Canoo - Q4 2023

Transcript

Operator (participant)

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.

John Wolf (CFO)

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 2023 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 Form 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 (CEO)

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, it is quite 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. 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. It had over $1 trillion TAM, with high volume, multi-year 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 pre-sold vehicle demand. Then we moved to validate the product functionality, mix, and multi-year delivery schedules with our customers. This process takes time to integrate to our customers' delivery roadmaps, which extends beyond the vehicle 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. 20 cents 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. 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, tirelessly 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 vehicle, 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 sale 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 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 of service centers. In addition to that, fine-tuning it to our customer base. By having concentrated customers, you don't have charging network issues. In addition to that, the way we've done it, we can have fast action teams available within four to eight hours for a customer's needs. These are very important building blocks in 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 a support workforce that is focused on the quality of the product delivery, safety, continuous training, customer journey, and aftersales. These cannot be afterthoughts. They come across quickly, and I know this because I come out of aftersales. I'd like to talk to you a little bit about this slide.

Many people have asked us, "Why, have we picked, three thousand-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's these 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 at your weakest point, and your production stops and your cost skyrockets. We've been very focused on that, and while it may seem very unpopular at the time, the 20,000 unit run rate is, is, 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, you know, a lot of the everybody thought that if you can produce more volume, your economics get better. 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 variance. As you can see, as they moved from 3,000 units and stepped up to a 20,000 unit run rate, they had their economics right. They were harmonizing their supply chain, which as they went through, and as Elon has said, manufacturing hell. We understand it. It's hot down here. But one thing we didn't do, is we didn't, we didn't deceive you with a big factory, with, you know, a 150,000 unit annual capacity. We just didn't go to the luxury markets. We stayed lean.

We focused on areas where customer bases would be solid and where the economics 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, it, 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 gonna now turn it over to Greg for some financial metrics.

Greg Ethridge (CFO)

Thanks, Tony. Our team is focused every day on executing what Tony's talked about in his materials and supporting him 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 in the repositioning, the refounding 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 into this refounding has not been properly explained. We are an IP-sensitive company, so we tend to underspeak, particularly when we're in the process of transitions. 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 that 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 continue to follow the roadmap to be able to access this funding. Now I'm gonna pass this over to Ramesh to cover the financials and our guidance.

Ramesh Murthy (CFO)

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% savings 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 our gradual and cautious phase 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's Defense Innovation Unit. We are at the beginning of our phased ramp manufacturing approach in delivering commercial vehicles here.

We expect to ramp 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 cost, 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 2022.

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 2022. On an annual basis, SG&A was $113.3 million in 2023, compared to $196 million in 2022, a 42% reduction from prior years. GAAP net loss was -$29 million for the fourth quarter of 2023, compared to a GAAP net loss of -$80.2 million in the prior year period.

GAAP net loss was -$302.6 million for 2023, compared to -$487.7 million in 2022, a reduction of 38% from 2022. Adjusted EBITDA was -$54.6 million for the quarter, compared to -$60.5 million in the prior year period. Adjusted EBITDA was -$224.7 million for 2023, compared to -$408.6 million in 2022, a reduction of 45% from 2022. Adjusted EPS was -0.08 per share for the quarter pre-split, compared to adjusted EPS of -0.19 per share for the prior year period. Adjusted EPS was -1.73 per share post-split for the quarter, and -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 twelve months ended December 31, 2023 was $251.1 million, compared to $400.5 million in the prior year period. Our capital expenditures were $67.1 million for the twelve months ended December 31, 2023, compared to $97.3 million for the twelve months ended December 31, 2022. Net cash provided by financing activities for the twelve 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 2023 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-$100 million, and a cash outflow of between $45 million-$75 million per quarter. Our relentless focus and discipline of expense management, including labor arbitrage and transition of our workforce to Oklahoma, among 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 (CEO)

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. 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 effectively you can deploy it, and you can only deploy it in certain increments.

In this particular case, we've been very effective at being able to take the market opportunities and reduce the spend that 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 give more than 100%. 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. Operator, Kevin, thanks. Can you open the line up for questions?

Operator (participant)

Certainly. We'll now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. We ask you to please ask one question and one follow-up, then return to the queue. If you'd like to remove your question from the queue, please press star two. Once again, that's star one to be placed in the question queue. One moment please, while we poll for questions. Our first question today is coming from Craig Irwin from Roth MKM. Your line is now live.

