Basis of Presentation and Summary of Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2020
|Basis of Presentation and Summary of Significant Accounting Policies|
|Basis of Presentation and Summary of Significant Accounting Policies||
2. Basis of Presentation and Summary of Significant Accounting Policies
A summary of the significant accounting policies followed by the Company in the preparation of the accompanying financial statements is set forth below.
Retroactive Application of Recapitalization
As discussed in Note 4, our Business Combination on December 21, 2020 is accounted for as a recapitalization of equity structure. Pursuant to Generally Accepted Accounting Principles (“GAAP”), we recasted the Company’s consolidated statements of redeemable convertible preference shares and stockholders' (deficit) equity from December 31, 2018 to December 21, 2020, the total stockholder’s equity (deficit) within the Company’s consolidated balance sheet as of December 31, 2019 and the weighted average outstanding shares basic and diluted for the year ended December 31, 2019 by applying the recapitalization retroactively.
Retroactive Application of Recapitalization to Consolidated Statements of Redeemable Convertible Preference Shares and Stockholders’ (Deficit) Equity
As of the Business Combination on December 21, 2020, all 110.3 million shares of Legacy Canoo A series and A-1 series redeemable convertible preference shares of Legacy Canoo (“A/A-1 Shares”) were automatically exchanged into Legacy Canoo ordinary shares at a 1:1 ratio, which were converted again to our Common Stock at a conversion ratio of 1.239434862. The 110.3 million shares consisted of three previous conversions from the Legacy Canoo’s Angel series and Seed series redeemable convertible preference shares and convertible debt.
Unless otherwise indicated, all other Legacy Canoo ordinary shares as well as previously issued Legacy Canoo share options, restricted ordinary shares and restricted stock units (“RSUs”) presented in the accompanying recasted consolidated statements of redeemable convertible preference shares and stockholders’ (deficit) equity and/or in the related notes are presented on an as- or as if-converted basis, converted at the ratio of 1.239434862 and presented as shares or awards of our Common Stock.
Retroactive Application of Recapitalization to Consolidated Statements of Operations
Based on the retroactive application of recapitalization to our consolidated statements of redeemable convertible preference shares and stockholders’ (deficit) equity, we recalculated the weighted-average shares for the year ended December 31, 2019. The basic and diluted weighted-average Legacy ordinary shares are retroactively converted to Common Shares to conform to the recasted consolidated statements of redeemable convertible preference shares and stockholders' (deficit) equity. The following table summarizes the weighted-average Common Shares, basic and diluted for the year ended December 31, 2019 after factoring all retroactive application of recapitalization.
Retroactive Application of Recapitalization to Consolidated Balance Sheets
To conform to the retroactive application of recapitalization to our consolidated statements of redeemable convertible preference shares and stockholders’ (deficit) equity, we reclassified the $100.0 million of Angel Shares and the $100.0 million of Seed Shares to the additional paid in capital as of December 31, 2019.
Basis of Presentation
The Company’s consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
The consolidated financial statements include the results of Canoo Inc. and its subsidiaries. Our comprehensive loss is the same as our net loss. All intercompany transactions and balances have been eliminated in the consolidation.
The impact of COVID-19, including changes in consumer and business behavior, pandemic fears and market downturns and restrictions on business and individual activities, has had, and is expected to continue to have, an adverse impact on the economies and financial markets of many countries, including the geographical areas in which Canoo operates. Specifically, the COVID-19 pandemic has caused disruption in the manufacturing, delivery and overall supply chain of vehicle manufacturers and suppliers, which may have an adverse impact on the production schedule of our EVs and our other business prospects and operations.
As the COVID-19 pandemic continues to evolve, the extent of the impact to Canoo’s businesses, operating results, cash flows, liquidity and financial condition will be primarily driven by the severity and duration of the pandemic, the pandemic’s impact on the U.S. and global economies and the timing, scope and effectiveness of federal, state and local governmental responses to the pandemic. Those primary drivers are beyond Canoo’s knowledge and control and, as a result, at this time, Canoo is unable to predict the cumulative impact, both in terms of severity and duration, that the COVID-19 pandemic will have on Canoo’s business, operating results, cash flows and financial condition. Although Canoo has made its best estimates based upon current information, actual results could materially differ from the estimates and assumptions developed by management. Accordingly, it is reasonably possible that the estimates made in the consolidated financial statements have been, or will be, materially and adversely impacted in the near term as a result of these conditions, and if so, Canoo may be subject to future impairment losses related to long-lived assets as well as changes in the fair value of its financial instruments.
Segment and Geographic Information
Our principal executive officer, as the chief operating decision maker, organizes the Company, manages resource allocations and measures performance on the basis of one operating segment.
