Lucid Group, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2021 , filed with the SEC on February 28, 2022. This discussion may contain forward-looking statements based upon Lucid’s current expectation, estimates and projections that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors”, in Part II, Item 1A of this Quarterly Report. Overview We are a technology and automotive company with a mission to inspire the adoption of sustainable energy by creating advanced technologies and the most captivating luxury electric vehicles, centered around the human experience. Our focus on in-house technological innovation, vertical integration, and a “clean sheet” approach to engineering and design have led to the development of our groundbreaking electric vehicle, the Lucid Air. We sell vehicles directly to consumers through our retail sales network and through direct online sales. We believe that owning our sales network provides an opportunity to closely manage the customer experience, gather direct customer feedback, and ensure that customer interactions are on-brand and tailored to our customers’ need. We also operate an in-house vehicle service network, with brick-and-mortar service centers in various geographies and a mobile service fleet. In addition to our in-house service capabilities, we established and continue to grow an approved list of specially trained collision repair shops which also serve as a repair hub for our mobile service offerings in some cases. We began delivering the Lucid Air to customers in October 2021. We expect to launch additional vehicles over the coming decade. We have already commenced design and engineering work for Project Gravity, a luxury SUV that is expected to leverage and expand the technological advancements from the Lucid Air. We expect to begin production of Project Gravity in 2024. After the Lucid Air and Project Gravity, we plan to leverage and expand our technological and manufacturing advancements to develop and manufacture progressively more affordable vehicles in higher volumes. We further believe that our battery systems expertise positions us to produce compelling stationary energy storage system (“ESS”) products. ESS is a technologically adjacent opportunity which can leverage the modular design of our battery packs and our extensive experience with battery pack and battery management systems. Recent Developments At-the-Market Offering On November 8, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with BofA Securities, Inc., Barclays Capital Inc. and Citigroup Global Markets Inc. (collectively, the “Managers”), under which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price up to $600 million. Subject to the terms and conditions of the Equity Distribution Agreement, the Managers may sell the shares by any method permitted by law including, without limitation, in ordinary brokers’ transactions, to or through a market maker, in privately negotiated transactions, in block trades, in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act or through a combination of any such methods of sale. The Equity Distribution Agreement will terminate on the earlier of September 1, 2025, its termination by the parties pursuant to the terms of the Equity Distribution Agreement, or the issuance and sale of all of the shares through any Manager pursuant to the terms under the Equity Distribution Agreement. Subscription Agreement In addition, on November 8, 2022, the Company entered into a Subscription Agreement (the “Subscription Agreement”) with Ayar, pursuant to which Ayar has agreed to purchase from the Company, subject to certain conditions, up to $915 million (the “Maximum Investment Amount”) of shares of its common stock in one or more private placements through March 31, 2023 (the “Ayar Investment”). The number of shares that Ayar will purchase from the Company in the Ayar Investment will be equal to the number of shares of its common stock that the Company actually sells pursuant to the Equity Distribution Agreement, multiplied by a ratio, the numerator of which is approximately 60.4%, which is the number of shares of its common stock owned by Ayar as a percentage of the total number of shares of its common stock outstanding as of September 30, 2022, and the denominator of which is approximately 39.6%, rounded down to the nearest whole share. The Company will settle the Ayar Investment on the last trading day of each calendar quarter based on the number of shares that are actually sold pursuant to the Equity Distribution Agreement during such calendar quarter, at a price per share equal to the weighted average price to the public of the shares that are actually sold pursuant to the Equity Distribution Agreement during such calendar quarter. In addition, Ayar will have the right, but not the obligation, to enter into a subscription agreement substantially on the terms and subject to the conditions set forth in the Subscription Agreement in respect of any increase to the maximum offering amount under the Equity Distribution Agreement and/or any new at-the-market 40 offering of the Company’s common stock made or commenced, respectively, during the term of the Subscription Agreement. The Subscription Agreement will terminate automatically upon the earlier of March 31, 2023, the date upon which the Company has sold to Ayar shares for an aggregate purchase price equal