Craig Irwin (Stock Analyst)

Hi, good evening, and thanks for taking my questions. So, Tony, I guess investors are probably going to be most excited or, or really excited about the, the post office results after, after testing starts later on this year. But, Walmart, I think, has had, had some vehicles from you guys over a year now, right? And, they've been using those for deliveries in the Dallas area. Can you maybe just, you know, give us a little color on what you guys are learning, what the experience is, you know, how this vehicle and the format of the vehicle is a fit for, the services Walmart is using them to provide, and, how this is maybe, informing your, your customer and production strategy?

Tony Aquila (CEO)

Yeah. Ahead, Craig. So as being a workflow partner with your customers, you know, we, we don't just sell vehicles, we integrate to workflows. And, you know, Walmart has been, and we respect that completely, it's very proprietary about how they're doing things and how they're addressing their last mile delivery and what they need, configuration and so on. But to your point, it hasn't been just a year of testing. It's been over a year of testing, and it's been tested in extreme weather conditions, and we've learned a tremendous amount, and it's really helped us fine-tune how their rollout schedule will work, as well as others. So we really try to take that step so we don't get surprised, and then, you know, they slow down on receiving vehicles and so on.

So, you know, we learned a lot from them, but we also learned a lot from the US Army. NASA taught us a lot as well. You know, we tried to go after customers, which I think is the point that you're making, is customers that will teach us exactly what we need to do so we have as little of backtracking as possible as we start the rollout schedule, and then we can start rolling out and roll out consistently and effectively.

Craig Irwin (Stock Analyst)

Understood. Understood. Then, probably the biggest change in the story in the last couple of months is your new strategy of acquiring equipment that other people have spent a lot of money to buy to bring down the necessary CapEx at Canoo. Can you maybe frame out for us the breadth of opportunities that you're looking at? And, you know, if you could, I don't know, give us a little color on what's possible as far as the potential reduction in CapEx needs if you're able to actually acquire some of these things that you're also looking at out there, hopefully to acquire over the next, you know, months and quarters.

Tony Aquila (CEO)

Yeah. So Craig, we have, we've this has been a key part of our strategy, and, you know, it was a risk at, in the beginning. When we, when we realized contract manufacturing economics don't work, and you don't have enough control, and you end up with very little unique IP, we, as you remember, we pivoted, and we went into say, "We got to do it ourselves." We brought the things in-house. We increased our amount of, you know, I think our patents went from 17 to 200, close to 250 now. And we, and we focused on, you know, bulletproofing the platform and, and, and getting those kinds of items right. But at that time, we knew that the product was fine-tuning itself, so locking and getting, you know, pouring the foundation down for large volume was not smart.

So we knew we weren't ready. We didn't want to risk our investors' capital, you know, me being an investor as well. It seemed to me like it's mathematics. Living through the 2001 bubble, you know, the 2008, you know that not everybody can make it in these new technology curves. And so this time around, with a few more laps around the track, we chose to focus on the perceived competitors that would likely not make it, that actually did make those leaps early. We tracked on them. We studied them as we studied the volume, the step-level volumes in manufacturing and all the pieces you've got to get right. And, and we continue to do that. We see more opportunities out there.

You know, it's unfortunate that these things happen to them, but it's fortunate for our shareholders because we've had the discipline to wait. We also had secondary strategies in the event that that didn't come to fruition, but fortunately, it has.

Craig Irwin (Stock Analyst)

Understood. Well, congratulations on the progress. I'll go and hop back in the queue.

Tony Aquila (CEO)

Thanks, Craig.

Operator (participant)

Thank you. Next question is coming from Stephen Gengaro from Stifel. Your line is now live.

Stephen Gengaro (Managing Director and Senior Equity Analyst)

Thanks. Good afternoon, everybody. I guess just sort of following up on that line of questioning and just maybe helping me understand this a little bit. So the way I thought about it was, I think you're at 20,000 units of readiness in Oklahoma City, and these assets you're buying are incremental to that capacity? I just want to make sure, A, I understand that before I ask my question that goes along with that.

