LUCID GROUP, INC. Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis provides information that Lucid management
believes is relevant to an assessment and understanding of Lucid's consolidated
results of operations and financial condition as of September 30, 2021 and for
the three and nine months ended September 30, 2021 . The discussion should be
read together with the consolidated financial statements for the three and nine
months ended September 30, 2021 and 2020, the related notes that are included
elsewhere in this quarterly report on Form 10-Q (this "Quarterly Report"), and
the final prospectus and definitive proxy statement (the "Proxy
Statement/Prospectus") filed on June 25, 2021 with the U.S. Securities and
Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act
of 1933 (the "Securities Act"), as amended. This discussion may contain
forward-looking statements based upon Lucid's current expectations, estimates
and projections that involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of various factors, including those set forth under "Risk Factors" in
Part II, Item 1A of this Quarterly Report.
Overview
We are a technology and automotive company with a mission to inspire the
adoption of sustainable transportation by creating the most captivating luxury
electric vehicles centered around human experience. Our focus on in-house
technological innovation and a "clean sheet" approach to engineering and design
have led to the development of our groundbreaking electric vehicle, the Lucid
Air , which has gone into production.
The Lucid Air is a luxury electric sedan that redefines both the luxury car
segment and the electric vehicle space. Through miniaturization of the key
drive-train components, the Lucid Air is designed to deliver compelling
performance and interior space with an exterior that is reminiscent of a
high-performance sports car. We believe our drivetrain and battery pack
technologies are significant differentiators and our battery technology has been
driven more than twenty million real-world miles since Lucid's inception. With
our 900V+ electrical architecture, we expect that some variants of the Lucid Air
will be able to achieve sufficient charge in approximately 20 minutes to travel
300 miles and have travel range in excess of 500 miles on a single charge. The
Lucid Air is expected to be available in a variant with over 1,000 horsepower
and the ability to travel from zero to 60 miles per hour in less than 2.5
seconds. We are also the supplier of battery technology for the premier EV
racing series. We believe the Lucid Air will establish the bar for excellence
across future Lucid products and experiences by fusing art and science to
capture the potential of electrification.
The Lucid Air is manufactured in-house at our greenfield purpose-built electric
vehicle manufacturing facilities in Casa Grande, Arizona , named Advanced
Manufacturing Plant-1 ("AMP-1") and Lucid Powertrain Manufacturing Plant
("LPM-1"). Upon completion of our facilities, our manufacturing footprint in
Casa Grande is expected to exceed 5 million square feet on 495 acres. Our AMP-1
facility is designed with an initial output capacity to produce up to 34,000
vehicles annually. We started our production of the Lucid Air utilizing our
AMP-1 facility in September. In late October 2021 , reservation holders of Lucid
Air Dream Edition models began receiving their vehicles, with customer
deliveries ramping up thereafter.
We expect to launch additional vehicles over the coming decade. We have already
commenced engineering and design work for Project Gravity, a luxury SUV that is
expected to leverage the same platform and many of the technological
advancements developed for the Lucid Air . We expect to begin production of
Project Gravity at the end of 2023. After the Lucid Air and Project Gravity, we
plan to leverage our technological and manufacturing advancements to develop and
manufacture progressively more affordable vehicles in higher volumes. We further
believe that our battery systems expertise positions us to produce compelling
stationary energy storage system ("ESS") products. ESS is a technologically
adjacent opportunity which can leverage the modular design of our battery packs
and our extensive experience with battery pack and battery management systems.
We plan to sell our vehicles directly to consumers through both our retail store
or gallery locations, which we refer to as "Studios," and our online purchasing
platform as we believe the direct-to-consumer sales model reflects today's
changing customer preferences. We believe that our direct-to-consumer sales
model, combined with a digitally enhanced luxury experience through our website
and a refined in-store experience, creates opportunities to tailor to each
customer's purchase and ownership preferences. As of September 30, 2021 , we have
opened nine retail stores and expect additional stores and service centers to
open in North America throughout 2021. We believe in owning our sales and
service network in order to control our customers' experience throughout their
journey with us. We are also in the process of establishing an in-house service
footprint through brick-and-mortar service centers in various geographies and a
planned mobile service fleet. In order to deliver excellent in-house and mobile
services to our customers, we also plan to have an approved list of vetted and
specially trained body shop technicians.
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Our revenue to date has been generated primarily from the sales of battery pack
systems, supplies and related services. Through September 30, 2021 , we had not
sold any vehicles. We began commercial sales of Lucid Air Dream Edition in late
October 2021 . We incurred net losses of $524.4 million and $161.2 million for
the three months ended September 30, 2021 and 2020, respectively, $1.5 billion
and $408.1 million for the nine months ended September 30, 2021 and 2020,
respectively, and $719.4 million and $277.4 million for the years ended
December 31, 2020 and 2019, respectively. We expect to incur significant net
losses for the foreseeable future. We plan to make significant investments in
capital expenditures to build and expand our manufacturing, sales and service
facilities, hire a commercial sales team, and continue to invest in research and
development. We expect that our existing cash and cash equivalents will be
sufficient to meet our capital expenditure and working capital requirements for
a period of at least twelve months from the date of this Report.
Recent Developments
Closing of the Merger
On the Closing Date, Churchill and Lucid consummated the Merger. Pursuant to the
Merger Agreement, Lucid became a wholly owned subsidiary of Churchill and
Churchill was immediately renamed "Lucid Group, Inc. " Upon the consummation of
the Merger in connection with the Merger Agreement, all holders of 451,295,965
issued and outstanding Legacy Lucid common stock received shares of Lucid common
stock at a deemed value of $10.00 per share after giving effect to the exchange
ratio of 2.644 (the "Exchange Ratio") resulting in 1,193,226,511 shares of Lucid
common stock issued and outstanding as of the Closing and all holders of
42,182,931 issued and outstanding Legacy Lucid equity awards received Lucid
equity awards covering 111,531,080 shares of Lucid common stock at a deemed
value of $10.00 per share after giving effect to the Exchange Ratio.
