And welcome to
the Canoo, Inc. 1st Quarter 2021 Earnings Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Kamal Hamid, Vice President, Investor Relations. Please go ahead, sir.
Welcome to Canoo's Q1 2021 earnings conference call. My name is Kamal Hamid, VP of Investor Relations at Canoo. As part of our presentation today, we will direct you to a short video that you can access from the landing page for this webcast. If you haven't joined via webcast, we invite you to log on using the link in our earnings release so that you can view the video. Today, I have with me Tony Aquila, our Chairman and CEO Bernardo Giger, Interim CFO and Ramesh Murthy, Chief Accounting Officer.
Tony will provide an update on the progress we have made since our last call and describe the metrics we will report on for the balance of 2021. Then I'll turn it over to Renato and Ramesh, who will go over our Q1 financial results. Tony will then provide closing remarks, 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 Form 10 Q and 10 ks 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, May 17, 2021, based on information currently available to us.
Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non GAAP financial measures. You can find a reconciliation of these non GAAP financial measures to GAAP financial measures in today's earnings release, which can be found on the IR section of our website. Now, before I turn it over to Tony, we would like to share a new piece of marketing creative. This video embodies our mission to bring EVs to everyone.
It shows our expanded product line, including the lifestyle vehicle, Multi purpose delivery vehicle and the pickup. It also highlights the families, fleets and working professionals that the Canoo product portfolio will soon serve, while delivering an extraordinary customer experience. Now, please navigate to the webcast landing page and access the video link For those of you who are not able to view the video, you can access it on our YouTube channel or the IR portion of our website. With that, I'll turn the call over to Tony.
Thanks, Kamal. At Canoo, our mission is To bring EVs to everyone, and this video shows how we have progressed the product portfolio to address a wide range of use cases And expand our total addressable market. It has only been 7 weeks since we last reported earnings due to the timing Now we are moving into a normal quarterly cadence with this report. In 2021, we will report on the following business areas: product and technology, Our progress towards production, manufacturing, our order and sales pipeline, human capital and operations and any other material updates. Reporting on these areas will keep you up to date on how we are progressing on key aspects Before going into the business update, I wanted to share our view of the EV and SPAC market There are many things happening in the market, including an evolving regulatory environment.
STAX have democratized access to capital for emerging growth companies that would normally have been backed by early stage private capital. By nature, these early stage companies will remain dynamic as they mature in the public view. We have transitioned our strategy to better position us for success as a public company. Our new leadership conducted deep due diligence and course corrected our strategy and we have performed in line With the EV specs over the past number of months. The EV sector has seen significant investor interest With 1,000,000,000 of dollars being invested, the EV SPACs are now facing some near term headwinds, including The SEC's interest and determination on how warrants are treated, supply chain constraints impacting both EV and Frankly ICE OEMs and company specific issues.
Our experienced leadership at Canoo Have navigated many market cycles. We are focused on building a business today that will be positioned for long term success. Now, let me walk you through some of our business updates. We have a large Fast growing and profitable addressable market. Our business model takes into account total addressable markets, We call TAMs for both sales of new vehicles and sales in the aftermarket.
Today, the new vehicle addressable market for our Product is projected to be 4,400,000 vehicles in the U. S. And Europe by 2026. The new vehicle market is projected to grow by 16% annually from 2023 In addition to new vehicle sales, we intend to capitalize on after sales TAM in 3 ways. Dollars 280,000,000,000 in service, maintenance and repair With an approximate 40% to 50% gross margin and $400,000,000 in over the air Services with a 70% to 80% gross margin and $24,000,000,000 in accessories and customization with an estimated 50% margin.
And finally, by focusing on the full multiple owner lifecycle, Canoo will have the opportunity to capture over 70 monetizable transactions across Owners 1, 2, 3, As we announced today, preorders are now open on our website for all our vehicles. The lifestyle vehicle, the multipurpose delivery vehicle All of these vehicles The lifestyle vehicle will be our first product to market and will come in 4 trims: 1, delivery 2, base 3, premium and 4, adventure. We're targeting a starting price range of $34,750 to 49,950 Pricing for the Adventure trim will be announced in the coming quarters. These prices are before incentive programs, which we hope for customers to apply to Upfitting. Further, we will provide you more details on our digital service offering and customer journey platform in the near future.
