Lordstown Motors Corp. (NASDAQ:RIDE) Q4 2022 Earnings Call Transcript
Lordstown Motors Corp. (NASDAQ:RIDE) Q4 2022 Earnings Call Transcript March 6, 2023
Operator: Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Lordstown Motors Q4 2022 Earnings Conference Call. Thank you. Carter Driscoll, Head of Investor Relations, you may begin.
Carter Driscoll: Thank you, operator. Good morning and thank you to all for joining the Lordstown Motors' fourth quarter and fiscal 22 earnings conference call. To supplement today's discussion, please go to our IR website, view our press release and investor deck. Before we begin, I want to call your attention to our Safe Harbor provision for forward-looking statements that is posted on our website and is part of our quarterly update. The Safe Harbor provision identifies risk factors and uncertainties that may cause actual results to differ materially from the content of our forward-looking statements for the reasons we cite in our Form 10-K and other SEC filings, including uncertainties posed by the difficulty in predicting future outcomes. Joining us today will be Lordstown Motors' CEO and President, Edward Hightower; CFO, Adam Kroll; and Executive Chairman, Dan Ninivaggi. With that, I'd like to turn the call over to Edward.
Edward Hightower: Thank you, Carter and welcome everyone. I would like to start today by giving you an update on the Endurance temporary production pause to address post-launch quality concerns and the voluntary recall that we announced last week. As we shared throughout last year leading up to the launch, engineering readiness, quality and part availability would govern the speed and ramp up of the Endurance launch. Post-launch, the ongoing adherence to our part quality and vehicle quality standards is required to maintain or accelerate our production plan. Shortly after our January production update, we began to discover and experienced several new performance and quality issues with the vehicles coming off the production line and vehicles in process.
The issues affected several vehicle subsystems, including propulsion, chassis and infotainment. At a high level, most of these issues could be attributed to supplier part quality shortfalls and software glitches. As our customers are our highest priority, we decided to temporarily pause production as we work with our supplier network to root-cause the issues; conduct additional vehicle component and software testing; and as needed, make updates to affected vehicle components and software. Concurrent with this production pause, we recently discovered isolated incidences of Endurance's losing propulsion while driving. Root-cause analysis by our engineering team, manufacturing partners and supplier network identified a specific electrical connection as the driver of this issue.
In this regard, we filed paperwork with the National Highway Traffic Safety Administration, NHTSA, to voluntarily recall the Endurance to address this issue. The recall affects 19 vehicles that are either in the hands of customers or being used internally by LMC. We have worked with our supplier network to implement a part corrective action that we believe will address this issue and have begun to retrofit customer and internal vehicles with the updated parts. Subsequent to this filing, our part brake supplier informed us that one of the source components in this system was not to specification. They have since supplied us with corrected parts and we have filed a voluntary recall to address this issue as well. Vehicles waiting for shipment and vehicles in process at the manufacturing plant will also be retrofitted with both corrective actions once sufficient quantities of the components are available.
Our team has also worked closely with our supplier network to root-cause the other post-launch quality issues and develop and implement corrective actions, which have included part quality corrections, part design modifications, retrofits and software updates. We now have line of sight to the resolution of the issues that resulted in the production pause and voluntary recalls and in the coming weeks, expect to announce when we will resume production and deliveries. We recognize and understand that this news is disappointing to our stakeholders. It is to our team as well. However, please understand that the actions we have taken are consistent with our company values in the best interest of our customers and aligned with the long-term interest of Lordstown Motors.
New vehicle launches require time, experience and diligence, especially as vehicles transition towards electrification and the increased use of features, technologies and attributes driven by software. Our experienced team has collectively been involved in hundreds of new vehicle launches across multiple OEMs around the world. We will continue to put our customers and values first. As we have discussed on previous earnings calls, we plan to build an initial batch of up to 500 Endurance vehicles this year in order to see the commercial fleet market demonstrate the capabilities of the truck and support our OEM partnership pursuits, which is critical to scaling production. To-date, approximately 40 Endurance vehicles have been completed or are in process.
