Greetings, and welcome to the Canoo 4th 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. Please note that this conference is being recorded. I will now turn the conference over to our host, Kamal Hamid, Vice President of Investor Relations.
Thank you. You may begin.
Welcome to Canoo's Q4 and full year 2020 earnings conference call. My name is Kamal Ahmed, VP of Investor Relations at Canoo. With me today is Tony Aquila, Canoo's Executive Chairman and Renato Giger, Canoo's Interim Chief Financial Officer and Principal Accounting Officer. Bernardo has worked with Tony as public company CFO for many years. He brings more than 30 years of leadership experience with a proven track record in complex global organizations where he was responsible for leading global teams supporting multibillion dollar operations.
He will be invaluable to us as we build out our finance function at Knapp. 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 discussion 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 ks and 10 Q and the reports that we may file on Form 8 ks with the Securities and Exchange Commission. 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 Canoo story, our mission is to bring EVs to everyone and we are led by our Executive Chairman, Tony Ophala. Tony is a visionary entrepreneur and public market leader who has consistently created significant value for his shareholders. He recognized the important software would play in a connected auto ecosystem decades before anyone else. He built several marquee businesses in both Public and private domains from the ground up, including Ncerra and Solera, he brings deep experience in building high growth companies that are focused on technology, data and productivity. With that, I'll turn the call over to Tony.
Thank you, Kamal. I invested in Canoo because of the technology associated with the multipurpose platform and the market opportunity it created, enabling our mission to bring EVs to everyone. Since Henkei got on the role of Executive Chairman, working with the team And leading industry consultants, we've done a deep dive to determine how to optimize our growth opportunities and 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 Pete Savasian As our Chief Technology Officer, Automotive, Pete has many years of experience in bringing EVs market and has been a very valuable add to our team.
Today, we announced that Renato Giger, who I have worked with and known for many years, joined us as our Interim CFO. He, along with Ramesh Murthy, Our new Chief Accounting Officer and Hector Ruiz, our new VP of Global Strategy, Tax Counsel And treasury will drive the necessary finance process, infrastructure and systems to transition us From a private company to a public company or as we say move from little p to big 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 4 to 6 quarters, we will be focused on completing the build out of our executive team in a disciplined manner. 2nd, We have decided to shift our manufacturing into 2 phases.
Phase 1, as previously announced, we will use Contract Manufacturing to launch production of the NPP1LV derivative. We will announce the selection of our partners shortly. Phase 2, we will move forward On our Mega Microfactory where we will build our MPP-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 have negotiated 1,000,000,000 of dollars in incentives for high-tech companies, including automotive manufacturing. We issued an RFI RFP focused on the areas of geography, labor force, educational systems, supporting infrastructure and their desire to build out an EV infrastructure in their states.
And 3rd, many investors have asked if we will be reporting on the industry impact of COVID-nineteen, I. E. Chips, Battery, other shortages, collaboration effects and design impacts, etcetera. 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 3 vehicles we have announced: our pickup truck, Our multipurpose delivery vehicle or MPDV-one and our lifestyle vehicle, all of which sit on our multipurpose platform, which we call MPP 1. I'm excited about these enhancements to our business model. And now let me tell you what attracted me to Canute. 1st, as an investor And now as an Executive Chairman and the market opportunity we see, freed 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 cab Forward vehicle that maximizes interior space and cargo capacity while reducing part count and simplifying manufacturing. Bifurcating the mechanical propulsion elements of a vehicle from the cabin gave us a blank canvas to create functional productivity solutions customized to use cases. Industry wide, Today, OEMs focus only on the 1st owner sale, which represents only a small profit potential associated with the entire Life cycle of a vehicle. Instead, we will focus on the 70% to 80% of profitability generated across the multiple Owner lifecycle of a vehicle. We built in revenue touch points for all owners throughout the vehicle lifecycle, Through the aftermarket and customization.
