Yahoo Finance Canoo Inc. (NASDAQ:GOEV) Q3 2023 Earnings Call Transcript
Canoo Inc. (NASDAQ:GOEV) Q3 2023 Earnings Call Transcript November 14, 2023
Canoo Inc. beats earnings expectations. Reported EPS is $-0.06, expectations were $-0.12.
Operator: Greetings and welcome to the Canoo Third Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kunal Bhalla, Senior Vice President, Capital Markets, Corporate Development, and Purchasing. Thank you. Please go ahead.
Kunal Bhalla: Thank you, everyone, for joining us on our Q3 2023 earnings call. We're excited to be presenting this call from our Oklahoma City facility. During the call, Tony will update you on our business progress; Greg Ethridge, who joined as our CFO in August, having previously served on our Board, will provide an introduction and update on sales and financing. And finally, Ramesh will go over the Q3 financial results. Please be advised, we may make forward-looking statements based on current expectations. These are subject to 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 and on our most recent form 10-Q and 10-K and other reports that we may file with the SEC, including Form 8-K.
All of our statements are made as of today and are 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'll discuss non-GAAP financial measures. You can find the 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. Over to you, Tony.
Tony Aquila: Thanks, Kunal, and welcome, everyone. We live in the most interesting times with an imperative for global innovation, but with macro and micro headwinds compounded by financial crosswinds, especially in certain industries and markets like ours. When our country has fallen behind, while this is daunting at times, this can feel like forever, but it can and will pass. Based on your creativity to resolve, and determination to find a way to get your vision and mission to market and then to scale. What is inspiring to me is that, it takes just a small group of innovators and hardworking believers who accept nothing other than to find a way to win. What is also inspiring to me, as our country has always done its most impactful work when the world has decided to give us number two or number three or even last place at times to only see us emerge back in the game and many times on top.
To be amongst these great innovators, you must find your own inner resolve to lead and not to follow others, but rather hold the bar so high that at times you even doubt yourself, because as we have all seen many people vote against the innovators versus support them. I am blessed and honored to have a group of like-minded people who volunteer every day, do their part and more so that we can accomplish our mission. While times are tough, we are grateful that every day, more and more of you are becoming believers in our strategy that we introduced two plus years ago when we took over the direction and leadership of Canoo. Our vision was bold, not the easiest to understand, and was hyper-focused on different and, as we now know, emerging markets that require unique products, sub-products, and approaches to first meet the needs of our customers in fleet, government, and military, and then on to consumer markets.
Some have asked me why not focus on consumers first? It's simple. If you design your products and service for the most discerning commercial customers who aim to test the bounds of the possible, they will help you find a way to build it into reality through rigorous testing and value-based feedback because their business and mission have a critical dependence on our platform to perform in volume and under stress. Not only are our fleet customers contracted multi-year volume buyers with bankable credit profiles and are those who demand minimalism with maximum functionality and safety, these partners can help you fast-forward generations of continuous improvement, which will ultimately benefit our consumer customers when we increase and expand our delivery to these additional markets.
The risk of manufacturing before rigorous testing has been blown out by the best, you run the risk of costly recalls. Because of this, we have never just tested our products to pass a regulatory standard, but rather to live or die by the validation of our hardworking people of our country and our customers who rely on our product for critical processes. The big bets we have made around the redesign and functionality of our platform are beginning to play out successfully at multiple levels. But we still have things to prove. We have worked nearly three years to get to this point. We have de-risked the business plan, de-risked the technology, and settled legacy matters. And we'll continue blocking and tackling with our characteristic of scrappiness, perseverance, and tenacity, and the discipline and experience we will gain at a time like this is great for Canoo's future DNA.
Look, as I mentioned, there have been substantial headwinds for Canoo and the whole EV market over the last 12 months. Headwinds will slow down any aircraft, but if engineered properly and if determined, it will complete its mission. Now, let me update you on our manufacturing progress in the quarter. We are proud to be a creative and adaptive team and continue to find innovative ways to acquire long lead time capital intensive and environmentally sensitive items. With the market in distress, the team has opportunistically and accretively added manufacturing assets at reduced prices. We are continuing to grow our presence in Oklahoma, and by the end of Q4 2023, target 20% to 25% of our total workforce will be Oklahomans. In our workforce development program with the Cherokee Nation, we began hiring and training employees at our Oklahoma facilities.
Yesterday, we reached a key milestone and announced that we would be delivering our first batch of made in Oklahoma electric vehicles to the state of Oklahoma Office of Management and Enterprise Services under an agreement to sell up to 1,000 vehicles. Our manufacturing milestones achieved this quarter are: on July 27th we hit a 20,000 unit run rate for our battery modular line installed in prior Oklahoma and the Cherokee Nation; July 31st 20,000 unit run rate for our robotics and assembly line for our ladder frame equipment installed at Oklahoma City; August 17th, EPA permit granted for our OKC facility; November 10th, commissioning of equipment completed on both the ladder frame system in Oklahoma City and the battery module system in Pryor; November 14th, today we update the general assembly system is on track to achieve the 20,000 unit run rate for Q1 2024.