to the Maximum Investment Amount, or its termination by the parties pursuant to the terms of the Subscription Agreement. Potential Impact of an Economic Downturn on our Business A global economic recession or other downturn, whether due to inflation, ongoing conflict in Ukraine or other geopolitical events, COVID-19 or other public health crises, interest rate increases or other policy actions by major central banks, or other factors, may have an adverse impact on our business, prospects, financial condition and results of operations. Adverse economic conditions as well as uncertainty about the current and future global economic conditions may cause our customers to defer purchases or cancel their reservations and orders in response to tighter credit, decreased cash availability, fluctuations in foreign currency exchange rates, and weakened consumer confidence. Reduced demand for our products may result in significant decreases in our product sales, which in turn would have a material adverse impact on our business, prospects, financial condition and results of operations. Because of our premium brand positioning and pricing, an economic downturn is likely to have a heightened adverse effect on us compared to many of our electric vehicle and traditional automotive industry competitors, to the extent that consumer demand for luxury goods is reduced in favor of lower-priced alternatives. In addition, any economic recession or other downturn could also cause logistical challenges and other operational risks if any of our suppliers, sub-suppliers or partners become insolvent or are otherwise unable to continue their operations, fulfill their obligations to us, or meet our future demand. In addition, the deterioration of conditions in global credit markets may limit our ability to obtain external financing to fund our operations and capital expenditures on terms favorable to us, if at all. See “Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information regarding risks associated with a global economic recession, including under the caption “A global economic recession or other downturn may have a material adverse impact on our business, prospects, results of operations and financial condition.” Impact of the COVID-19 Pandemic on our Business The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. Infection rates vary across the jurisdictions in which we operate. Governmental authorities have continued to implement numerous and constantly evolving measures to attempt to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limits on gatherings, quarantines, shelter-in-place orders and business shutdowns. We have taken proactive action to protect the health and safety of our employees, customers, partners and suppliers, consistent with the latest and evolving governmental guidelines. We expect to continue to implement appropriate measures until the adequate containment of the COVID-19 pandemic. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers. While certain of our and our suppliers’ operations have from time-to-time been temporarily affected by government-mandated restrictions, we were able to commence deliveries of the Lucid Air to customers and to proceed with the construction of our Advanced Manufacturing Plant 1 in Casa Grande, Arizona (“AMP-1”). Broader impacts of the pandemic have included inflationary pressure as well as ongoing, industry-wide challenges in logistics and supply chains, such as increased port congestion, intermittent supplier delays and a shortfall of semiconductor supply. Because we rely on third party suppliers for the development, manufacture, and/or provision and development of many of the key components and materials used in our vehicles, as well as provisioning and servicing equipment in our manufacturing facilities, we have been affected by inflation and such industry-wide challenges in logistics and supply chains. While we continue to focus on mitigating risks to our operations and supply chain in the current industry environment, we expect that these industry-wide trends will continue to impact our cost structure as well as our ability and the ability of our suppliers to obtain parts, components and manufacturing equipment on a timely basis for the foreseeable future. In the current circumstances, given the dynamic nature of the situation, any impact on our financial condition, results of operations or cash flows in the future continues to be difficult to estimate and predict, as it depends on future events that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, potential additional waves of infection, the emergence of more virulent or more dangerous strains of the virus, the actions taken to mitigate the virus or its impact, the development, distribution, efficacy and acceptance of vaccines worldwide, how quickly and to what extent normal economic and operating conditions can resume, the broader impact that the pandemic is having on the economy and our industry and specific implications the pandemic may have on our suppliers and on global logistics. See “Risk Factors” in Part II, Item 1A of this Quarterly Report for additional information regarding risks associated with the COVID-19 pandemic, including under the caption “ The ongoing COVID-19 pandemic has adversely affected, and we cannot predict its ultimate impact on, our business, prospects, results of operations