No other OEM, whether ICE or EV, has done or is doing that today. As a tech first, industry second company, our software and hardware are a connected platform that can capitalize on the full multi owner lifecycle of a vehicle. Let me give you some context about our addressable market. Big picture, today, there are about 1,500,000,000 light vehicles on the road globally. We believe that 80% of those will be replaced by EV over the next 4 to 5 car generations, which means the market will add more than 1,000,000,000 new EV and efficient fuel cell 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 2,050. As part of 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 EVs is the quickest, most impactful way to achieve their carbon reduction goals.
Providing a further tailwind, the Biden administration has announced plans to 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 EB market will drive 1,000,000,000 of dollars in private and public investment with a multiplier of 4 to 7 new jobs for every new EV job. And these jobs will carry higher than average salaries due to the advanced manufacturing nature of EVs. 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 or CAGR in the next 10 years.
By 2,030, it is estimated that EVs will account for 25% of new car sales or $28,100,000 annual vehicle sales, bringing EVs to 8% of the global car park. We don't have to wait for EV technology to become economic 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 tradespeople 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 23,000 miles per year.
According to our estimates, after 9,000 miles of driving, an EV breaks even compared to an ICE vehicle On a TCO basis, total cost of ownership, our MPDV1 provides over 35% TCO savings on a volumetric capacity basis over 8 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 123,000,000 commercial and mobility working people on the road today that would have economic benefit from switching to an EV. And of course, we are focused on fleets with our low TCO 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 EV 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 EVs.
In our view, many of the competitors have drawbacks that we do not. Because of the large capital investments Legacy automotive companies have already incurred, they 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, TCO, leading to suboptimal design, performance and user experience, and therefore, leaving the long term residual value With a 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 multipurpose platform, our MPP. So far, we have announced 3 derivatives From our NPP, our pickup truck, our multipurpose delivery vehicle, NPDV 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 20,000,000 TAM and business model with multiple revenue pillars. This resulted in over 300 miles in estimated range, over 13% greater power density In our e motor compared to leading competitors, 50% 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 B2B. We're not B2C, but we are B2 all, setting us apart from any other OEM. Just like the pickup truck redefined the U. S.
Auto market, in fact, doubling in sales From 2010 to 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 economically benefit the driving enthusiasts and the trade and delivery professionals. Our unique design and ability to satisfy specific use cases has resulted Insignificant customer interest and press coverage, highlighting our vehicles as the future of the delivery van and The Swiss Army Knife of 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 upfitting to meet the new owners' use case.
In this example, you can see how a delivery vehicle Can be repurposed as a refrigerated truck, a pop up retail shop and then a food truck as it goes from one owner to the next. This makes our vehicles feel new and customized to each owner use case regardless of the vehicle age or mileage. Heading deeper into our strategy, we recognize that our Core value proposition is technoelectro mechanical innovations. We will capitalize on our addressable market in 3 ways. 1, our engineering IP enables our broader TAM.
2, our software IP will fundamentally to alter the value proposition across a vehicle's lifecycle. 3, our aftermarket and customization strategy We will drive revenue streams across generations of owners of the vehicle with accessories, add ons or upgrades. Going into our engineering IP further, our MPP-one was designed to support As much as 75% of the most popular vehicles on the road today and provide improved manufacturability. We are excited that Canoo 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 bed, 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 proof 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. These solutions are brought to market. All of our proprietary electronic As we continue to be validated both internally and externally by third parties, To date, our test vehicles have accumulated almost 500,000 testing and validation miles, providing us with important data for our Gamma build. By targeting use cases and customers across all generations of owners, we continue to build throughout the life cycle of the vehicle across multiple owners. For example, our recently revealed Pickup could include a front gate, an extendable bed, step storage solutions and more, which could all be added with the second, third or fourth owner.
We demonstrated the effectiveness of this approach by recently revealing 2 new models. In Q4, we announced our MPDV, our multipurpose delivery vehicle. And then shortly after in Q1, we revealed our pickup truck. With the lifestyle vehicle Previously announced, this brings us to 3 derivatives on our MPP-one. This ethos With that, I'll turn the call over to Renato.
Renato?
