UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:
(Exact name of registrant as specified in its charter)
(State or Oher Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol(s) |
| Name of each exchange on which registered |
Warrants, each whole warrant exercisable for one share of common stock at an exercise price of $11.50 per share | GOEVW | The Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ◻ | Accelerated filer | ☐ | ||
☒ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of August 6, 2021, there were
TABLE OF CONTENTS
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8 | ||||
Condensed Consolidated Statements of Stockholders’ Equity (Deficit) | 9 | |||
11 | ||||
12 | ||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |||
33 | ||||
34 | ||||
35 | ||||
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36 | ||||
36 | ||||
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38 | ||||
39 |
2
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including, without limitation, statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and projections about future events. All statements, other than statements of present or historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of such terms or other similar expressions. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control.
Forward-looking statements in this Quarterly Report on Form 10-Q may include, for example, statements about:
● | our ability to recognize the anticipated benefits of the business combination and proceeds from the concurrent private placement, which may be affected by, among other things, competition and the ability of the combined business to grow and manage growth profitably; |
● | our financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder; |
● | changes in our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects and plans; |
● | our product development timeline and expected start of production; |
● | our manufacturing strategy, including with respect to a contract manufacturing partner and owned facilities; |
● | the implementation, market acceptance and success of our business model; |
● | our ability to scale in a cost-effective manner; |
● | developments and projections relating to our competitors and industry; |
● | the impact of health epidemics or pandemics, including the COVID-19 pandemic, on our business and the actions we may take in response thereto; |
● | our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others; |
● | our future capital requirements and sources and uses of cash; |
● | our ability to obtain funding for our future operations; |
● | our business, expansion plans and opportunities; and |
● | the outcome of any known and unknown litigation and regulatory proceedings. |
3
These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or otherwise implied by the forward-looking statements. Below is a summary of certain material factors that may make an investment in our common stock speculative or risky.
● | We are an early stage company with a history of losses and expect to incur significant expenses and continuing losses for the foreseeable future. |
● | We may be unable to adequately control the costs associated with our operations. |
● | We have yet to achieve positive operating cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain. |
● | Our financial results may vary significantly from period to period due to fluctuations in our operating costs, product demand and other factors. |
● | Our business plans require a significant amount of capital. In addition, our future capital needs may require us to sell additional equity or debt securities that may dilute our stockholders’ equity or introduce covenants that may restrict our operations or our ability to pay dividends. |
● | Our limited operating history makes evaluating our business and future prospects difficult and may increase the risk of your investment. |
● | We previously identified material weaknesses in our internal control over financial reporting. If we are unable to remediate the material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business and stock price. |
● | If we fail to manage our growth effectively, we may not be able to design, develop, manufacture, market and launch our electric vehicles ("EVs") successfully. |
● | Our ability to develop and manufacture EVs of sufficient quality and appeal to customers on schedule and on a large scale is unproven and still evolving. |
● | We have no experience to date in high volume manufacture of our EVs, and when we manufacture, we will be manufacturing at least in part with a contract manufacturing partner with whom we have not previously worked. |
● | We will depend initially on revenue generated from a single EV model and in the foreseeable future will be significantly dependent on a limited number of models. |
● | We may fail to attract new customers in sufficient numbers or at sufficient rates or at all or to retain existing customers. |
● | We may experience significant delays in the design, production and launch of our EVs, which could harm our business, prospects, financial condition and operating results. |
● | Increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion battery cells, could harm our business. |
● | A consumer subscription model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating the impact of a subscription model on our business, operating results |
4
and future prospects difficult. In addition, the novel approach of offering a subscription directly from an OEM may never achieve the level of market acceptance necessary to achieve profitability. |
● | We face legal, regulatory and legislative uncertainty in how our go-to-market models will be interpreted under existing and future law and we may be required to adjust our consumer business model in certain jurisdictions as a result. |
● | We face risks and uncertainties related to litigation, regulatory actions and government investigations and inquiries. |
● | The automotive market is highly competitive, and we may not be successful in competing in this industry. |
Importantly, the summary above does not address all the risks and uncertainties that we face. Additional discussion of the risks and uncertainties summarized herein, as well as other risks and uncertainties that we face, can be found under Part II, Item IA, “Risk Factors” in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 31, 2021. The above summary is qualified in its entirety by those more complete discussions of such risks and uncertainties. Given such risks and uncertainties, you should not place undue reliance on forward-looking statements.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report on Form 10-Q. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results or developments may not be indicative of results or developments in subsequent periods.
