UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM 10-Q
______________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _________ to _________
Commission file number: 001-39160
______________________
FISKER INC.
(Exact name of registrant as specified in its charter)
______________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices)
(833 ) 434-7537
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
______________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 17, 2023, the registrant had 218,201,457 shares of Class A Common Stock and 132,354,128 shares of Class B Common Stock, par value $0.00001 per share, outstanding.
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are forward-looking and as such are not historical facts. These forward-looking statements include, without limitation, statements regarding future financial performance, business strategies, expansion plans, future results of operations, estimated revenues, losses, projected costs, prospects, plans and objectives of management. These forward-looking statements are based on our management’s current expectations, estimates, projections and beliefs, as well as a number of assumptions concerning future events, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “seek,” “should,” “would” and variations thereof and similar words and expressions are intended to identify such forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements in this report may include, for example, statements about:
•our ability to grow and manage growth profitably;
•our ability to continue to enter into binding contracts with OEMs or tier-one suppliers in order to execute on our business plan;
•our ability to execute our business model, including market acceptance of our planned products and services;
•our expansion plans and opportunities;
•our expectations regarding future expenditures;
•our ability to raise capital in the future;
•our ability to attract and retain qualified employees and key personnel;
•the possibility that we may be adversely affected by other economic, business or competitive factors;
•changes in applicable laws or regulations;
•the outcome of any known and unknown litigation and regulatory proceedings;
•our ability to maintain the listing of our Class A common stock, par value $0.00001 per share (“Class A Common Stock”) on the New York Stock Exchange (“NYSE”);
•the possibility that the Russian-Ukraine war, the Israeli-Hamas conflict, rising interest rates, inflation and governmental responses to an inflationary environment, or public heath issues, including epidemics or pandemics, may adversely affect the results of our operations, financial position and cash flows; and
•other factors described in this report, including those described in the section entitled “Risk Factors” under Part I, Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2023, as supplemented by reports subsequently filed with the SEC, including the risk factors set forth in the section entitled “Risk Factors” under Part I, Item 1A of this report.
The forward-looking statements contained in this report are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section entitled “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the effect of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
The forward-looking statements made by us in this report speak only as of the date of this report. Except to the extent required under the federal securities laws and rules and regulations of the SEC, we disclaim any obligation to update
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any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website (www.fiskerinc.com) and various social media channels as a means of disclosing information about the company and its products to its customers, investors and the public (e.g., @fiskerinc, @fiskerofficial, #fiskerinc, #henrikfisker and #fisker on Twitter, Facebook, Instagram, YouTube, TikTok and LinkedIn). The information posted on social media channels is not incorporated by reference in this report or in any other report or document we file with the SEC. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about the Company when you enroll your e-mail address by visiting the “Investor Email Alerts” section of our website at www.investors.fiskerinc.com. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about the Company when you enroll your e-mail address by visiting the “Investor Email Alerts” section of our website at www.investors.fiskerinc.com.
ADDITIONAL INFORMATION
Unless the context indicates otherwise, references in this report to the “Company,” “Fisker,” “we,” “us,” “our” and similar terms refer to Fisker Inc. (f/k/a Spartan Energy Acquisition Corp.) and its consolidated subsidiaries (including Fisker Group Inc. or Legacy Fisker). References to “Spartan” refer to Spartan Energy Acquisition Corp., our predecessor company prior to the consummation of the Business Combination (as defined below).
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Fisker Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Equity investment | |||||||||||
| Total current assets | |||||||||||
| Non-current assets: | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets | |||||||||||
| Right-of-use assets, net | |||||||||||
| Other non-current assets | |||||||||||
| Total non-current assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Non-current liabilities: | |||||||||||
| Customer deposits | |||||||||||
| Lease liabilities | |||||||||||
2025 Convertible senior notes and derivative liability, carried at fair value | |||||||||||
| 2026 Convertible senior notes | |||||||||||
| Total non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
COMMITMENTS AND CONTINGENCIES (Note 17) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Class A Common stock, $ | |||||||||||
Class B Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Receivable for stock issuance | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Fisker Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Months ended September 30, 2023 and 2022
(In thousands, except share and per share data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Gross margin | ( | ( | |||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ||||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Foreign currency gain (loss) | ( | ( | |||||||||||||||||||||
Unrealized gain loss recognized on equity securities | ( | ( | ( | ( | |||||||||||||||||||
Fair value adjustment on 2025 convertible senior notes and derivative liability | |||||||||||||||||||||||
| Total other income (expense) | ( | ( | |||||||||||||||||||||
| Loss before income taxes | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| Provision for income taxes | ( | ( | |||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per common share | |||||||||||||||||||||||
| Net loss per share attributable to Class A and Class B Common stock- Basic and Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Weighted average Class A and Class B Common shares outstanding- Basic and Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Fisker Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
(Unaudited)
| Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock unit awards, net of statutory tax withholdings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Share issued under “At-the-market” offering, net of stock issuance costs | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Conversion of 2025 Convertible Senior Notes | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Receivable for stock issuance | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2023 | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock unit awards, net of statutory tax withholdings | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Recognition of Magna warrants | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Shares issued under “At-the-market” offering, net of stock issuance costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Conversion of 2025 Convertible Senior Notes | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||
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| Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2022 | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock unit awards, net of statutory tax withholdings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Recognition of Magna warrants | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued under "At-the-market" offering, net of stock issuance costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Accumulated Deficit | Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2022 | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options and issuance of restricted stock unit awards, net of statutory tax withholdings | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Recognition of Magna warrants | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Shares issued under "At-the-market" offering, net of stock issuance costs | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Fisker Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, except share data)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Reconciliation of net loss to net cash used in operating activities: | |||||||||||
| Stock-based compensation expense | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of right-of-use asset | |||||||||||
| Accretion of debt issuance costs | |||||||||||
| Change in fair value of 2025 convertible senior notes and derivative liability | ( | ||||||||||
| Unrealized loss recognized on equity securities | |||||||||||
| Unrealized foreign currency (gain)/loss | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Inventory | ( | ||||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Customer deposits | |||||||||||
| Change in operating lease liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Acquisition of equity investment | ( | ||||||||||
| Funding of notes receivable | ( | ||||||||||
| Purchases of property and equipment and intangible asset | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Proceeds from the issuance of convertible notes | |||||||||||
| Proceeds from the exercise of stock options | |||||||||||
| Payments for statutory withholding taxes | ( | ( | |||||||||
| Proceeds from stock issuance under "At-the-market" offering | |||||||||||
| Payments for "At-the-market" issuance costs | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of the period | |||||||||||
| Cash, cash equivalents and restricted cash, end of the period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Fisker Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(In thousands, except share data)
(Unaudited)
1. Overview of the Company
Fisker was originally incorporated in the State of Delaware on October 13, 2017 as a special purpose acquisition company under the name Spartan Energy Acquisition Corp. for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses. Spartan completed its initial public offering in August 2018. On October 29, 2020, Spartan’s wholly-owned subsidiary merged with and into Fisker Holdings Inc. (f/k/a Fisker Inc.), a Delaware corporation (“Legacy Fisker”), with Fisker Holdings Inc. surviving the merger as a wholly-owned subsidiary of Spartan (the “Business Combination”). In connection with the Business Combination, Spartan changed its name to Fisker Inc.
Legacy Fisker was incorporated in the State of Delaware on September 21, 2016. In connection with its formation, the Company entered into stock purchase agreements with the Company’s founders, whereby the founders contributed certain intellectual property (primarily trademarks) and interests in Platinum IPR LLC. Platinum IPR LLC was an entity solely owned by the Company’s founders, which held Fisker trademarks registered in a variety of jurisdictions around the world. The founders’ transfer of its interest in Platinum IPR LLC and the transfer of trademarks was accounted for as a transfer of assets between entities under common control. The carrying amount of the transferred assets is recorded based on the prior carrying value, which was de minimis.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The condensed consolidated balance sheet as of September 30, 2023, the condensed consolidated statements of operations and the condensed consolidated statements of changes in stockholders’ equity for the nine-months ended September 30, 2023 and 2022, and the condensed consolidated statements of cash flows for the nine-months ended September 30, 2023 and 2022, as well as other information disclosed in the accompanying notes, are unaudited. The consolidated balance sheet as of December 31, 2022 was derived from the audited consolidated financial statements as of that date. The interim condensed consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023.
Comprehensive loss is not separately presented as the amounts are equal to net loss for the three and nine-months ended September 30, 2023 and 2022.
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Going Concern, Liquidity and Capital Resources
The Company evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern over the next twelve months from the date of filing this report. As of September 30, 2023, the Company had approximately $527.4 million in unrestricted cash and cash equivalents. The Company believes that substantial doubt about its ability to continue as a going concern does not exist as its cash on hand will be sufficient to meet its working capital and capital expenditure requirements for a period of at least twelve months from the date of the filing of this Form 10-Q.
Prior to the third quarter of 2023, the Company did not generate any significant revenue from its core business operations and has incurred significant accumulated losses of approximately $1.5 billion. The Company expects to continue to incur operating losses for the foreseeable future. The Company expects its capital expenditures and working capital requirements to increase during the remaining months of 2023 and beyond, as it continues serial production of the Fisker Ocean, develops its customer support and marketing infrastructure and expands its research and development efforts. The Company has raised additional cash resources from the issuance of senior convertible notes on July 11, 2023 and September 29, 2023 with net proceeds of $445.1
Supplier Risk
During the third quarter of 2023, suppliers ramped production of components for serial production of vehicles, which are assembled in Austria. As of September 30, 2023, these supplier contracts do not represent unconditional purchase obligations with take-or-pay or specified minimum quantities provisions. The Company has secured battery capacity with a supplier located in China for the Fisker Ocean SUV. Under the terms of the agreement, from 2023 through 2025, the battery supplier will deliver two different battery solutions for the Fisker Ocean SUV, with an initial battery capacity of over 5 gigawatt-hours annually.
We are dependent on our suppliers, including single source suppliers, for the production of the Fisker Ocean SUV. The inability of these suppliers to deliver necessary components of our products in a timely manner at prices, quality levels and volumes acceptable to us, or our inability to efficiently manage these components from these suppliers, could have a material adverse effect on our business, prospects, financial condition and operating results.
Revenue from Contracts with Customers
The Company follows a five-step process in which (i) a contract is identified, (ii) the related performance obligations are identified, (iii) the transaction price is determined, (iv) the transaction price is allocated to the identified
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performance obligations, and (v) revenue is recognized when (or as) performance obligations are satisfied. The Company’s revenue is primarily generated from the sale of electric vehicles and accessories to customers, as well as specific services that meet the definition of a performance obligation under ASC 606, including over-the-air ( “OTA”) software updates as they become available. Revenue recognized from the sale of the Fisker Ocean during the three and nine-months ended September 30, 2023 was $71.6 million and $72.3 million, respectively.
The Company recognizes revenue related to the vehicles at a point in time when the customer obtains control of the vehicle either upon completion of delivery or upon pick up of the vehicle by the customer. As the Company has a stand-ready obligation to deliver unspecified OTA software updates when-and-if they become available, the Company recognizes revenue from the OTA software updates ratably over the basic vehicle warranty term, commencing when control of the vehicles is transferred to the customer. We also defer revenue from specific services that meet the definition of a performance obligation including premium connectivity and roadside assistance. We also recognize a sales return reserve estimate.