Thank you, Tony. I'm very pleased to be here today on Canoo's first earnings call as a public company. Starting with Q4 2020 results. Research and development expense was $90,000,000 in the Q4 of 2020 compared to $28,600,000 in the prior year period. Excluding $58,700,000 of stock based compensation in the Q4 of 2020, research and development expense was 31,300,000 SG and A expense was $35,700,000 in the Q4 of 2020 compared to $7,100,000 in the prior year period.
Excluding $24,500,000 of stock based compensation in the Q4 of 2020, SG and A expense was 11,200,000 GAAP net loss was $12,300,000 in the Q4 of 2020 compared to a GAAP net loss of $42,700,000 in the prior year period. GAAP net loss in the Q4 of 2020 included a $115,400,000 noncash 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 liability. Q4 2020 adjusted EBITDA was minus $42,500,000 compared to adjusted EBITDA of minus $35,300,000 in the prior year period. Turning to our results of the full year 2020. Revenue for the full year of 2020 was 2 point £6,000,000 up $2,600,000 compared to the prior year.
Research and development expense was 140,900,000 compared to $137,400,000 in the prior year. Excluding $59,400,000 And $900,000 of stock based compensation in 2020 2019, respectively. Research and development expense was 83,500,000 and $136,500,000 respectively. SG and A expense was $51,600,000 in the full year 2020 compared to $31,600,000 in the prior year. Excluding $24,900,000 $1,000,000 of stock based compensation in 2020 and 2019, respectively.
SG and A expense was $26,700,000 $30,500,000 respectively. GAAP net loss was $89,800,000 in 2020 compared to a GAAP net loss of $182,400,000 in the prior year period. GAAP net loss in 2020 included a $115,400,000 noncash 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 shares liability. 2020 adjusted EBITDA was minus $108,300,000 compared to an adjusted EBITDA of minus $167,100,000 in the prior year period. Turning to our balance sheet and cash flow.
We ended the year with €702,400,000 of cash on our balance sheet. Cash used in operations for the 3 months ended December 31, 2020, was $42,000,000 compared to $43,700,000 in the prior year period. Capital expenditures were $6,300,000 for the Q4 of 2020 compared with $3,900,000 in the prior year period. Cash used in operations for the year ended December 31, 2020 was €107,100,000 compared to $171,500,000 in the prior year period. Capital expenditures for the year ended December 31, 2020, were $7,600,000 compared with $22,100,000 in the prior year.
Now let me turn to our guidance for Q1 2021. We anticipate the forward expenditures, approximately €45,000,000 to €50,000,000 for operating expenses, excluding depreciation and stock based compensation and approximately $10,000,000 to $12,000,000 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 at Canoo for their hard work And determination in building 1 of the most innovative vehicles on the market and coming to market today. We believe Our multipurpose platform and vehicle derivative based on our use case, combined with our 3 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. 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's been some fairly significant hiring and a bit of a ramp in R and D. This was always expected After you completed the SPAC IPO, can you talk about sort of where you are in the process of hiring? How many more people would you aim to hire over the course of 2021? What is the potential growth And operating expenses look like because of that.
And the $45,000,000 to $50,000,000 in OpEx is good. It's a very healthy number. Do you have maybe an updated stock comp number to use with that?
Yes. Hi,
Craig. This is Tony. So from a hiring perspective, I'll answer that. Renato and Ramesh can talk to the stock comp piece. But from a hiring Perspective, we're targeting about another 100 FTEs that we'll be adding in as we move through the gamma phase.
Of course, it is a talent war out there. We've actually done pretty well, all things considering, but it's been a hard market, so to speak, and we'll continue to use aggressive tactics to find the right people for to meet our plan.
This is Renato. When it comes to comp based compensation, we are not forecasting that because it's very it depends on share price Going up or down, and therefore, we are not forecasting it, number 1. Number 2, because it has no cash impact, it's not that relevant as of today.
What I would add to that, Craig, is we are targeting 75th percentile and above to ensure we're hiring the best people Ian, that's what I refer to in the aggressive tactics.