Tony Aquila (CEO)

So yeah, some of it was, you know, like, if you remember back in, you know, how Tesla came up online, they had some manual and some automated processes that would, you know, call it hybrid automation. And you want some of that because you want to be able to keep an eye on certain things that you're still trying to lock down to, you know, go into mass production. This is really kind of in certain areas that we were fixed. We have capacity above that 20,000, but in other areas, we had it at a manual rate.

So this helped us kind of close those gaps, and now we actually have additional robotics to help us as we kind of look at some of the steps that we're going to be preparing to move towards automation versus having a hybrid of workforce activity. Like, for example, today, we are now using AI that where it took 16.5 man-hours to inspect the welds on the frame, which holds on the MPP 1, which holds the modular battery packs, and the, as you know, these things have haunted many manufacturers. We now, using AI, have increased our sigma, and that operation can be performed in less than an hour with a higher accuracy rate. So, you know, it's, it...

We're really focused on, if you will, this starts to get to our BOM cost and our economics, getting that right. You go too fast, you have to lay down things that are fixed, and then it becomes tough to move around them. So the things we kept manual were things that we knew that there were technology advantages or purchase advantages that we could do if we could were successful at purchasing that equipment from others. Hopefully, that makes sense. That gives you a more detailed response, but that was what the way our strategy was put together. Right?

Stephen Gengaro (Managing Director and Senior Equity Analyst)

No, that does help. I mean, you're basically creating more efficiency around the 20,000 units, not necessarily... Because I was just sort of thinking about in terms of why not get 20,000 units running before you start spending more money? But you clearly made me understand how it increases the efficiency of the units being built. So that was very helpful.

Tony Aquila (CEO)

Yeah, you can't imagine how much you actually caught that would otherwise be fixed cost. If you look at the slide that we gave an example of the other companies, it is very tough to make it up on volume when you get the foundation wrong. And that's why we minimized the number of parts, increased the amount of technology in our own IP. So yeah, you're right. This is the right way to do it, to get to the right economics and to be able to deliver a high-quality product.

Stephen Gengaro (Managing Director and Senior Equity Analyst)

Great, thank you. And then the other question, just kind of centered around some of the guidance parameters, but what, when we think about that cash outflow per quarter number that you provided and sort of the funding gap to sort of to meet those needs, I mean, how should we think about that? I mean, clearly you're going to need more capital as the year evolves. How should we think about the types of capital that you and sort of the timing on kind of when you're gonna, you know, try to pull the trigger on these financings?

Tony Aquila (CEO)

Yeah. So look, I think, you know, the market has been more difficult for sure than we had hoped for, but our strategy would have the ability to ratchet it down. If you think about it, a lot of people punished us because we didn't put a lot of cash on the balance sheet. We're good stewards of people's money. You know, as you can see, some of these companies that went out with high volume facilities, they're burning cash. They're gonna burn cash, and they're still gonna be refining their product because it takes maturation and customer feedback. So I think, you know, from our perspective, we've reduced ourselves down by, I think, 50% already, to kind of align to the areas.

But we're very focused on the workforce being aligned to the customer base, the sequence of the customer base, how to expand, where to expand, where to automate, where not. And the good news is, we're picking up savings as we start to migrate to manufacturing in Oklahoma, because the cost of living is so significantly less there than in California, for example. We're able to pick up a very positive arbitrage. So, you know, we got, we got some good tailwind, but, but most of all, you know, in young companies, the more capital you have, likely, the more you'll waste. The bigger the facility you build, and if you don't figure out how to align CapEx to growth, you, you will burn your shareholders' money. It will take you a while to get it right.

It will take you a while to get it right, no matter what, because we're only as strong as our weakest link in the supply chain. We continue to work on that. That's a big, big focus for the next few quarters as we start to ramp ourselves up. But one thing I wanna let you guys know, the 3,000-unit threshold goes back in history to the entrepreneurs that figured out how to bring it all together, whether it be in Henry's time, you know, Elon's time. These people are inspirations to us, and we studied what they did, the pain they felt through the journey. As I said earlier, Elon called it manufacturing hell.

What we tried to do is learn from them, see what they did, see how they did the Step-Level Manufacturing, and at the same time, pay attention to those that had endless amounts of capital, like Boeing. You can't push the quality curve. You can't move things faster than your workforce can perform the duties. You could have good quality at this level to poor quality at another level. We saw a Japanese manufacturer, when they globally expand, do that. We've done a lot of studying so that we can be really... At the end of the day, we will be a company that can produce margin at low volumes, and that gives us the ability to geographically replicate our model as well.