Any fees that are paid or payable by the Company to a customer’s lender when financing is arranged are recognized as an offset to vehicles sales. Shipping and handling is considered a fulfillment activity. Sales taxes collected from customers are excluded from the transaction price of electric vehicle contracts.
Payment for EV sales is typically received at or prior to delivery, or according to agreed upon payment terms. The standalone selling prices of all performance obligations are estimated by considering costs to develop and deliver the good or service, third-party pricing of similar goods or services and other information that may be available. The transaction price is allocated among the performance obligations in proportion to the standalone selling price of each performance obligation.
Deferred revenue is the total transaction price allocated to unsatisfied, or partially unsatisfied performance obligations as of the balance sheet date. This is primarily relates to undelivered OTA software updates. Deferred revenue was immaterial as of September 30, 2023.
Other revenue consists of sales of merchandise and home charging solutions.
Cost of Revenues
Fair Value Measurements
The Company follows the accounting guidance in ASC 820 Fair Value Measurement (“ASC 820”), for its fair value measurements of financial assets and liabilities measured at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3: Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Fair Value Option
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value and consists of raw materials, work in progress and finished goods. Inventory value is determined using standard cost, which approximates actual cost on a first-in, first-out basis. The Company records inventory write-downs for excess or obsolete inventories based upon assumptions about current and future demand forecasts. If inventory on-hand is in excess of future demand forecast, the excess amounts are written-off.
Long-Lived Assets
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets as follows:
| Useful Life (in years) | |||||
| Tooling | |||||
| Machinery and equipment | |||||
| Furniture and fixtures | |||||
| IT hardware and software | |||||
| Leasehold improvements | Shorter of their estimated life or remaining lease term | ||||
Construction in progress is comprised primarily of costs incurred to construct serial production tooling located at affiliates of Magna and our suppliers.
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Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the term of the related lease. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repair expenditures are expensed as incurred, while major improvements that increase functionality of the asset are capitalized and depreciated ratably to expense over the identified useful life.
Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset group to its carrying amount. The Company assesses impairment for asset groups, which represent a combination of assets that produce distinguishable cash flows. If the carrying amount of the asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. The Company has not recorded any impairment charges during the periods presented.
Income Taxes
Income taxes are recorded in accordance with ASC 740, Income Taxes (“ASC 740”), which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
There are transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. As of September 30, 2023, there were no material changes to either the nature or the amounts of the uncertain tax positions previously determined for the year ended December 31, 2022.
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The functional currency of the Company’s foreign subsidiaries is the U.S. Dollar. For these subsidiaries, monetary assets and liabilities denominated in non-U.S. currencies are re-measured to U.S. Dollars using current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities denominated in non-U.S. currencies are maintained at historical U.S. Dollar exchange rates. Expenses are re-measured at average U.S. Dollar monthly rates.
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency. Transaction gains and losses are immaterial for all periods presented.
3. Fair Value Measurements
The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used for such measurements were as follows (in thousands):
Fair Value Measured as of September 30, 2023: | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets included in: | |||||||||||||||||||||||
| Money market funds included in cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Equity investment | |||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities included in: | |||||||||||||||||||||||
| 2025 convertible senior notes and derivative liability | $ | $ | $ | $ | |||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||
Fair Value Measured as of December 31, 2022: | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets included in: | |||||||||||||||||||||||
| Money market funds included in cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Equity investment | |||||||||||||||||||||||
| Total fair value | $ | $ | $ | $ | |||||||||||||||||||
The fair value of the Company’s money market funds is determined using quoted market prices in active markets for identical assets. The carrying amounts included in the Condensed Consolidated Balance Sheets under Current assets approximate fair value because of the short maturity of these instruments.
15
On July 28, 2021, the Company made a commitment for a private investment in public equity (PIPE) supporting the planned merger of European EV charging network, Allego B.V. (“Allego”) with Spartan Acquisition Corp. III (NYSE: SPAQ), a publicly-listed special purpose acquisition company. Fisker Inc. was the exclusive electric vehicle automaker in the PIPE and, in parallel, Allego agreed to terms to deliver a range of charging options for Fisker customers in Europe. On March 16, 2022, the merger closed and the Company delivered cash of $10.0 million in exchange for 1,000,000 shares of Allego's Class A common stock (NYSE: ALLG). The Company’s ownership percentage is less than 5 % and does not result in significant influence. The Company has classified its equity investment in Allego as a current asset. For equity securities still held as of September 30, 2023, unrealized losses recognized during the three-months ended September 30, 2023 totaled $0.5 million and unrealized losses recognized during the nine-months ended September 30, 2023 totaled $0.9 million, as shown separately in the Condensed Consolidated Statement of Operations.
In August 2021, the Company issued convertible senior notes due in 2026. We carry the convertible senior notes at face value less the unamortized debt issuance costs on our consolidated balance sheets and present the fair value for disclosure purposes only. As of September 30, 2023, the fair value of the 2026 Notes was $214.8 million compared to its fair value of $309.8 million as of December 31, 2022. The estimated fair value of the convertible notes, which are classified as Level 2 financial instruments, was determined based on the estimated or actual bid prices of the convertible notes in an over-the-counter market on the last business day of the period.
The fair value of the 2025 convertible senior notes is estimated based on a discounted cash flow model and a Monte Carlo simulation, which represent Level 3 measurements.
4. Inventory
Inventory consists of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in progress | |||||||||||
Finished goods | |||||||||||
| Total | $ | $ | |||||||||
Inventory was comprised of raw materials, work in progress related to the production of vehicles for sale and finished goods inventory including new vehicles available for sale. Expenditure related to services performed subsequent to the start of production of salable vehicles are expensed as incurred in cost of revenues in the Condensed Consolidated Statements of Operations.
The Company writes-down inventory for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value. The Company recorded an obsolescence reserve on inventories of $0.9 18.2 million inventory valuation adjustment in cost of revenues in the three months ended September 30, 2023, due to the ramp up in production which impacted the allocation of fixed production overhead costs.
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5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following as of September 30, 2023 and December 31, 2022 (in thousands):
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| Advanced payments to suppliers | $ | $ | |||||||||
| Value-added tax receivables | |||||||||||
| Prepaid insurance | |||||||||||
| Prepaid and other current assets | |||||||||||
| $ | $ | ||||||||||
6. Intangible Assets
The Company has the following intangible assets (in thousands):
As of September 30, 2023 | |||||||||||||||||||||||
| Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Capitalized cost - manufacturing | $ | $ | ( | $ | |||||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||||||||
As of December 31, 2022 | |||||||||||||||||||||||
| Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Capitalized cost - manufacturing | $ | $ | ( | $ | |||||||||||||||||||
| $ | $ | ( | $ | ||||||||||||||||||||
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7. Property and Equipment, Net
Property and equipment, net, consists of the following (in thousands):
As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| Tooling | $ | $ | |||||||||
| Machinery and equipment | |||||||||||
| Furniture and fixtures | |||||||||||
| IT hardware and software | |||||||||||
| Leasehold improvements | |||||||||||
| Construction in progress | |||||||||||
| Total property and equipment | |||||||||||
| Less: Accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Construction in progress is comprised primarily of costs incurred to construct serial production tooling located at affiliates of Magna and our suppliers. Assets of $450.2 million that are ready for their intended use have changed categories from Construction in progress to Tooling during the nine-months ended September 30, 2023. Assets of $101.3 million have also changed categories from Construction in progress to Machinery and equipment during the nine-months ended September 30, 2023.
8. Leases
The Company has entered into various operating lease agreements and a finance lease agreement for certain office space, manufacturing and warehouse facilities, retail and customer services locations, equipment, and vehicles. We determine whether a contractual arrangement is or contains a lease, including embedded leases, at inception and record the lease when the underlying assets is made available for us by the lessor, or the date of commencement. At lease commencement, the Company measures the lease liability at the present value of lease payments not yet paid. For purposes of calculating lease liabilities, lease terms include options to extend or renew the lease when it is reasonably certain that we will exercise such options. Certain operating leases provide for annual increases to lease payments based on an index or rate. Lease expense for finance lease payments is recognized as amortization expense of the finance lease right-of-use asset over the lease term.
Operating leases
During the nine-months ended September 30, 2023 and year ended December 31, 2022, the Company recorded non-cash lease right-of-use assets of $49.1 million and $33.4 million and non-cash lease liabilities of $37.9 million and $35.0 million, respectively, on its consolidated balance sheet.
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| As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| Assets: | |||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Liabilities: | |||||||||||
| Operating lease — current | $ | $ | |||||||||
| Operating lease — long-term | $ | $ | |||||||||
The components of lease related expense are as follows (in thousands):
| Three-months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Lease costs | |||||||||||
| Operating lease expense | $ | $ | |||||||||
| Short-term lease expense | |||||||||||
| Total lease costs | $ | $ | |||||||||
| Nine-months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Lease costs | |||||||||||
| Operating lease expense | $ | $ | |||||||||
| Short-term lease expense | $ | ||||||||||
| Total lease costs | $ | $ | |||||||||
Operating and short-term lease related expenses are included in selling, general and administrative expense on the Condensed Consolidated Statement of Operations.
Other information related to operating leases is as follows:
| As of September 30, 2023 | As of December 31, 2022 | ||||||||||
| Weighted average remaining lease term (in years) | |||||||||||
| Weighted average discount rate | % | % | |||||||||
The components of supplemental cash flow information related to leases are as follows (in thousands):
| Nine months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flow information: | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows used by operating leases | $ | $ | |||||||||
| Non-cash activity: | |||||||||||
| ROU asset obtained in exchange for operating lease obligations | $ | $ | |||||||||
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As of September 30, 2023, future minimum payments of our operating lease liabilities during the next five years and thereafter are as follows (in thousands):
| Operating Leases | |||||
| Year ending December 31, 2023 | $ | ||||
| Year ending December 31, 2024 | $ | ||||
| Year ending December 31, 2025 | $ | ||||
| Year ending December 31, 2026 | $ | ||||
| Year ending December 31, 2027 | $ | ||||
| Thereafter | $ | ||||
| Total | $ | ||||
| Less: present value discount | ( | ||||
| Total lease costs | $ | ||||
The Company’s lease agreements do not provide an implicit rate, so the Company used an estimated incremental borrowing rate, which was derived from third-party information available at lease inception, in determining the present value of lease payments. The rate used is for a secured borrowing of a similar term as the lease.
Finance leases
During 2023 the Company recorded embedded finance lease right-of-use assets of $24.1 million on its consolidated balance sheet, related to certain equipment and tooling that is controlled and used by the Company for vehicle manufacturing. The Company paid for a majority of the costs during 2022 with a remaining liability of $10.0 million as of September 30, 2023 to be paid in 2023. Amortization of right-of-use assets totaled $0.8 million for the nine-months ended September 30, 2023 and future amortization of embedded finance lease right-of-use assets will be recognized over a lease term of approximately 8 years. The Company did not have any finance leases during 2022. As of September 30, 2023, the embedded finance lease right-of-use assets, totaling $25.6 million and lease liabilities from finance leases are included in other non-current assets and accrued expenses on the balance sheet.