Okay. The second question, there's a little bit of a contradiction in your Paired remarks. So Tony, you talked about how engineering IP broadens your TAM, but then you announced that you're 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 that the original story was it would subsidize The development and broaden the partner opportunity with potentially multiple hats under license.
Yes. So look, I would say that from a company's perspective, it was a contradiction. It hasn't been a contradiction from my statements. Look, as I said in the remarks, we looked into this. It kind of goes to your first question too with the talent war And everything, just the $25,000,000 it 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 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, Certainly, once I invested and then I took the chairmanship, we started the analysis. I had concerns about this. If you study all You can find a partnership or something like that, it can make sense.
And we'll continue to list Thanks. But to be a contract engineering house is just really not going to drive the best shareholder value.
Okay. And then, Yes, this is a tough question, but all the institutions are going to ask this question tomorrow, right? So, first, Alex Marcin Tkowski is gone, now Paul Balcionis, these are the 2 gentlemen that sold the pipe. A lot of people met with them and Uli for your de SPAC process. That's a fairly heavy turnover and we didn't have Uli on the call today, which appears like I'm missing.
Can you maybe talk about the high turnover and what's going on here? And is Uli still Chief Executive Officer?
Yes. So look, as we've kind of been navigating through going public, we're obviously bringing in people With extreme public company experience, we're making the call today from Dallas, Texas, not in California due to California is still in a bit of a lockdown, Texas being wide open. So yes, Uli is still currently the CEO of the company. And as far as with respect to your comment about turnover, it's true. There's There has 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 SPACs and a lot of companies As they go through this migration, 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'll stay ahead of it as we navigate this step by step, quarter by quarter.
Last question, if I may. You're obviously deemphasizing engineering and engineering services. So that seems to imply that the original SPAC model is no longer guidance going forward. Is that accurate?
We will be giving we're not going to give at this point, it doesn't make sense to give guidance until we complete the work that we have started. And with all that's gone on in the SPAC 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 they've never 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 is known and contracted, not based on light Reservation models, I think that's dangerous.
I think it could be somewhat misleading. And Typical of any leadership change, different standard comes in and we'll guide you through that. Kamal will be following up with you on a regular basis. This certainly do acknowledge your point, Craig, that 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 and the margins of the areas we plan to operate under.
Let's kind of table that and discuss through it.
So I will acknowledge that these are I can surprise us on the call today, and that's not ideal after a SPAC the ideal process. So I just wanted to underline that. Thank you.
Fully understand your perspective. Obviously, 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 Which we've done in the past and we intend to do here. But hey, we understand the situation it puts you in And we will 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 R. F. Lafferty and 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 market Out there on the road.
Any feedback or data and are these prototypes with fleet customers?
I'm sorry, Jamie, can you repeat that please? It broke up a little bit on this end.
Sure. So, yes, on the press release, you mentioned you have about 13 drivable prototypes. Are these prototypes with fleet customers? And could you tell us how far The long way these prototypes are and when we could see maybe a beta model out there?
Yes. So obviously, we've released the video footage for The truck and the NPDD. So as soon as the world opens up, we'll have a proper Analyst Day And we will bring you guys in, so you can see it and ride in the vehicles, but we've got 500,000 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, We're happy to entertain if you'd like to come down and see them.
Yes, that would be great. Now these prototypes, have you And especially in the pickup trucks, have you tested it as far as weight capacity, torque, towing capacity? I mean, just trying to get a readout on how much You could compete with something like the F-one hundred and fifty.
Yes. So look, the size of the vehicle, the pickup truck, We've got it kind of focused on around the same £2,000 Payload capacity range, £1800 to £2,000. And that's kind of aerodynamically Somewhere in the 200 plus mile range on a 600 horsepower, 500 Pounds of torque setup, drivetrain. And again, when you come down, happy to show you The vehicle in more detail and we'll continue to engineer that. We'd like to get that those numbers up a little bit.
But right now that's everything what we can. And as far as towing capacity goes, We're currently looking at about £2,500 depending on again, depending on range effect. So you can get up a little higher depending on the range.
