Canoo Inc. (NASDAQ:GOEV) Q4 2023 Earnings Call Transcript April 1, 2024
Canoo Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Canoo Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to John Wolf, Head of Investor Relations. Please go ahead, John.
Unidentified Company Representative: Thank you, Kevin, and thank you, everyone for joining us on our Q4 and full year 2023 earnings call. During the call, Tony will update you on our business and strategy. Greg Ethridge will provide an update on our financing activities, and Ramesh will go over the Q4 and full year ’23 financial results and also provide some perspective on our outlook for 2024. Please be advised that we may be making 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 10-Q and 10-K and other reports that we may file with the SEC including Form 8-Ks. 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. With that, I’ll hand it over to Tony.
Tony Aquila: Thanks, John. Thanks, everyone for joining us today. You’ve all seen the recent news from us and others, which has highlighted the big opportunities and the big problems, the perils of hurrying to market before being ready. We’ve heard for three plus years that asset-light and racing to high volume was the path to success and profitability. When in fact, at the opposite, and it’s dangerous and expensive to hurry up to slow down. Even those with endless amounts of capital, like, Boeing have learned the hard way and it has impacted tens of billions of shareholder value. We have always been realistic about our business, shared what we knew, when we knew it and made tough decisions and took you through it. It’s our job to tell our shareholders what is competitive, what works and doesn’t and what gives us an advantage as we’ve learned from our customers.
We do things differently from others because it’s the right thing to do for us. And based on my experience and our team’s experience with building successful businesses across different industries, this has not been an easy task. Early on, we decided to invest in a highly profitable large market and that was a pivot for us. But it had over $1 trillion TAM with high volume multiyear delivery contracts with opportunities to expand and democratize our technology. We needed to control our IP and software. So we brought it in-house. We created a scalable global platform that addresses all service maintenance repair activities, including some customer workflows. Built an economically resistant customer base. We didn’t go after consumers. We went after customers with large orders, high-grade bankable credit, discerning fleet industrial and government customers that could help us refine our product under stress and fatigue.
We developed a step level manufacturing process. We talked to you about 20,000 unit increments to be capital efficient so that we can scale our CapEx with our presold vehicle demand. Then we move to validate the product functionality, mix and multiyear delivery schedules with our customers. This process takes time to integrate to our customers’ delivery road maps which extends beyond the vehicle at itself. We have seen a very difficult market. We have adapted our disciplined capital deployment approach by raising only the amounts of capital we need for each milestone and we will continue to do so. As market conditions continue to evolve, as you can see on the slide that we put in front of you, we remain in a position to take advantage of these dislocations to reduce CapEx and scale our operations.
$0.20 on the dollar to purchase new or near new assets. This was unthinkable just 12 months ago by many analysts and investors who were worried that securing these items would have long lead times. We didn’t disagree with you. We just focused on being the second new owner of that equipment. This resulted in a 35% to date or $48 million reduction in capital spending compared to our initial 2023 CapEx guidance of $140 million, which is directly attributable to unrealized shareholder value. We believe that our disciplined approach and in light of recent dislocations makes our stock an attractive investment opportunity in a very important and unstoppable sector. Achieving the foreign trade zone designation took a lot of work by many people on the team.
For our Oklahoma City facility, it is an important building block in our strategy and the value of this will become more apparent to you in the coming quarters, but let me give you a few highlights. It will generate additional working capital benefits, including moving these newly acquired assets into our facility. Enhances our geographic expansion opportunities while reducing our cost of delivering our Made in America vehicles at globally competitive prices. Up to $70 million in permanent working capital reduction, incremental opportunities by vertically integrating more critical components with our key suppliers. Recently, we announced the USPS purchase of our right-hand drive LDV 190 vehicles. The USPS being one of the largest fleets is driving the transition to electrification powered by one of the largest veteran workforces in the country.