and financial condition. ” 41 Key Factors Affecting Our Performance We believe that our future success and financial performance depend on a number of factors that present significant opportunities for our business, but also pose risks and challenges, including those discussed below and in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report. Design and Technology Leadership We believe that we are positioned to be a leader in the electric vehicle market by unlocking the potential for advanced, high-performance, and long-range electric vehicles to co-exist. The Lucid Air is designed with race-proven battery pack technologies and robust performance together with a sleek exterior design and expansive interior space given our miniaturized key drivetrain components. We anticipate consumer demand for the Lucid Air based on its luxurious design, high-performance technology and sustainability leadership, and the growing acceptance of and demand for electric vehicles as a substitute for gasoline-fueled vehicles. We have received significant interest in the Lucid Air from potential customers. As of November 7, 2022, we had refundable reservations and non-refundable orders of cars yet to be delivered that reflect potential sales of over $3.2 billion. Direct-to-Consumer Model We operate a direct-to-consumer sales and service model, which we believe will allow us to offer a personalized experience for our customers based on their purchase and ownership preferences. We expect to continue to incur significant expenses in our sales and marketing operations for sale of the Lucid Air, including to open studios, hire a sales force, invest in marketing and brand awareness, and stand up a service center operation. As of September 30, 2022, we have opened twenty-nine studios and service centers, one in Germany, two in Canada, twenty-six in the United States (one in each of Colorado, Massachusetts, Michigan, New Jersey, Texas, and Virginia, and two in each of Arizona, Illinois, New York, and Washington, three in Florida, as well as nine in California). We also intend to hire additional sales, customer service, and service center personnel. We believe that investing in our direct-to-consumer sales and service model will be critical to deliver and service the Lucid electric vehicles we plan to manufacture and sell. Establishing Manufacturing Capacity Achieving commercialization and growth for each generation of electric vehicles requires us to make significant capital expenditures to scale our production capacity and improve our supply chain processes in the United States and internationally. We expect our capital expenditures to increase as we continue our expansion of AMP-1 and construction of planned Advanced Manufacturing Plant 2 in the Kingdom of Saudi Arabia (“AMP-2”). The amount and timing of our future manufacturing capacity requirements, and resulting capital expenditures, will depend on many factors, including the pace and results of our research and development efforts to meet technological development milestones, our ability to develop and launch new electric vehicles, our ability to achieve sales and experience customer demand for our vehicles at the levels we anticipate, our ability to utilize planned capacity in our existing facilities and our ability to enter new markets. Technology Innovation We develop in-house battery and powertrain technology, which requires us to invest a significant amount of capital in research and development. The electric vehicle market is highly competitive and includes both established automotive manufacturers and new entrants. To establish market share and attract customers from competitors, we plan to continue to make substantial investments in research and development for the commercialization and continued enhancements of the Lucid Air, the development of Project Gravity, and future generations of our electric vehicles and other products. Inflationary Pressure The U.S. economy has experienced increased inflation recently, including as a result of the COVID-19 pandemic. Our cost to manufacture a vehicle is heavily influenced by the cost of the key components and materials used in the vehicle, cost of labor, as well as cost of equipment used in our manufacturing facilities. As we continue our phased construction of our AMP-1 facility, increases in steel prices and cost of construction labor have led to higher capital expenditures. We expect that the inflationary pressure will persist for the foreseeable future. 42 Results of Operations Revenue The following table presents our revenue for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Revenue $ 195,457 $ 232 $ 195,225 *nm $ 350,468 $ 719 $ 349,749 *nm *nm - not meaningful We began generating sales from the deliveries of vehicles in the fourth quarter of 2021. We recognize vehicle sales when the customer obtains control of the vehicle which is upon delivery. We also generate revenue from the sale of powertrain kits, battery pack systems, supplies and related services for vehicles to a single customer. Revenue increased by $195.2 million and $349.7 million, respectively, for the three and nine months ended September 30, 2022, as compared to the same periods in the prior year, primarily driven by customer deliveries of Lucid Air vehicles. Cost of Revenue The following table presents our cost of revenue for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Cost