All of the Company’s property and equipment and right of use assets are located in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.
On an ongoing basis, management evaluates its estimates, including those related to i) useful lives of property and equipment; ii) the realization of deferred tax assets and estimates of tax reserves; iii) the valuation of equity securities and stock-based compensation; iv) the recognition and disclosure of contingent liabilities; and v) the fair value of financial instruments. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company may engage third party valuation specialists to assist with estimates related to the valuation of the underlying value of its assets, liabilities and equity. Such estimates often require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs.
Cash and Cash Equivalents
Cash and cash equivalents consist of investments that are highly liquid, readily convertible to cash and which have an original maturity date within three months from the date of purchase as well as savings, checking and other bank accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents. The Company, at times, maintains cash and cash equivalent balances at financial institutions in excess of amounts insured by United States government agencies or payable by the United States government directly. The Company places its cash with high credit quality financial institutions.
We did not have any restricted cash at December 31, 2020. The 2019 restricted cash was required by our bank as a security deposit for our employee credit card program.
Property and Equipment
Property and equipment is stated at historical cost less accumulated depreciation. Depreciation is provided on property and equipment over the estimated useful lives on a straight-line basis. Expenditures for repairs and maintenance are expensed as incurred. Useful lives by asset category are as follows:
On January 1, 2018, the Company early adopted Accounting Standards Codification (“ASC”) No. 842, Leases (“ASC 842”), on a modified retrospective basis at the beginning of the period of adoption. The Company determines if an arrangement is a lease at inception if the company concludes that the contract is in the scope of ASC 842 and the Company has the right to control the identified asset. Operating leases are included in operating lease right-of-use (“ROU”) assets, and operating lease liabilities are included in accrued expenses and operating lease liabilities in the consolidated balance sheet.
The operating lease ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The operating lease ROU assets and operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company estimates an incremental borrowing rate based on the estimated market rate of interest for a collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease right-of-use asset also includes any lease payments made prior to the lease commencement date. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The determination of the lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The Company has elected to exclude short-term leases (i.e., leases with expected terms of 12 months or less) from the recognition requirements of ASC 842, and has elected to account for lease and certain non-lease components as a single component.
At December 31, 2020, the Company had only one operating lease for its corporate headquarters in Torrance, California. See Note 10 “Related Party Lease” for additional information.
Impairment of Long-Lived Assets
The Company assesses the carrying value of its long-lived assets, consisting primarily of property and equipment and lease ROU assets, when there is evidence that events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Such events or changes in circumstances may include a significant decrease in the market price of a long-lived asset, a significant change in the extent or manner in which an asset is used, a significant change in legal factors or in the business climate, a significant deterioration in the amount of revenue or cash flows expected to be generated from a group of assets, a current expectation that, more likely than not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or any other significant adverse change that would indicate that the carrying value of an asset or group of assets may not be recoverable. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the
excess of the asset’s carrying value over its fair value is recorded. To date, the Company has not recorded any impairment losses on long-lived assets.
The company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to income tax matters in income tax expense.
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:
As allowed by ASC 820, we have elected fair value accounting for our convertible notes. 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 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 December 31, 2020 and 2019 (in thousands):
As described in Note 11, the Company has a contingent obligation to issue 15.0 million shares of our Common Stock to certain stockholders and employees (i.e., the Earnout Shares, defined below). Upon the occurrence of a bankruptcy or liquidation, any unissued Earnout Shares would be fully issued regardless of whether the share price target has been met.
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.
Following is a summary of the change in fair value of contingent Earnout Shares (defined below) liability for the year ended December 31, 2020 (in thousands).
Following is a summary of the change in fair value of related party derivative liability for the year ended December 31, 2020 and 2019 (in thousands).
The Company’s contingent Earnout Shares liability and embedded derivative liability on its convertible notes are considered a “Level 3” fair value measurement. Refer to Note 11 and Note 7, respectively, for discussion of the Company’s methods for valuation.
Contingent Earnout Shares Liability
The Business Combination provide certain stockholders and employees with the contingent right to up to an additional 15.0 million shares of our Common Stock (the “Earnout Shares”). Issuances are made in three tranches of 5.0 million shares each upon reaching share price targets within specified time frames. The first tranche will be issued if the share price reaches $18 within two years of the closing of the Business Combination. The second tranche will be issued if the share price reaches $25 within four years of the closing of the Business Combination. The third tranche will be issued if the share price reaches $30 within five years of the closing of the Business Combination. The tranches may also be issued upon a change of control transaction that occurs within the respective timeframes and results in per share consideration exceeding the respective share price target. Additionally, the full 15.0 million Earnout Shares will be issued in the event of a liquidation or bankruptcy. The Company determined that the right to Earnout Shares represents a contingent liability that meets the definition of a derivative and recognized it on the balance sheet at its fair value upon the
Business Combination date. The right to Earnout Shares is remeasured at fair value each period through earnings. See Note 11 for further discussion.