Stephen Gengaro (Managing Director and Senior Equity Analyst)

Great. No, that's, that's great, color. I'll get back in the queue. Thank you.

Tony Aquila (CEO)

You bet.

Operator (participant)

Thank you. Next question is coming from Dan Ives, from Wedbush Securities. Your line is now live.

Dan Ives (Managing Director and Senior Research Analyst)

Yeah, thanks. So when you give that revenue guidance, I mean, obviously, that's a pretty big range, you know, the $50 million-$100 million. Can you just talk about the high end and the low end in terms of just the variables?

Tony Aquila (CEO)

Yeah.

Dan Ives (Managing Director and Senior Research Analyst)

for the year? Yeah.

Tony Aquila (CEO)

Yeah. So, Dan, the reason why the thing is variable this wide, because you got to harmonize your supply chain, you got to bring up your workforce. You've got a lot of things. We don't want to deceive anyone, right? The reality of it is the goalposts are wide right now because they have to be. Now, granted, we could push. If we chose to deploy more capital, we could accelerate it, but our error rate would go up, and our cost per unit would go up with it because you lose the advantage in your supply chain discipline, and you have to harmonize it.

That's why we studied the step-level manufacturing function of those who were successful, as well as those who are burning massive amounts of cash per unit and will continue into the tens of thousands of units produced. That's not what we plan to do. We plan to build a business that has high margin, has extensibility into our customer's workflow, and can grow in 20,000-unit increments that are pre-sold, and with customers that have given us multiyear orders. They actually are very much aligned with us. They don't want a product that has problems. That's why we tested it for multiple years with these customers. That's why we, for the last 20+ months, the U.S. Army has been beating on it. That feedback is unbelievably valuable to us, and it's proven testing. It's not theoretical or just standards testing.

Dan Ives (Managing Director and Senior Research Analyst)

Great. And then just on the capital side, like, from a timing perspective, because your whole point is you're not—you're gonna take it as you need, not just taking one stump, right? Like, I mean, that's sort of the point here, is that, like, to really fund the operation.

Tony Aquila (CEO)

Yeah. I mean, look, right now, we got to get all our suppliers harmonized, and we got to get our workforce completely trained. So we'll continue our, you know, our schedule of building aligned with our customers, and they're in support of us doing it the way we're doing it. They've been on the other end of the curve when it doesn't work, and they don't wanna be on that, and that's the power of having, you know, large fleet customers. They actually understand this. And so, you know, we'll build, we'll study, we'll deploy, and we will sprinkle our technologies into a few international markets that can help capitalize us.

But that we have the ability to control our burn rate down as low as $15 million a month up to probably $35 million a month. But after that, you just don't have the efficiency at this phase. So we're not gonna deploy capital wildly, even as we arrange for capital to be available to us in its various forms. So, you know, it's, it's, it's the right thing to do...

Dan Ives (Managing Director and Senior Research Analyst)

. Got it. Thanks.

Operator (participant)

Thank you. Next question is coming from Donovan Schaefer from Northland Capital Markets. Your line is now live.

Donovan Schafer (Managing Director and Senior Research Analyst)

Hey, guys. Thanks for taking the questions. So I first want to ask about the user experience in the vehicle when we talk about NASA and the post office, you know, they're both very high profile. In the case of NASA, you know, you wouldn't anticipate that to be a large volume or that that would lead to large volume. But from a user experience and a use case standpoint, you know, it allows you to sort of highlight certain things like, you know, the ingress and egress from the back, where you've got, you know, two astronauts and, I don't know, $1 million-plus dollar space suits and so forth.

With the post office, just the frequency with which a delivery person, post office workers coming in and out of the vehicle over and over again. So I'm curious, I guess the question is: how do you take the... Maybe it's better to focus on the case of NASA, where it's not a lot of volume.

Tony Aquila (CEO)

Yes.

Donovan Schafer (Managing Director and Senior Research Analyst)

But the question is: how do you leverage that experience to convince others, and beyond just, you know, the initial launch, space launch or whatever?