As you may recall, we decided to limit the size of the first batch of commercial production as the BOM cost of the Endurance is materially higher than our selling price. Forming the right partnerships will create the business rationale to invest in the hard tooling and VAVE actions required to reduce its BOM cost and scale production of the truck. Lordstown Motors launch of the Endurance created the opportunity for other OEMs to access the platform and manufacturing capacity of a fully homologated and certified vehicle in the second most popular segment in the United States, full-size pickup trucks. While we continue to pursue partnership opportunities, should we not identify a partner in the coming months, we may decide to pause commercial production of the Endurance until a partner is identified.
This week, we will be displaying the Endurance at NTEA Work Truck Week in Indianapolis. We will also display an Endurance with commercial fleet-focused accessories from leading manufacturers and suppliers of aftermarket equipment. To provide our customers with aftermarket service and warranty support, we have entered into an agreement with a third-party provider, under which, we will jointly provide service and warranty for the Endurance vehicles in key states where allowed by law. Technicians at these service locations will complete Lordstown's vehicle service training curriculum and our partner provider will provide service solutions, including warranty and preventive and scheduled maintenance. We will share more about on the strategic rollout with our service partner in the coming weeks.
Switching to our future vehicle program, we continue to work collaboratively with Foxconn and the MIH consortium on the pre-development work and vehicle development process, or VDP, deliverables for our next platform and vehicle program. The next platform and vehicle program are key to Lordstown Motors' long-term business strategy and are becoming a greater portion of our company's focus. While we are not ready to announce the details yet, I can tell you that this vehicle will serve growing battery electric vehicle commercial fleet segments that are different from those targeted by the Endurance. Also, the new vehicle will likely source key components and subsystems from Foxconn and MIH consortium members and be built in the Foxconn EV Ohio assembly plant.
Discussions with potential anchors' customers are also ongoing. Our asset-light business model and collaboration with the Foxconn EV ecosystem, including MIH, will provide the opportunity for Lordstown Motors to create winning EVs that are tailored to the needs of our customers that use them for various work applications while gaining the cost benefits of scale. We shared the story of Lordstown future and collaboration with Foxconn and MIH earlier this year at CES. We also plan to discuss our role in the growing Foxconn EV ecosystem later this month at the upcoming South-by-Southwest event in Austin, Texas during their Mobility, Electrification and Innovation Trade. Q4 2022 was a very busy and exciting quarter and Q1 2023 has continued this trend.
I will now turn the floor over to our CFO, Adam Kroll, to present our Q4 performance and financial outlook. Adam?
Adam Kroll: Thank you, Edward. Good morning, everyone and thank you for joining us. During 2022, we significantly reduced our cash burn, fixed costs and operating complexity as well as raised $263 million in capital, of which $210 million was from Foxconn and the balance from common stock issuances into the market. The Foxconn funds included $157 million related to the plant sale that was received in 2022, plus another $53 million in November from the sale of common and preferred stock. You may recall the total proceeds from the plant sale were $257 million, of which $100 million in down payments were received in 2021. Under the terms of the investment agreement we entered into with Foxconn in November and subject to regulatory approval, other conditions and satisfaction of EV program milestones, Foxconn is expected to purchase up to $117 million in additional common and preferred stock.
As a reminder, the use of proceeds from the preferred stock investments may only be used to fund cost associated with developing the new vehicle program. There is more detail on the sources and timing of all the funds raised in our earnings deck on our IR site. Q1 of 2022 was our last full quarter with plant operating costs as the asset sale closed May 11. In that quarter, our total operating costs were approximately $22 million and were budgeted to rise to support launch and increase production. Thus, we shed roughly $100 million in annual operating costs in exchange for a contract manufacturing fee per vehicle and $257 million in asset sale proceeds. In addition, we benefit from substantially lower operating complexity and risk by putting manufacturing in the hands of Foxconn.
And as Ed discussed, we advanced our long-term vehicle development partnership with Foxconn and its EV ecosystem. I also want to point out that in every quarter of 2022 we outperformed our cash burn and liquidity targets through spending discipline, well beyond the impact of the production and launch timing. Ending with almost $222 million in cash and short-term investments, the fourth quarter was our most significant beat at $57 million or 34% above the top end of the range in our outlook. As you are all aware, the transitional aspects of 2022 create a lot of noise, which I will call out as I walk you through our results. More detail can be found in our press release and the earnings deck on our IR site. Upon reaching certification in Q4, we began customer deliveries of the Endurance, resulting in revenue recognition of three vehicles in the period.