Unless otherwise stated in this Quarterly Report on Form 10-Q or the context otherwise requires, and regardless of capitalization, references to:
● | “Business Combination” refers to the Company’s merger consummated on December 21, 2020 pursuant to that certain Merger Agreement and Plan of Reorganization, dated August 17, 2020, by and among HCAC, HCAC IV First Merger Sub, Ltd., an exempted company incorporated with limited liability in the Cayman Islands and a direct, a wholly owned subsidiary of HCAC, EV Global Holdco LLC (f/k/a HCAC IV Second Merger Sub, LLC), a Delaware limited liability company and a direct, wholly owned subsidiary of HCAC, and Canoo Holdings Ltd., an exempted company incorporated with limited liability in the Cayman Islands. |
● | “common stock” are to our common stock, $0.0001 par value per share; |
● | “Company,” “our Company” “we” or “us” are to Canoo Inc. following completion of the Business Combination in December 2020; |
● | “HCAC” means the special purpose acquisition company, Hennessy Capital Acquisition Corp. IV; |
● | “Legacy Canoo” means Canoo Holdings Ltd. prior to completion of the Business Combination in December 2020; |
● | “management” or our “management team” are to our officers and directors; |
5
● | “private placement warrants” are to warrants sold to certain initial purchasers as part of the private placement that occurred simultaneously with the completion of HCAC’s initial public offering, which are not-redeemable so long as they are held by the initial purchasers of the warrants or their permitted transferees; and |
● | “public warrants” are to our redeemable warrants sold as part of the units in HCAC’s initial public offering (whether they were purchased in our initial public offering or thereafter in the open market) and to any private placement warrants that are sold to third parties that are not initial purchasers of the warrants or their permitted transferees or otherwise voluntarily converted by their holder. |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
CANOO INC.
Condensed Consolidated Balance Sheets
(in thousands, except par values) (unaudited)
| June 30, |
| December 31, | |||
| 2021 |
| 2020 | |||
Assets |
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Current assets |
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Cash and cash equivalents | $ | | $ | | ||
Prepaids and other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities and stockholders' equity |
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Liabilities |
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Current liabilities |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Total current liabilities |
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Contingent earnout shares liability | | | ||||
Private placement warrants liability | — | | ||||
Operating lease liabilities |
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Long-term debt | — | | ||||
Other long-term liabilities | — | | ||||
Total liabilities | | | ||||
Commitments and contingencies (Note 8) |
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Stockholders’ equity |
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Preferred stock, $ |
| — |
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Common stock, $ | | | ||||
Additional paid-in capital |
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Accumulated deficit |
| ( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
CANOO INC.
Condensed Consolidated Statements of Operations (in thousands, except per share values)
Three and Six Months Ended June 30, 2021 and 2020 (unaudited)
| Three months ended | Six months ended |
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June 30, | June 30, | ||||||||||||
| 2021 |
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| 2020 |
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Revenue | $ | — | $ | — | $ | — | $ | — | |||||
Costs and Operating Expenses |
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Cost of revenue, excluding depreciation | — | — | — | — | |||||||||
Research and development expenses, excluding depreciation |
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Selling, general and administrative expenses, excluding depreciation |
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Depreciation |
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Total costs and operating expenses |
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Loss from operations |
| ( |
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Other (expense) income |
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Interest income (expense) |
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(Loss) gain on fair value change in contingent earnout shares liability | ( | — | | — | |||||||||
Loss on fair value change in private placement warrants liability | — | — | ( | — | |||||||||
Other (expense) income, net |
| ( |
| | ( | | |||||||
Loss before income taxes | ( | ( | ( | ( | |||||||||
Provision for income taxes | — | — | — | — | |||||||||
Net loss and comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Per Share Data: |
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Net loss per share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Weighted-average shares outstanding, basic and diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
8
CANOO INC.