Listen, we believe it's essential for us to be disciplined when stepping our way into volume manufacturing with the right pace of investment and with our supply chain partners. Now I'd like to have Greg cover sales and capital markets activities and then after that we can go to Ramesh.
Greg Ethridge: Thank you, Tony. Just a quick intro. I've had the privilege of serving on the Canoo Board of Directors since December 2020 until recently, when Tony asked me to join the management team full time and put my skills to use for this next phase of growth. Prior to that, I spent 14 years investing and managing direct private and public control investments, often serving as an interim financial manager role. And prior to that, I spent 10 years in investment banking, working in capital markets and restructuring. From my first days of meeting Canoo in mid-2020 and understanding the unique benefits of the modular platform and the technology stack, I had a strong belief in the substantial business opportunity for the company.
My conviction about the company's success became stronger after getting to know Tony and the team here and witnessing the business model pivot that he directed in early 2022. For those of you that don't remember, the pivot was the change from a consumer-facing electric vehicle to the fleet-focused electric delivery vehicles that have now generated $750 million in committed orders or 18,000 units for key commercial customers and also large additional opportunities with government customers. This business model shift turned out to be prescient, given the difficulties of consumer exposure in a high interest rate environment. The news focused towards well-funded, high credit quality commercial government and military customers appears to be well timed.
Now shifting to our revenue and sales pipeline and recent milestones. During the third quarter, we entered the revenue generating phase for the company. Sales during the quarter were generated from vehicle deliveries, but also from revenue from the DOD's, Defense Innovation Unit Contract and Services. As you know, our multi-purpose platform, or MPP, and many of the underlying technologies, electric drive unit, battery modules, and the system itself offer revenue generating potential for more than just complete vehicle sales. We will continue delivering additional vehicles throughout the balance of the year to our highly discerning, high-grade, credit, government, and commercial fleet customers, the types of customers you want, especially during tough market cycles.
On July 12th, Canoo delivered the Crew Transportation Vehicles, or CTV, a derivative of the lifestyle vehicle models to NASA. These specially configured CTVs will transport astronauts to the launch pad at Florida's Kennedy Space Center for future Artemis missions. It was an historic day for our company and a very proud day for our team. On October 20th, Canoo was pleased to attend when NASA officially revealed the CTVs at the Formula 1 Grand Prix in Austin, Texas. On November 10th, we revealed the American Bulldog, a derivative of the Screaming Eagle that was delivered to the U.S. Army and been in constant testing since November of 2022. The Bulldog was developed as a further derivative and byproduct of this extensive testing. And again, as Tony mentioned, we announced yesterday, November 13, that we are delivering our first vehicles in an up to 1,000 unit agreement to the Oklahoma Office of Management and Enterprise Services.
We are very proud of our partnership with the state of Oklahoma and its workforce. On our sales pipeline -- our sales pipeline continuous to build through 2025 with continuing -- sorry, we had a little technical glitch here. Continuing order book, growth and pricing stability across our target segments. The team recently concluded pre-launch trials with key customers on our LDV 130, LDV 190, and other derivative products. $3 billion plus order book across both Stage 2 and Stage 3 orders, over 67,000 total reservation count. 3% sequential growth in the quarter on Stage 2 and Stage 3 orders, strong product acceptance on the commercial fleet side allows us to be more discerning on customer choice and modulate order acceptance given our very strong backlog.
Through pilot and pre-delivery customer testing, we found 97% to 100% of the use cases are satisfied when looking at the last two years of driving evaluations and deliveries with key fleet customers. Six unique duty cycles including high volume, high traffic metros, rural areas across both food deliveries and general merchandise. 150 plus days of reliable performance in extreme high temperature conditions in multiple weather environments. And over 10,000 industrial and commercial use miles and many thousand deliveries made to unique locations. As we move into production, we also expect to start receiving deposits from our commercial fleet customers. At Canoo, as Tony described, we have been hyper-focused on delivering units to our customers and optimizing across our business.
We have a strong track record of raising small amounts of capital and allocating it to different functional areas and using milestone-based achievements. During the quarter we raised $78 million in equity linked securities and in October we raised another $45 million. Year-to-date we have successfully raised approximately $250 million in total capital to support the growth of Canoo. The most recent $45 million convertible preferred investments that closed in October was from a foreign strategic partner that has ability to significantly upside its investment as we continue to achieve our milestones. This long-term investor is interested in a manufacturing partnership with Canoo and can support Canoo at very attractive price points for certain parts of the vehicle.