As I explained on our last earnings call, with the start of commercial production and sales, we would begin reporting cost of sales in the fourth quarter, some of which were reported in R&D or SG&A for the first 9 months of 2022. Fourth quarter and full year reported cost of sales totaled approximately $30 million. However, it's important to understand how that breaks down. Our production costs were $635,000, which included direct materials on the vehicles sold, manufacturing, warranty accrual, delivery and launch-related costs. The remaining $29.4 million of cost of sales included $8.3 million of depreciation on production equipment and tooling we continue to own and $21 million of charges in connection with inventory write-down, primarily related to our NRV adjustment for inventory acquired during the period and another charge we took for excess inventory on hand.
The NRV represents a charge we take to write down inventory to the net realizable value, which equates to the sales price of the Endurance. The result is that what goes through cost of sales and production cost represents a zero direct material margin because it is after the NRV. The excess inventory charge was a small amount taken to address purchases related to supplier minimum heart order quantities that are in excess of our anticipated consumption. More detail can be found in the notes to our financial statements in the 10-K. Our total SG&A and R&D costs for the fourth quarter were $37.8 million and for the year, were $246.1 million. SG&A expenses were $22.2 million for the quarter, including $7.6 million in non-cash items for the write-off of a prepaid royalty and accelerated stock comp and $1.2 million of litigation accruals.
The remaining $13.3 million includes $8.3 million in personnel and professional fees; $3.2 million in legal fees and insurance premiums; and $1.9 million in other services, software and marketing expenditures. Compared to the fourth quarter of 2021, personnel and professional fees were down 39%, primarily due to a significant reduction in consulting support that has been trending down since the start of 2022. Outside legal costs continue to trend down as well compared to Q4 of 21. They were down almost 80%. And a significant reduction in our annual insurance renewals in the quarter led to a 23% decrease in premiums, which will carry forward. Other costs, primarily marketing spend, were 11% higher compared to the prior year as we ramp selling activity.
For the fiscal year, SG&A expenses were $138.3 million. However, that includes $33.9 million in litigation accruals, $25.6 million in NRV charges for the first 9 months of 2022 before reporting cost of sales and $7.6 million for the write-off of the prepaid royalty and accelerated stock comp. The remaining $71.1 million of SG&A consisted of $40.5 million for personnel and professional fees; $11.4 million of legal expenses; $11.8 million of insurance premiums; and $7.2 million for other services, software and marketing expenditures. The year-over-year improvement was driven by a $23.9 million decrease in outside legal fees and $9.2 million in other professional and consulting fees, net of an increase in personnel costs as we build capabilities in-house.
Partially offsetting these items were higher expenditures for services and marketing as we prepare to launch the Endurance, along with higher insurance premium, representing the timing of a higher renewal late in 2021. R&D expenses were $15.6 million in the quarter, including $1.8 million of accelerated stock comp; $10.6 million in personnel and consulting costs; and $3.2 million in software, other services and overhead. This compares to non-plant related personnel and consulting costs of $16.9 million in the fourth quarter of 2021 and $14.2 million in the third quarter of 2022, representing decreases of 38% and 26%, respectively, as Endurance development and testing expenditures trend down approaching the launch, as previously discussed in our outlooks.
For the same reason, freight costs were also down $1.4 million versus Q4 of 2021 and relatively flat to the third quarter of 22. For the full year, the headline number of $107.8 million in R&D compares to $284 million in 2021. However, these amounts include plant-related costs of $33.3 million in 2022 incurred prior to the sale in May and $57.1 million in 2021. The amount in 2022 also reflects an $18.4 million reimbursement received from Foxconn as part of the sale. Prototype component expenses were $22.8 million in 2022, down 78% versus $105 million in 2021 due to the transition from parts testing to beta and PPV builds and ultimately, launch. The remaining R&D expenditures in 2022 totaled $70 million compared to $122 million in 2021. In 2022, personnel and professional fees were $55.2 million, representing an almost 47% decrease from 2021.