Canoo is building and refining our go to market Strategy and team and we are continuing to fine tune our analysis to determine the proper revenue mix. The optimal mix will include a subscription program that represents approximately less than 20% of our volume. This will allow our customers to take advantage of the tax credits and rebates associated with vehicle purchases and leasing and is in line with the current administration's emphasis on expanding clean energy and EV penetration and infrastructure. We will provide more information on mix, margin and geography in the coming quarters. Our retained top tier accounting and management consultants are helping validate our analysis on these topics as well as our reforecast of the financial model.
We will take a disciplined sales pipeline approach to managing opportunities, which will provide more certainty about projected orders and will be closely tied to how we develop our production system. We will report our sales order pipeline in 3 stages. The first will include potential customers that have qualified. 2 will include orders with a commitment volume and date. 3rd and the final stage will include orders accompanied by a binding contract with a non refundable deposit.
Disclosing our pipeline in this way will reduce any misperceptions of the difference between a refundable reservation At Canoo, we continuously innovate on 3 vectors: Engineering, software and hardware. To give a few examples, we have developed our own electric motor with approximately 40% higher power density, 24% higher peak power and 18% fewer parts Then comparable EV motors. We designed the 1st harmonized drive by wire system and a unique transverse leaf spring Technology, which allow us to eliminate strut towers, creating a flatter platform and more than 50 cubic feet We have implemented bidirectional charging capability, which enables our vehicles to function as mobile power plants and meet what we believe will be an increasing demand from private We use leading battery cells, which are cleverly and efficiently packaged into an MTP using proprietary Canoe technology, resulting in superior specific energy and energy density The above further clarifies our focus on engineering and protecting our IP. We believe This focus generates a higher return on capital than contract engineering, which features operating margins As part of our continuous innovation, we would like to announce a multi state university program And we will start with the University of Wisconsin.
This partnership will focus on advancing Key electric powertrain technology further enhance U. S. Competitiveness that we believe benefits The entire EV industry over time accelerates and expands our ability to innovate and create more IP for Canoo and broaden access to a critical talent pipeline of PhDs, Undergraduates and interns before entering the workforce, which is a huge mutual benefit. We have target to launch our partnership with the opening of the university post COVID. Now, I want to give special thanks to a great American visionary and innovator, former Governor Tommy Thompson, President of the University of Wisconsin System.
I would also like to thank Chancellor Rebecca Blank But to be clear, this partnership is separate and does not influence our Phase 2 manufacturing Through our beta phase, we have invested more than $250,000,000 in R and D, validation and testing, which has allowed us to log and analyze a huge amount of data. With our beta phase complete, we are now accelerating Phase 1 of Gamma. In Gamma, We will produce vehicles with design and parts using production tools and processes. This is an important phase that validates the car's final design and our manufacturing method. In this phase, we will produce 120 to 150 vehicles and log 100 of 1000 of additional miles.
2, ensure that the highest production quality standards validate the production vehicle in the real world across multiple climates and environments, iterate on the software ecosystem, better define service, maintenance and repair processes and improve customer satisfaction and reduce total cost of ownership. We believe deeply in providing our customers with the highest safety standards, which is why we are investing in our gamma phase before start of production or as we say SOP. By investing in this important step, we can reduce the likelihood of recalls and customer dissatisfaction, which can cost 100 of 1,000,000 of dollars. We remain on track to complete gamma and meet SOP by late 2022. We will provide an update on gamma phase on a quarterly basis.
We do not currently Expect delays due to COVID-nineteen at this time. However, if certain conditions that exist today continue to affect the market, and our expected timing may be impacted. Our current production plan is to produce 500 to 1000 units In 20 22, 15,000 units in 2023. In 2023, There is some additional capacity beyond our plan. However, we are taking a conservative approach to our projections.
We will continue to update this in the coming quarters. Now, an update on our 2 phases of manufacturing. 4 trends of our lifestyle vehicle to market. This enhances our ability for geographic expansion and speed to market. To meet our timeline of SOP by late 2022, we have accelerated our down selection To 2 high quality established globally positioned contract manufacturers, Our team's work to carefully evaluate potential partners is expected to result in savings of approximately 200,000,000 We will now move to final selection, which we plan to announce in the next quarter.