9. Accrued Expenses
A summary of the components of accrued expenses is as follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accrued vendor liabilities | $ | $ | |||||||||
| Advance payments from customers | |||||||||||
| Order deposits | |||||||||||
| Accrued interest | |||||||||||
| Accrued professional fees | |||||||||||
| Accrued payroll | |||||||||||
| Accrued other | |||||||||||
| Total accrued expenses | $ | $ | |||||||||
Accrued vendor liabilities include amounts owed to vendors but not yet invoiced in exchange for vendor purchases, inventory purchases, and research and development services. Certain estimates of accrued vendor expenses are based on costs incurred to date.
Order Deposits
In the third quarter of 2022, the Company began accepting order deposits of $5,000 USD or equivalent currency (Order Deposits) for Fisker Ocean Ones, a limited-edition trim level of the Fisker Ocean. The Company also converted customer deposits for reservation holders who previously made a deposit for an Extreme, Ultra or Sport Ocean prior to
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August 16, 2022, the enactment date of the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”). Order deposits will be applied to the sales price of the vehicle and recognized as revenue when the vehicle is sold and delivered to the customer. Order Deposits are not included in customer deposits.
On July 1, 2022, the Company entered into a contract for global payment processing agreement with JPMorgan Chase Bank, N.A. (“Chase”). Order Deposits paid directly to the Company via ACH or other direct payment mechanisms are received in the Company’s bank account and available for its use in the subsequent month after the month in which the Order Deposits were placed. For Order Deposits made through credit card transactions, Chase holds cash received from customers until the vehicle is delivered to the customer at which time the cash is deposited into the Company’s bank account and available for its use. Cash received from Order Deposits and the conversion of any customer deposit into an Order Deposit results in the recognition of a contract liability. As of September 30, 2023 and December 31, 2022 contract liabilities for Order Deposits totaled $3.5 million and $4.9 million, respectively.
Advance Payments from Customers
Customer payments received in advance of vehicle delivery, a recognized contract liability, totaled $27.4 million as of September 30, 2023. There were no customer payments received in advance of vehicle delivery as of December 31, 2022.
10. Customer Deposits
Customer deposits consists of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Customer reservation | $ | $ | |||||||||
| Customer SUV option | |||||||||||
| Total customer deposits | $ | $ | |||||||||
11. Unconsolidated Variable Interest Entity
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12. Convertible Senior Notes
2026 Notes
In August 2021, we issued an aggregate of $667.5 million principal amount of 2.50 % convertible senior notes due in September 2026 (the “2026 Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2026 Notes have been designated as green bonds, whose proceeds will be allocated in accordance with the Company’s green bond framework. The 2026 Notes consisted of a $625.0 million initial placement and an over-allotment option that provided the initial purchasers of the 2026 Notes with the option to purchase an additional $100.0 million aggregate principal amount of the 2026 Notes, of which $42.5 million was exercised. The 2026 Notes were issued pursuant to an indenture dated August 17, 2021. The net proceeds from the issuance of the 2026 Notes were $562.2 million net of debt issuance costs and cash used to purchase the capped call transactions (“2026 Capped Call Transactions”) discussed below. The debt issuance costs are amortized to interest expense.
The 2026 Notes are unsecured obligations which bear regular interest at 2.50 % annually and are payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2022. The 2026 Notes will mature on September 15, 2026, unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2026 Notes are convertible into cash, shares of our Class A common stock, or a combination of cash and shares of our Class A common stock, at our election, at an initial conversion rate of 50.7743 shares of Class A common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $19.70 per share of our Class A common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2026 Notes. We may redeem for cash all or any portion of the 2026 Notes, at our option, on or after September 20, 2024 if the last reported sale price of our Class A common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days at a redemption price equal to 100 % of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Holders of the 2026 Notes may convert all or a portion of their 2026 Notes at their option prior to June 15, 2026, in multiples of $1,000 principal amounts, only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2021 (and only during such calendar quarter), if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day;
•during the -business day period after any consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our Class A common stock and the applicable conversion rate of the 2026 Notes on such trading day;
•if we call such 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the notes called (or deemed called) for redemption; or
•on the occurrence of specified corporate events.
On or after June 15, 2026, the 2026 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Holders of the 2026 Notes who convert the 2026 Notes in connection with a make-whole fundamental change, as defined in the indenture governing the 2026 Notes, or in connection with a redemption may be entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change, holders of the 2026 Notes may require us to repurchase all or a portion of the 2026 Notes at a price equal to 100 % of the principal amount of 2026 Notes, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
We accounted for the issuance of the 2026 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
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| September 30, 2023 | December 31, 2022 | ||||||||||
Convertible Senior 2026 Notes | |||||||||||
Principal amount | |||||||||||
Unamortized debt issuance costs and debt discount | ( | ( | |||||||||
Net carrying amount | |||||||||||
Interest expense related to the amortization of debt issuance costs for the three and nine-months ended September 30, 2023 was $0.5 million and $1.3 million, respectively. Contractual interest expense for the three and nine-months ended September 30, 2023 was $4.2 million and $12.5 million, respectively.
As of September 30, 2023, the if-converted value of the 2026 Notes did not exceed the principal amount. The 2026 Notes were no t eligible for conversion as of September 30, 2023. No sinking fu nd is provided for the 2026 Notes, which means that we are not required to redeem or retire them periodically.
Capped Call Transactions
In connection with the offering of the 2026 Notes, we entered into the 2026 Capped Call Transactions with certain counterparties at a net cost of $96.8 million. The 2026 Capped Call Transactions are purchased capped call options on 33.9 million shares Class A common stock, that, if exercised, can be net share settled, net cash settled, or settled in a combination of cash or shares consistent with the settlement elections made with respect to the 2026 Notes if converted. The cap price is initially $32.57 per share of our Class A common stock and subject to certain adjustments under the terms of the 2026 Capped Call Transactions. The strike price is initially $19.70 per share of Class A common stock, subject to customary anti-dilution adjustments that mirror corresponding adjustments for the 2026 Notes.
The 2026 Capped Call Transactions are intended to reduce potential dilution to holders of our Class A common stock upon conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount, as the case may be, with such reduction or offset subject to a cap. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital in our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification.
Senior Convertible Notes Due 2025
On July 10, 2023, the Company entered into the Securities Purchase Agreement (the “Original Purchase Agreement”) with an institutional investor pursuant to which the Company sold, and the Investor purchased, $340 million in aggregate principal amount of 0 % senior convertible notes due in 2025 (the “Series A-1 Notes”) in a registered direct offering. The Series A-1 Notes were sold at an original issue discount of approximately twelve percent (12 %) resulting in gross proceeds to the Company of $300 million.
Pursuant to the terms of the Original Purchase Agreement, during the six-month period beginning on the one-year anniversary of the issuance of the Series A-1 Notes and ending on the eighteen-month anniversary of the issuance of the Series A-1 Notes, the Investor could purchase up to an additional $226.7 million in aggregate principal amount of senior convertible notes due two years after the date of issuance (the “Investor AIR Notes”) in one or more registered direct offerings. If the Investor elected, during the AIR Period, to purchase the full amount of Investor AIR Notes, the Company could, at its option, require the Investor to purchase up to an additional $113.3 million in aggregate principal amount of senior convertible notes due 2 years after the date of issuance (the “Issuer AIR Notes” and, together with the Investor AIR Notes, the “Additional Notes”).
On September 29, 2023, the Company and the Investor entered into Amendment No. 1 to the Original Purchase Agreement the “Purchase Agreement Amendment”), in order to:
•Increase the aggregate principal amount of Investor AIR Notes available for purchase to $566.7 million, to be purchased at any time after (A) with respect to the initial $170.0 million of Investor AIR Notes, September 27, 2023, (B) with respect to the next $226.7 million of Investor AIR Notes, December 29, 2023 or (C) with respect to the remaining $170.0 million of Investor AIR Notes, March 29, 2024;
•Extend the Investor’s right to effect a closing of Investor AIR Notes to March 29, 2026;
•Increase the aggregate principal amount of Issuer AIR Notes to $226.7 million;
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•Increase the amount of Common Stock required to be reserved by the Company prior to obtaining the stockholder approval described below to 782,000,000 shares of Class A Common Stock; and
•Require that the Company either obtain the prior written consent of requisite stockholders or seek and obtain stockholder approval at a special meeting (in each case no later than January 31, 2024), in order to (x) approve the issuance of securities issued or issuable in an Additional Closing (as defined in the Securities Purchase Agreement) and (y) increase the authorized shares of the Company from 1,250,000,000 to 2,000,000,000 . If the Company fails to obtain such approval, it will seek approval at an additional stockholder meeting on or prior to March 31, 2024 and, if necessary, semi-annually thereafter.
On September 29, 2023, pursuant to the terms of the Purchase Agreement Amendment, the Company sold, and the Investor purchased, $170.0 million of the “Series B-1 Notes” in a registered direct offering. The Series B-1 Notes were issued at an original issue discount of approximately twelve percent (12 %) resulting in gross proceeds to the Company of $150.0 million.
The Series A-1 Notes and the Series B-1 Notes (collectively, the “2025 Notes”) were issued as senior obligations of the Company under an indenture dated July 11, 2023, by and between the Company and Wilmington Savings Fund Society, FSB, as the trustee, as supplemented by that certain Second Supplemental Indenture dated September 29, 2023. The Notes bear interest at the rate of 0 % per annum, however, the interest rate of the Notes will automatically increase to 18 % per annum (the “Default Rate”) upon the occurrence and continuance of an event of default. The Notes are subject to certain covenants, including a financial test covenant, that requires the Company to have available cash equal to or greater than $340 million at the end of each quarter. The financial test covenant was amended to require the Company to have available cash equal to or greater than $250 million at the end of each quarter. Refer to Note 18, Subsequent Event, for additional information regarding covenant compliance.
The 2025 Notes are convertible into common stock at any time, in whole or in part, at the Investor’s option at a conversion price of $5.5744 with respect to the Series A-1 Notes and $7.5986 with respect to the Series B-1 Notes. The conversion prices are subject to proportional adjustment upon the occurrence of any stock split, stock dividend, stock combination, and/or similar transactions. Additionally, the conversion prices are subject to a full-ratchet adjustment in connection with a subsequent offering at a per share price less than the fixed conversion price in effect. Furthermore, in the event of default, the 2025 Notes may be converted using an alternative conversion price equal to the lower of (i) the conversion price in effect or (ii) 80 % of the average stock price preceding conversion.
The 2025 Notes amortize in nine equal installments on each three-month anniversary beginning July 11, 2023, with respect to the Series A-1 Notes and September 29, 2023 with respect to the Series B-1 Notes. The Company may elect to settle each installment in cash based on 103 % of the principal amount (plus any accrued default interest or late charges) or in shares of Class A Common Stock, subject to the satisfaction of certain conditions including trading volume and continued NYSE listing requirements, priced at the lower of (i) the conversion price in effect of (ii) 93 % of the average stock price preceding such settlement, subject to a floor price of $1.16 which is subject to adjustment to stock splits, dividends, combinations, or other similar events. The investor may elect to defer installments to future periods as it did during the third quarter of 2023. Refer to Note 18, Subsequent Event, for additional information regarding conversions in the fourth quarter of 2023.