Condensed Consolidated Statement of Stockholders’ Equity (in thousands)
Three and Six Months Ended June 30, 2021 (unaudited)
Additional | Total | |||||||||||||
Common stock | paid-in | Accumulated | stockholders’ | |||||||||||
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| Shares | Amount | capital |
| deficit |
| Equity | ||||||
Balance as of December 31, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Proceeds from exercise of public warrants |
| | — |
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| — |
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Repurchase of unvested shares – forfeitures | ( | — | ( | — | ( | |||||||||
Issuance of shares for restricted stock units vested |
| | — |
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Issuance of shares upon exercise of vested stock options |
| | — |
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Stock-based compensation |
| — | — |
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Conversion of private placement warrants to public warrants |
| — | — |
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Net loss and comprehensive loss |
| — | — |
| — |
| ( |
| ( | |||||
Balance as of March 31, 2021 |
| | $ | | $ | | $ | ( | $ | | ||||
Repurchase of unvested shares – forfeitures | ( | — | ( | — |
| ( | ||||||||
Issuance of shares for restricted stock units vested | | — | — | — | — | |||||||||
Issuance of shares upon exercise of vested stock options | | — | — | — | — | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Net loss and comprehensive loss | — | — | — | ( | ( | |||||||||
Balance as of June 30, 2021 |
| | $ | | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
CANOO INC.
Condensed Consolidated Statement of Stockholders’ Deficit (in thousands)
Three and Six Months Ended June 30, 2020 (unaudited)
Additional | Total | |||||||||||||
Common stock | paid-in | Accumulated | stockholders’ | |||||||||||
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| Shares | Amount | capital |
| deficit |
| deficit | ||||||
Balance as of December 31, 2019 |
| | $ | | $ | | $ | ( | $ | ( | ||||
Issuance of shares upon exercise of unvested share options |
| | — |
| — |
| — |
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Gain on extinguishment of related party convertible debt |
| — | — |
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Stock-based compensation |
| — | — |
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Net loss and comprehensive loss |
| — | — |
| — |
| ( |
| ( | |||||
Balance as of March 31, 2020 | | $ | | $ | | $ | ( | $ | ( | |||||
Repurchase of ordinary shares – forfeitures | ( | — | ( | — | ( | |||||||||
Stock-based compensation | — | — | | — | | |||||||||
Net loss and comprehensive loss | — | — | — | ( | ( | |||||||||
Balance as of June 30, 2020 |
| | $ | | $ | | $ | ( | $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
CANOO INC.
Condensed Consolidated Statements of Cash Flows (in thousands)
Six Months Ended June 30, 2021 and 2020 (unaudited)
| Six months ended | |||||
June 30, | ||||||
| 2021 |
| 2020 | |||
Cash flows from operating activities: |
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Net loss | ( | ( | ||||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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Non-cash operating lease expense |
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Loss on the disposal of property and equipment | — | | ||||
Debt discount amortization | — | | ||||
Stock-based compensation | | | ||||
Gain on fair value in contingent earnout shares liability |
| ( |
| — | ||
Loss on fair value change in private placement warrants liability | | — | ||||
Changes in operating assets and liabilities: |
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Prepaids and other current assets |
| ( |
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Other assets | | | ||||
Accounts payable | | ( | ||||
Accrued interest expense | — | ( | ||||
Accrued expenses and other current liabilities | | | ||||
Operating lease liabilities | — | ( | ||||
Net cash used in operating activities |
| ( |
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Cash flows from investing activities: |
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Purchases of property and equipment |
| ( |
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Net cash used in investing activities |
| ( |
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Cash flows from financing activities: |
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Proceeds from related party convertible debt |
| — |
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Proceeds from issuance of restricted ordinary shares | — | | ||||
Proceeds from convertible debt | — | | ||||
Loan advance | — | | ||||
Repurchase of restricted ordinary shares | — | ( | ||||
Proceeds from exercise of public warrants | | — | ||||
Repurchase of unvested shares | ( | — | ||||
Payment of offering costs | ( | — | ||||
Repayment of PPP loan | ( | — | ||||
Other | — | | ||||
Net cash (used in) provided by financing activities |
| ( |
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Net decrease in cash, cash equivalents, and restricted cash |
| ( |
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Cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash, beginning of period |
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Cash, cash equivalents, and restricted cash, end of period | | | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets |
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Cash and cash equivalents at end of period | | | ||||
Restricted cash at end of period |
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Total cash, cash equivalents, and restricted cash at end of period shown in the condensed consolidated statements of cash flows | | | ||||
Supplemental non-cash investing and financing activities |
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Acquisition of property and equipment included in current liabilities | $ | | $ | — | ||
Offering costs included in accounts payable | $ | | $ | — | ||
Recognition of operating lease right-of-use asset | $ | | $ | — | ||
Conversion of private placement warrants to public warrants | $ | | $ | — | ||
Gain on extinguishment of convertible debt recorded in Additional paid-in capital | $ | — | $ | | ||
Supplemental disclosures of cash flow information |
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Cash paid for interest | $ | | $ | — |
The accompanying notes are an integral part of these condensed consolidated financial statements.