In addition, As to the end of Q1, 2021, we have sourced 74% of our supply chain for Phase 1. Phase 2, our wholly owned manufacturing. This will be for high volume North American delivery built In and for America and beyond, aligns with the current administration's vision for investing in American Clean Energy and provides us an opportunity to access non diluted capital in the form of state and federal subsidies, Creating more American advanced manufacturing jobs. It reduces our BOM and transportation costs and strengthens our global competitiveness while reducing local taxes and import costs. To date, we have evaluated more than 100 potential sites across the U.
S. For our Phase 2 manufacturing facility. Our team and world class advisors have met with multiple governors and other state and local leaders. I have personally been inspired by the reception of these forward thinking governors and senators who are focused on securing a leading position in new sustainable clean energy technology Recently, states such as New York and Michigan Have announced incentive packages for EV adoption and infrastructure. We see this trend continuing as part of the U.
S. Focus On enhancing clean energy and infrastructure. At our recent Board meeting, we officially narrowed our search from 8 states to 4, We plan to down select to 2 sites by the end of the quarter and update you As of the end of Q1, our workforce has grown by 28% versus Q4 2020 to 544, driven by hiring of engineers. Our workforce consists of 4 52 FTEs 92 contractors. We work with contractors on short duration projects that require flexible staffing and where competitively sensitive information is not Given our focus on innovation, about 80% of our workforce is dedicated to R and D, which is made up almost entirely of engineers and we continue to attract top talent to drive this innovation.
In addition, we have substantially built out our executive management team and have recently filled Key roles in the go to market, fleet sales and software development, which we will be profiling in the coming quarters. In addition to our design and engineering hub in California, we are diversifying our footprint of our employee base. We have added or will be adding offices in Texas focused on corporate functions, rapid prototyping and go to market Michigan, focused on purchasing and costing and as I mentioned earlier, Wisconsin, which will focus on electric powertrain research and innovation. We're also exploring international hubs For further expansion, geographic diversification of our workforce will optimize our human capital cost and enable us To attract talent specific to certain regions, the result is a workforce that is stronger, more diverse and drives higher return on capital that is able to work in multiple time zones. As I mentioned earlier, there has been a lot of attention on STAX.
We recently received a notice from the SEC that they are conducting an investigation They characterize the process as a fact finding inquiry. Unfortunately, for obvious reasons, We are unable to take any questions regarding this, but we are committed to providing timely updates as appropriate. We are also pleased to announce that we have been able to repay the essential PPP loan Of $6,900,000 that was granted in July of 2020 prior to the merger with We would like you to save the date for Canoo's 1st IR Day. Before I turn the call over to Renato and Ramesh, I would really like to share that we are hosting our 1st IR Day on June 17 in Dallas, Texas. This event will be webcast and in person attendance will be limited.
You will hear from several members of our senior management and we will provide updates on projected volumes, timing and other important milestones. Registration is now open at canoirday.com. With that, let me turn the call over to Renato and Ramesh.
Thank you, Tony. Our Q1's 2021 results are as follows. Research and development expense was $39,200,000 for the quarter compared to $19,300,000 in the prior year period. Excluding $7,100,000 of stock based compensation, research and development expense was 32,200,000 SG and A expense was $55,600,000 for the quarter compared to $4,100,000 in the prior year period. Excluding $38,000,000 of stock based compensation, SG and A expense was 17,600,000 GAAP net loss was $15,200,000 for the quarter compared to a GAAP net loss of $30,900,000 in the prior year period.
GAAP net loss in the Q1 of 2021 included a $83,600,000 non cash gain On the fair value change of earnout shares liability related to the periodic remeasurement of the fair value of our contingent earn out shares liability and a €1,600,000 loss on the fair value change in private placement warrants liability. Adjusted EBITDA was minus $49,800,000 for the quarter compared to minus $23,000,000 in the prior year period. Ramesh?
Thank you, Renato. Turning to the balance sheet and cash flow. We ended the quarter With $641,900,000 of cash and cash equivalents, cash used in operations for the 3 months ended March 31, 2021 was $53,900,000 compared to $23,700,000 in the prior year period. Capital expenditures were $12,100,000 for the 3 months ended March 31, 2021, compared with $700,000 in the prior year period. Turning to our guidance for the Q2 of 2021, We anticipate the following expenditures approximately $65,000,000 to $75,000,000 for operating expenses, excluding stock based compensation and depreciation and approximately $45,000,000 to $55,000,000 for capital expenditures.