And my follow-up question, As far as outsourcing a contract manufacturer, have you how far we progressed? 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 detail on the outsourcing.
We have a couple
of finalists right now. We're in that phase. Obviously, with the leadership change, we wanted to look into those into great detail. We brought in some of the new hires that We brought in our manufacturing experts. We launched a 2 pronged approach, Contract manufacturing as well as with the especially with the tailwinds from the Biden administration, there's a lot of Subsidies and creating a state deal.
So we'll be announcing and we'll be looking to wrap that up In the coming weeks to months and they will announce. And those people are with respect to capital guys. The capital range is a little bit different because of the geography between the finalists. And of course, the new model that will introduce the mega micro factory approach Is designed so that since we do have our own motors, since we do have a lot of our own design and componentry, as we internationalize Platform, a lot of us have a lot of experience in internationalization. You can the micro element is you can take your engine component part of the factory and you can Slap it somewhere else and make your engine.
So kind of similar best in class activities.
But what's the rationale going from an outsourced manufacturer to take into doing the manufacture in your own plant?
Yes. So good question. If you think about the way to best internationalize your And to address low volume units on a top hat basis because the MPP platform is common across the vehicles we've announced. So that component we want to manufacture 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 announce the state.
In addition to that, on the geographic side, it would be very wise without Tilting too much of our hand at this time is to think about if you have a contract manufacturer similar to best in class again, You 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 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 demand, U. S. Versus Europe, Any particular market open towards more the consumer side or the fleet customer?
So Europe shows a lot of strength, more strength and adoption speed wise on the multipurpose delivery vehicle, Especially because of our turning radius and the size of it. It can go on Roman roads, it can go on American roads, it We can go on Latin American roads, which is a very important part of the equation. In addition to that, those countries have already made their phase out statements for ICE vehicles to EB. So that's in part driving this 2 pronged approach. I think a lot of people are going to get themselves 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 new to market, this will ensure a delivery schedule.
We may have some Cost in shipping, but we won't have any long term leakage of our CapEx and These other things. So think of it as being somewhere in the European theater.
All right. That's all the questions I have. 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. Just wanted to ask a just follow on to that contract manufacturing line of questioning. I mean, are you looking at somebody a company that is really going to be just an assembler? Or how much help I mean, you're pretty far along in the process on the platform itself, But I mean, somebody would help on design and engineering in addition to being a contract manufacturer. A lot of the contract manufacturers have a lot of capability, a lot sort of Magna or Magna Steyr, if you will.
Just curious how integrated you'll get with them?
Yes. So look, I mean, I think from a to your point About on an NPP or as the market talks about it as a skateboard, 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 of driving the chassis out in the desert. From our perspective, most likely, one of the components of that would be 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 our a lot of the components. We're targeting around 80% of the components to be ours and located in the U. S. Or 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 leverageable As we build out our delivery strategy state by state, country by country.
So maybe to add to
it more succinctly, This is
a contract manufacturer, an interim contract manufacturer that you may use for niche products over time, But you yourself want to be the ultimate manufacturer over time and this is a stepping stone to getting there. Is that a fair way of characterizing it?
I think to be it's not a one dimensional thing on this. It's multi dimensional to you. 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
Okay. And or 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 3 derivatives are on the same NPP.
Got it. Okay. And then just a second question. I mean, when you look at The competitive landscape, a tremendous 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, concerning debate is 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 than the way they traditionally have 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 you're going to be going after?
So look, I think a lot of these guys are going to be doing what I'll call electro modding. They're going to be putting battery systems in ICE platforms. That is suboptimal from a TCO basis. As you probably know, our background, we're the aftermarket guys. We know every Both from every car for the last 50 years and its performance all the way to the wrecking yard.
And when you start to put different weight distributions and power You just fatigue frames. And so this is a pure design as we showed you again in the video and love to host you as well, come down and see it, Touch it and feel it and drive it. You'll see that this is a very uniquely designed platform. And so I think on a pure basis, we've got to jump, but competition is here. And the ratio in 2010 was kind 10 vehicles to every truck, right, 10 cars to every truck, it's now 5:one.