We are proud to be working with them to provide our right-hand drive steer by wire technology. Look out for the first vehicles delivering your mail starting this May. We will showcase our right-hand drive vehicles at several U.K. commercial vehicle fleet events in the coming weeks. Over the past year, we have made significant progress in our business. We’ve completed our product, advanced our manufacturing scale and delivered vehicles to customers. 22 vehicles completed in 2023, of which 17 were completed in Q4. Three delivered to NASA at the midyear and nine delivered to customers in Q4, 10 have been allocated for demo and sales to international customers. Our OKC assembly plant in less than one year is on schedule to achieve our targeted step level manufacturing of 20K run rate readiness.
On the slide, you’ll see that there’s a couple of important things in that, we’ll talk about in a minute, which is our strategy about how to roll out our product without high cost up source centers. In addition to that, fine-tuning it to our customer base. By having concentrated customers, you don’t charging network issues. In addition to that, the way we’ve done it, we can have fast action teams available within 4 hours to 8 hours for a customer’s needs. These are very important building blocks and building a sustainable business. We will now shift our focus to harmonizing and optimizing our supply chain to support step level manufacturing. What has been lost on many is that you have to have four key elements in place before you scale. You got to be disciplined not to hurry up to go slow.
You must have your product, your platform and your economics right. A highly trained workforce that can produce the same quality as you move up from low volume to step level manufacturing run rates. A support organization that is harmonized and optimized across the supply chain. And that aligns with your quality and step-level manufacturing and tracking process. And to support workforce that is focused on the quality of the product delivery, safety, continuous training, customer journey and aftersales. These cannot be after thoughts. They come across quickly, and I know this because I come out of after sales. I’d like to talk to you a little bit about this slide. Many people have asked us why have we picked 3,000-ish units to be in your first year.
Because you can — as you study how the successful new entrants have done it going all the way back to Henry himself, you can see that there is the step level functions in manufacturing, and that’s because of the confluence that you have to bring together, all of the relevant elements, otherwise, you break it to your weakest point and your production stops in your cost skyrockets. We’ve been very focused on that. And while it may seemed very unpopular at the time, the 20,000 run rate is in recent history, a great example of how you step through manufacturing, 3,000 and 20,000 as you can see on the slide. We remain steadfast in our belief and have prepared a few slides to help you further understand and appreciate our production strategy. We encourage you to look at it and ask questions when we get to the Q&A so that we can drill down a bit deeper into the what.
We are very cautious to make sure we do not get in the situation of others. This next slide is a very telling slide as well. In that a lot of — everybody thought that if you can produce more volume, your economics get better. And that’s really actually not the case. It actually starts with your embedded logic in your run rate and the CapEx. If you’re too CapEx heavy, as you can see in this example, you’re way ahead of your ability to produce, you will ultimately slow down based on your weakest link, and that will cause your cost to skyrocket as we can see here. But if you study the successful examples like Tesla and while it was chaotic and difficult, their phase was purely positive violence. As you can see, as they moved from 3,000 units and stepped up to a 20,000 unit run rate, they had their economic right.
They were harmonizing their supply chain, which as they went through and as Elon has said, manufacturing health. We understand it. It’s hot down here. But one thing we didn’t do because we didn’t receive you with a big factory, with 150,000 unit annual capacity. We just didn’t go to the luxury market. We stayed lean. We focused on areas where customer bases would be solid and where the would work and that you could work through all of the four key elements and grow your business and grow into a profitable one, and learn how to scale it in those increments. This slide is a slide we wish we could have showed you a year ago, but I don’t think you would have believed us because everybody was focused on more volume. As you can see, it doesn’t help.
You’ve got to first get it right. Now that you have a better understanding of our strategy, the first three quarters of this year will be about the things I mentioned above, including and very focused on harmonizing the supply chain and fine-tuning our product mix to our customers’ workflows. We’re collecting data from our vehicles constantly in collaboration with our customers, with over 20,000 customer miles driven over the last few quarters. Same day fast action teams across any point of our disciplined rollout map, across the seven states, as we disclosed earlier, we have had very few deployments. We’ve had many opportunities to do upgrades over the air and test our system, and that has prevailed well. I’m going to now turn it over to Greg for some financial metrics.