Before we open the call up for Q and A, I'll turn the call over to Tony for closing remarks.
Thank you, Ramesh. As we look ahead to the balance of 2021, we expect to execute against several of our key initiatives, including announcing a contract manufacturing partner, a location for our future owned manufacturing facilities and identifying supply chain partners. I would like to close by thanking the whole Canoo team And all our advisors and consultants for their hard work and for their many accomplishments in such a short time. We would now like to open the call for Q and A. Operator?
Thank you. We'll now be conducting a question and answer Our first question today is coming from John Murphy from Bank of America. Your line is now live.
Good afternoon, Tony. Thanks for all the info. I got to agree with you. I mean, some of your comments about market segmentations and Other things in the industry are very on point. So clearly, you're understanding a lot here.
But one thing about the STACK side of things that I think is debatable and what you're saying These early stage companies like yourselves forming in a public forum. One of the things that we had thought initially and this Might be wrong, but I want to get your perspective on it is that the STACK funding allows you to accelerate and maybe shoot the gap more nimbly and faster and get out there and take market share ahead of the incumbents doing Based on some of the timelines that you're talking about and the volumes that you're talking about, it seems like you're going to have a lot of incumbent competition Online at similar times as you so maybe you could just comment on that and maybe if you could move faster or you think they're going to move slower or how you think the competitive environment is going to shape up over time?
Yes. So John, I think that's a good point to kind of further discuss. So my view on I'm pro For the democratization of venture capital, private equity and public equity to participate in innovation, We see our competitive countries doing similar things. So from my perspective, it absolutely accelerates The innovation curve and I think it's super positive impact. What it does do though There's kind of having taken another company public and been involved in public offerings before.
A traditional IPO is different than a SPAC, as you know. They're called emerging growth companies and they have a little bit different standards. So, The public has to get used to some of the fact that some of this stuff is being evolving in front of the public view. And that's why it's called an UGC, right? So, that was the point that I was making there.
However, from our side, Being that we have public company experience, what we've done is we've moved dramatically much more to our style, which is to be conservative. 1, it's better to outperform than underperform. It's a long term investing game, And we want to build a great long strong company that can globally expand and can really return capital Over all of its owners of the vehicle. In fact, the return on capital goes up as the vehicle changes hands. So, we're very grateful Thank you for the fact that we've been able to participate in this fact.
But my only point is that the world is learning how to use them And I am convinced they will continue to get better, but we are big supporters. And I think some styles will be Too maybe optimistic for some people like us and some may think of us as too conservative. But it's a long term game. And the big triggers in this industry is really In the 2024, 2025 time frame, if you think about it, right? That's when the rubber really meets the electric road.
And so, we believe that if somebody really looks at the real investments we've made in platform, Our own IP, our security capability layers, the fact that we use less chips than anyone, if anybody really looks how we invested our money To this point, how much headcount human capital we've assembled, it would say that we are a contender. And the more we focus now on go to market and we're pretty excited about some of the things that we will be rolling out, but we will always take a conservative
And it's not just headcount,
it's the right folks. It's right human capital talent that you need. Where do you think you reached critical mass on that? How do you think about that as a key milestone? Obviously, you could talk about the number of vehicles you're making, Driven on test meals and all that stuff.
But I mean headcount and sort of that critical mass on the human capital side is really going to be A critical measure, how do you think about that and where you think you turn the corner on that? Is that 1,000, 2,000, 5,000? Because you're up against companies, as you know, that have 100 of 1000 of employees to some extent, not a lot of them are engineers. So it's not necessarily apples to apples. But I mean, how do you think about that human capital level at which you turn the corner and things really start changing?
Yes. So look, I think in an entrepreneurial environment, we are totally focused on our own product line. We can today with the use of technology and keep in mind when you engineer a platform that is technologically capable of adaptations and is able to take multiple derivatives And to do it from a technology focus, primarily, you get exponential output out of your personnel. In addition to that, what you get is in this design, you've got 20% less plus parts The 30% less parts as well. And so you pick up a lot of speed.
Why? Because you have no steering column, you have none of those things that again I refer back to the point that I made earlier, where somebody really looks at what we've done. And that will all come out in time and that's why we're excited about having an IR day next month, so people can see the real product and the real depth. But critical mass, In my opinion, for us, based on what we've announced to date, is in the $750,000,000 range to a1000. And that's kind of where we're targeting right now for what we've announced.