11
CANOO INC.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, unless otherwise stated) (unaudited)
1. Organization and Business
Canoo Inc. (“Canoo” or the “Company”) is a mobility technology company with a mission to bring EVs to everyone. The Company has developed a breakthrough EV platform that it believes will enable it to rapidly innovate, and bring new products addressing multiple use cases to market faster than its competition and at lower cost.
Business Combination
On December 21, 2020 (the “Closing Date”), Hennessy Capital Acquisition Corp. IV (“HCAC”) consummated the previously announced merger pursuant to that certain Merger Agreement and Plan of Reorganization, dated August 17, 2020 (the “Merger Agreement”), by and among HCAC, HCAC IV First Merger Sub, Ltd., an exempted company incorporated with limited liability in the Cayman Islands and a direct, a wholly owned subsidiary of HCAC (“First Merger Sub”), EV Global Holdco LLC (f/k/a HCAC IV Second Merger Sub, LLC), a Delaware limited liability company and a direct, wholly owned subsidiary of HCAC (“Second Merger Sub”), and Canoo Holdings Ltd., an exempted company incorporated with limited liability in the Cayman Islands (“Legacy Canoo”). Pursuant to the terms of the Merger Agreement, a business combination between HCAC and Legacy Canoo was effected through the merger of (a) First Merger Sub with and into Legacy Canoo, with Legacy Canoo surviving as a wholly-owned subsidiary of HCAC (Legacy Canoo, in its capacity as the surviving corporation of the merger, the “Surviving Corporation”) and (b) the Surviving Corporation with and into Second Merger Sub, with Second Merger Sub being the surviving entity, which ultimately resulted in Legacy Canoo becoming a wholly-owned direct subsidiary of HCAC (all transactions collectively, the “Business Combination”).
On the Closing Date, and in connection with the closing of the Business Combination, HCAC changed its name to Canoo Inc. and the Company’s common stock began trading on The Nasdaq Global Select Market under the ticker symbol GOEV.
The financial statements included in this report reflect (i) the historical operating results of Legacy Canoo prior to the Business Combination; (ii) the combined results of HCAC and Legacy Canoo following the closing of the Business Combination; (iii) the assets and liabilities of Legacy Canoo at their historical cost; and (iv) the Company’s equity structure for all periods presented.
2. Basis of Presentation and Summary of Significant Accounting Policies
These unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States (“GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by GAAP have been omitted if they substantially duplicate the disclosures contained in the Company’s annual audited consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements should be read in connection with the Company’s audited financial statements and related notes as of and for the year ended December 31, 2020 (“Annual Report on Form 10-K”). Results of operations reported for interim periods are not necessarily indicative of results for the entire year. In the opinion of management, the Company has made all adjustments necessary to present fairly its condensed consolidated financial statements for the periods presented. Such adjustments are of a normal, recurring nature. The Company’s financial statements have been prepared under the assumption that the Company will continue as a going concern, which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future.
The accompanying unaudited condensed consolidated financial statements include the results of the Company and its subsidiaries. The Company’s comprehensive loss is the same as its net loss.
12
Except for any updates below, no material changes have been made to the Company’s significant accounting policies disclosed in Note 2 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K.
Retroactive Application of Recapitalization
The Business Combination on December 21, 2020 was accounted for as a recapitalization of equity structure. Pursuant to GAAP, the Company retrospectively recasted the weighted-average shares included within its condensed consolidated statements of operations for the three and six months ended June 30, 2020. Legacy Canoo redeemable convertible preference shares – Angel Series (“Angel Shares”) and Legacy Canoo redeemable convertible preference shares – Seed Series (“Seed Shares”) were converted to Legacy Canoo A series redeemable convertible preference shares and later were exchanged into Legacy Canoo ordinary shares. The basic and diluted weighted-average Legacy Canoo ordinary shares are retroactively converted to shares of the Company’s common stock to conform to the recasted condensed consolidated statements of stockholders' equity (deficit). The following table summarizes the weighted-average common stock of the Company, basic and diluted for the three and six months ended June 30, 2020 after factoring all retroactive application of recapitalization.