Tony Aquila (CEO)

Yeah, I think, you know, for customers, to see, you know, for, for government and large fleets to see that a young company can be selected by NASA to be, to be a key provider, we literally control the first eight miles of every Artemis launch, and 2.4 billion people watch, for the longest stint of time, that launch. And to be able to have our brand there, that's just one benefit. The other benefit is what they taught us about ingress, egress. Fully kitted individuals in, in suits that are $10s of millions, and nothing can go wrong.

You know, the stumble and snag elements that we learned, those are all very important workflows as we bring our platform up in size as well, and we learned a great deal from that, from the existing platform to even as we continue to expand, because you know our platform can continue to go. We went from 130 to 190, and our platform has the ability to extend again. So, that information from NASA was really invaluable. We would have had many, many engineers on ingress, egress, which would have actually ended up probably giving us something similar to what every other vehicle... If you've driven our vehicles, you see the ingress, egress is very different. And the way you can work around the vehicle is very different.

The way you can enter the vehicle from the work element is different. So, you know, these are things that we learned from them. You know, from the army, we learned some similar things, but in a rugged, you know, so to speak, exponentially faster, egress and ingress. What has to be in place? What, what do they need? What protection? You know, those kinds of things. Those are all very similar behaviors. And then you get the Walmarts of the world that give you just incredible start and stop data, you know, open and close data. The ability to have, you know, liquid, goods inside a vehicle that, that require certain, you know, behaviors to protect their goods as an extension of their business.

So, you know, we pick things that would actually help us develop this product with using less money, because we were solving a big problem for all of them, and we tried to align with people. And it's not easy to be a young company, to convince these guys to take a shot. But when they saw how committed we are and what our mission is, and how we can return capital to them, then, of course, you know, those things lined up. So we are very proud about it, and I appreciate you acknowledging it. And the other thing, the post office, they ran tests for quite a while, on our vehicle. They took the vehicle, they tested it, and they came back, and they made their first order.

I would say the USPS team is, is a world-class team when it comes to making this decision. You know, what, what the postmaster general has done in assembling his team is impressive, but it gave us the shot to prove right-hand drive without us going to the right-hand drive market. So we already got that lean in element to it. And of course, as that happened, the minute we announced that, we had people from the U.K., which says, "Our market is underserved." Right-hand markets are always underserved. In my other company, we built a massive business in automotive in the U.K. It's a very great workforce. Our product fits perfectly in that marketplace. So, you know, those kind of things, we're trying to always figure out how to do things where we can get it proven before we take the leap of faith.

Donovan Schafer (Managing Director and Senior Research Analyst)

Okay, that makes a lot of sense. Then, I wanted to actually follow up on EV charging infrastructure. So, you know-

Tony Aquila (CEO)

Yeah.

Donovan Schafer (Managing Director and Senior Research Analyst)

I appreciate. I think in the prepared remarks, you talked about focusing on fleets, you know, large fleets, you know, companies with very large fleets that puts them in a better position to get the infrastructure in place. But you know, that, that certainly has been a challenge, even in some cases with large, with large fleets.

Tony Aquila (CEO)

Yes. Mm-hmm.

Donovan Schafer (Managing Director and Senior Research Analyst)

So my question is, you know, how do you... Are you trying to engage with the customers in a way where you're trying to get them, you know, you're pushing them to think far enough ahead of time for procurement, getting things in place?

Tony Aquila (CEO)

Yes.

Donovan Schafer (Managing Director and Senior Research Analyst)

And maybe how it's written in contracts, you know, do they have to take delivery, if for their own reasons they don't get the charging infrastructure in place? Or is that a condition where if the infrastructure is not there, then they don't have to take delivery?

Tony Aquila (CEO)

Actually, you know, when you have a model where you sell to build, you actually have the luxury of doing a better service to your customers, 'cause you're not forcing it upon them. Your terms are actually more aligned to their interests, which creates greater partnerships. We don't sell to anyone that can't charge, and we help them figure it out. We see business opportunities there. They're not in our priority, immediate priority list, but this is why we have to concentrate on certain state rollouts and certain customer configurations, because they have to charge these vehicles. Range anxiety is a real thing, for those of you who have been out there. It was a real thing when Henry Ford came around and started bringing us, you know, mobility, you know, on wheels instead of, you know, by hoof.