And that's really on the shorter end of that curve, which is, Now we'll be updating that. We opened our order We have additional capacity in our projection. We focused on world class Global producers that can give us geographic reach on the 3rd party manufacturing partnership side And we're focused, which aligns very well with the administration initiative of bringing this Advanced manufacturing of EV to the U. S. So, will our headcount rise over time?
Yes. But right now, everything we're focused Don, is to get into that 7,501,000 range of FTEs based on our product roadmap.
Okay. And then just lastly, I mean, it seems like with the roadmap that you're laying out that incremental capital over time Maybe something that you need. I mean, is that something that you think is going to continue to be relatively available and open and hopefully Stay low cost to get this machine really running. How do you think about sort of the cadence of potential capital raises over
time? Yes. So look, I mean, one of the good things obviously that's happened is Our government is now acting like the Chinese government and others where they're stimulating clean energy technology. So that allows us Access non dilutive capital. We've seen and we have really deeply dived into how that capital can help us Of course, we haven't factored that into any of our projections.
So again, conservative approach. But for those of you who know me, I've raised 1,000,000,000 and 1,000,000,000 of dollars of various instruments. As you go back and look at the And a ebb and flow of cash in Tesla's journey, our journey, we will manage cash very appropriately And we will pace it to our product roadmap. The event we see more positive trends as we're running now a more conservative model, We would then be raising capital ahead of and so this is Industry and a evolution where capital will be important. And of course, we got to punch out milestones.
So it's as non dilutive as possible, but we're building everything from now. And our relationship with The Street now that the market is opening up again, we'll be out on the road
Great. Thank you very much. Looking forward to June 17. Thanks, John.
Thank you. Our next question is coming from Jamie Perez from R. F. Lafferty and Company. Your line is now live.
Hey, how are you doing everybody? Good day. Thanks for the update on the manufacturing. I'm sort of focusing on Phase 2 where the manufacturer comes in house. Have you started ordering long lead time equipment because it looks like over the next couple of years, The feel of manufacturing is going to be pretty, crudy.
Could you give us any update on that?
Yes. So we are so because we're entering into gamma in the LV, The tooling and equipment we're ordering and many of it has already been ordered. So we've got a very good grip On the large items on week time, stamping and all those other items. So yes. 2nd of all, because we get high utility derivatives that we can put on the NPP, We obviously get a lot of scale.
So we're very focused on that for those of us coming out of this industry and understanding it Deeply and of course we can set up assembly lines in a laddered fashion to meet our demand. So, we are Feeling good about it, of course, we haven't ordered the 2nd batch of stuff. It could be impacted by demand and or pandemic effects. That's why we took a 2 pronged approach, which one gets us off the ground. It's quick.
It's leveraging somebody else's site facilities and expertise while we get ours up and get it perfected, So we can move to high volume and then flip to the other relationship and make it much more focused on geographic expansion. And as we discussed in the earnings part is we've already sourced 75% approximately of the parts and that's going up every day. So look, again, I come back to this isn't an outside in design, this is an inside out design with an outside in focus. And so I think that as we roll out the customer journey piece, we're focusing on multiple owners. Those things will also become an area of focus and appreciation compared to the competitive landscape.
And so, my comments on that would be some will in fact, just based on your comment, we'll report more In detail by segregation of the Phase 1 manufacturing and the Phase 2, when we get towards the equipment and, stamping piece for the wholly owned facility.
All right. Thanks. And then the next one is more of a comment. I mean, you've taken a pretty bold step in transparency and I commend that Be more transparent compared to other companies because the issue of preorders reserve is also a question, But, yes, just glad to hear that there's more transparency on the preorders. Yes, that's all I have.
Thanks for my questions.
Jamie, I appreciate that. And we definitely are very focused on transparency and clarity because obviously We want to make sure that people understand the difference between someone's reservation and someone's order.
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Claude at this point.
Thank you everybody for joining us. Look forward to seeing a lot of you on IR Day on June 17. Those of you who can't attend in person, We'd love to have you attend virtually, so it will be a hybrid event. So please reach out with any questions you have and we'll be sure to get back with you. Thank you.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.