The Merger has been accounted for as a reverse recapitalization under U.S. GAAP.
Under this method of accounting, Churchill has been treated as the acquired
company for financial reporting purposes. The reverse recapitalization
accounting treatment was primarily determined based on the stockholders of
Legacy Lucid having a relative majority of the voting power of Lucid and having
the ability to nominate the majority of the members of the Lucid board of
directors, senior management of Legacy Lucid comprise the senior management of
Lucid, and the strategy and operations of Legacy Lucid prior to the Merger
comprise the only ongoing strategy and operations of Lucid. Accordingly, for
accounting purposes, the financial statements of Lucid represent a continuation
of the financial statements of Legacy Lucid with the Merger being treated as the
equivalent of Legacy Lucid issuing shares for the net assets of Churchill,
accompanied by a recapitalization. The net assets of Churchill were recognized
as of the Closing at historical cost, with no goodwill or other intangible
assets recorded. Operations prior to the Merger are presented as those of Legacy
Lucid and the accumulated deficit of Legacy Lucid has been carried forward after
Closing.
All periods prior to the Merger have been retrospectively adjusted using the
Exchange Ratio for the equivalent number of shares outstanding immediately after
the Closing to effect the reverse recapitalization.
In connection with the Closing, the Company raised $4,439.2 million of gross
proceeds, including the contribution of $2,070.1 million of cash held in
Churchill's trust account from its initial public offering along with $2,500.0
million of cash raised by Churchill in connection with the PIPE Investment and
$0.4 million of cash held in the Churchill operating cash account. The gross
proceeds were net of $0.2 million paid to redeem 21,644 shares of Churchill
Class A common stock held by public stockholders and $131.4 million in costs
incurred by Churchill prior to the Closing. The Company additionally incurred
$38.9 million of transaction costs, consisting of banking, legal, and other
professional fees, of which $36.2 million was recorded as a reduction to
additional paid-in capital of proceeds and the remaining $2.7 million was
expensed in the condensed consolidated statements of operations. The total net
cash proceeds to the Company were $4,400.3 million . We intend to use the net
proceeds for future capacity expansion, general corporate purposes and to meet
our working capital needs.
See Note 1 - Description of Business and Note 3 - Reverse Recapitalization in
our unaudited interim condensed consolidated financial statements included
elsewhere in this Quarterly Report for more information.
Key Factors Affecting Our Performance
We believe that our future success and financial performance depend on a number
of factors that present significant opportunities for our business, but also
pose risks and challenges, including those discussed below and in the section
entitled "Risk Factors" in Part II, Item 1A of this Quarterly Report.
Design and Technology Leadership
We believe that we are positioned to be a leader in the electric vehicle market
by unlocking the potential for advanced, high-performance, and long-range
electric vehicles to co-exist. The Lucid Air is designed with race-proven
battery pack technologies and robust performance together with a sleek exterior
design and expansive interior space given our miniaturized key drivetrain
components. We anticipate consumer demand for the Lucid Air based on its
luxurious design, high-performance technology and sustainability leadership, and
the growing acceptance of and demand for electric vehicles as a substitute for
gasoline-fueled vehicles. We have received significant interest in the Lucid Air
from potential customers. Through September 30, 2021 , we have refundable
reservations that reflect potential sales greater than $1,300.0 million .
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Direct-to-Consumer Model
We plan to operate a direct-to-consumer sales and service model, which we
believe will allow us to offer a personalized experience for our customers based
on their purchase and ownership preferences. We expect to incur significant
expenses in our sales and marketing operations as we prepare for
commercialization of the Lucid Air , including to open Studios, hire a sales
force, invest in marketing and brand awareness, and stand up a service center
operation. As of September 30, 2021 , we had opened nine Studios, four locations
in California , two locations in Florida , one location in New York , one location
in Illinois and one location in Arizona . By the end of 2021, we expect to open
additional Studios and service centers in North America . We also intend to hire
additional sales, customer service, and service centers personnel. We believe
that investing in our direct-to-consumer sales and service model will be
critical to deliver and service the Lucid electric vehicles we plan to
manufacture and sell.
Establishing Manufacturing Capacity
Achieving commercialization and growth for each generation of electric vehicles
requires us to make significant capital expenditures to scale our production
capacity and improve our supply chain processes in the United States and
internationally. We expect our capital expenditures to increase each year
through 2023 as we continue our phased construction of our AMP-1 and LPM-1
facilities and international expansion and then to decrease in the
subsequent years. The amount and timing of our future manufacturing capacity
requirements, and resulting capital expenditures, will depend on many factors,
including the pace and results of our research and development efforts to meet
technological development milestones, our ability to develop and launch new
electric vehicles, our ability to achieve sales and experience customer demand
for our vehicles at the levels we anticipate, our ability to utilize planned
capacity in our existing facilities and our ability to enter new markets.
Technology Innovation
We develop in-house battery and powertrain technology, which requires us to
invest a significant amount of capital in research and development. The electric
vehicle market is highly competitive and includes both established automotive
manufacturers and new entrants. To establish market share and attract customers
from competitors, we plan to continue to make substantial investments in
research and development for the commercialization and continued enhancements of
the Lucid Air , the development of Project Gravity, and future generations of our
electric vehicles and other products.