So, we've been very realistic about it, and we focused on how our technology is universal. It's adaptable to all the different types. We've never had an issue with that, but we don't try to oversell people on the charging infrastructure. We do make sure we know their routes, what their delivery schedule is. One of the benefits of our business is these are known activity routes, so it's a lot easier to figure it out versus unknown and unrestrained systems. In addition to that, our systems are developed such that the fleet customer can control the settings in the vehicle, so they keep a certain set of things which extends range, and because range can be different based on drivers. And we've used technology to minimize that.

That's workflow, that's workflow efficiency, that's increased return on capital and less greenhouse gas emissions activities. So you know, it's things like that that we've really concentrated on to take away the risk of that. But at the same time, you know, as Greg mentioned, with the DOE, they're rolling out, giving money to help get the raw materials. We're big supporters of that. You know, we need the time on our side before those loans would even be entertainable for us, just as us. And so we wanna see that infrastructure because that will help us step up to the next 20,000 and the next 20,000. We know the market is there. We know the market is there, particularly with our customer base.

It's not economically sensitive because these vehicles yield a return on capital, and so getting that charging infrastructure right is a precursor before we qualify the customer.

Donovan Schafer (Managing Director and Senior Research Analyst)

Okay, that makes a lot of sense. I'll take the rest of my questions offline. Thanks, guys.

Tony Aquila (CEO)

You bet.

Operator (participant)

Thank you. Next question is coming from Sameer Joshi from H.C. Wainwright. Your line is now live.

Samir Joshi (Wall Street Analyst)

Hey, thanks for taking my questions. Just a clarification, or more, little bit more light on, the manufacturing assets that you have purchased. Will they need any modification, customization, or upgrades, to be fully implemented? And then once they are... Well, first, what is the timeline for that? And are there costs associated with that? And when should we start seeing the benefits from them? Like, are you already using these, or will it be six months from now, 2024, 2025?

Tony Aquila (CEO)

Yes. Some of the equipment is deployed, some of it is being deployed, and some of it needs modification. So your question really spans across all the elements, is the answer. If you look at the slide that we have up here, you can see some of this has got U.K. power systems. We got to change the controllers. We know the cost. We've worked with the manufacturers. In many cases, we've gotten actual brand-new warranties extended to them. And, you know, the costs are relatively small. As far as some of the integration elements, which I think is the question you may be alluding to, but we brought most of that programming in-house as part of this strategy, so we wouldn't be, you know, caught at risk.

Our team has done a great job at developing those skill sets, along with AI, to help us accelerate our ability to bring our product to market.

Samir Joshi (Wall Street Analyst)

Understood. And then just another one, on the 2024, sort of, outlook and achievements. One of the items is a seven-state rollout of service centers. Is that within 2024, or will the rollout begin and you will have maybe one or two centers, or one or two states with these service centers?

Tony Aquila (CEO)

Yeah. So we have a team, a special team. You know, they're much like elite soldiers. They'll parachute in if necessary. And we've kind of mapped out our rollout centered around where we have facilities, so we can deploy teams. We explain to our customers why that's important to them. In addition to that, when you have a lot of vehicles that are running often one to two shifts, you know, you can have your fast action team show up and at night and have and do the service activities on location. So the good news is 80+, you know, I think we're getting close to 86% of all our activities are over the air. We've been successfully deploying that.

There's some areas we're improving with our releases, but our over-the-air upgrades have been going better and better. You know, as many of you know, with electric vehicles, it can be touch and go. And I think we're just way farther along because of the help we've gotten from the customer base that has been actually driving these vehicles for two years. I mean, it's not like we're rolling the dice. And software is key to the experience. I mean, even in your ICE vehicles, how many of you have problems with plugging your devices into the vehicle? So, you know, we're very sensitive to keeping it simple, keeping it democratized and upgradable. So as the hardware changes, you can upgrade that piece of hardware. You don't have to buy a new car.

To us, that is a very important way of aligning to our customers' interests, and it's also a very profitable business for us as well. They win, we win.

Samir Joshi (Wall Street Analyst)

Thanks for taking the questions. Good luck with 2024.

Tony Aquila (CEO)

Thank you.

Operator (participant)

Thank you. Next question today is coming from Jaime Perez from R.F. Lafferty. Your line is now live.