Greg Ethridge: Thanks, Tony. Our team is focused every day on executing what Tony has talked about in his materials and supporting him to build the right foundation for a successful company. I’m also focused on telling this story to the market. We’ve been very quiet for a lot of reasons and the repositioning, the of the company, but I’m perfectly positioned to tell the evolution of the story since 2020. We needed the smoke to clear first and now that’s happened. The amount of hard work that’s gone to this refounding has not been properly explained. We are an IP-sensitive company. So we tend to under speak, particularly when we’re in the process of transition. But now we’re out and it’s my job to make sure the market and our investors understand the progress and understand Tony’s vision.
We have been very active since the last earnings call, and we’ve just scratched the surface. But let’s be very clear, we will only raise the capital that we need. We have and will continue to raise capital based on milestones and progress. There have been many mistakes made in our industry, but one of them is also raising too much capital. You can only effectively deploy so much capital at one time. Just to recap the financing activities in 2023. We were successful raising $285 million of equity or equity-linked capital and of that $80 million was raised in Q4, including the $45 million that was funded from an international strategic partner. All of this capital was very well put to use and we will continue to make progress towards accessing additional forms of debt and other non-dilutive forms of capital as we move into 2024.
Some of you may be wondering about the DOE and other non-dilutive forms of capital. And as we recently announced, we received our first funding from the state of Oklahoma and we very much appreciate the state’s support. But we also expect to see progress on the federal side. We continue to monitor and apply for many forms of government support focused on our industry. The DOE programs have appropriately been focused on critical materials and battery technology, but we believe the next phase will be for manufacturing and we think we are a very good candidate. Just a quick reminder on some of the statistics. The DOE ATVM has been funded with about $40 billion, $19 billion has been conditionally approved across 11 different companies. Almost 95% of that has been focused on battery technology or materials, but only $2.5 billion was actually funded.
So we have not missed this opportunity. It just hasn’t come to us yet and we’re very excited to follow the road map to be able to access this funding. Now, I’m going to pass this over to Ramesh to cover the financials and our guidance.
Ramesh Murthy: Thank you, Greg. Now let me walk you through the results for the fourth quarter and for the fiscal year 2023. This was a year of calibration. We are very proud of our financial discipline this past year, which was driven by our operational focus to achieve our desired milestones. Key accomplishments include a 53% reduction in our research and development expenses year-over-year, 30% saving from workforce transition from California to Oklahoma, as well as from engineering to other key areas of need and a 50% reduction in legal expenses, primarily resulting from the SEC resolution and 60% reduction from other professional services. After having achieved our lowest quarterly operating expenses in Q3 of 2023, since we’ve been a public company, we have turned the corner and began a gradual and cautious pace ramp manufacturing.
Our revenues in the fourth quarter and fiscal year 2023 were $0.4 million and $0.9 million, respectively. Revenues were generated from our deliveries to NASA as well as from our commercial deliveries in Q4 of 2023. Revenues in fiscal year 2023 also include amounts generated from the completion of certain engineering milestones and the delivery of certain battery modules to the Department of Defense Innovation Unit. We are at the beginning of our phased ramp manufacturing approach in delivering commercial vehicles here. We expect to volumes over the rest of 2024 at a measured pace to match with the delivery schedules that are being agreed to with our customers. We incurred $1.5 million in cost of revenue during the three months ended December 31, 2023.
Our cost of revenues, primarily include vehicle components and parts, labor costs and amortized tooling and capitalized costs involved in producing an assembly of our parts and components. Moving to the income statement. Our fourth quarter 2023 results are as follows: Research and development expenses totaled $31.5 million for the quarter compared to $44.2 million in the prior year period, a 29% reduction from Q4 of ’22. On an annual basis, research and development expenses totaled $139.2 million for 2023 compared to $292.2 million for 2022, a 53% reduction from prior year. SG&A expense was $28.1 million for the quarter, compared to $36.4 million in the prior year period, a 23% reduction from Q4 of ’22. On an annual basis, SG&A was $113.3 million in 2023 compared to $196 million in 2022, a 42% reduction from prior year.