12/21/20 |
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| Weighted | |||||||||
Merger | Recapitalized | Days | Average | |||||||||||
As | Conversion | Common | Outstanding | % of | Common | |||||||||
Date | Description | Calculated | Ratio | Stock | in 2020 | weighting | Shares | |||||||
3 months ended 6/30/2020 | Weighted-average shares, basic and diluted | | | | % | | ||||||||
12/31/2018 |
| Angel Shares |
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3/4/2019 |
| Seed Shares |
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5/6/2019 |
| Seed Shares |
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12/21/20 |
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As | Merger | Recapitalized | Days | Average | ||||||||||
Previously | Conversion | Common | Outstanding | % of | Common | |||||||||
Date | Description | Reported | Ratio | Stock | in 2020 | weighting | Shares | |||||||
6 months ended 6/30/2020 | Weighted-average shares, basic and diluted | | | | % | | ||||||||
12/31/2018 |
| Angel Shares |
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3/4/2019 |
| Seed Shares |
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5/6/2019 |
| Seed Shares |
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COVID-19
Beginning in the first quarter of 2021 and continuing in the second quarter of 2021, there has been increasing availability and administration of vaccines against COVID-19 in many parts of the world, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, virus variants, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains and intermittent supplier delays. The Company has also previously been affected by temporary facility closures, employment and compensation adjustments, and impediments to administrative activities supporting its product research and development.
Ultimately, the Company cannot predict the duration or severity of the COVID-19 pandemic or any variant thereof. The Company will continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve its business as appropriate, and the Company will have to project demand and infrastructure requirements globally and deploy its workforce and other resources accordingly.
13
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, which provides a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value represents the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses the following hierarchy in measuring the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available:
● | Level 1 Quoted prices in active markets for identical assets or liabilities. |
● | Level 2 Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
● | Level 3 Valuations are based on inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis as required by ASC 820, by level, within the fair value hierarchy as of June 30, 2021 and December 31, 2020 (in thousands):
June 30, 2021 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets |
|
|
|
|
|
|
|
| ||||
Money Market Funds | $ | | $ | | $ | — | $ | — | ||||
Liability |
|
|
|
|
|
|
|
| ||||
Contingent earnout shares liability | $ | | $ | — | $ | — | $ | |
December 31, 2020 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets |
|
|
|
|
|
|
|
| ||||
Money Market Funds | $ | | $ | | $ | — | $ | — | ||||
Liability |
|
|
|
|
|
|
|
| ||||
Contingent earnout shares liability | $ | | $ | — | $ | — | $ | | ||||
Private placement warrants liability | $ | | $ | — | $ | | $ | — |
As described in Note 10, the Company has a contingent obligation to issue
The Earnout Shares are accounted for as a contingent liability and its fair value is determined using Level 3 inputs, since estimating the fair value of this contingent liability requires the use of significant and subjective inputs that may and are likely to change over the duration of the liability with related changes in internal and external market factors. The tranches were valued using the Monte Carlo simulation of the stock prices based on historical and implied market volatility of a peer group of public companies.
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Additionally, as described in Note 12, the private placement warrants that were outstanding were converted to public warrants on March 2, 2021. The private placement warrants are accounted for as a liability and its fair value is determined using Level 2 inputs, since the Company’s public warrants are actively traded and the Company’s private placement warrants have terms and provisions that are identical to those of the public warrants.
Following is a summary of the change in fair value of contingent Earnout Shares liability and private placement warrants liability for the six months ended June 30, 2021 (in thousands).