Jaime Perez (Stock Analyst)

All right. Thanks for taking my question. Hey, everybody. The assets that you-

Tony Aquila (CEO)

Hey, Jamie.

Jaime Perez (Stock Analyst)

The assets you guys purchased, is everything in place? I mean, do you need any capital to get that up and running? Has it been, sort of optimized? What's the sort of status that, of the equipment, that you purchased?

Tony Aquila (CEO)

Yeah, the good news is, it's as if we bought new equipment. I mean, it's new, literally, and because, you know, unfortunately, you know, the markets, in some cases of those that didn't make it, wanted to see big facilities with all this stuff rather than drive a product and, you know, see it how it works. So, you know, we've been able to pick those up, and in some cases, it's just power translation. Others is just normal software programming for the robotics. And, you know, we brought that in-house. But yeah, there's always some expense. I'd probably say, you know, probably somewhere in the five to seven cents on the dollar, net cost, for us, but it's fixed because we brought it in-house, most of it.

Jaime Perez (Stock Analyst)

Right.

Tony Aquila (CEO)

So maybe we got a few points of variable. But no, we sized all that up. Our team went on-site before we, you know, we made the move. Often, we were the first ones to actually ignite the process because we were like: Hey, we got, we've got the money. We'll give you the money, we'll buy the equipment, and we'll buy it all, and here's what we'll buy. And we'll, you know, we even will try to help them sell what we don't want. So, but this is direct shareholder value, as you know, Jamie, right? So,

Jaime Perez (Stock Analyst)

All right, one more question. I know we talked about EV infrastructure. What about, on a fleet management? Because I know, Tony, you come from the software side. Any-

Tony Aquila (CEO)

Yeah.

Jaime Perez (Stock Analyst)

redevelopment on that?

Tony Aquila (CEO)

Yeah. Well, look, I, I am excited to, you know, similar to, you know, the fact that we've always kept things a bit quiet until we got them pretty far in motion, as you can tell. I'm really excited about where we are as a TEM, as an OE- versus an OEM, how we look at things, you know, and, and the benefit we bring to our customers. I will tell you, this is a very, very important area to me, and it's a very, very meaningful thing to our customers. So, the answer to that is, you know, and a lot of this will be proprietary, you know, configurations for, for our customer base. And of course, that, that makes a greater relationship on a long-term basis and a residual, you know, return on capital for us over time.

Obviously, you're entering the software margins. By the way, the example we posted up about learning from, you know, what amazing things Henry and Elon did, it. But when you look at ours, ours is not including software revenue at this time because we're not exposing the market to that.

Jaime Perez (Stock Analyst)

Right. All right, thanks for taking my question.

Tony Aquila (CEO)

You bet.

Jaime Perez (Stock Analyst)

All right.

Operator (participant)

Thank you. Next question is coming from Pavel Molchanov from Raymond James. Your line is now live.

Pavel Molchanov (Senior Investment Portfolio Analyst)

Hey, thanks for taking the question. Can I just clarify, as you guys look for kind of interesting, distressed stuff to buy, are you looking for only, you know, physical equipment, or would you be open to buying an entire fab, you know, at a particular site?

Tony Aquila (CEO)

Yeah. So look, with respect to where we have sovereign partners, as you know, we have aligned with a sovereign partner. That partner is helping us refine our supply chain. They have the ability to invest capital, and tooling and help us, you know, pay on a piece price. And we're really working on some things that will continue to evolve out there. But what I will tell you is we're not diving deep into the water. You know, we're being very, very cautious as to how we move from a physical site location. We're dead center of the United States right now. We have a free trade zone, which means we can export, we can import, we can do everything we need to do and do a dead center mass of the U.S. on 1-40.

So our cost to deliver is less, our cost to receive is less. So, you know, I would say it would have to be a deal where we got paid and it realigned with a strategic move, and it was aligned with somebody like a sovereign who was helping us expand, if that makes sense.

Yeah, absolutely. And in fact, in that context, given that, you know, your recent acquisition was from a European-based company, are you open to establishing a production footprint across the Atlantic?