The Investor’s right to purchase the Investor AIR Notes provided for in the Original Purchase Agreement, and as amended in the Purchase Agreement Amendment (a net written call option) was determined to be a separate financial instrument from the 2025 Notes issued to the Investor, as the Investor could detach and sell the 2025 Notes to other investors while retaining the rights to purchase the Investor AIR Notes. As a result, the Company concluded that the written option is required to be accounted for as a derivative liability which is required to be remeasured to fair value each balance sheet date with changes in fair value recorded in earnings. As discussed in Note 2, the Company elected the fair value option to account for the 2025 Notes, including the Series A-1 Notes. Accordingly, the $300.0 million of proceeds received were allocated to the Series A-1 Notes and the call option at their estimated fair values as of the issuance date (July 11, 2023). The Series A-1 Notes and the call option will subsequently be remeasured to their fair values at the end of each reporting period.
As the Purchase Agreement Amendment amended the terms and conditions of the investor’s call option, the Purchase Agreement Amendment was evaluated as a modification to the freestanding derivative instrument. The effect of the modified terms was recognized in the mark to market adjustment as of the three months-ended September 30, 2023. Upon issuance any Additional Notes under the Purchase Agreement, the Company expects to continue to elect to apply the fair value option .
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The fair value of the 2025 senior convertible notes and derivative liability was estimated using the Monte Carlo simulation pricing model with embedded lattice, and with the following range of assumptions:
| Expected term (in years) | |||||
| Volatility | |||||
| Dividend yield | |||||
| Risk-free interest rate | |||||
| Common stock price | $ | ||||
A reconciliation of the beginning and ending balances for the Notes and the call option (derivative liability), which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows for the three and nine months ended September 30, 2023 (in thousands):
2025 Notes, at fair value | |||||
Fair value - December 31, 2022 | $ | ||||
Fair value - June 30, 2023 | |||||
Issuance of Series A-1 Notes | |||||
Issuance of Series B-1 Notes | |||||
Change in fair value - mark to market adjustment | ( | ||||
Fair value - September 30, 2023 | $ | ||||
13. Common Stock and Warrants
Magna Warrants
On October 29, 2020, the Company granted Magna up to 19,474,454 warrants, each with an exercise price of $0.01 , to acquire underlying shares of Class A common stock of Fisker, which represented approximately 6.0 % ownership in Fisker on a fully diluted basis as of the grant date. The right to exercise vested warrants expires on October 29, 2030 . The warrants are accounted for as an award issued to non-employees measured on October 29, 2020 with three interrelated performance conditions that are separately evaluated for achievement.
| Milestone | Percentage of Warrants that Vest Upon Achievement | Number of Warrants that Vest Upon Achievement | ||||||||||||
| (a) (i) Achievement of the “preliminary production specification” gateway as set forth in the Development Agreement; (ii) entering into the Platform Agreement; and (iii) entering into the Initial Manufacturing Agreement | % | |||||||||||||
| (b) (i) Achievement of the “target agreement” gateway as set forth in the Development Agreement and (ii) entering into the Detailed Manufacturing Agreement, which will contain terms and conditions agreed to in the Initial Manufacturing Agreement | % | |||||||||||||
| (c) Start of pre-serial production | % | |||||||||||||
The cost upon achievement of each milestone is recognized when it is probable that a milestone will be met. The cost for awards to nonemployees is recognized in the same period and in the same manner as if the Company had paid cash for the goods or services. At September 30, 2023, the Company capitalized costs as an intangible asset representing the
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future economic benefit to Fisker Inc. For the nine-months ended September 30, 2023, the recognized cost of $3.8 million (a non-cash transaction) associated with services rendered, resulted in an increase in capitalized cost-manufacturing to $258.3 million as of September 30, 2023. The Company will continually assess the reasonableness of the estimated useful life and will assess the intangible asset for impairment. If an indicator of impairment exists, the undiscounted cash flows will be estimated. If the carrying amount of the intangible asset is not recoverable, the Company will then determine its fair value and record an impairment loss. As of September 30, 2023, no indicators of impairment exists.
The fair value of each warrant is equal to the intrinsic value (e.g., stock price on grant date less exercise price) as the exercise price is $0.01 . The terms of the warrant agreement require net settlement when exercised. Using the measurement date stock price of $8.96 for a share of Class A common stock, the warrant fair values for each tranche is shown below. Capitalized cost also results in an increase to additional paid in capital equal to the fair value of the vested warrants. Awards vest when a milestone if met. Magna has 12,969,986 vested and exercisable warrants to acquire underlying Class A common stock of Fisker as of September 30, 2023, none of which are exercised.
| Fair value | Capitalized at September 30, 2023 | ||||||||||
| Milestone (a) | $ | $ | |||||||||
| Milestone (b) | |||||||||||
| Milestone (c) | |||||||||||
| $ | $ | ||||||||||
At-the-market Equity Program
14. Loss Per Share
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entitled to the same liquidation and dividend rights. The following table sets forth the computation of basic and diluted loss per Class A Common Stock and Class B Common Stock:
| Three-months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average Class A common shares outstanding | |||||||||||
| Weighted average Class B common shares outstanding | |||||||||||
| Weighted average Class A and Class B common shares outstanding- Basic and Diluted | |||||||||||
| Net loss per share attributable to Class A and Class B Common shareholders- Basic and Diluted | $ | ( | $ | ( | |||||||
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Denominator: | |||||||||||
| Weighted average Class A common shares outstanding | |||||||||||
| Weighted average Class B common shares outstanding | |||||||||||
| Weighted average Class A and Class B common shares outstanding- Basic and Diluted | |||||||||||
| Net loss per share attributable to Class A and Class B Common shareholders- Basic and Diluted | ( | $ | ( | ||||||||
| As of September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Convertible senior notes (a) | |||||||||||
| Stock options and warrants | |||||||||||
| Total | |||||||||||
15. Stock Based Compensation
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Stock-based compensation expense is as follows (in thousands):
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Selling, general and administrative expense | $ | $ | |||||||||
| Research and development expense | |||||||||||
| Production expense | |||||||||||
| Total | $ | $ | |||||||||
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Selling, general and administrative expense | $ | $ | |||||||||
| Research and development expense | |||||||||||
| Production expense | |||||||||||
| Total | |||||||||||
Stock options
Options under the Plan may be granted at prices as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100 % of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an ISO granted to a 10 % shareholder shall not be less than 110 % of the estimated fair value of the shares on the date of grant. The fair value of the shares is determined by the Board of Directors on the date of grants. Stock options generally have a contractual life of 10 years. Upon exercise, the Company issues new shares.
In 2016 and 2017, the Company’s founders were granted an aggregate of 15,882,711 six years
The Company did not grant any stock options during the three-months ended September 30, 2023.
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| Options | Weighted Average Exercise Price | Weighted Average Contractual Term (in Years) | |||||||||||||||
| Balance as of December 31, 2022 | |||||||||||||||||
| Granted | |||||||||||||||||
| Exercised | ( | ||||||||||||||||
| Forfeited | ( | ||||||||||||||||
| Balance as of September 30, 2023 | |||||||||||||||||
The fair value of each stock option grant under the Plan was estimated on the date of grant using the Black-Scholes option pricing model, with the following range of assumptions:
| Nine Months Ended September 30, 2023 | |||||
| Expected term (in years) | |||||
| Volatility | |||||
| Dividend yield | |||||
| Risk-free interest rate | |||||
| Common stock price | $ | ||||
The Black-Scholes option pricing model requires various highly subjective assumptions that represent management’s best estimates of the fair value of the Company’s common stock, volatility, risk-free interest rates, expected term, and dividend yield. As the Company’s shares have actively traded for a short period of time subsequent to the Business Combination, volatility is based on a benchmark of comparable companies within the automotive and energy storage industries.
The expected term represents the weighted-average period that options granted are expected to be outstanding giving consideration to vesting schedules. Since the Company does not have an extended history of actual exercises, the Company has estimated the expected term using a simplified method which calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. The Company has never declared or paid cash dividends and does not plan to pay cash dividends in the foreseeable future; therefore, the Company used an expected dividend yield of zero . The risk-free interest rate is based on U.S. Treasury rates in effect during the expected term of the grant. The expected volatility is based on historical volatility of publicly-traded peer companies.
Restricted stock awards
During the nine-months ended September 30, 2022, the Company granted employees, who rendered services during the year ended December 31, 2021 and were employees of the Company on the grant date, a restricted stock unit (“RSU”) award based in proportion to the service period beginning from the employee’s hire date to the end of the year. The restricted stock unit awards vested on the grant date which resulted in the release of 339,340 shares of Class A common stock equal to stock-based compensation expense of $4.5 million recognized in the nine-months ended September 30, 2022. The Company’s founders declined to receive an award related to performance in 2021 and 2022. In accordance with the Company’s Outside Director Compensation Policy, each outside Board of Directors member will receive an annual RSU equal to $200,000 granted on the date of the Company’s annual shareholders’ meeting which vests in 25 % increments at the end of each calendar quarter. Each Outside Director may elect to convert all or a portion of his or her annual Board of Directors retainer, excluding any annual retainer that an Outside Director may receive for serving as Lead Director and any annual retainers for committee service, into RSUs in lieu of the applicable cash retainer payment (“RSU Election”). The RSU awards granted to Outside Directors vested on the grant date which resulted in stock-based compensation expense of $0.8 0.3
The number of Class A Common Stock granted to Outside Directors annually is based on the 30 -day average closing trading price of Class A common stock on the day preceding the grant date (“RSU Value”). When an Outside Director
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exercises his or her RSU Election, the number of shares of Class A Common Stock equal the amount of cash subject to such RSU Election divided by the applicable RSU Value and are fully vested.
The following table summarizes RSU activity under the Plan:
| RSU Awards | Weighted Average Grant Date Fair Value | |||||||||||||
| Unvested as of December 31, 2022 | $ | |||||||||||||
| Awarded | ||||||||||||||
| Vested | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
| Unvested as of September 30, 2023 | $ | |||||||||||||
Performance-based restricted stock awards
In the third quarter of 2021, the Company’s compensation committee ratified and approved performance-based restricted stock units (“PRSUs”) to all employees (“Grantee”) the value of which is determined based on the Grantee’s level within the Company (“PRSU Value”). Each PRSU is equal to one underlying share of Class A common stock. The number of shares subject to a Grantee’s PRSU award equals the Grantee’s PRSU Value divided by the closing price per Class A common share on the service inception date, or if the service inception date is not a trading day, the closing price per Share on the closest trading day immediately prior to the service inception date; in each case rounded down to the nearest whole number. Each PRSU award shall vest as to 50 % of the PRSU Value upon the Committee’s determination, in its sole discretion, and certification of the occurrence of the Ocean Start of Production and shall vest as to 50 % of the PRSUs upon the first anniversary of the Ocean Start of Production, in each case, subject to (i) the Grantee’s continuous service through the applicable vesting date, (ii) the Grantee’s not committing any action or omission that would constitute Cause for termination through the applicable vesting date, as determined in the sole discretion of the Company, and (iii) the Ocean Start of Production occurring on or before December 31, 2022. The compensation committee has discretion to reduce or eliminate the number of PRSUs that shall vest pursuant to each PRSU award upon the certification of the occurrence of the Ocean Start of Production and/or upon the first anniversary of the Ocean Start of Production, after considering, any factors that it deems relevant, which could include but are not limited to (i) Company performance against key performance indicators, and (ii) departmental performance against goals. The service inception date precedes the grant dates for both performance conditions. The grant date for each of the performance conditions is the date Grantees have a mutual understanding of the key terms and conditions of the PRSU, which will occur when each performance condition is achieved, and the compensation committee has determined whether it will exercise its discretion to adjust the PRSU award. Recognition of stock-based compensation occurs when performance conditions are probable of achievement. Measurement of stock-based compensation attributed to the PRSU awards will be based on the fair value of the underlying Class A Common Stock once the grant date is determined (e.g., variable accounting).