Results of Operations
The following tables set forth our results of operations for the periods
presented (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 $ change % change 2021 2020 $ change % change
Revenue $ 232 $ 334 $ (102) (31)% $ 719 $ 342 $ 377 110%
Cost of revenue 3,320 609 2,711 445% 3,424 550 2,874 523%
Gross loss (3,088) (275) (2,813) *nm (2,705) (208) (2,497) *nm
Operating expenses
Research and development(1) 242,408 133,890 108,518 81% 586,579 341,589 244,990 72%
Selling, general and
administrative(1) 251,554 27,935 223,619 800% 455,478 57,719 397,759 689%
Total operating expenses 493,962 161,825 332,137 205% 1,042,057 399,308 642,749 161%
Loss from operations (497,050) (162,100) (334,950) 207% (1,044,762) (399,516) (645,246) 162%
Other income (expense), net:
Change in fair value of forward
contracts - - - *nm (454,546) (8,719) (445,827) *nm
Change in fair value of convertible
preferred stock warrant liability - (57) 57 *nm (6,976) (171) (6,805) *nm
Change in fair value of common stock
warrant liability (24,787) - (24,787) *nm (24,787) - (24,787) *nm
Transaction costs expensed (2,717) - (2,717) *nm (2,717) - (2,717) *nm
Interest expense (76) (10) (66) 660% (111) (20) (91) 455%
Other (expense) income, net 249 785 (536) (68)% (151) 76 (227) (299)%
Total other (expense) income, net (27,331) 718 (28,049) *nm (489,288) (8,834) (480,454) *nm
Loss before provision for (benefit
from) income taxes (524,381) (161,382) (362,999) 225% (1,534,050) (408,350) (1,125,700) 276%
Provision for (benefit from) income
taxes 22 (145) 167 *nm 31 (245) 276 *nm
Net loss and comprehensive loss
$ (363,166) 225%$ (1,534,081) $ (408,105) $ (1,125,976) 276% *nm - not meaningful 37
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(1) Includes stock-based compensation expense as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 $ change % change 2021 2020 $ change % change
Research and development $ 59,196 $ 679 $ 58,517 *nm $ 85,899 $ 2,072 $ 83,827 *nm
Selling, general and
administrative 177,760 597 177,163 *nm 280,301 1,185 279,116 *nm
Total $ 236,956 $ 1,276 $ 235,680 *nm $ 366,200 $ 3,257 $ 362,943 *nm
*nm - not meaningful
Revenue
To date, we have primarily generated revenue from the sales of battery pack
systems, supplies and related services for vehicles to a single customer. We
have identified the sale of battery pack systems and the related supplies as a
performance obligation to be recognized at the point in time when control is
transferred to the customer. While our customer generally has the right to
return defective or non-conforming products, product returns have been
immaterial in past periods. We do not expect the sales from the battery pack
systems for the world's premier electric racing series to be material for the
go-forward commercialized business.
Revenue decreased by $0.1 million , or 31%, for the three months ended
September 30, 2021 as compared to the same period in the prior year. The
decrease is attributable to a decrease in sales of our battery pack systems and
supplies for vehicles.
Revenue increased by $0.4 million , or over 100%, for the nine months ended
September 30, 2021 as compared to the same period in the prior year. The
increase is attributable to an increase in sales of our battery pack systems and
supplies for vehicles.
Cost of Revenue
Cost of revenue related to battery pack systems, supplies and related services
for electric vehicles primarily consists of direct parts and materials, shipping
and handling costs, headcount related costs, such as salaries and related
personnel expenses, including stock-based compensation, and estimated warranty
expenses related to battery pack systems. Cost of revenue also includes
allocated overhead costs such as depreciation of manufacturing related equipment
and facilities, amortization of capitalized internal-use software, facilities,
and information technology costs.
We have commenced commercial production of the Lucid Air , and we expect to
capitalize the cost to manufacture vehicles and expense these capitalized
inventory costs in the fourth quarter of 2021 when the vehicles are sold within
cost of revenue. We have not capitalized any vehicle manufacturing costs to
date.
Cost of revenue increased by $2.7 million , or over 100% for the three months
ended September 30, 2021 as compared to the same period in the prior year. The
increase was due to cost incurred during the early stage of production that
began during the quarter. Gross loss increased by $2.8 million , or over 100%,
and gross margin decreased by over 100% primarily due to an increase in cost of
revenue in the current period.
Cost of revenue increased by $2.9 million , or over 100%, for the nine months
ended September 30, 2021 as compared to the same period in the prior year. The
increase was due to cost incurred during the early stage of production that
began during the quarter. Gross loss increased by $2.5 million , or over 100%,
and gross margin decreased by over 100% primarily due to an increase in cost of
revenue for the nine months period.
Operating Expenses
Our operating expenses consist of research and development and selling, general
and administrative expenses.
Research and Development
Our research and development efforts have primarily focused on the development
of our battery and powertrain technology, the Lucid Air , Project Gravity and
future generations of our electric vehicles. Research and development expenses
consist primarily of materials, supplies and personnel-related expenses for
employees involved in the engineering, designing, and testing of electric
vehicles. Personnel-related expenses primarily include salaries, benefits and
stock-based compensation. Research and development expenses also include
professional services fees, allocated facilities costs, such as office and rent
expense and depreciation expense, and other engineering, designing, and testing
expenses.
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Research and development expense increased by $108.5 million , or 81%, for the
three months ended September 30, 2021 as compared to the same period in the
prior year. The increase was primarily attributable to increases in
personnel-related expenses of $100.4 million due to growth in headcount and
stock-based compensation expense of $58.5 million recognized in relation to the
RSUs. Additionally, we incurred increase in other allocated overhead expense of
$8.6 million primarily related to additional facilities needed to scale our
business.
Research and development expense increased by $245.0 million , or 72%, for the
nine months ended September 30, 2021 as compared to the same period in the prior
year. The increase was primarily attributable to increases in personnel-related
expenses of $194.4 due to growth in headcount and stock-based compensation
expense of $83.8 million recognized in relation to the RSUs and the fourth
closing of the Legacy Lucid Series E preferred stock issuance. Additionally, we
incurred increases in office and rent expense of $21.5 million and other
allocated overhead expenses of $18.3 million primarily related to additional
facilities needed to scale our business.
Selling, General, and Administrative
Selling, general, and administrative expenses consist primarily of
personnel-related expenses for employees involved in general corporate, selling
and marketing functions, including executive management and administration,
legal, human resources, accounting, finance, tax, and information technology.
Personnel-related expenses primarily include salaries, benefits and share-based
compensation. Selling, general, and administrative expenses also include
allocated facilities costs, such as office, rent and depreciation expenses,
professional services fees and other general corporate expenses. As we continue
to grow as a company, build out our sales force, and commercialize the Lucid Air
and planned future generations of our electric vehicles, we expect that our
selling, general and administrative costs will increase.
We also expect to incur additional expenses as a result of operating as a public
company, including expenses necessary to comply with the rules and regulations
applicable to companies listed on a national securities exchange and related to
compliance and reporting obligations pursuant to the rules and regulations of
the SEC , as well as higher expenses for general and director and officer
insurance, investor relations, and professional services.
Selling, general, and administrative expense increased by $223.6 million , or
over 100%, for the three months ended September 30, 2021 as compared to the same
period in the prior year. The increase was primarily attributable to increases
in share-based compensation expense of $177.2 million related to RSUs. The
increase was also attributable to personnel-related expenses of $26.6 million
due to growth in headcount and other compensation related charges as we grew our
sales force and expanded general and administrative functions needed to scale
our business. Additionally, we incurred increase in other allocated overhead
costs of $9.1 million primarily related to additional facilities to support the
growing operations of our business.
Selling, general, and administrative expense increased by $397.8 million , or
over 100%, for the nine months ended September 30, 2021 as compared to the same
period in the prior year. The increase was primarily attributable to increases
in share-based compensation expense of $279.1 million related to RSUs and the
fourth closing of the Legacy Lucid Series E preferred stock issuance. The
increase was also attributable to personnel-related expenses of $59.1 million
due to growth in headcount and other compensation related charges as we grew our
sales force and expanded general and administrative functions needed to scale
our business. Additionally, we incurred increases in other allocated overhead
costs of $23.7 million primarily related to additional facilities to support the
growing operations of our business and increases in professional service fees of
$16.4 million .
Change in Fair Value of Contingent Forward Contracts
Our contingent forward contracts provided the holder the right to purchase
Legacy Lucid Series D preferred stock and Legacy Lucid Series E preferred stock
in future periods and were subject to remeasurement to fair value at each
balance sheet date. Changes in the fair value of our contingent forward
contracts were recognized in the condensed consolidated statements of operations
and comprehensive loss.
Change in contingent forward contracts liability increased by $445.8 million , or
over 100%, for the nine months ended September 30, 2021 as compared to the same
period in the prior year primarily due to the change in fair value of the Legacy
Lucid Series E contingent forward contracts. The Legacy Lucid Series E
contingent forward contracts were settled during six months ended June 30, 2021 .
Change in Fair Value of Convertible Preferred Stock Warrant Liability
Our convertible preferred share warrant liability related to the warrants to
purchase shares of Legacy Lucid Series D preferred stock was subject to
remeasurement to fair value at each balance sheet date. Changes in the fair
value of our convertible preferred share warrant liability were recognized in
the condensed consolidated statements of operations and comprehensive loss. All
issued and outstanding shares of Legacy Lucid Series D preferred stock were
settled in March 2021 and there will no longer be future earnings adjustments
pertaining to the convertible preferred share warrant liability related to
Legacy Lucid Series D preferred stock.
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We recorded loss of $7.0 million for the nine months ended September 30, 2021
due to the changes in fair value of the convertible preferred stock warrant
liability related to Legacy Lucid Series D preferred stock upon the exercise and
settlement of all outstanding warrants to purchase Legacy Lucid Series D
preferred stock.
Change in Fair Value of Common Stock Warrant Liability
OnJuly 23, 2021 , in connection with the reverse recapitalization treatment of the Merger, the Company effectively issued 44,350,000 private warrants to purchase shares of Lucid's common stock. The private warrants were initially recognized as a liability onJuly 23, 2021 , at a fair value of$812.0 million . The private warrants remained unexercised as ofSeptember 30, 2021 and the liability was remeasured to fair value as ofSeptember 30, 2021 , resulting in a loss of$24.8 million for the three and nine months endedSeptember 30, 2021 , classified within change in fair value of common stock warrant liabilities in the condensed consolidated statements of operations. See Note 8 - Common Stock Warrant Liability in our unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report for more information. Transaction Costs Expensed In connection with the Merger, the Company incurred$38.9 million in one-time direct and incremental transaction costs, consisting of banking, legal, and other professional fees. Transaction costs incurred by Lucid were allocated on a relative fair value basis between equity and liability-classified instruments deemed to be issued for financial reporting purposes at the Closing by Lucid. The Company's$36.2 million transaction costs allocable to equity-classified instruments, including the common stock and public warrants, were charged as a direct reduction to Lucid's additional paid-in capital of the gross proceeds remitted to Lucid from Churchill. The Company's$2.7 million transaction costs allocable to liability-classified instruments measured at fair value, including the private warrants, were charged to the condensed consolidated statement of operations upon the Closing for the three and nine months endedSeptember 30, 2021 . Interest Expense Interest expense consists primarily of the interest incurred on our capital leases. Interest expense did not significantly fluctuate during the three and nine months endedSeptember 30, 2021 as compared to the same period in the prior year. Other Income (Expense), net Other income (expense), net consists primarily of foreign currency gains and losses. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than theU.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Other expense did not significantly fluctuate during the three and nine months endedSeptember 30, 2021 as compared to the same period in the prior year. Provision for (Benefit from) Income Taxes Our provision for (benefit from) income taxes consists of an estimate forU.S. federal and state income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. We maintain a valuation allowance against the full value of ourU.S. and state net deferred tax assets because we believe it is more likely than not that the recoverability of these deferred tax assets will not be realized. The provision for (benefit from) income taxes did not significantly fluctuate during the three and nine months endedSeptember 30, 2021 as compared to the same period in the prior year. Liquidity and Capital Resources Sources of Liquidity Since inception, we have financed our operations primarily from the issuances of equity securities, including convertible preferred stock and the proceeds of the Merger, and convertible notes. As ofSeptember 30, 2021 , we had$4.8 billion of cash and cash equivalents and short-term investments. As an early stage growth company, we have incurred substantial net losses since inception. We expect to continue to incur net losses in accordance with our operating plan as we continue to expand our research and development activities to complete the development of vehicles, 40 -------------------------------------------------------------------------------- establish our consumer base and scale our operations to meet anticipated demand. We anticipate to continue spend on capital expenditures to support our commercialization and growth as we continue our phased construction of our AMP-1, LPM-1 and international manufacturing facilities, purchase infrastructure for our vehicle production and launch our retail studios to support our direct-to-consumer model. As ofDecember 31, 2020 , our non-cancellable commitments, as disclosed below in "- Contractual Obligations and Commitments," do not include any commitments related to these capital expenditures as we do not have any commitments related to these capital expenditures that we cannot cancel without a significant penalty. In addition to our capital expenditures, we expect our operating expenses to increase as we hire a commercial sales and service team and continue to invest in research and development. We expect these investments to be a key driver of our long-term growth and competitiveness, but will negatively impact our free cash flow. We have based these estimates on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently anticipate. We believe that our cash on hand following the consummation of the Merger, including the proceeds from thePIPE Investment , will be sufficient to meet our capital expenditure and working capital requirements for a period of at least twelve months from the date of this Report. We expect to require additional capital to finance our operations, which may include seeking additional capital through equity offerings or debt financings. The amount and timing of our future funding and our commercialization requirements, if any, will depend on many factors, including the pace and results of our research and development efforts and our commercialization efforts. We may be unable to obtain any such additional financing on reasonable terms or at all. Our ability to access capital when needed is not assured and, if capital is not available to us when, and in the amounts needed, we could be required to delay, scale back or abandon some or all of our development programs and other operations, which could materially harm our business, prospects, financial condition and operating results. The expenditures associated with the development and commercial launch of our vehicles, the anticipated increase in manufacturing capacity, and the international expansion of our business operations are subject to significant risks and uncertainties, many of which are beyond our control, which may affect the timing and magnitude of these anticipated expenditures. These risk and uncertainties are described in more detail in the section entitled "Risk Factors" in Part II, Item 1A. Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): Nine Months Ended September 30, 2021 2021 2020 Cash used in operating activities$ (745,401) $ (377,407) Cash used in investing activities (299,294) (355,860) Cash provided by financing activities 5,236,843 892,575
Net increase in cash, cash equivalents, and restricted cash
Cash Used in Operating Activities Our cash flows used in operating activities to date have been primarily comprised of costs related to research and development, payroll and other general and administrative activities. As we continue to ramp up hiring after starting commercial operations, we expect our cash used in operating activities to increase significantly before it starts to generate any material cash flows from our business. Net cash used in operating activities of$745.4 million for the nine months endedSeptember 30, 2021 primarily consisted of$1,534.1 million of net loss, adjusted for$895.0 million of non-cash charges and a decrease in net operating assets of$106.3 million . The non-cash charges primarily included losses for changes in fair value of contingent forward contracts and warrant liabilities of$486.3 million , share-based compensation expense of$366.2 million , non-cash operating lease cost of$8.6 million , depreciation and amortization of property and equipment of$26.6 million and amortization of insurance premium of$7.2 million . The increase in net operating assets is primarily due to an increase in operating assets of$123.4 million offset by an increase in operating liabilities of$17.1 million . Net cash used in operating activities of$377.4 million for the nine months endedSeptember 30, 2020 primarily consisted of$408.1 million of net loss, adjusted for$17.7 million of non-cash charges and an increase in net operating assets of$13.0 million . The non-cash charges primarily included the fair value of contingent forward contracts and warrant liabilities of$8.9 million , depreciation and amortization of$5.4 million , and stock-based compensation expense of$3.3 million . The increase in net operating assets and liabilities is primarily due to an increase in operating liabilities of$11.5 million and an increase in operating assets of$1.5 million . 41 -------------------------------------------------------------------------------- Cash Used in Investing Activities We continue to experience negative cash flows from investing activities as we expand our business and continue to build our infrastructure. Cash flows from investing activities primarily relate to capital expenditures to support our growth. Net cash used in investing activities of$299.3 million for the nine months endedSeptember 30, 2021 was primarily attributable to capital expenditures. Net cash used in investing activities of$355.9 million for the nine months endedSeptember 30, 2020 was entirely attributable to capital expenditures. Cash Provided by Financing Activities Since inception, we have financed our operations primarily from the issuances of equity securities, including convertible preferred stock and the proceeds of the Merger, and convertible notes. Net cash provided by financing activities of$5,236.8 million during the nine months endedSeptember 30, 2020 was primarily attributable to gross proceeds of approximately$4,439.2 from the Merger,$600.0 million of proceeds from the issuance of LegacyLucid Series E preferred stock,$173.3 million of proceeds from the exercises of public warrants,$41.9 million proceeds from short-term insurance financing note,$6.0 million of proceeds from the exercises of stock options,$3.0 million of proceeds from the issuance of LegacyLucid Series D preferred stock, partially offset by$3.0 million cash paid for the repurchase of LegacyLucid Series B preferred stock and$16.8 million cash paid for the short-term insurance financing note. Net cash provided by financing activities also reflects that the Company incurred$38.9 million of transaction costs related to the Merger, of which$34.1 million were not yet paid as ofSeptember 30, 2020 . Net cash provided by financing activities of$892.6 million during the nine months endedSeptember 30, 2020 was primarily attributable to$400.0 million of proceeds from the issuance of LegacyLucid Series D preferred stock,$499.7 million of proceeds from the issuance of LegacyLucid Series E preferred stock, and$2.9 million of proceeds from the exercises of stock options. Net cash provided by financing activities also reflects uses of cash of$9.9 million to repurchase LegacyLucid Series C preferred stock. Contractual Obligations and Commitments The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments Due by Periods Total < 1 year 1 - 3 years 3 - 5 year > 5 years (in thousands) Operating lease obligations$ 253,796 $ 25,490 $ 56,470 $ 55,681 $ 116,155 Non-cancellable purchase commitment 506,000 101,200 404,800 - - Total commitments$ 759,796 $ 126,690 $ 461,270 $ 55,681 $ 116,155 Operating lease obligations - Operating leases include nine lease agreements we entered into fromJanuary 2020 toDecember 31, 2020 for retail locations inArizona ,California ,Florida, New York , andVirginia , with lease expiration dates ranging fromMarch 2025 throughDecember 2032 . Base rent for these leases ranges from$0.1 million to$0.4 million per annum, with certain leases having 3% annual base rent escalation clauses during the lease terms. As ofDecember 31, 2020 , the remaining operating lease commitments were$253.8 million . These commitments are reflected in the table above. Non-cancellable purchase commitments - As ofDecember 31, 2020 , we are committed to purchase battery cells from a provider over the next three years for a total estimated minimum of$506.0 million . Battery cell costs may fluctuate from time to time under the purchase commitment based on, among other things, supply and demand, costs of raw materials, and purchase volume. The table above does not include contracts that are not enforceable and legally binding and that do not specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. AtSeptember 30, 2021 , there were no material changes in our contractual obligations as reported in the audited financial statements for the year endedDecember 31, 2020 . 42 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates Our consolidated financial statements and the related notes thereto included elsewhere in this Report are prepared in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures in our financial statements and accompanying notes. We base our estimates on historical experience and on various other factors that we believe 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. Actual results may differ from these estimates under different assumptions or conditions due to the inherent uncertainty involved in making those estimates and any such differences may be material. We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. Other than the policies described in Note 2 - Summary of Significant Accounting Policies in the Company's unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report, there have been no material changes to its critical accounting policies and estimates as compared to those disclosed in its audited consolidated financial statements as of and for the years endedDecember 31, 2020 and 2019. Stock-Based Compensation We have granted stock-based awards consisting primarily of incentive and non-qualified stock options and restricted stock units ("RSUs") to employees, members of our board of directors, and non-employees. Stock Options Stock options generally vest over four years, and the majority of which vest at a rate of 25% on the first anniversary of the grant date, with the remainder vesting ratably each month over the next three years. Stock options generally expire 10 years from the date of grant and are exercisable when the options vest. Stock-based compensation expense for stock options is generally recognized on a straight-line basis over the requisite service period based on the estimated fair value of the awards on the date of grant. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires certain subjective inputs and assumptions, including the fair value of our underlying common stock, expected common stock price volatility, expected dividend yield of our common stock, risk-free interest rates, and the expected option term. The assumptions used in the Black-Scholes option-pricing model are estimated as follows: Fair value of common stock - The fair value of our common stock was estimated because our common stock had not yet been publicly traded prior to the Merger. Expected Volatility - The volatility rate was determined by using an average of historical volatilities of selected industry peers deemed to be comparable to our business corresponding to the expected option term as we did not have sufficient history of trading in our common stock prior to the Merger. Dividend Yield - The expected dividend yield was zero as we had never declared or paid cash dividends and have no current plans to do so in the foreseeable future. Risk Free Interest Rate - The risk-free interest rate was based on theU.S. Treasury yield curve in effect at the time of grant for zero-couponU.S. Treasury notes with maturities corresponding to the expected option term. Expected Option Term - The expected option term represented the period that the Lucid Options were expected to be outstanding and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. We continue to use judgment in evaluating the expected volatility over the expected option term and the expected option term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of the expected volatility over the expected option term, which could materially impact our future stock- based compensation expense. 43 --------------------------------------------------------------------------------
RSUs
RSUs are subject to both service-based and performance-based vesting conditions. The service-based vesting condition for these awards is typically satisfied equally over four years with a cliff vesting period of one year and continued vesting in equal quarterly installments thereafter. The performance-based vesting condition was satisfied upon the Closing of the Merger. These qualifying liquidity events were not deemed probable until consummated, and therefore, stock-based compensation related to these RSUs remained unrecognized prior to the consummation of the Merger. We estimate the fair value of RSUs based on the estimated fair value of our underlying common stock as of the date of the grant. Stock-based compensation for RSUs is generally recognized on a graded vesting basis over the requisite service period once the performance condition is satisfied. CEO RSU Award InMarch 2021 , our board of directors approved the grant of RSUs toPeter Rawlinson as Lucid's CEO (the "CEO RSU Award") to encourageMr. Rawlinson to focus on the long-term success of Lucid. The CEO RSU Award is comprised of RSUs that are subject to performance and service conditions (the "CEO Time-Based RSUs") and RSUs that are subject to performance and market conditions (the "CEO Performance RSUs"), as described further below. CEO Time-Based RSUs - The performance condition was satisfied upon the Closing of the Merger. The service conditions will be satisfied in 16 equal quarterly installments onMarch 5 ,June 5 ,September 5 , andDecember 5 beginning on the first quarterly installment date that is at least two months after the Closing, which will beDecember 5, 2021 , provided thatMr. Rawlinson remains in continuous service through each vesting date. The grant date fair value of the CEO Time-Based RSUs will be recognized using a graded vesting attribution method over the service period for each tranche. The grant date fair value of the CEO Time-Based RSUs was based on the estimated fair value of Lucid's underlying common stock as of the date of the grant. CEO Performance RSUs - The performance condition was satisfied upon the Closing of the Merger. The market conditions will be satisfied based upon the achievement of certain market capitalization goals of Lucid and the continued employment ofMr. Rawlinson at each vesting date during the five-year period beginning after the Closing of the Merger. The CEO Performance RSUs will vest only if Lucid achieves the Lucid market capitalization targets, which if achieved, would allow Lucid's other stockholders to benefit from the increases in our market capitalization. The Lucid market capitalization targets will be adjusted to reflect any stock splits, stock dividends, combinations, reorganizations, reclassifications, or other similar changes in capitalization or corporate events. The grant date fair value of the CEO Performance RSUs will be recognized using a graded vesting attribution method over the estimated requisite service periods for the five tranches, regardless of whether the Lucid market capitalization targets are achieved. If the Lucid market capitalization targets are met sooner than the requisite service period, the stock-based compensation expense will be adjusted to reflect the cumulative expense associated with the vested award. Tax Withholding - During the first year following the Closing of the Merger, we expect that Lucid will settle tax withholding obligations in connection with any vesting of the CEO RSU Award through "net settlement," i.e., by remitting cash to satisfy the tax withholding obligation and withholding a number of the vested shares on each vesting date. The amount of the tax withholding due on each vesting and net settlement date will be based on the fair value of the common stock on such vesting and net settlement date. Depending on the fair value of the common stock and the number of RSUs vesting on any applicable vesting and net settlement date, such net settlement could require Lucid to expend substantial cash funds to satisfy tax withholding.
Common Stock Warrant Liability
We accounted for privately placed common stock warrants (the "private warrants")
to purchase shares of Lucid common stock as liabilities at their estimated fair
value because these private warrants are not deemed indexed to our common stock.
The warrants were recorded at fair value upon issuance and were subject to
remeasurement to fair value at each period end, with any fair value adjustments
recognized as a component within other income (expense), net in our condensed
consolidated statements of operations and comprehensive loss. A portion of our
private warrants are subject to certain contingent forfeiture provisions.
The fair value of the private warrants that are not subject to the contingent
forfeiture provisions was estimated using a Black-Scholes option pricing model
that takes into account the contract terms as well as the quoted price of the
Company's common stock in an active market. The volatility is based on the
actual market activity of the Company's peer group as well as the Company's
historical volatility. The expected life is
44
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based on the remaining contractual term of the warrants, and the risk free
interest rate is based on the implied yield available on U.S. Treasury
securities with a maturity equivalent to the warrants' expected life.
The fair value of the private warrants that are subject to the contingent
forfeiture provisions was estimated using a Monte-Carlo simulation, which
involved random iterations of future stock-price paths over the contractual life
of the private warrants, including the probability distribution of outcomes, the
payoff to the holder was determined based on the achievement of the various
market thresholds within each simulated path. The present value of the payoff in
each simulated trial is calculated, and the fair value of the liability is
determined by taking the average of all present values.
See Note 8 - Common Stock Warrant Liability and Note 11 - Earnback Shares and
Warrants to the unaudited interim condensed consolidated financial statements
included elsewhere in this Quarterly Report for more information.