Earnout Shares Liability
Beginning fair value at December 31, 2020 | $ | | |
Change in fair value during the period | ( | ||
Ending fair value at June 30, 2021 | $ | |
Private Placement Warrants Liability
Beginning fair value at December 31, 2020 | $ | | |
Change in fair value during the period | | ||
Conversion of private placement warrants to public warrants | ( | ||
Ending fair value at June 30, 2021 | $ | — |
3. Immaterial correction of prior period financial statements
Subsequent to issuance of the Company’s Annual Report on Form 10-K for the year-ended December 31, 2020, on April 12, 2021, the SEC Division of Corporation of Finance released Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (the “Statement”). Upon review and analysis of the Statement, management determined that the Company’s private placement warrants issued in connection with HCAC's IPO on March 5, 2019 do not meet the scope exception from derivative accounting prescribed by ASC 815-40, Contracts in Entity’s Own Equity. Accordingly, the private placement warrants should have been recognized by the Company at fair value as of the Closing Date and classified as a liability, rather than equity in the Company’s previously reported consolidated balance sheet as of December 31, 2020. Thereafter, the change in fair value of the outstanding private placement warrants should have been recognized as a gain (loss) within other (expense) income each reporting period in the Company’s consolidated statement of operations. The fair value of the private placement warrants as of the Closing Date on December 21, 2020 and December 31, 2020 amounted to $
The impact of the misstatement as of December 31, 2020 resulted in an understatement of the private placement warrants liability of $
Accordingly, management is correcting the relevant financial statements and related footnotes as of December 31, 2020 within these condensed consolidated financial statements. Management has evaluated the materiality of these misstatements based on an analysis of quantitative and qualitative factors and concluded they were not material to the prior period financial statements, individually or in aggregate.
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The following tables reflect the impact of the immaterial correction on the Company’s previously reported consolidated balance sheet as of December 31, 2020 (in thousands):
As of December 31, 2020 | ||||||
| As Previously |
| Warrants |
| ||
Reported | adjustments | As Corrected | ||||
Consolidated Balance Sheet | ||||||
Private placement warrants liability |
| — |
| |
| |
Total liabilities |
| |
| |
| |
Stockholders' equity (deficit) |
|
|
|
|
|
|
Additional paid in capital |
| |
| ( |
| |
Accumulated deficit |
| ( |
| |
| ( |
Total stockholders' equity (deficit) |
| |
| ( |
| |
4. Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”), in the form of Accounting Standards Updates (“ASUs”), to the FASB’s Accounting Standards Codification.
The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have immaterial impact on the Company’s consolidated financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06 Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40). The objective of the amendments in this ASU is to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The amendments in this ASU reduce the number of accounting models for convertible debt instruments and redeemable convertible preference shares. For convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features no longer are separated from the host contract. The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods therein. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on the consolidated financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments ( Subtopic 470-50 ), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity ( Subtopic 815-40 ): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options ("ASU No. 2021-04"). This ASU provides a principles-based framework for issuers to account for a modification or exchange of freestanding equity-classified written call options. The provisions of the ASU are effective for annual periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on the consolidated financial statements.
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5. Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Machinery and equipment | $ | | $ | | ||
Computer hardware |
| |
| | ||
Computer software |
| |
| | ||
Vehicles |
| |
| | ||
Furniture and fixtures |
| |
| | ||
Leasehold improvements | | | ||||
Construction-in-progress |
| |
| | ||
| |
| | |||
Less: Accumulated depreciation |
| ( |
| ( | ||
Property and equipment, net | $ | | $ | |
Construction-in-progress is primarily comprised of tooling necessary in the production of the Company’s vehicles. Completed tooling assets will be transferred to their respective asset classes and depreciation will begin when an asset is ready for its intended use. As of June 30, 2021, manufacturing has not begun and therefore no depreciation on tooling has been recognized to date.
Depreciation expense for property and equipment was $
6. Accrued Expenses and Other Current Liabilities
Accrued expenses consisted of the following (in thousands):
June 30, | December 31, | |||||
| 2021 |
| 2020 | |||
Accrued property and equipment purchases | $ | | $ | | ||
Accrued research and development purchases |
| |
| | ||
Accrued professional fees |
| |
| | ||
Other accrued expenses | | | ||||
Total accrued expenses | $ | | $ | |
7. Long-term debt
On July 7, 2020, Legacy Canoo entered into a promissory note for loan proceeds under the Paycheck Protection Program (the “PPP”) (the “PPP Loan”) administered by the Small Business Administration (“SBA”) established under Division A, Title I of the CARES Act. Loan advance proceeds were received by the Company during the six months ended June 30, 2020, and therefore was accounted for as a financing cash inflow in the condensed consolidated statement of cash flows for the six months ended June 30, 2020.
The PPP provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the business, subject to certain limitations. The Company used the PPP Loan proceeds for purposes consistent with the provisions of the PPP. As of May 14, 2021, the Company repaid its PPP Loan in full, which was accounted for as a financing cash outflow in the condensed consolidated statement of cash flows for the six months ended June 30, 2021.