I mean, next week or late this week, I'll be leaving for a couple continents of meetings that we've been engaged in with people for, in some cases, the last year and a half, as we lay this out. If you study me from my history and my last company, you know, we grew our business to 96 countries very profitably. We figured out the model. We moved, you know, linguistically, socially, and in alignment with our product scalability. You know, so that was kind of my earlier point, where you got to get the four pillars right before you hit the volume curve. It's not impressive to have to pull all these things back. And so, the answer is, there is a plan.

We're focused on that plan, and when those pieces are lined up and well underway, is when you'll likely hear about it.

Pavel Molchanov (Senior Investment Portfolio Analyst)

Got it. Thanks very much.

Tony Aquila (CEO)

You bet.

Operator (participant)

Thank you. Next question today is coming from Poe Fratt from Alliance Global Partners. Your line is now live.

Poe Fratt (Investment Research Analyst)

Yeah. Hi, Tony. Hi, Greg. I'll make it quick since the call is going on so long. Can you just help us understand the cash outflow number? Does that include CapEx or is CapEx over and above that?

Tony Aquila (CEO)

No, it includes, as one of the earlier questions, you know, asked about whether—what the incremental purchases do for us, it helps us automate more. We, you know, developed a hybrid process, just like, you know, Henry and Elon did. I mean, we're following, you know, the great ones. And so our number is inclusive.

Poe Fratt (Investment Research Analyst)

And then on the annual revenue, if you just break out, you know, even- put it evenly through the year, you know, the first quarter would be $12.5 million-$25 million. Is that... Are you within that range in the first quarter, or are we looking at more a second half ramp in, in annual revenue?

Tony Aquila (CEO)

I mean, at this phase, you know, it's really, it's really about the run rate, rather than the quarterly revenue. I would say, you know, once we're in a different phase, we'd probably say, you know, giving it to you, the information that way. What's really important is by the time we get to 3,000 units, we have to have the economics right, we've got to have the supply chain aligned, the workforce trained. Otherwise, we can't go to 20,000 units without breaking. It's proven history. So, you know, that's what we're focused on. We're focused on being able to execute that and then move to the next increment. As far as what we release every quarter, it depends on the workflow we're working on with the customer. And getting these economics right are critical.

As you can see, you know, those that have built, you know, whatever, 25,000, 50,000 units, and they still got negative, you know, 100+% margin units. It's just... What we're very focused on is getting those things right, and we'll step out the rollouts, and we'll do them in conjunction with our clients, because that's the way they expect it to be done as well. By the way, when we do our agreements with customers, we give them in year one, we only give them a certain level of accuracy because we want to allow our supply chain to mature. And they accept that because they know that's the truth of things. But we have a minimum level, and we focus on that, and that aligns with the rollouts, with the infrastructure.

We make sure our customers have the ability to charge their vehicles, store their vehicles, that we can visit them on off hours and do any service work. I mean, there's a lot of things that are coming into play that a lot of people just hurried up and rushed over and then tried to put it into place later. I built the largest service maintenance repair networks in my other business. This is no joke stuff, and you will lose a customer if you don't do this right. And what we're doing here is we're doing it right because we know it, we understand the value of it, and uptime is everything. So, you know, that's the way we're doing it.

We're not giving guidance any other way than telling you the most important thing is that we cross this threshold, and we know our economics, our product quality, and our supply chain consistency, and our workforce capability.

Operator (participant)

Thank you. Our final question today is a follow-up from Steven Gianvario from Stifel. Your line is now live.

Dan Ives (Managing Director and Senior Research Analyst)

Thanks. Thanks for taking the question. Just quickly, when we think about the kind of the revenue cadence in 2024, should we think about it kind of growing and developing throughout the year and being more back halfway?

Tony Aquila (CEO)

I mean, we'll definitely be... If you're a believer in us and you look at everything we've said and what we've done, and how we're doing it, and how we're laying it out for you now, that it's the time to be much more displaying of our approach, it would tell you that we are gonna consistently be stepping up.

Mm-hmm.

If we slow down, there's a very good reason, because otherwise we'd lose money building vehicles, which we don't want to do. So, you know, it gets back to, you know... I mean, it's just you can analyze the reality of things versus the projections of things in this industry and the aviation industry and see what will stop you from scaling.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Tony Aquila (CEO)

Just like to thank everybody for your questions, your time today, and your commitment to help us build a great company, and we're gonna do it here in America, and we hope all of you join us. Thank you.

Operator (participant)

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.