today. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. May now disconnect.