Our financial instruments not subject to ASC 820 include cash and cash equivalents, restricted cash, accounts payable and other current liabilities. The carrying amounts of these instruments approximated fair value because of their short-term maturities on December 31, 2020.
The Company applies ASC 606, which governs how the Company recognizes revenue.
Under ASC 606, the Company recognizes revenue when the Company transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company recognizes revenue pursuant to the five-step framework contained in ASC 606: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations.
During 2020, the Company's revenue was derived from the provision of consulting services on a project basis. The Company's fixed price contracts related to these services contain a single performance obligation, which was satisfied in July 2020 when the Company provided the final report to the customer. Revenue for these services was recognized at a point in time, when the project was delivered.
Sales taxes are not included in our gross revenue.
There were no contract liabilities as of December 31, 2020 and 2019.
Cost of Revenue, excluding Depreciation
Cost of revenue, excluding depreciation, includes materials, labor, and other direct costs related to the provision of engineering, development, and design consulting services.
Research and Development Expenses , excluding Depreciation
Research and development expenses, excluding depreciation consists of salaries, employee benefits and expenses for design and engineering personnel, stock-based compensation, as well as materials and supplies used in research and development activities. In addition, research and development expenses include fees for consulting and engineering services from third party vendors. The Company allocates a portion of overhead costs which includes lease expense, utilities and worker’s compensation premiums to the research and development department expense based on headcount.
Selling, General and Administrative Expenses, excluding Depreciation
The principal components of our selling, general and administrative expenses are salaries, wages, benefits and bonuses paid to our employees; stock-based compensation; travel and other business expenses; professional services fees (including legal, audit and tax); and ordinary day-to-day business expenses.
Depreciation is provided on property and equipment over the estimated useful lives on a straight-line basis. Upon retirement or disposal, the cost of the asset disposed of and the related accumulated depreciation are removed from the accounts and any gain or loss is reflected in the loss from operations. No depreciation expense is allocated to research and development, cost of revenue and general and administrative expense.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs for loss contingencies are expensed as incurred.
The Company accounts for stock-based compensation awards granted to employees and directors based on the awards’ estimated grant date fair value. The Company estimates the fair value of its share options using the Black-Scholes option-pricing model. For awards that vest solely based on continued service (“service-only vesting conditions”), the resulting fair value is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for the award, usually the vesting period, which is generally. The Company recognizes the fair value of stock-based awards which contain performance conditions using the graded vesting method, when it is probable the performance condition will be met. The Company accounts for forfeitures as they occur. The Company classifies stock-based compensation expense in its consolidated statement of operations in the same manner in which the award recipient’s payroll costs are classified.
For purposes of calculating stock-based compensation, we estimate the fair value of our stock options using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions including liquidity dates, volatility, discount rates, the risk-free rate and the fair value of our Common Stock. These assumptions generally require significant judgment and involve inherent uncertainties, which can materially affect the estimate of the fair value of our stock options and ultimately how much stock-based compensation expense is recognized.
Prior to our Business Combination on December 21, 2020, the fair value of our RSUs is based on the fair value of the Legacy Canoo’s ordinary shares on the date of grant. As there is no public market for the Legacy Canoo’s ordinary shares, Legacy Canoo, with the assistance of a third-party valuation specialist, determined the fair value of the Legacy Canoo’s ordinary shares at the time of the grant of RSUs by considering a number of objective and subjective factors, including the likelihood of achieving a liquidity event and transactions involving the Legacy Canoo’s ordinary shares, among other factors. The fair value of the Legacy Canoo’s ordinary shares was derived from the Legacy Canoo’s total equity value divided by the number of shares outstanding and was estimated using a probability-weighted expected return model, using different probability weightings estimated for public offering scenario, M&A scenario and dissolution scenario. The factors and scenario weighting estimates require significant judgment involve inherent uncertainties, which can materially affect the estimate of the fair value of our RSUs and ultimately how much Stock-based compensation expense is recognized.
After December 21, 2020, we estimate the fair value of RSUs based on the market price of our Common Stock underlying the awards on the grant date. Fair value for awards with our stock price performance metrics is calculated using the Monte Carlo simulation model, which incorporates stock price correlation and other variables over the time horizons matching the performance periods.
For the years ended December 31, 2020 and December 31, 2019 total stock-based compensation expense was $84.3 million and $1.9 million, respectively.
The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef