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 December 31, 2021 and for
the fiscal year ended December 31, 2021 . The discussion should be read together
with our consolidated financial statements and related notes that are included
elsewhere in this annual report on Form 10-K (this "Annual Report"). For
discussion related to our financial condition as of December 31, 2020 , results
of operations for year ended December 31, 2020 and year to year comparison
between year ended December 31, 2020 and 2019, refer to 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 I, Item 1A of this Annual Report.
Overview
We are a technology and automotive company with a mission to inspire the adoption of sustainable energy by creating advanced technologies and the most captivating luxury electric vehicles, centered around the human experience. Our focus on in-house technological innovation, vertical integration, and a "clean sheet" approach to engineering and design have led to the development of our groundbreaking electric vehicle, theLucid Air . We sell vehicles directly to consumers through our retail sales network and through direct online sales. We believe that owning our sales network provides an opportunity to closely manage the customer experience, gather direct customer feedback, and ensure that customer interactions are on-brand and tailored to our customers' need. We also operate an in-house vehicle service network, with brick-and-mortar service centers in various geographies and a mobile service fleet. In addition to our in-house service capabilities, we established and continue to grow an approved list of specially trained collision repair shops which also serve as a repair hub for our mobile service offerings in some cases. We began delivering theLucid Air to customers inOctober 2021 . We expect to launch additional vehicles over the coming decade. We have already commenced design and engineering work for Project Gravity, a luxury SUV that is expected to leverage many of the technological advancements and learnings from theLucid Air . We expect to begin production of Project Gravity in the first half of 2024. After theLucid 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.
Impact of the COVID-19 Pandemic on our Business
The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. Infection rates vary across the jurisdictions in which we operate. Governmental authorities have continued to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limits on gatherings, quarantines, shelter-in-place orders and business shutdowns. We have taken proactive action to protect the health and safety of our employees, customers, partners and suppliers, consistent with the latest and evolving governmental guidelines. We expect to continue to implement appropriate measures until the COVID-19 pandemic is adequately contained. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers. While certain of our and our suppliers' operations have from time-to-time been temporarily affected by government-mandated restrictions, we were able to commence deliveries of theLucid Air to customers and to proceed with the construction of theArizona plant. Broader impacts of the pandemic have included ongoing, industry-wide challenges in logistics and supply chains, such as increased port congestion, intermittent supplier delays and a shortfall of semiconductor supply. Because we rely on third party suppliers for the development, manufacture, and/or provision and development of many of the key components and materials used in our vehicles, as well as provisioning and servicing equipment in our manufacturing facilities, we have been affected by such industry-wide challenges in logistics and supply chains. While we continue to focus on mitigating risks to our operations and supply chain in the current industry environment, we expect that these industry-wide trends will continue to affect our ability and the ability of our suppliers to obtain parts, components and manufacturing equipment on a timely basis for the foreseeable future. 65 -------------------------------------------------------------------------------- In the current circumstances, given the dynamic nature of the situation, any impact on our financial condition, results of operations or cash flows in the future continues to be difficult to estimate and predict, as it depends on future events that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, potential additional waves of infection, the emergence of more virulent or more dangerous strains of the virus, the actions taken to mitigate the virus or its impact, the development, distribution, efficacy and acceptance of vaccines worldwide, how quickly and to what extent normal economic and operating conditions can resume, the broader impact that the pandemic is having on the economy and our industry and specific implications the pandemic may have on our suppliers and on global logistics. See Item 1A., "Risk Factors," for additional information regarding risks associated with the COVID-19 pandemic, including under the caption "The ongoing COVID-19 pandemic has adversely affected our business, results of operations and financial condition."
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 I, Item 1A of this Annual 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 theLucid 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 theLucid Air from potential customers. As ofDecember 31, 2021 , we had refundable reservations and non-refundable orders of cars yet to be delivered that reflect a potential order book greater than$2.2 billion .
Direct-to-Consumer Model
We 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 continue to incur significant expenses in our sales and marketing operations for sale of theLucid Air , including to open Studios, hire a sales force, invest in marketing and brand awareness, and stand up a service center operation. As ofDecember 31, 2021 , we had opened twenty Studios and service centers, one in each ofArizona ,Canada , NewYork, Michigan ,Texas ,Virginia ,Washington , and two inIllinois , three inFlorida , as well eight inCalifornia . We expect additional stores and service centers to open inNorth America ,Europe , and theMiddle East in 2022. 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 inthe United States and internationally. We expect our capital expenditures to increase as we continue our phased construction of our AMP-1 and LPM-1 facilities and international expansion. 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 theLucid Air , the development of Project Gravity, and future generations of our electric vehicles and other products.
Inflationary Pressure
TheU.S. economy has experienced increased inflation recently, including as a result of the COVID-19 pandemic. Our cost to manufacture a vehicle is heavily influenced by the cost of the key components and materials used in the vehicle, cost of labor, as well as cost of equipment 66 -------------------------------------------------------------------------------- used in our manufacturing facilities. As we continue our phased construction of our AMP-1 facility, increases in steel prices and cost of construction labor have led to higher capital expenditures. We expect that the inflationary pressure will persist for the foreseeable future.
Fiscal Year Highlights
InJuly 2021 , Churchill and Legacy Lucid consummated the Merger. Pursuant to the Merger Agreement, Legacy Lucid became a wholly owned subsidiary of Churchill and Churchill was immediately renamed "Lucid Group, Inc. ". The total net proceeds to us were$4,400.3 million , which consisted of$4,439.2 million gross proceeds, net of$131.4 million in costs incurred by Churchill prior to the Closing,$38.9 million of transaction costs, consisting of banking, legal, and other professional fees,$2.7 million of costs expensed in our consolidated statements of operations, and$0.2 million paid to redeem 21,644 shares ofChurchill Class A common stock held by public stockholders. Revenue for the year endedDecember 31, 2021 was$27.1 million , which was largely attributable to commercial sales of the Lucid Air Dream Edition that began in the fourth quarter of 2021. Historically, revenue was primarily attributable to the sale of battery pack systems, supplies and related services for vehicles to a single customer. 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. InDecember 2021 , Lucid issued an aggregate of$2,012.5 million principal amount of 1.25% convertible senior notes. The net proceeds from the issuance of the 2026 Notes were$1,986.6 million , net of debt discounts and issuance costs.
We incurred net losses of
Results of Operations
Revenue
The following table presents our revenue for the periods presented (in
thousands):
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Revenue $ 27,111 $ 3,976 $ 23,135 582 %
We began generating sales from the deliveries of vehicles in the fourth quarter
of 2021. We recognize vehicle sales when the customer obtains control of the
vehicle which is upon delivery. We also generate revenue from the sale of
battery pack systems, supplies and related services for vehicles to a single
customer.
Revenue increased by
Cost of Revenue
The following table presents our cost of revenue for the periods presented (in
thousands):
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Cost of revenue $ 154,897 $ 3,070 $ 151,827 *nm
*nm - not meaningful
Costs of revenue related to vehicle sales primarily include direct parts, materials, shipping and handling costs, allocable overhead costs such as depreciation of manufacturing related equipment and facilities, information technology costs, personnel costs, including wages and stock-based compensation, estimated warranty costs and charges to reduce inventories to their net realizable value less costs to sell or charges for inventory obsolescence.
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, personnel costs including wages and stock-based
compensation, and estimated warranty costs related to battery pack systems. Cost
of battery pack systems also includes allocated overhead costs such as
depreciation of manufacturing related equipment and facilities, and information
technology costs.
67
--------------------------------------------------------------------------------
Cost of revenues increased by $151.8 million for the year ended December 31,
2021 , compared to the year ended December 31, 2020 , primarily due to the
manufacture and sale of our first production vehicles in the fourth quarter of
2021. We had significant personnel and overhead costs to operate our large-scale
manufacturing facilities while ramping up production, with production activity
for a limited quantity of vehicles in the quarter ended December 31, 2021 . In
the near term, we expect our production volume of vehicles to be significantly
less than our manufacturing capacity. Additionally, we recorded an impairment
charge of $48.9 million in the quarter ended December 31, 2021 to reduce our
inventories to their net realizable values less costs to sell. We expect
impairment charges could negatively affect our costs of vehicle sales in the
near term as we ramp production volumes up toward our manufacturing capacity.
Operating Expenses
The following table presents our operating expenses for the periods presented
(in thousands):
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Operating expenses
Research and development $ 750,185 $ 511,110 $ 239,075 47 %
Selling, general and administrative 652,475 89,023 563,452 633 %
Total operating expenses $ 1,402,660 $ 600,133 $ 802,527 134 %
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
prototype material, engineering, design and testing services, and allocated
facilities costs, such as office and rent expense and depreciation expense, and
other engineering, designing, and testing expenses.
Research and development expense increased by $239.1 million , or 47%, for the
year ended December 31, 2021 as compared to the prior year. The increase was
primarily attributable to increases in personnel-related expenses of $238.4
million due to growth in headcount (which included stock-based compensation
expense of $133.6 million ), increase in facilities related costs of $65.4
million , partially offset by a decrease of $64.7 million for prototype material,
engineering, design and testing services.
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, facilities and real estate, accounting, finance, tax, and information technology. Personnel-related expenses primarily include salaries, benefits and stock-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 theLucid 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 theSEC , as well as higher expenses for general and director and officer insurance, investor relations, and professional services. Selling, general, and administrative expense increased by$563.5 million , or over 633%, for the year endedDecember 31, 2021 as compared to the prior year. The increase was primarily attributable to increases in personnel-related expenses of$447.6 million due to growth in headcount (which included stock-based compensation expense of$370.0 million ) and increase in facilities related costs of$53.4 million . 68 --------------------------------------------------------------------------------
Other Income (Expense), net
The following table presents our other income and expense, net for the periods
presented (in thousands):
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Other income (expense), net:
Change in fair value of forward contracts (454,546) (118,382) (336,164) 284 %Change in fair value of convertible preferred stock warrant liability
(6,976) (1,205) (5,771) 479 %
Change in fair value of common stock warrant
liability (582,760) - (582,760) *nm
Transaction costs expensed (2,717) - (2,717) *nm
Interest expense (1,374) (64) (1,310) *nm
Other expense, net (893) (690) (203) 29 %
Total other expense, net (1,049,266) (120,341) (928,925) 772 %
*nm - not meaningful
Change in Fair Value of Contingent Forward Contracts
Our contingent forward contracts provided the holder the right to purchase
Legacy
Change in contingent forward contracts liability increased by$336.2 million , or over 284%, for the year endedDecember 31, 2021 as compared to the prior year primarily due to the change in fair value of the LegacyLucid Series E contingent forward contracts. The LegacyLucid Series E contingent forward contracts were settled during six months endedJune 30, 2021 .
Change in Fair Value of Convertible Preferred Stock Warrant Liability
Our convertible preferred stock warrant liability related to the warrants to purchase shares of LegacyLucid 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 stock warrant liability were recognized in the consolidated statements of operations and comprehensive loss. All issued and outstanding shares of LegacyLucid Series D preferred stock were settled inMarch 2021 and there will no longer be future earnings adjustments pertaining to the convertible preferred share warrant liability related to LegacyLucid Series D preferred stock.
We recorded loss of
Change in Fair Value of Common Stock Warrant Liability
Our common stock warrant liability relates to the private warrants to purchase shares ofLucid Group common stock that were effectively issued upon the Closing in connection with the reverse recapitalization treatment of the Merger. Our common stock warrant liability is subject to remeasurement to fair value at each balance sheet date. Changes in the fair value of our common stock warrant liability were recognized in the consolidated statements of operations and comprehensive loss. The private warrants remained unexercised as ofDecember 31, 2021 . The liability was remeasured to fair value, resulting in a loss of$582.8 million for the year endedDecember 31, 2021 , and was classified within change in fair value of common stock warrant liability in the consolidated statements of operations. See Note 9 - Common Stock Warrant Liability in our consolidated financial statements included elsewhere in this Annual Report for more information.
Transaction Costs Expensed
In connection with the Merger, we incurred$2.7 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 transaction costs of$36.2 million 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 transaction costs of$2.7 million allocable to liability-classified instruments 69 --------------------------------------------------------------------------------
measured at fair value, including the private warrants, were charged to the
consolidated statement of operations upon the Closing for the year ended
Interest Expense
Interest expense consists primarily of the interest incurred related to the 2026
Notes issued in
Interest expense incurred related to the 2026 Notes is not material for the year endedDecember 31, 2021 . Interest expense did not significantly fluctuate during the year endedDecember 31, 2021 as compared to the prior year.
Other Expense, net
Other 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 year ended
Provision for (Benefit from) Income Taxes
Year Ended December 31, 2021 vs. 2020
2021 2020 $ Change % Change
Provision for (benefit from) income taxes 49 (188) 237 *nm
*nm - not meaningful
Our provision for (benefit from) income taxes consists of an estimate for U.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 our U.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 year ended
Liquidity and Capital Resources
Sources of Liquidity
As of
We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over at least the next 12 months, including investment in funding (i) ongoing operations, (ii) research and development projects for new products/ technologies, (iii) ongoing production and manufacturing ramps at existing manufacturing facilities inCasa Grande, Arizona , (iv) Phase 2 of construction at Advanced Manufacturing Plant 1 ("AMP-1") inCasa Grande, Arizona , (v) the start of construction of a manufacturing facility in theKingdom of Saudi Arabia , (vi) retail Studios and service centers, and (vii) other initiatives related to the sale of vehicles and/ or technology. We anticipate our cumulative spending on capital expenditures to be in the range of$2.0 billion over the next twelve months to support our continued commercialization and growth objectives as we strategically invest in manufacturing capacity and capabilities, our retail Studios and service center footprint throughoutNorth America and across the globe, development of different products and technologies, and other areas supporting the growth of Lucid's business. We expect our operating expenses to increase in the 2022 calendar year to grow and support the operations of a global automotive company targeting volumes in line with Lucid's aspirations. As ofDecember 31, 2021 , our total minimum lease payments are$311.8 million , of which$36.7 million is due in the succeeding 12 months. We also have an agreement to spend$804.3 million to purchase battery cells over the next four years. For details regarding these obligations, refer to Note 14 - Leases and Note 15 - Commitments and Contingencies. We may incur additional payments due as a result of the cash associated with the net settlement of the CEO RSU Award further described below. 70 -------------------------------------------------------------------------------- InDecember 2021 , Lucid entered into a purchase agreement pursuant to which we issued$2,012.5 million of the 2026 Notes. The 2026 Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears onJune 15 andDecember 15 of each year, beginning onJune 15, 2022 . The Notes will mature onDecember 15, 2026 , unless earlier repurchased, redeemed or converted. Before the close of business on the business day immediately beforeSeptember 15, 2026 , noteholders will have the right to convert their Notes only upon the occurrence of certain events. From and afterSeptember 15, 2026 , noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election. The initial conversion rate is 18.2548 shares of common stock per$1,000 principal amount of Notes, which represents an initial conversion price of approximately$54.78 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a "Make-Whole Fundamental Change" (as defined in the indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. We have generated significant losses from our operations as reflected in our accumulated deficit of$6.1 billion and$1.4 billion as ofDecember 31, 2021 and 2020, respectively. Additionally, we have generated significant negative cash flows from operations and investing activities as we continue to support the growth of our business. 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 I, Item 1A.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Year Ended December 31,
2021 2020 2019
Cash used in operating activities (1,058,133) (570,196) (235,299)
Cash used in investing activities (420,693) (459,582) (104,290)
Cash provided by financing activities 7,136,428 1,290,545 621,432
Net increase in cash, cash equivalents, and restricted cash
5,657,602 260,767 281,843
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$1,058.1 million for the year endedDecember 31, 2021 primarily consisted of$2,579.8 million of net loss, adjusted for$1,704.2 million of non-cash charges and an increase in net operating assets of$182.5 million . The non-cash charges primarily included losses for changes in fair value of contingent forward contracts and warrant liabilities of$1,044.3 million , stock-based compensation expense of$516.8 million , non-cash operating lease cost of$12.6 million , depreciation and amortization of property and equipment of$62.9 million , amortization of insurance premium of$18.5 million , and write-down of inventory of$48.9 million . The decrease in net operating assets is primarily due to a decrease in operating assets of$253.7 million offset by an increase in operating liabilities of$71.2 million . Net cash used in operating activities of$570.2 million for the year endedDecember 31, 2020 primarily consisted of$719.4 million of net losses, adjusted for$134.6 million of non-cash charges and a decrease in net operating assets and liabilities of$14.6 million . The non-cash charges primarily included the changes in stock-based compensation of$4.6 million , depreciation and amortization of$10.4 million , and the fair value of contingent forward contracts and warrant liabilities of$119.6 million . The decrease in net operating assets and liabilities primarily relate to decreases in operating assets of$17.8 million and decreases in operating liabilities of$3.2 million .
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$420.7 million for the year endedDecember 31, 2021 was primarily attributable to capital expenditures. Net cash used in investing activities of$459.6 million for the year endedDecember 31, 2020 was entirely attributable to capital expenditures. 71 --------------------------------------------------------------------------------
Cash Provided by Financing Activities
Since inception, we have financed our operations primarily from the issuances of equity securities, including convertible preferred stock, the proceeds of the Merger, and the 2026 Notes. Net cash provided by financing activities of$7,136.4 million during the year endedDecember 31, 2021 was primarily attributable to gross proceeds of approximately$4,439.2 million 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,$2,002.4 million in net proceeds from the issuance of the 2026 Notes,$3.0 million of proceeds from the issuance of LegacyLucid Series D preferred stock,$8.1 million of proceeds from the exercises of stock options, and$41.9 million in proceeds from short-term insurance financing notes, partially offset by$15.9 million for the payment of transaction costs for the issuance of the 2026 Notes,$27.9 million for the payment of short-term insurance financing note,$3.1 million for the payment of finance lease liabilities,$3.0 million cash paid for the repurchase of LegacyLucid Series B preferred stock,$38.9 million paid for transaction costs related to the Merger,$20.7 million for the repurchase of treasury stock, and$22.1 million for employee tax withholding related to stock repurchases. Net cash provided by financing activities of$1,290.5 million during the year endedDecember 31, 2020 was primarily attributable to$899.7 million of proceeds from the issuance of Lucid Series E Preferred Shares,$400.0 million of proceeds from the issuance of Lucid Series D Preferred Shares and$3.3 million of proceeds from the exercises of stock options, partially offset by the$12.1 million repurchase ofLucid Series C Preferred Shares.
Critical Accounting Policies and Estimates
The consolidated financial statements and the related notes thereto included elsewhere in this Annual 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. For additional information about our accounting policies, see Note 2 - Summary of Significant Accounting Policies in the consolidated financial statements included elsewhere in this Annual Report. Inventory Valuation Inventories are stated at the lower of cost or net realizable value. Cost is computed using standard cost for vehicles, which approximates actual cost on a first-in, first-out basis. We record inventory write-downs for excess or obsolete inventories based upon assumptions about current and future demand forecasts. If our inventory on-hand is in excess of future demand forecast, the excess amounts are written-off. Inventory is also reviewed to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the selling price of our vehicles less the estimated cost to convert the inventory on-hand into a finished product. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
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
72
--------------------------------------------------------------------------------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 the
Expected Option Term - The expected option term represented the period that the Lucid Group 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.
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. Stock-based compensation for RSUs that vest based only on continuous service is recognized on a straight-line basis over the requisite service period.
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 wasDecember 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 ofLucid Group 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 ifLucid Group achieves theLucid Group market capitalization targets, which if achieved, would allowLucid Group'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. 73 -------------------------------------------------------------------------------- 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 theLucid Group market capitalization targets are achieved. If theLucid Group 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. InJanuary 2022 , the market capitalization condition was met for four of the five tranches of CEO Performance RSUs, representing 13,934,271 performance RSUs. The vesting of these four tranches is subject to continuous service, and review and certification by the Board of Directors, which we expect to occur inMarch 2022 . As ofDecember 31, 2021 , the unamortized expense related to these four tranches amounted to$85.4 million which would be recognized as a stock-based compensation expense upon vesting. Tax Withholding - During the first year following the Closing of the Merger, we expect that we 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. However, in each instance of vesting, we will assess the facts and circumstances at that time to determine the appropriate method of tax settlement, which could include the satisfaction of tax withholding obligations via open market "sell to cover" sales by our CEO to the extent required to cover such obligations. 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 us 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 ofLucid Group 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 reporting period, with any fair value adjustments recognized as a component within other income (expense), net in our 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 our common stock in an active market. The volatility is based on the actual market activity of our peer group as well as our historical volatility. The expected life is based on the remaining contractual term of the warrants, and the risk-free interest rate is based on the implied yield available onU.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 9 - Common Stock Warrant Liability and Note 12 - Earnback Shares and Warrants to the consolidated financial statements included elsewhere in this Annual 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 could require us to issue additional stock 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 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 stock fair value and the$7.90 per share purchase price. We settled the contingent forward contract inApril 2021 .
See Note 7 - Contingent Forward Contracts to the consolidated financial statements included elsewhere in this Annual 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 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 74 -------------------------------------------------------------------------------- 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 consolidated statements of operations and comprehensive loss. We used a Black-Scholes model to calculate the fair value of the 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 10 - Convertible Preferred Stock to the consolidated financial statements included elsewhere in this Annual 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 forLucid Group'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.
Recently Adopted Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report for more information.
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.
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