As of September 30, 2023, the Company has approved and authorized PRSUs equal to 2,028,076 shares of Class A Common Stock with an aggregate PRSU value of $13.0 million of which 1,278,465 awards vested on March 24, 2023, the grant and vesting date for the first tranche of the PRSU award. As of December 31, 2022, achievement of the first tranche of the PRSU award was deemed probable resulting in the recognition of cumulative expense of $10.1 million. During the nine-month period ended September 30, 2023, the Company measured the cumulative expense to be recognized upon vesting based on the closing stock price on the grant and vesting date, which resulted in cumulative expense of $7.3 million, a reduction of $2.8 million from the Company’s measurement of compensation expense as of the end of 2022. There was no cumulative expense impact the during the three-months ended September 30, 2023.
16. Related Party Transactions
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17. Commitments and Contingencies
18. Subsequent Event
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Fisker is building a technology-enabled, asset-light automotive business that it believes will be among the first of its kind and aligned with the future state of the automotive industry. This involves a focus on vehicle development, customer experience, sales and service intended to change the personal mobility experience through technological innovation, ease of use and flexibility. The Company combines the legendary design and engineering expertise of Henrik Fisker to develop high quality electric vehicles with strong emotional appeal. Central to Fisker’s business model is the Fisker Flexible Platform Agnostic Design (“FF-PAD”), a proprietary process that allows the development and design of a vehicle to be adapted to any given electric vehicle (“EV”) platform in the specific segment size. The process focuses on selecting industry leading vehicle specifications and adapting the design to crucial hard points on a third-party supplied EV platform and outsourced manufacturing to reduce development cost and time to market. The first example of this is Fisker’s work to adapt the Fisker Ocean design to a base vehicle platform developed by Magna Steyr Fahrzeugtechnik AG & Co KG (“Magna Steyr”).
Recent Developments
We had several business updates in August, September, October, and November 2023, including (i) the opening of the flagship customer lounge in Los Angeles; (ii) commencing global test drive events; (iii) the publishing of our annual ESG impact report; (iv) the achievement of producing over 8,000 vehicles; (v) the delivery of over 2,000 vehicles in 10 countries; (vi) completion of the homologation process in the US and Europe for the Fisker Ultra trim; (vii) bolstering the balance sheet with a successful offering of $170.0 million in aggregate principal of 0% senior convertible notes due in 2025; (viii) the adjustment of Fisker Ocean Extreme, Ultra, and Sport trim pricing.
As outlined earlier this year, our production forecasts are linked to supply chain readiness and receipt of multiple regulatory homologation approvals across our launch markets. The timing of these approvals shifted in the first half of this
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year, which impacted our 2023 volume forecasts and supplier ramp readiness. Based on our current supplier capacity expectations, we currently forecast we will produce approximately 13,000 to 17,000 vehicles during 2023.
Our focus during this industrialization phase is to ensure process readiness, tooling maturity, part validation, volume ramp up, software maturity, and streamline logistics. Our suppliers are subject to external factors that could impact their ability to ramp output of components for our vehicles at high quality levels. For example, during the third quarter, one supplier experienced financial hardship and Fisker provided financial assistance to support our production needs. Our key supply chain partners are concentrated within an umbrella group of companies, and we are dependent upon their operational performance. Our ability to reach expected run rates is contingent upon key suppliers’ ability to mature software and components and the ability of our manufacturing partner to successfully ramp production at required quality levels. We continue to work with our suppliers and our manufacturing partner to meet our updated production goals for 2023 and prepare for higher volumes in 2024.
Basis of Presentation
Fisker currently conducts its business through one operating segment. Fisker’s automobile sales activity has been limited to date. Revenue from merchandise sales and home charging solutions represented Fisker’s commercial activity historically, but are not core to our ongoing business. Fisker’s historical results are reported under U.S. GAAP and in U.S. dollars. With the start of retail production of its Ocean SUV, Fisker expects its global operations to focus primarily on the USA and the European Union markets. As a result, Fisker expects that the financial results it reports for periods after it began retail production will not be comparable to the financial results for earlier periods including Fisker’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023.
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Results of Operations
Comparison of the Three Months Ended September 30, 2023 to the Three Months Ended September 30, 2022
The following table sets forth Fisker’s historical operating results for the periods indicated:
Three Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollar amounts in thousands) | |||||||||||||||||||||||
| Revenues | $ | 71,800 | $ | 14 | $ | 71,786 | n.m. | ||||||||||||||||
| Cost of revenues | 104,548 | 6 | 104,542 | n.m. | |||||||||||||||||||
| Gross Margin | (32,748) | 8 | (32,756) | n.m. | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 57,650 | 22,102 | 35,548 | 161 | % | ||||||||||||||||||
| Research and development | 13,428 | 117,885 | (104,457) | (89) | % | ||||||||||||||||||
| Total operating costs and expenses | 71,078 | 139,987 | (68,909) | (49) | % | ||||||||||||||||||
| Loss from operations | (103,826) | (139,979) | 36,153 | (26) | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Other income (expense) | (2,288) | 270 | (2,558) | n.m. | |||||||||||||||||||
| Interest income | 6,395 | 3,075 | 3,320 | 108 | % | ||||||||||||||||||
| Interest expense | (4,928) | (4,693) | (235) | 5 | % | ||||||||||||||||||
| Foreign currency gain/(loss) | 11,068 | (7,285) | 18,353 | (252) | % | ||||||||||||||||||
| Unrealized gain/(loss) recognized on equity securities | (530) | (730) | 200 | (27) | % | ||||||||||||||||||
Fair value adjustment on 2025 convertible note | 725 | — | 725 | n.m. | |||||||||||||||||||
| Total other income (expense) | 10,442 | (9,363) | 19,805 | (212) | % | ||||||||||||||||||
| Loss before income taxes | (93,384) | (149,342) | 55,958 | (37) | % | ||||||||||||||||||
| Provision for income taxes | (1,835) | — | (1,835) | n.m. | |||||||||||||||||||
| Net Loss | $ | (95,219) | $ | (149,342) | $ | 54,123 | (36) | % | |||||||||||||||
n.m. = not meaningful.
Revenue and Cost of Revenues
In the second quarter of 2023, we began producing vehicles for deliveries to our customers and, accordingly, we are recognizing vehicle revenues from the sale of initial Fisker Ocean SUVs. Merchandise sales and home charging solutions are not intended to comprise a significant portion of the Company’s revenues. Over the course of the fourth quarter of 2023, we continue to ramp production volumes at a measured pace to help facilitate the delivery of high-quality components from suppliers in line with our serial production run-rate.
During the three-month period ended September 30, 2023, the Company delivered 1,097 vehicles and recognized net revenue of $71.6 million with related cost of revenues totaling $104.4 million resulting in negative gross profit of $32.8 million. The increase in revenue, cost of revenue and gross profit is due to the increase in vehicles sales for the three-month period ended September 30, 2023. The Company had no vehicle sales during the corresponding three month period ended September 30, 2022. During the three-month period ended September 30, 2023, the Company determined that an $18.2 million inventory valuation adjustment was appropriate due to the lower levels of production during the ramp-up phase which we expect to continue until we reach full production.
Sales of branded apparel and goods and home charging solutions totaled $211 thousand with related costs of revenue sold of $137 thousand resulting in a gross profit of $74 thousand during the three month period ended September 30, 2023 compared to branded apparel sales of $14 thousand with related cost of revenues of $6 thousand resulting in gross profit of $8 thousand during the corresponding three month period ended September 30, 2022.
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Since commencing production and sale of our vehicles, our cost of revenues include mainly vehicle components and parts, labor costs, amortized tooling costs and capitalized costs associated with the Magna warrants, shipping and logistics costs, and reserves for estimated warranty expenses.
Subsequent to the release of our preliminary earnings results on November 13, 2023, we identified approximately $20 million of expenses that were related to services performed after the start of production of salable vehicles. The expenses were incorrectly recorded primarily as selling, general and administrative expenses in our preliminary earnings results, but were later determined to be associated with production set-up activities and are now appropriately reflected in cost of revenues. Additionally, other inventory adjustments were recorded resulting in a $4.0 million increase in net loss subsequent to the preliminary earnings results.
Selling, General and Administrative
Selling, general and administrative expenses consist mainly of personnel-related expenses for Fisker’s executive and other administrative functions, advertising and marketing expenses, and expenses for outside professional services, including legal, accounting and other advisory services.
Selling, general and administrative expenses increased by $35.5 million or 161% from $22.1 million during the three months ended September 30, 2022 to $57.7 million during the three month period ended September 30, 2023, primarily due to increased salaried employee headcount and stock-based compensation, and targeted marketing and advertising for events. With vehicle deliveries having begun in the second quarter of 2023, we have increased our marketing and advertising efforts in alignment with expected customer interest in the Fisker Ocean. Also, Center+, showroom, vehicle processing, and service and pickup locations will open throughout the remainder of 2023 resulting in higher expenses. The timing of openings will correspond with customer order demand and facility readiness in North America and Europe. Selling, general and administrative expenses include stock-based compensation expense of $2.5 million and $3.9 million for three months ended September 30, 2023 and 2022, respectively. Overall, total headcount for the Company increased to more than 1,300 employees as of September 30, 2023, compared to 760 employees as of December 31, 2022.
Research and Development
To date, Fisker’s research and development expenses have consisted primarily of external engineering services in connection with the design of the Fisker Ocean and PEAR models and development of the pre-production and start of production vehicles.
Research and development expenses decreased by approximately $104.5 million or 88.6% from $117.9 million during the three months ended September 30, 2022, to $13.4 million during the three months ended September 30, 2023. The decrease primarily relates to lower costs associated with the purchase and expense of prototype parts and engineering and design services incurred as Fisker met key development gateways during the third quarter of 2022 that did not recur in the third quarter of 2023 as Fisker Ocean consumer deliveries accelerated. Over the remainder of 2023, we expect research and development expenses will continue to trend lower than the corresponding three month period in 2022 as conceptual design and development of PEAR and costs associated with the completion of homologation in 2023 are not expected to exceed 2022’s costs incurred to complete the engineering and design of the Ocean and transition to production, including accrual of probable achievement of engineering and design milestones at the end of 2022. Research and development expense includes stock-based compensation expense of $3.3 million and $7.3 million for the three months ended September 30, 2023 and 2022, respectively.