We continue to be focused on a variety of other capital alternatives, including with additional overseas partners. Our primary focus this quarter and going forward will be to efficiently allocate capital and continue to achieve our business plan. We are generating savings that can be redeployed into business at many levels. We continue to be focused on getting maximum efficiency from our capital, and that is my mission. We will take advantage of market dislocations as the opportunities arrive, and Ramesh will describe those in more detail. In summary, despite a very challenging market backdrop this year, we have successfully raised capital to achieve our objectives and will continue to do so. Our team is scrappy, innovative, and persevere. We will continue to optimize our spend and take advantage of the opportunities in front of us to achieve our business plan objectives.
I will now hand it over to Ramesh to review the financial results.
Ramesh Murthy: Thank you, Greg. Now let me walk you through the results of Q3 2023. It was an exciting and historic quarter for two reasons. First, we are now a revenue generating company. As Tony mentioned earlier, our first revenues were generated in July when we delivered our first three NASA vehicles on time, followed by revenues generated from the completion of certain engineering milestones and delivery of certain battery modules to the Department of Defense's -- Defense Innovation Unit. We generated revenues of approximately $519,000 in Q3 of 2023. Our revenues in the third quarter reflect the inflection point we are at, beginning the phased ramp manufacturing approach in delivering low volume vehicles starting Q4 of 2023.
We expect to ramp volumes over the rest of 2023 and 2024 at a measured pace to match with the delivery schedules that are being agreed to with our customers. We incurred $903,000 in cost of revenues during the three months ended September 30, 2023. Our cost of revenues primarily includes vehicle components and parts, labor costs, and amortized tooling and capitalized costs involved in producing and assembly of our parts and components. Our negative gross margin of 384,000 during the three months ended September 30th, 2023 was primarily due to the custom-built initial vehicle deliveries to NASA and certain increased logistics and freight costs. And includes a lower of cost of net realizable value or LCNRV adjustment of approximately $366,000.
We expect negative gross margin to improve on a per vehicle basis as we increase overall production levels and achieve commercial cost savings on material and labor costs. Second, our continuous optimization of operating expenses and narrowed focus on our milestones has resulted in the lowest adjusted negative EBITDA since we have been as a public company. Moving to the income statement. Our third quarter 2023 results are as follows: Research and development expenses totaled $22 million for the quarter compared to $57.1 million in the prior year period, a 61% reduction from Q3 of 2022. SG&A expense was $24.9 million for the quarter compared to $48.8 million in the prior year period. A 49% reduction from Q3 of 2022. GAAP net loss was $112 million for the quarter, compared to gap net loss of $117.7 million in the prior year period.
Adjusted EBITDA was negative $40.4 million for the quarter, compared to negative $80.8 million in the prior year period. Adjusted EPS was negative $0.07 per share for the quarter compared to adjusted EPS of negative $0.31 per share in the prior year period. Turning to cash flow. We ended the quarter with $8.3 million of cash and cash equivalents. After giving effect to the issuance, sale and delivery of preferred shares and warrants, for a total of $45 million, our cash balance would have been $53.3 million. Cash used in operations for the nine months ended September 30th, 2023 was $191.4 million, compared $329.9 million in the prior year period. Our capital expenditures of $45.4 million for the nine months ended September 30, 2023 compared to $88.8 million for the nine months ended September 30, 2023.
Net cash provided by financing activities for the nine months ended September 30, 2023 was $208.9 million compared to net cash provided by financing activities for the nine months ended September 30, 2022 of $181.3 million. Our monthly cash flows in Q3 of 2023 was approximately 40% lower than our average cash flow per month in 2022. We continue to optimize cash as we move into Q4 of 2023. Moving to our guidance. We had previously provided our guidance for the second half of the year as follows. Adjusted EBITDA of negative $120 million to negative $140 million and CapEx of $70 million to $100 million dollars. Our relentless focus and discipline of expense management, including the labor arbitrage as a result of change in labor mix from engineering to manufacturing and transition of our workforce to Oklahoma and our deliberate strategy to minimize long-term purchase commitments amongst other factors allow us to improve our negative adjusted EBITDA guidance.
This improvement has resulted in our revised negative adjusted EBITDA guidance to now be between $85 million to $105 million for the second half of 2023, which is a 30% improvement from the guidance we have shared in the prior quarter. From a CapEx perspective, our phased ramp manufacturing approach allows us to fully utilize our low-volume tools prior to switching over to the high-volume tools and pace our asset expansion to align with production, thereby avoiding higher amortization over initial units produced. These reasons, combined with the other reasons Greg mentioned above, as it relates to partnering with others in the industry to acquire minimally used equipment at optimized cost allows us to reduce our guidance. Thereby we share the following revised guidance for the second half of 2023 of CapEx being $30 million to $40 million.
Our 2023 second half adjusted EBITDA guidance of negative $85 million to negative $105 million will bring our full year adjusted EBITDA guidance to negative $210 million to negative $235 million, which is approximately a 50% reduction from the prior year. Now, let me turn it back to Tony for final remarks.
Tony Aquila: Before we go to Q&A, I want to take this time to thank all of our supporters, and especially the Canoo team and our partner suppliers for their incredible flexibility and support while we navigate our way through to the next phase. Operator, please take us to questions.
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