And 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 On 50, if you will, just staying with that particular line, that's very different. And on top of that, you have a multifunctional Intelligent bed system, which for those this is a design that is really designed for the people that use their vehicles. And ED will give them a great return on capital. And so look, I mean, there's no doubt there's going to be Competition and 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, where we intend to place just like we have in our previous
And then just last few real quick. I mean, you've tweaked the business model a little bit. But I mean, just curious on the sort of retailer to the consumer Sai, how you're thinking about that going forward? Is there just too much opportunity on the commercial side and you're kind of putting that sort of back burner or is this subscription still in play because I know that was part of the story before. Is that changing in any way or is that just Sort of later gated or is it just the same as before?
So great question, John. So look, You know the industry well. If you think about a membership model, when I came in and took my role, I mean, we Spent a lot of money analyzing the weight that this will have on the balance sheet. And I think to the point that Craig was talking about 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 membership.
Otherwise, you've got a big cash hit That starts to develop on you as you can probably imagine. So we'll be doing that on an appropriate basis. Had I been here from day 1, I can tell you I wouldn't change anything on that NPP. It is an amazing design, which is why I compliment the engineering team incredibly. Would I have changed the sequence of top hats and use cases I would have 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 So on the balance sheet, yes, there's probably 80% change, but it's too 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 and we'll walk you through this. And again, I I apologize to anybody.
As a leader, you always own the past before the present or the future. And so I take everyone's comments in all three categories.
I'm sorry to keep calling, but I mean this is definitely so then you're saying you're Tilt away from the consumer much more in commercial and away from something with sort of more balance sheet heavy to something that will be more On the fleets, owning the vehicles, so it just seems like ROI goes up and there's a little bit less risk. Is that
We're definitely taking data that the risk factor is down. But what I would tell you is we are concentrating on commercial and If you will, kind of the mobility professional user. That bring it to e marketing is developing, 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 of where the LV was, It was really going after the people moving side of the world.
COVID just hit it, punched it 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 has a much more positive trend. It's just math.
That's incredibly helpful. Thank you.
Our next question comes from Todor Petrov with Tuohy Brothers. Please state your question.
Hi, guys. Thank you for taking my questions. Some of them were answered, but I will shoot Two new ones. I will go back to the product validation. And I appreciate that you have 13 drivable Prototypes, 32 better properties, but they were the same number in August of last year.
So no new Drivable cars having built in the Q4, you did some crash test, but the product validation phase It's so important for us. So if you can explain the pickup truck, for example, I assume that was built In Q4, but the prototype numbers did not increase. So now can you Yes. Yes. Thank you.
Yes, good question. So look, we've increased our driving miles obviously in testing and we've tested more seasonality And we'll continue to do the testing. COVID put a little bit of pressure on that, which is why we said starting next This quarter we'll report exactly where the COVID impacts were. And then with respect to crash testing, for example, has gone up. You're reusing The NPP and we're then putting a modified or regenerated top hat on it, so we can crash Test it again.
We're recycling some of the NPP 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. It's chassis driven.
So the pickup truck, Was it really drivable? You said it's in the parking lot. We can drive it if it wasn't for COVID, but the number of prototypes did not increase. So is it really something that we could try?
Yes. So yes, it is on our NPP. The pickup truck is on top of our NTP. So we just took another chassis And we rejuvenated it 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. It's like a vehicle that gets wrecked, it gets repaired, it's back on the line. That makes sense?
That's great. That's a good test for Your second, 3rd, 4th owner philosophy?
That is correct. That is part of the way we're calibrating it. We want it to be reliable For and so you have a good view on your total cost of ownership as well as your insurance cost.
Great. Thank you. And my second question is, You introduced first the lifestyle vehicle, then the delivery truck, then the pickup truck. Has the timeline of launching vehicles Changed due to where the market is going. You said you focus more on commercial.
So should we still expect the lifestyle to launch first? Or Has the timeline changed? Thank you.