Interest Expense
Interest expense consists of interest expense associated with the convertible senior convertible notes due in 2026.
Interest expense amounted to $4.9 million and $4.7 million during the three months ended September 30, 2023 and 2022, respectively due to the sale, in August 2021, of $667.5 million principal amount of 2.50% convertible senior notes due in September 2026. Interest expense in the subsequent three month period throughout calendar year 2023 will approximate $4.6 million, including accretion of debt issuance costs.
Foreign Currency Gain/Loss
The Company recorded a foreign currency gain of $11.1 million during the three months ended September 30, 2023, compared to a loss of $7.3 million during the three months ended September 30, 2022, primarily due to remeasurement losses on Euro-denominated monetary assets caused by weakening Euro currency rates. For the remainder of 2023, we
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expect EUR denominated transactions associated with our foreign operations and services provided by suppliers will increase and will subject Fisker to greater fluctuation in realized gain and losses from foreign currencies.
Unrealized Gain/Loss Recognized on Equity Securities
Unrealized loss recognized on equity securities held as of September 30, 2023 totaled $0.5 million for the three months ended September 30, 2023 compared to a loss of $0.7 million during the three months ended September 30, 2022.
Fair value adjustment on 2025 convertible not
The Company elected to account for its 2025 convertible notes with changes in fair value recorded as a component of other income (expense), which resulted in a net $0.7 million fair value adjustment for the three-months ended September 30, 2023.
Provision for Income Tax
Fisker’s income tax provision 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. Fisker maintains a valuation allowance against the full value of its U.S. and state net deferred tax assets because Fisker believes the recoverability of the tax assets is not more likely than not.
Provision for income tax amounted to $1.8 million for the three months ended September 30, 2023.
Net Loss
Net loss was $95.2 million during the three months ended September 30, 2023, a decrease of approximately $54.1 million from a net loss of $149.3 million during the three months ended September 30, 2022, for the reasons discussed above.
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Comparison of the Nine-Months Ended September 30, 2023 to the Nine-Months Ended September 30, 2022
The following table sets forth Fisker’s historical operating results for the periods indicated:
Nine-Months Ended September 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| (dollar amounts in thousands) | |||||||||||||||||||||||
| Revenues | $ | 72,823 | $ | 36 | 72,787 | n.m. | |||||||||||||||||
| Cost of revenues | 105,472 | 25 | 105,447 | n.m. | |||||||||||||||||||
| Gross Margin | (32,649) | 11 | (32,660) | n.m. | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 137,552 | 61,615 | 75,937 | 123 | % | ||||||||||||||||||
| Research and development | 143,422 | 290,505 | (147,083) | (51) | % | ||||||||||||||||||
| Total operating costs and expenses | 280,974 | 352,120 | (71,146) | (20) | % | ||||||||||||||||||
| Loss from operations | (313,623) | (352,109) | 38,486 | (11) | % | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Other income (expense) | (2,593) | (553) | (2,040) | n.m. | |||||||||||||||||||
| Interest income | 19,870 | 4,693 | 15,177 | n.m. | |||||||||||||||||||
| Interest expense | (14,134) | (13,827) | (307) | 2 | % | ||||||||||||||||||
| Foreign currency gain/(loss) | 14,467 | (9,956) | 24,423 | (245) | % | ||||||||||||||||||
| Unrealized gain/(loss) recognized on equity securities | (920) | (5,640) | 4,720 | (84) | % | ||||||||||||||||||
Fair value adjustment on 2025 convertible note | 725 | — | 725 | n.m. | |||||||||||||||||||
| Total other income (expense) | 17,415 | (25,283) | 42,698 | (169) | % | ||||||||||||||||||
| Loss before income taxes | $ | (296,208) | $ | (377,392) | 81,184 | (22) | % | ||||||||||||||||
| Provision for income taxes | $ | (2,173) | $ | — | (2,173) | n.m. | |||||||||||||||||
| Net Loss | $ | (298,381) | $ | (377,392) | 79,011 | (21) | % | ||||||||||||||||
Revenues and Cost of Revenues
In the second quarter of 2023, we began producing vehicles for deliveries to our customers and, accordingly, we are recognizing vehicle revenues from the sale of initial Fisker Ocean SUVs. Merchandise sales and home charging solutions are not intended to comprise a significant portion of the Company’s revenues. Over the course of the second half of 2023, we continue to ramp production volumes at a measured pace to ensure the supplier base can delivery high-quality components in line with our serial production run-rate.
During the nine month period ended September 30, 2023, the Company delivered 1,108 vehicles and recognized net revenue of $72.3 million with related cost of revenues totaling $105.2 million resulting in negative gross profit of $32.9 million. The increase in revenue, cost of revenue and gross profit is due to the increase in vehicles sales for the nine-month period ended September 30, 2023. The Company had no vehicle sales during the corresponding three month period ended September 30, 2022. During the nine-month period ended September 30, 2023, the Company determined that a $18.2 million inventory valuation adjustment was appropriate due to the lower levels of production during the ramp-up phase which we expect to continue until we reach full production.
Sales of branded apparel and goods and home charging solutions totaled $523 thousand with related costs of revenue of $186 thousand resulting in a gross profit of $337 thousand during the nine-month period ended September 30, 2023 compared to branded apparel sales of $36 thousand with related cost of revenues of $25 thousand resulting in gross profit of $11 thousand during the corresponding nine-month period ended September 30, 2022.
Since we commenced production and sale of our vehicles, cost of revenues includes mainly vehicle components and parts, including batteries, labor costs, amortized tooling costs and capitalized costs associated with the Magna warrants, shipping and logistics costs, and reserves for estimated warranty expenses.
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Selling, General and Administrative
Selling, general and administrative expenses consist mainly of personnel-related expenses for Fisker’s executive and other administrative functions, advertising and marketing expenses, and expenses for outside professional services, including legal, accounting and other advisory services.
Selling, general and administrative expenses increased by $75.9 million or 123% from $61.6 million during the nine-months ended September 30, 2022 to $137.6 million during the nine-month period ended September 30, 2023, primarily due to increased salaried employee headcount, improved benefits in line with our human capital and ESG goals designed to offer potential employees competitive compensation packages and stock-based compensation, and targeted marketing and advertising for events. With vehicle deliveries beginning in the second quarter of 2023, we have increased our marketing and advertising efforts in alignment with expected customer interest in the Fisker Ocean. Also, Center+, showroom, vehicle processing, and service and pickup locations will open throughout the remainder of 2023 resulting in higher expenses. The timing of openings will correspond with customer order demand and facility readiness in North America and Europe. Selling, general and administrative expenses include stock-based compensation expense of $5.4 million and $6.1 million for nine-months ended September 30, 2023 and 2022, respectively.
Research and Development
To date, Fisker’s research and development expenses have consisted primarily of external engineering services in connection with the design of the Fisker Ocean model and development of the pre-production and start of production vehicles.
Research and development expenses decreased by approximately $147.1 million or 50.6% from $290.5 million during the nine-months ended September 30, 2022, to $143.4 million during the nine-months ended September 30, 2023. The decrease primarily relates to lower costs associated with the purchase and expense of prototype parts and engineering and design services incurred as Fisker met key development gateways during the first half of 2022 that did not recur in the first half of 2023 as the Fisker Ocean was in the final stages of homologation. Higher costs in the first nine-months of 2022 are only partially offset by higher headcount in the first nine-months of 2023. During the fourth quarter of 2023, we expect research and development expenses will continue to trend lower than the corresponding nine-month periods in 2022 as conceptual design and development of PEAR and costs associated with the completion of homologation in 2023 are not expected to exceed 2022’s costs incurred to complete the engineering and design of the Ocean and transition to production, including accrual of probable achievement of engineering and design milestones at the end of 2022. Research and development expense includes stock-based compensation expense of $7.7 million and $11.3 million for the nine-months ended September 30, 2023 and 2022, respectively.
Interest Expense
Interest expense consists of interest expense associated with the convertible senior notes.
Interest expense amounted to $14.1 million and $13.8 million during the nine-months ended September 30, 2023 and 2022, respectively due to the sale, in August 2021, of $667.5 million principal amount of 2.50% convertible senior notes. Interest expense in the subsequent three-month period throughout calendar year 2023 will approximate $4.6 million, including accretion of debt issuance costs.
Foreign Currency Gain/Loss
The Company recorded a foreign currency gain of $14.5 million during the nine-months ended September 30, 2023, compared to loss of $10.0 million during the nine-months ended September 30, 2022, primarily due to remeasurement losses on Euro-denominated monetary assets caused by weakening Euro currency rates. For the remainder of 2023, we expect EUR denominated transactions associated with our foreign operations and services provided by suppliers will increase and will subject Fisker to greater fluctuation in realized gain and losses from foreign currencies.
Unrealized Gain/Loss Recognized on Equity Securities
Unrealized losses recognized on equity securities held as of September 30, 2023 totaled $0.9 million for the nine-months ended September 30, 2023 compared to a loss of $5.6 million during the nine-months ended September 30, 2022.
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Fair value adjustment on 2025 convertible note
The Company elected to account for its 2025 convertible notes with changes in fair value recorded as a component of other income (expense), which resulted in a net $0.7 million fair value adjustment for the nine-months ended September 30, 2023.
Provision for Income Tax
Fisker’s income tax provision 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. Fisker maintains a valuation allowance against the full value of its U.S. and state net deferred tax assets because Fisker believes the recoverability of the tax assets is not more likely than not.
Provision for income tax amounted to $2.2 million for the nine-months ended September 30, 2023.
Net Loss
Net loss was $298.4 million during the nine-months ended September 30, 2023, a decrease of approximately $79.0 million from a net loss of $377.4 million during the nine-months ended September 30, 2022, for the reasons discussed above.
Liquidity and Capital Resources
During the second quarter of 2023, Fisker began to generate revenues from its core business operations. To date, Fisker has funded its capital expenditures and working capital requirements through equity and convertible notes, as further discussed below. Fisker’s ability to successfully expand its business may depend on many factors, including its working capital needs, the availability of equity or debt financing and, over time, its ability to generate cash flows from operations.
As of September 30, 2023, Fisker’s cash and cash equivalents totaled $527.4 million and restricted cash totaled $98.0 million which supports future working capital needs.
In July and September 2023, we entered into purchase agreements for the sale of an aggregate of $510.0 million principal amount of convertible senior notes due in 2025. The net proceeds from the issuance of the 2025 Notes was $445.1 million, net of debt issuance costs. The 2025 Notes mature in July 2025 and September 2025, unless repurchased, redeemed, or converted in accordance with their terms prior to such date.
In May 2022, we entered into the Distribution Agreement, pursuant to which Fisker established the ATM Program. Pursuant to the ATM Program, Fisker could, at its discretion and from time to time during the term of the Distribution Agreement, sell, through the Agents, shares of its Class A Common Stock as would result in aggregate gross proceeds to Fisker of up to $350 million by any method permitted by law deemed to be an “at-the-market offering” as defined in Rule 415 of the Securities Act of 1933, as amended, including without limitation sales made directly on the New York Stock Exchange, on any other existing trading market for the Class A Common Stock or to or through a market maker. In addition, the sales agents were able to also sell the shares of Class A Common Stock by any other method permitted by law, including, but not limited to, negotiated transactions. We issued 21,153,154 shares of Class A Common Stock under the ATM Program during the nine-months ended September 30, 2023 for gross proceeds of $133.1 million, before $2.0 million of commissions and other direct incremental issuance costs. Effective July 12, 2023, the Company terminated the Distribution Agreement. As a result, the Company will not offer or sell any more share under the May 2022 ATM Program.