Freight was lower by $6 million or 86%. Again, the trends are all tied to progression of Endurance development to launch. Other operating items for the year totaled $111.4 million, representing a non-cash impairment on our long-lived assets. As highlighted last quarter, the move into commercial production triggered a review for impairment and a charge of approximately $75 million in Q3. The primary metric we use to evaluate fair value is our enterprise value, which, of course, fluctuates with our stock price, cash position and net assets or liabilities. The decline in our stock price during the fourth quarter was the primary contributor to the incremental impairment of approximately $21 million in Q4. We also wrote down the value of certain prepayments for inventory that are for quantities we do not anticipate being consumed by the Endurance, including assets related to the right to access General Motors parts, which represents the balance of the total impairment.
More detail on each of these can be found in the 10-K footnote. At the end of 2022, cash and short-term investments were almost $222 million, approximately $18 million higher than the third quarter of 2022. The change in cash consists of $42.7 million in cash used for operations, inclusive of a $21.1 million working capital investment; $2.9 million in capital expenditures, net of $1.1 million in asset sale proceeds; and $63.7 million in cash proceeds from the issuance of common and preferred stock, including the $52 million purchased by Foxconn. The $57 million cash beat I mentioned earlier was due to cost containment, which represented approximately $13 million, along with $12.4 million in stock sales under the ATM, $12 million in lower CapEx and $13 million in working capital, excluding inventory.
Supply chain issues and a decision not to pull forward as much of the inventory purchases into the fourth quarter contributed to the outperformance. The impact of lower Endurance production and inventory buys was less than $3 million of the benefit. The CapEx benefit was almost entirely timing related and will shift into the first and second quarters of 2023. Turning to our outlook, while our business model is more durable and operational execution has improved, we will continue to execute a capital-constrained business plan, making trade-offs on what and when we spend the funds we have. Scaling the Endurance, even where we defined a strategic OEM partner, will require substantial additional capital. And while we expect $100 million in preferred stock funding under the Foxconn investment agreement, we will cover the planned predevelopment work for the new vehicle program in 2023.
Significantly, more capital will need to be raised to reach certification, homologation and commercial sales. In addition, our litigation contingencies could be material. With several moving parts and variables with the Endurance program and the first joint EV program with Foxconn, we are confining our outlook to the first quarter of 2023. Moreover, we won't be providing production guidance that is highly dependent upon the timing to resolve the matters Ed discussed earlier and other factors. I will point out again that cost of sales now reflects essentially zero direct material margin, given the NRV is almost entirely taken prior to a sale due to advanced inventory buys. However, we will have incremental production costs associated with warranty recalls, delivery, manufacturing and other costs.
We also expect to take additional NRV charges on inventory acquired in future periods as well as depreciation. We expect to end the first quarter of 2023 with $150 million to $170 million in cash and short-term investments, excluding any additional Foxconn funding, other equity sales or contingent liabilities. Relative to Q4 of 2022, we anticipate aggregate SG&A and R&D to decline slightly without the accelerated stock compensation, litigation accruals and asset write-downs, as R&D modestly increases with new program development activity, partially offsetting the larger decrease in SG&A. We expect CapEx to be modestly higher for the reasons I mentioned earlier, and working capital is likely to consume less cash. The remaining $117 million of Foxconn investments discussed earlier are broken down as follows: approximately $47 million from a second tranche of common stock, following satisfaction of conditions under the investment agreement, followed by tranches of $30 million and $40 million of preferred stock purchases that are each subject to achieving mutually agreed development milestones and satisfying other conditions.
We cannot predict at this stage when or if those milestones will be achieved. As a reminder, the preferred stock investments will fund an increasing share of our costs as development of the new program advances. Lastly, the investment agreement limits the use of proceeds from the preferred stock solely for the new program. Our team is highly focused on resuming Endurance production and deliveries and developing the new program with our lower cost structure and in collaboration with the Foxconn EV Ecosystem. With that, operator, please open the line for questions.
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