GAAP net loss was negative $29 million for the fourth quarter of ’23 compared to a GAAP net loss of negative $80.2 million in the prior year period. GAAP net loss was negative $302.6 million for 2023 compared to negative $487.7 million in 2022, a reduction of 38% from 2022. Adjusted EBITDA was negative $54.6 million for the quarter compared to negative $60.5 million in the prior year period. Adjusted EBITDA was negative $224.7 million for the 2023 compared to negative $408.6 million in ’22, a reduction of 45% from 2022. Adjusted EPS was negative $0.08 per share for the quarter pre-split compared to adjusted EPS of negative $0.19 per share for the prior year period. Adjusted EPS was negative $1.73 per share post-split for the quarter and negative $9.73 per share post-split for the year.
Cash flow summary. Turning to cash flow. We ended the quarter with $6.4 million of cash and cash equivalents. After giving effect to the proceeds from our prepaid advances for a total of $50 million, our cash balance would have been $56.4 million. Cash used in operations for the 12 months ended 31 December 2023 was $251.1 million compared to $400.5 million in the prior year period. Our capital expenditures were $67.1 million for the 12 months ended December 31, 2023, compared to $97.3 million for the 12 months ended December 1, 2022. Net cash provided by financing activities for the 12 months ended December 31, 2023 was $288.5 million compared to net cash provided for the prior year — for a total amount of $290.4 million. Our monthly cash outflow in Q4 of ’23 was approximately 35% lower than our average cash flow per month in 2022.
We continue to optimize cash as we move into 2024. Moving to our guidance. Our guidance for 2024 is as follows: Annual revenues between $50 million to $100 million and a cash outflow of between $45 million to $75 million per quarter. Our relentless focus and discipline of expense management, including labor arbitrage, and transition of our workforce to Oklahoma, amongst other factors allow us to improve our negative adjusted EBITDA guidance. From a CapEx perspective, our phased ramp manufacturing approach allows us to fully utilize our low volume tools prior to switching over to high volume tools and pace our asset expansion to align with our production, thereby avoiding a high amortization over initial units produced. These reasons combined with seeking opportunities to acquire distressed assets, which are new or like new allow us to optimize investments in CapEx for this upcoming year.
As we continue to seek opportunities to acquire distressed assets, we will provide our CapEx guidance in the future quarters. Turning it back to Tony for closing remarks.
Tony Aquila: Thanks, Ramesh. As you guys can see, it’s a marathon, not a sprint. Some of you have been down this road a few times as well as we have. We want to remind everyone that we’ve been very focused on highly profitable large markets, controlling our IP, not being dependent on China or others, developing economically resistant customer bases who are committed to the EV rollout, stepped manufacturing approach, coordinating our manufacturing in alignment with our supply chains and validating our product with our customers and their workflows, and we have to stay disciplined on raising capital. It’s not, as I’ve always said about how much capital you have, it’s how effective we can deploy it. And you can only deploy it in certain increments.
And in this particular case, we’ve been very effective at being able to take the market opportunities and reduce the spend we would otherwise have done. We spent hundreds of millions less than others. And we couldn’t have done this without the support of our customers, our supply chain partners and all our associates that have worked hard because this is a very lean phase in a company’s life and everybody has to get more than 100%. And I can tell you that I’m very proud of this team and what they’ve done and what they continue to do. In the coming quarters, our story will become even more clear. And we have an earnings call coming up in May, and so we look forward to closing the gap. Again, I want to thank everyone who believes in us and always know that we put our own money in, we stand in front of you, and we will continue to do so.
We believe in what we’re doing, and we know it takes time to prove it and that’s what we have to do, and that’s what we will do.
Unidentified Company Representative: Operator, Kevin, thanks can you open the line up for questions?
Operator: Certainly. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Craig Irwin from ROTH MKM. Your line is now live.
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