In August 2021, we entered into a purchase agreement for the sale of an aggregate of $667.5 million principal amount of convertible senior notes due in 2026. The net proceeds from the issuance of the 2026 Notes were $562.2 million, net of debt issuance costs and the 2026 Capped Call Transactions discussed further in Note 9. The 2026 Notes mature on September 15, 2026, unless repurchased, redeemed, or converted in accordance with their terms prior to such date. The 2026 Notes were not convertible as of September 30, 2023.
Fisker expects its capital expenditures and working capital requirements to increase in 2023 and beyond, as it optimizes production and deliveries of the Fisker Ocean, develops its customer support and marketing infrastructure and expands its research and development efforts on PEAR, Ronin and other future vehicle programs such as our electric pick-up truck. Fisker believes that its cash on hand will be sufficient to meet its working capital and capital expenditure requirements for a period of at least twelve months from the date of this Form 10-Q. Fisker may, however, need additional
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cash resources, to fund its operations until it achieves operational profitability, due to changed business conditions or other developments, supply chain challenges, disruptions due to COVID-19, competitive pressures, and regulatory developments, among other developments.
To the extent our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If such financing is not available, or if the terms of the financing are less desirable than we expect, we may be forced to decrease our level of investment in product development or scale back our operations, which could have an adverse impact on our business and financial prospects.
Cash Flows
The following table provides a summary of Fisker’s cash flow data for the periods indicated:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
( in thousands) | |||||||||||
| Net cash used in operating activities | $ | (517,580) | $ | (341,430) | |||||||
| Net cash used in investing activities | (177,685) | (167,256) | |||||||||
| Net cash provided by financing activities | $ | 584,112 | $ | 130,943 | |||||||
Cash Flows used in Operating Activities
Fisker’s net cash flows used in operating activities to date have been primarily comprised of costs related to research and development, payroll and other selling, general and administrative activities. Lease commitments as of September 30, 2023, will result in cash payments of $4.4 million for the remainder of 2023, and $18.7 million for 2024, and $64.8 million for 2025 and thereafter. Structural improvements are required before Fisker can use many of its Fisker Lounges, Center +, vehicle processing, and service and pickup locations in North America and Europe for its intended purposes. The timing for completion of the structural improvements is expected during 2023 and 2024. Compared to 2022, Fisker expects its cash used in operating activities will increase as a decrease in development costs of the Fisker Ocean are offset by higher working capital throughout the remainder of 2023.
Net cash used in operating activities increased by approximately $176.2 million from $341.4 million during the nine-months ended September 30, 2022 to $517.6 million during the nine-months ended September 30, 2023.
Cash Flows used in Investing Activities
Fisker’s cash flows used in investing activities, historically, have been comprised mainly of purchases of property and equipment. During the nine-months ended September 30, 2023, the Company acquired assets related to production of the Fisker Ocean and its components that totaled $170.0 million compared to $157.3 million during the nine-months ended September 30, 2022. Fisker continues to expect 2023 capital expenditures for tooling and manufacturing equipment to range between $225.0 million and $240.0 million of which we expect at least 50% is denominated in foreign currencies, as serial production tooling and equipment installations continue at both vehicle assembly and supplier facilities during 2023.
Fisker used cash of $177.7 million for investing activities during the nine-months ended September 30, 2023, compared to $167.3 million during the corresponding nine-months ended September 30, 2022.
Cash Flows from Financing Activities
Through September 30, 2023, Fisker has financed its operations primarily through the sale of equity securities and convertible senior notes.
Net cash from financing activities was $584.1 million during the nine-months ended September 30, 2023, which was primarily due to the proceeds from the issuance of 2025 convertible note of $445.1 million, net of issuance costs of $4.9 million, the issuance of the ATM equity program of $135.9 million, net of stock issuance costs of $1.9 million, as well as aggregate proceeds from the exercise of stock options of $2.8 million. Net cash from financing activities was $130.9 million during the nine-months ended September 30, 2022 which was primarily due to the proceeds from the issuance of the ATM equity program.
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Off-Balance Sheet Arrangements
Fisker is not a party to any off-balance sheet arrangements, as defined under SEC rules.
Critical Accounting Policies and Estimates
Fisker’s financial statements have been prepared in accordance with GAAP. In the preparation of these financial statements, Fisker is required to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Fisker considers an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the condensed consolidated financial statements.
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2022. Except for the following, there have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023.
Inventory Valuation
We review our inventory to ensure that its carrying value does not exceed its net realizable value (NRV), with NRV based on the estimated selling price of inventory in the ordinary course of business, less estimated costs of completion, disposal and transportation. When our expectations indicate that the carrying value of inventory may exceed its NRV, we perform an exercise to calculate the approximate amount by which carrying value is greater than NRV and record additional cost of revenues for the difference.
Once a write-off occurs, a new, lower cost basis is established. We also regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimates of the future demand for our products and market and economic conditions and for damaged or otherwise impaired goods.
Should our estimates used in these calculations change in the future, such as estimated selling prices or production costs, additional write-downs may occur.
2025 Convertible Note
The Company analyzed the purchase option related the Securities Purchase Agreement dated as of July 10, 2023 and determined that the purchase option for the Additional Optional Note and Additional Mandatory Note represents a freestanding instrument that should be classified as a derivative. The Company has recorded the Option to Purchase Additional Notes as a derivative liability, which is carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any change in fair value is recorded as a component of the income statement. The Company fair values the derivative using the Monte Carlo simulation pricing model with embedded lattice.
As permitted under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments (“ASC 825”), the Company elected to account for its convertible promissory notes with changes in fair value are recorded as a component of non-operating loss in the consolidated statements of operations. As a result of electing the fair value option, direct costs and fees related to the convertible notes were expensed as incurred.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Fisker has not, to date, been exposed to material market risks given its early stage of operations. In the future, Fisker expects to be exposed to foreign currency translation and transaction risks and potentially other market risks, including those related to interest rates or valuation of financial instruments, among others.
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Foreign Currency Risk
Fisker’s functional currency is the U.S. dollar, while certain of Fisker’s current and future subsidiaries are expected to have functional currencies in Euro, British Pound Sterling, Indian Rupee, and Chinese Yuan Renminbi reflecting their principal operating markets. Fisker’s contracts with OEMs and/or tier-one automotive suppliers to be transacted in Euro or other foreign currencies. We have completed homologation of the Fisker Ocean or sale in the U.S. and Europe resulting in revenue transactions denominated in Euro or other foreign currencies. In addition, Fisker expects that certain of its subsidiaries will have functional currencies other than the U.S. dollar, meaning that such subsidiaries’ results of operations will be periodically translated into U.S. dollars in Fisker’s condensed consolidated financial statements, which may result in revenues and earnings volatility from period to period in response to exchange rates fluctuations. The Company assesses whether opportunities exist to purchase foreign currencies with U.S. dollars to take advantage of favorable exchange rates.
In April and July 2022, the Company purchased 130.1 million Euros for $140.0 million U.S. dollars, a currency exchange rate of 1 U.S. dollar for 1.076 Euro and 50.0 million Euros for $50.9 million U.S. dollars, a currency exchange rate of 1 U.S. dollar for 1.018 Euro which are designed to provide a hedge against future foreign currency exposures. As of September 30, 2023, the Company has fully utilized these funds for research and development and production of Ocean and future projects.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures.
Management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation (pursuant to Rule 13a-15(b) under the Exchange Act) of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgement in evaluating the benefits of our controls and procedures relative to their costs. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below.
Material Weaknesses in Internal Control Over Financial Reporting
In connection with the preparation of our interim condensed consolidated financial statements for the quarter ended September 30, 2023, material weaknesses were identified in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company’s material weaknesses are as follows:
–The Company did not design and maintain an effective control environment commensurate with its financial reporting requirements. Specifically, the Company has experienced a change in key accounting personnel and, as a result, lacked a sufficient number of professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately. In addition, the Company did not design and maintain effective controls for communicating and sharing information between the operations, accounting, information technology, finance and legal departments. Specifically, there are insufficient controls to ensure that the accounting department is consistently provided with complete and adequate support, documentation and information, and that matters are resolved in a timely and effective manner.
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–The Company did not design and maintain effective controls in response to the risks of material misstatement over the accounting for inventory and related income statement accounts. Specifically, controls over the accounting for inventory and related income statement accounts were not sufficient to respond to changes to the risks of material misstatement to financial reporting due to changes in the business.
These material weaknesses contributed to the following additional material weakness:
–The Company did not design and maintain effective controls related to the accounting for certain non-routine, complex or unusual events or transactions. Specifically, the Company did not design and maintain effective controls to timely analyze and account for the financial statement effects of variable interest entities and valuation of convertible debt and the related derivative liability.
These material weaknesses resulted in material audit adjustments to inventory, costs of revenue, convertible debt and derivative liability balances during the quarter ended September 30, 2023. Additionally, each of the material weaknesses described above could result in a misstatement of substantially all account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Notwithstanding the above, management believes the Company’s consolidated financial statements and related financial information included in this Form 10-Q fairly present, in all material respects, the Company’s balance sheet, statements of operations, comprehensive income and cash flows as of and for the periods presented.
Changes in Internal Control over Financial Reporting
The Company is in the process of implementing certain changes in its internal controls to remediate the material weaknesses described above. The accounting personnel changes described above are changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in legal proceedings arising in the ordinary course of business. We are not currently a party to any litigation or legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.
For a description of our material pending legal proceedings, please see Note 17, Commitments and Contingencies, to the unaudited condensed consolidated financial statements included elsewhere in this report for more information.
Item 1A. Risk Factors
Please see Part I, Item 1A. Risk Factors in our Annual Report filed on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 1, 2023, for a discussion of risks, uncertainties and other factors that could materially affect our business, financial condition or future results, and the following risk factors, which supplement the foregoing:
We are dependent on our suppliers, a significant number of which are single or limited source suppliers, and the inability of our suppliers to deliver necessary components for our vehicles in a timely manner and at prices and volumes acceptable to us could have a material adverse effect on our business, prospects and operating results.
While we obtain components from multiple sources whenever possible, many of the components used in our vehicles are purchased from a single source. We believe that we may be able to establish alternate supply relationships and can obtain or engineer replacement components for many single sourced components, but we may be unable to do so in the near term (or at all) at prices or quality levels that are acceptable to us for some single sourced components. In addition, we could experience delays if our suppliers do not meet agreed upon timelines or they experience production constraints that in turn limit our production.
Any disruption in the supply of components, including semiconductor shortages, whether or not from a single source supplier, could temporarily disrupt production of our vehicles until an alternative supplier is able to supply the required components. Changes in business conditions, unforeseen circumstances, governmental changes, and other factors beyond our control could also affect our suppliers’ ability to deliver components to us on a timely basis. Any of the foregoing could materially and adversely affect our ability to produce vehicles, increase our costs and negatively affect our liquidity and financial performance. For example, the consequences of the conflict between Russia and Ukraine or the conflicts in the Middle East, including international sanctions, the potential impact on inflation and increased disruption to supply chains may impact us, result in an economic downturn or recession either globally or locally within the U.S. or other economies, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited “cold”wars or in the form of virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on our results of operations, financial condition and prospects. Such consequences also may increase our funding cost or limit our access to the capital markets.
If any of our significant suppliers experience substantial financial difficulties, cease operations, or otherwise face business disruptions, we may be required to provide financial support or take other measures in an effort to ensure components and materials remain available to us. Financial support provided by us to distressed suppliers could adversely impact our liquidity and results of operations.
We have identified material weaknesses in our internal control over financial reporting. If our remediation of such material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to develop and maintain effective internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired, which could adversely affect investor confidence in the accuracy and completeness of our financial statements and adversely affect our business and operating results and the market price for our Class A common stock.
As a public company, we are required to establish and periodically evaluate procedures with respect to our disclosure controls and procedures and our internal control over financial reporting. In the course of preparing our financial statements for the quarterly period ended September 30, 2023, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. For a discussion of these material weaknesses, please see Part I, Item 4 “Controls and Procedures”.
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While the control deficiencies described above did not result in a material misstatement to our financial statements, the control deficiencies created a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represent material weaknesses in our internal control over financial reporting. We will not be able to fully remediate these material weaknesses until appropriate steps have been completed and controls have been operating effectively for a sufficient period of time.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, additional weaknesses in our disclosure controls and procedures and internal control over financial reporting may be discovered in the future. If we are unable to remediate the material weaknesses in a timely manner and further implement and maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process, and report financial information accurately, and to prepare financial statements within required time periods could be adversely affected, which could result in material misstatements in our financial statements that may continue undetected or a restatement of our financial statements for prior periods. This may negatively impact the public perception of the Company and cause investors to lose confidence in the accuracy and completeness of our financial reports, which could negatively affect the market price of our common stock, harm our ability to raise capital on favorable terms, or at all, in the future, and subject us to litigation or investigations by regulatory authorities, which could require additional financial and management resources or otherwise have a negative impact on our financial condition.
Retail vehicle sales depend significantly on affordable interest rates and availability of credit for vehicle financing and a substantial increase in interest rates could adversely affect our business, prospects, financial condition, results of operations, and cash flows.
In certain regions, including North America and Europe, financing for new vehicle sales has been available at relatively low interest rates for several years due to, among other things, expansive government monetary policies. As interest rates have risen, market rates for new vehicle financing have also risen, which may make our vehicles less affordable to customers or steer customers to less expensive vehicles that would be less profitable for us, adversely affecting our business, prospects, financial condition, results of operations, and cash flows. Additionally, if consumer interest rates continue to increase substantially or if financial service providers tighten lending standards or restrict their lending to certain classes of credit, customers may not desire or be able to obtain financing to purchase our vehicles. As a result, a continuing substantial increase in customer interest rates or tightening of lending standards could have a material adverse effect on our business, prospects, financial condition, results of operations, and cash flows.
Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult.
Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes evaluating our business, operating results and future prospects difficult. Our distribution model is not common in the automotive industry today. Our plan is to conduct vehicle sales directly to users rather than through dealerships, primarily through our Flexee App and Fisker Experience Centers. This model of vehicle distribution is relatively new and, with limited exceptions, unproven, and subjects us to substantial risk. For example, we will not be able to utilize long established sales channels developed through a franchise system to increase sales volume. If our inventory grows at a pace that materially exceeds the pace we deliver vehicles to our customers, our working capital would be adversely affected. Moreover, our success will depend in large part on our ability to effectively develop our own sales channels and marketing strategies, which includes competing with companies that have well established distribution channels. If we are unable to achieve this, it could have a material adverse effect on our business, prospects, financial results and results of operations. There are substantial automotive franchise laws in place in many geographies in the world, and we might be exposed to significant franchise dealer litigation risks.
Absent relief, as a result of our failure to timely file a periodic report with the SEC, we are currently ineligible to file a registration statement on Form S-3, which may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Form S-3 permits eligible issuers to conduct registered offerings using a short form registration statement that allows the issuer to incorporate by reference its past and future filings and reports made under the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings under Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”). The shelf registration process, combined with the ability to forward incorporate information, allows issuers to avoid delays and interruptions in the offering process and to access the capital markets in a more expeditions and efficient manner than raising capital in a standard registered offering pursuant to a registration statement on Form S-3. The
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ability to newly register securities for resale may also be limited as a result of the loss of Form S-3 eligibility with respect to such registrations.
As a result of our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, absent a waiver of the Form S-3 eligibility requirements, we are ineligible to file new registration statements on Form S-3 until no earlier than December 1, 2024. In the event of the absence of a waiver, our S-3 ineligibility may significantly impair our ability to raise necessary capital needed for our business. If we seek to access the capital markets through a registered offering pursuant to a new registration statement on Form S-1, we would be required to disclose the proposed offering and the material terms thereof before the offering commences. As a result of such disclosure and potential for SEC review of such registration statement on Form S-1, we may experience delays in the offering process and we may incur increased offering and transaction costs and other considerations. If we are unable to raise capital through a registered offering, we would be required to raise capital on a private placement basis, which may be subject to pricing, size and other limitations imposed under NYSE’s rules, or seek other sources of capital. In addition, absent a waiver of the Form S-3 eligibility requirements, we will not be permitted to conduct sales in an “at the market offering” as defined in Rule 415 under the Securities Act. Any of the foregoing may impair our ability to raise capital on terms favorable to us, in a timely manner or at all.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
See Part II, Item 5.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information.
During the quarter ended September 30, 2023, no director or officer of the Company adopted terminated
The information below included in this Item 5 is provided in lieu of filing such information on a Current Report on Form 8-K under Items 1.01, 2.03, 2.04 and 3.01 as designated below.
Item 1.01 Entry into a Material Definitive Agreement
Indenture
As previously disclosed, on July 10, 2023, the Company entered into a Securities Purchase Agreement (the “Original Purchase Agreement”) with an institutional investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, $340,000,000 in aggregate principal amount of 0% senior convertible notes due 2025 (the “Series A-1 Notes”) in a registered direct offering. On September 29, 2023, the Company and the Investor entered into Amendment No. 1 to the Original Purchase Agreement (the “Purchase Agreement Amendment”, and together with the Original Purchase Agreement, the “Securities Purchase Agreement”). Pursuant to the terms of the Purchase Agreement Amendment, the Company agreed to sell, and the Investor agreed to purchase, $170,000,000 in aggregate principal amount of 0% senior convertible notes due 2025 (the “Series B-1 Notes” and together with the Series A-1 Notes, the “Notes”) in a registered direct offering.
The Notes were issued as senior obligations of the Company under that certain Indenture (the “Base Indenture”), dated July 11, 2023, by and between the Company and Wilmington Savings Fund Society, FSB, as the trustee (the “Trustee”), as supplemented by that certain Second Supplemental Indenture (the “Second Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), entered into on September 29, 2023. On November 22, 2023, the Company, along with certain of its subsidiaries, and the Trustee entered into a third supplemental indenture (the “Third Supplemental Indenture”) to the Indenture pursuant to which, among other things, (i) the Company agreed to secure the obligations under the Notes pursuant to a Pledge Agreement (as defined below) and a security agreement, to be entered into by and among the Company, the Investor and certain subsidiaries of the Company and such other security documents and
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certificates as specified in the Pledge Agreement, including the guaranties executed by certain subsidiaries of the Company (ii) the Investor agreed to reduce the Financial Test (as defined in the Notes) to $250,000,000 effective immediately.
This summary is qualified in its entirety by reference to the full text of the form of Third Supplemental Indenture, which is attached as Exhibit 4.1 to this Quarterly Report on Form 10-Q.
Pledge Agreement
In connection with the Third Supplemental Indenture, the Company and certain of its direct and indirect wholly owned subsidiaries entered into a Pledge Agreement (the “Pledge Agreement”), dated as of November 22, 2023, in favor of the Investor as collateral agent in the form attached hereto as Exhibit 10.1, pursuant to which the Notes will be secured by a first priority security interest in all of the existing and future assets of the Company and certain of its subsidiaries, including a pledge of all of the share capital of certain subsidiaries of the Company (limited, in the case of foreign subsidiaries and domestic foreign holding companies, to 65% of the capital stock of first tier foreign subsidiaries and domestic foreign holding companies). No later than December 8, 2023, the Company and the Investor have agreed to enter into a security agreement and, as is customary for a transaction of this nature, to perfect by December 31, 2023 the security interest in certain assets located in foreign jurisdictions, including entering into account control agreements for cash.
This summary is qualified in its entirety by reference to the full text of the form of Pledge Agreement, which is attached as an exhibit to this Quarterly Report on Form 10-Q.
Amendment and Waiver Agreement
On November 22, 2023, the Company entered into an amendment and waiver agreement (the “Waiver”) with the Investor. Pursuant to the Waiver, the Investor agreed to waive a covenant event of default resulting from the late filing of the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2023. Such event of default is described in further detail below under Item 2.04. The Investor also agreed to reduce the amount of cash required under the Financial Test to $250,000,000.
This summary is qualified in its entirety by reference to the full text of the Waiver which is attached as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
Item 2.03. Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information set forth above under the Item 1.01 header is incorporated herein for purposes of this Item 2.03.
Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
As a result of the failure of the Company to timely file this Quarterly Report on Form 10-Q, the Company triggered an event of default (the “Event of Default”) under the Notes.
On November 22, 2023, the Company and the Investor entered into the Waiver as described above whereby the Investor waived the Event of Default.
Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
On November 16, 2023, the Company, received a notice from the New York Stock Exchange (the “NYSE”) indicating that the Company is not in compliance with Section 802.01E of the NYSE Listed Company Manual as a result of its failure to timely file this Quarterly Report on Form 10-Q with the Securities and Exchange Commission (the “SEC”).
The NYSE informed the Company that, under NYSE rules, the Company will have six months from November 14, 2023 to file this Quarterly Report on Form 10-Q with the SEC and that the Company could regain compliance with the NYSE listing standards at any time prior to that date by filing its Form 10-Q. As such, the Company regained compliance with the NYSE listing standards as a result of filing this Quarterly Report on Form 10-Q on the date hereof.
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Item 6. Exhibits.
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Title | Form | File No. | Exhibit No. | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
| 4.1 | X | |||||||||||||||||||||||||||||||||||||
| 10.1 | X | |||||||||||||||||||||||||||||||||||||
| 10.2 | X | |||||||||||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||||||||
32.1* | ||||||||||||||||||||||||||||||||||||||
32.2* | ||||||||||||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||||||||||||||||||||||||||||
| 104 | Coverpage Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
* Furnished herewith | ||||||||||||||||||||||||||||||||||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 22, 2023.
| FISKER INC. | ||||||||
| By: | /s/ Dr. Geeta Gupta-Fisker | |||||||
| Name: | Dr. Geeta Gupta-Fisker | |||||||
| Title: | Chief Financial Officer and Chief Operating Officer | |||||||
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