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8. Commitments and Contingencies
Lease Commitments
Refer to Note 9 for information regarding operating lease commitments.
Legal Proceedings
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. Some of these claims, lawsuits and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions or relief.
On April 2, 2021 and April 9, 2021, the Company was named as a defendant in putative class action complaints filed in California on behalf of individuals who purchased or acquired shares of the Company’s stock during a specified period. Through the complaint, plaintiffs are seeking, among other things, compensatory damages. On June 25, 2021, the Company was named as a nominal defendant in a stockholder derivative complaint filed in Delaware. Through the stockholder derivative complaint, the plaintiff is asserting claims against certain of the Company’s current and former officers and directors and seeking, among other things, damages. However, the final determinations of liability arising from these litigation matters will only be made following comprehensive investigations and litigation processes.
In addition, on April 29, 2021, the SEC’s Division of Enforcement advised that it has opened an investigation related to, among other things, HCAC’s initial public offering, HCAC’s merger with the Company and the concurrent PIPE offering, historical movements in the Company, the Company’s operations, business model, revenues, revenue strategy, customer agreements, earnings, and other related topics, along with the recent departures of certain of the Company’s officers. The SEC has informed the Company that its current investigation is a fact-finding inquiry. The SEC has also informed the Company that the investigation does not mean that it has concluded that anyone has violated the law, and does not mean that it has a negative opinion of any person, entity or security. We are providing the requested information and cooperating fully with the SEC investigation.
At this time, the Company does not consider any such claims, lawsuits or proceedings that are currently pending, individually or in the aggregate, including the matters referenced above, to be material to the Company’s business or likely to result in a material adverse effect on its future operating results, financial condition or cash flows should such proceedings be resolved unfavorably.
Indemnifications
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The Company provided indemnifications to certain of its officers and employees with respect to claims filed by a former employer.
9. Related Party Transactions
On February 28, 2018, Legacy Canoo, via a wholly owned subsidiary, entered into a lease for an office facility in Torrance, California (“Torrance lease”) with an entity controlled by certain investors of Legacy Canoo, which was assigned to another entity controlled by certain investors of Legacy Canoo, on April 30, 2018. The original lease term is
18
The Torrance lease and Justin lease contain the option to extend the terms of the leases for
The Company has determined that the leases do not effectively transfer control of the underlying facilities to the Company based on the lease terms and, accordingly, the Company has classified the leases as operating leases. As such, the rent and property taxes are expensed on a straight-line basis in the condensed consolidated statements of operations.
Related party lease expense related to these leases was $
In June 2021, the Torrance lease property was sold to a non-related party lessor. The change in lessor did not impact the terms and conditions of the Torrance lease. As such, payments made to the new landlord will not be considered as a related party lease expense.
The weighted average remaining lease term at June 30, 2021 and December 31, 2020 was
years and years, respectively.Maturities of the Company’s operating lease liabilities at June 30, 2021 were as follows (in thousands):
Operating | |||
| Lease | ||
2021 (excluding the six months ended June 30, 2021) | $ | | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
Thereafter |
| | |
Total lease payments |
| | |
Less: imputed interest(1) |
| | |
| | ||
Current portion of operating lease liabilities |
| | |
Operating lease liabilities, net of current portion | $ | |
(1) | Calculated using the incremental borrowing rate |
On November 25, 2020, Legacy Canoo entered into an agreement, which remains in effect, with Tony Aquila, Executive Chairman and Chief Executive Officer of the Company to reimburse Mr. Aquila for certain air travel expenses based on certain agreed upon criteria (“aircraft reimbursement”). The total aircraft reimbursement to Mr. Aquila for the use of an aircraft owned by Aquila Family Ventures, LLC (“AFV”), an entity controlled by Mr. Aquila, for the purposes related to the business of the Company for the three and six months ended June 30, 2021 was approximately $
10. Contingent Earnout Shares Liability
As part of the Business Combination, certain stockholders and employees are entitled to additional consideration in the form of Earnout Shares of the Company’s common stock to be issued when the Company’s common stock’s price achieves certain market share price milestones within specified periods following the Business Combination on
19
December 21, 2020. The Earnout Shares do not have employment requirement and will be issued in tranches based on the following conditions:
1. | If the closing share price of the Company’s common stock equals or exceeds $ |
2. | If the closing share price of the Company’s common stock equals or exceeds $ |