Contingent Forward Contract
We accounted for the contingent forward contract to purchase LegacyLucid Series E preferred stock as a derivative liability because the contingent forward contract may require us to issue additional shares at a future date. The contingent forward contract was recorded at fair value upon issuance and was subject to remeasurement to fair value at each period end, with any fair value adjustments recognized as a component within other income (expense), net in our condensed consolidated statements of operations and comprehensive loss. The fair value of the contingent forward contract liability for the LegacyLucid Series E preferred stock issued inFebruary 2021 andApril 2021 was determined based on the forward payoff, which was determined as the difference between the estimated LegacyLucid Series E preferred shares fair value and the$7.90 per share purchase price.We settled the contingent forward contract inApril 2021 . See Note 6 - Contingent Forward Contracts to the unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report for more information. Convertible Preferred Stock Warrant Liability We accounted for warrants to purchase shares of LegacyLucid Series D preferred stock as liabilities at their estimated fair value because these warrants may obligate us to transfer assets to the holders at a future date under certain circumstances, such as a merger, acquisition, reorganization, sale of all or substantially all of our assets, each a change of control event. The warrants were recorded at fair value upon issuance and were subject to remeasurement to fair value at each period end, with any fair value adjustments recognized as a component within other income (expense), net in our condensed consolidated statements of operations and comprehensive loss. We used a Black-Scholes model to calculate the fair value of its redeemable convertible preferred stock warrant liability. InFebruary 2021 , all outstanding warrants to purchase shares of Legacy Lucid Series D Preferred Shares were exercised. See Note 9 - Convertible Preferred Stock to the unaudited interim condensed consolidated financial statements included elsewhere in this Quarterly Report for more information. Income Taxes We utilize the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded based on the estimated future tax effects of temporary differences between the financial reporting and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability. We recognize the effect on deferred income taxes of a change in tax rates in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the net amount that we believe is more-likely-than-not to be realized. We make estimates, assumptions and judgments to determine our provision for Lucid's income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent it believes that recovery is not likely, it establishes a valuation allowance. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. Interest and penalties related to unrecognized tax benefits which, as of the date of this Report, have not been material, are recognized within provision for income taxes. 45 -------------------------------------------------------------------------------- Recently Adopted Accounting Pronouncements See Note 2 to our consolidated financial statements included elsewhere in this Report for more information regarding recently issued accounting pronouncements. Internal Control Over Financial Reporting In connection with the preparation of our consolidated financial statements as of and for the fiscal years endedDecember 31, 2020 and 2019, we identified material weaknesses in our internal control over financial reporting. See the subsection entitled "Risk Factors - We have identified material weaknesses in our internal control over financial reporting. If we are unable to remediate these material weaknesses, or if we identify additional material weaknesses in the future or otherwise fail to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and the value of our common stock" in Part II, Item 1A.
Implications of being an
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2021 (the "JOBS Act") exempts "emerging growth companies" as defined in Section 2(A) of the Securities Act of 1933, as amended, from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. Lucid is an "emerging growth company" and has elected to take advantage of the benefits of this extended transition period. Lucid will use this extended transition period for complying with new or revised accounting standards that have different effective dates for public business entities and non-public business entities until the earlier of the date Lucid (a) is no longer an emerging growth company or (b) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. The extended transition period exemptions afforded by Lucid's emerging growth company status may make it difficult or impossible to compare Lucid's financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of this exemption because of the potential differences in accounting standards used. Refer to Note 2 to our consolidated financial statements included elsewhere in this Report for the recent accounting pronouncements. Lucid will remain an "emerging growth company" under the JOBS Act until the earliest of (a) the last day of Lucid's first fiscal year following the fifth anniversary of the Churchill IPO, (b) the last date of Lucid's fiscal year in which Lucid has total annual gross revenue of at least$1.07 billion , (c) the last date of Lucid's fiscal year in which Lucid is deemed to be a "large accelerated filer" under the rules of theSEC with at least$700.0 million of outstanding securities held by non-affiliates or (d) the date on which Lucid has issued more than$1.0 billion in non- convertible debt securities during the previous three years. Lucid will cease to be an emerging growth company as ofDecember 31, 2021 . Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities. Item 3. Qualitative and Quantitative Disclosures about Market Risk. We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates. Interest Rate Risk We are exposed to market risk for changes in interest rates applicable to our cash and cash equivalents, restricted cash, and short-term investments. We had cash, cash equivalents and restricted cash totaling$4.8 billion and short-term investments totaling$0.5 million as ofSeptember 30, 2021 . Our cash and cash equivalents and short-term investments were invested primarily in money market funds and certificates of deposits. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, issued by theU.S. government or liquid money market funds. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. A hypothetical 10% change in interest rates would not have a had material impact on the value of our cash, cash equivalents or short-term investments as ofSeptember 30, 2021 . 46 --------------------------------------------------------------------------------
Seasonality
Automotive sales typically tend to decline over the winter season though we do not expect seasonality to have a significant impact on our results of operations in the near term until we scale our business. Item 4. Controls and Procedures. Our management evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as ofSeptember 30, 2021 . Based on their evaluation, the Company's principal executive and principal financial officers concluded that, solely due to the material weaknesses in our internal control over financial reporting described below, the Company's disclosure controls and procedures were not effective as ofSeptember 30, 2021 . Notwithstanding the material weakness, management believes that the consolidated financial statements and related financial information included in this Quarterly Report fairly present in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in conformity withU.S. generally accepted accounting principles ("U.S. GAAP") Material Weaknesses in Internal Control Over Financial Reporting •Lucid did not maintain a sufficient complement of personnel with accounting knowledge, experience and training to appropriately analyze, record and disclose accounting matters to provide reasonable assurance of preventing material misstatements; •Lucid did not maintain an effective process to verify changes to vendor records for payment remittances; and •Lucid did not maintain effective controls over certain information technology ("IT") general controls for information systems that are relevant to the preparation of its consolidated financial statements. Specifically, Lucid did not design and maintain user access controls to ensure appropriate segregation of duties and restrict user access to its financial applications to appropriate company personnel. •Lucid did not maintain effective disclosure controls and procedures over financial reporting solely related to its accounting for warrants. Remediation Plan Lucid has begun implementation of a plan to remediate these material weaknesses. These remediation measures are ongoing and include the following steps: •hiring additional accounting and financial reporting personnel with appropriate technical accounting knowledge and public company experience in financial reporting? •designing and implementing effective processes and controls to prevent payment to unverified vendors •designing and implementing security management and change management controls over IT systems, including adjusting user access levels and implementing external logging of activity and periodic review of such logs? and •engaging an accounting advisory firm to assist with the documentation, evaluation, remediation and testing of Lucid's internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission . We will continue to monitor the design and effectiveness of these and other processes, procedures and controls and make further changes management determines appropriate. Upon the completion of the Merger on the Closing Date, the internal controls of Legacy Lucid became our internal controls. There has been no change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter endedSeptember 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 47
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