Yes, we're still going to launch the lifestyle vehicle. We'll bring it with a few more configuration upgrades, which we're working through now. So it can meet the needs of some other customers. But yes, we're going to stay on with the LV first and then the MPDV and then the pickup truck.
Great. Thank you, guys. Thank you.
Our next question comes from Joseph Spak with RBC Capital Markets. Please state your question.
Thanks everyone. Thanks so much. A lot to address. I guess I just want to clarify a couple of things. First on back to the subscription And model, just to be
clear, is that still a possibility just at a later point
in time Or is that something you think you've completely abandoned?
No, it's a ratio issue, Joe. We're going to focus Something sub-twenty percent of our sales will be in category. We just otherwise, we got to have to raise a lot more capital, As you know, because you're going to have to see this on your books and then you're going to have all this accounting 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 a 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 in the membership. So membership is not going away.
It's just being appropriately managed on our balance sheet. Does that make sense?
Yes. Okay.
So then with respect to the lifestyle vehicle and you mentioned a couple of times, mobility working people. I'm curious, have you had Conversations with either the TNCs directly or maybe fleet leasing companies because it does seem like a vehicle that Obviously, it aligns itself towards the TNCs pretty well. And obviously, you mentioned some of the electric benefits. So Curious if you could mention any plans there, any conversations you had, and obviously if you're sort of selling it either directly or to So that absolves the subscription ratio problem as well?
Yes. So they're not interested in subscription, right? It just doesn't work for them all. What they are interested in some kind of a variable lease mechanism that works for their balance sheet as well. But yes, we're moving into the commercialization phase.
We have international sales coming up online. So we're looking at large entities that are have already made the decision to make this migration over the next 2 car generations and that's 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 Inbound calls as of today as well as outbound.
Okay.
Last Last one for me, just going back to the decision to deemphasize engineering. With the Hyundai Arrangement, the original one, which I'm assuming that that's now off the table.
But if you go back to
that release, it did say Hyundai gains Access to technology, you mentioned IP leakage is one of the potential problems with that arrangement. Can you just Talk about like how do you unwind that sort of, I guess, memorandum of understanding what work was done? Do you think there was any IP legacy, obviously, Hyundai is coming out with their own electric vehicle platforms as well?
I think what happened is pretty Kind of case in point, right? So I think the company, just like any adolescent company, it's learning its way and 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 have changed the value of that contract significantly. And look, we have experience in this area And we're very focused on if we do work, 1, 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 3 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, it's 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 Sicanos with Cronos Capital. Please state your question.
Hi. Last year, during the course of the year, you stated a couple of times that you had Under discussion with some OEMs and possibly the contract manufacturers, you said that there are going to be some announcements by the end of Q4. I'm just wondering what happened that changed all that?
Right. So you're 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 focused on maybe a little more aggressive than I would be In their statements, I think more maturity of this team would not be That presumptuous. We only announced what is contracted.
But yes, I think they had the opportunities, But they weren't 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 obviously I wanted to go in a different direction based on the study we did And with the Board's help and observations also kind of solidified that. So I think We'll certainly work our way past this commentary. And then with respect to contract manufacturing, again, We wouldn't make an announcement.
Again, this comes back to having an experienced public company team. You got to be careful of the statements you make. So 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.
Steve, if you've got a follow-up question, that's fine. But I think we'll cut it off after that.
Okay. With respect to the coming 6 months or year, what can you say are your major milestones that you're looking at?
Yes. So look, we'll continue to progress our gamma for the LV, be really focused on How we will report reservations versus orders. In addition to that, locking in our geographic and 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 build and release. In addition to that, we'll 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 ones that I would say would be very 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, they did not return email. I don't know if any other gentleman on the call had any success with that, but I would suggest that your Investor Relations team Get up to gear and answer emails and be a little bit more forthcoming.
So we look, it's a great comment and we've 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 we'll do a much better job, but certainly feel free to call me anytime directly if you're not getting any
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. Thank you.
And California, I want to open it back up.
Thanks. This concludes today's conference. All parties may disconnect. Have a good evening.