of revenue $ 492,483 $ 3,320 $ 489,163 *nm $ 1,030,795 $ 3,424 $ 1,027,371 *nm *nm - not meaningful Cost of revenue related to vehicle sales primarily include direct parts, materials, shipping and handling costs, allocable overhead costs such as depreciation of manufacturing related equipment and facilities, information technology costs, personnel costs including wages and stock-based compensation, estimated warranty costs and charges to reduce inventories to their net realizable value or charges for inventory obsolescence. Cost of revenue related to powertrain kits, battery pack systems, supplies and related services for electric vehicles primarily consists of direct parts and materials, shipping and handling costs, personnel costs including wages and stock-based compensation, and estimated warranty costs related to battery pack systems. Cost of battery pack systems also includes allocated overhead costs such as depreciation of manufacturing related equipment and facilities, and information technology costs. Cost of revenue increased by $489.2 million and $1,027.4 million, respectively, for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year, primarily due to the manufacture and sale of Lucid Air vehicles in 2022. We incurred significant personnel and overhead costs to operate our large-scale manufacturing facilities while ramping up production, with production activity for a limited quantity of vehicles in the three and nine months ended September 30, 2022. In the near term, we expect our production volume of vehicles to continue to be significantly less than our manufacturing capacity. Additionally, we recorded write downs of $186.5 million and $364.6 million, respectively, in the three and nine months ended September 30, 2022 to reduce our inventories to their net realizable values, for any excess or obsolete inventories, and losses from firm purchase commitments. We expect inventory write downs could negatively affect our costs of vehicle sales in upcoming periods in the near term as we ramp production volumes up toward our manufacturing capacity. 43 Operating Expenses The following table presents our operating expenses for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Research and development $ 213,761 $ 242,408 $ (28,647) (12) % $ 600,218 $ 586,579 $ 13,639 2 % Selling, general and administrative 176,736 251,554 (74,818) (30) % 563,707 455,478 108,229 24 % Total operating expenses $ 390,497 $ 493,962 $ (103,465) (21) % $ 1,163,925 $ 1,042,057 $ 121,868 12 % Research and Development Our research and development efforts have primarily focused on the development of our battery and powertrain technology, the Lucid Air, Project Gravity, and future generations of our electric vehicles. Research and development expenses consist primarily of materials, supplies and personnel-related expenses for employees involved in the engineering, designing, and testing of electric vehicles. Personnel-related expenses primarily include salaries, benefits and stock-based compensation. Research and development expenses also include prototype material, engineering, design and testing services, and allocated facilities costs, such as office and rent expense and depreciation expense, and other engineering, designing, and testing expenses. Research and development expense decreased by $28.6 million, or 12%, for the three months ended September 30, 2022 as compared to the same period in the prior year. The decrease was primarily attributable to lower personnel-related expenses of $31.7 million due to lower stock-based compensation expense of $25.1 million, and a decrease of $18.5 million in allocated facilities cost, partially offset by an increase of $26.0 million for prototype material, engineering, design and testing services. The stock-based compensation expense was lower primarily due to the initial recognition of the cumulative expense recognized for the three months ended September 30, 2021 related to the restricted stock units (“RSUs”) upon the closing of the merger of a merger subsidiary of Churchill and Atieva, Inc., with Atieva, Inc. surviving such merger as a wholly owned subsidiary of Churchill (the “ Merger”) . Research and development expense increased by $13.6 million, or 2%, for the nine months ended September 30, 2022 as compared to the same period in the prior year. The increase was primarily attributable to higher personnel-related expenses of $41.0 million due to higher stock-based compensation expense of $37.2 million and an increase of $22.7 million for prototype material, engineering, design and testing services, partially offset by decreases of $33.7 million in allocated facilities costs and $18.9 million from lower utilization of contractors and professional fees. The stock-based compensation expense for the nine months ended September 30, 2021 included expenses recognized related to the RSUs upon the closing of the Merger, and the fourth closing of the Legacy Lucid Series E preferred stock issuance. Selling, General, and Administrative Selling, general, and administrative expenses consist primarily of personnel-related expenses for employees involved in general corporate, selling and marketing functions, including executive management and administration, legal, human resources, facilities and real estate, accounting, finance, tax, and information technology. Personnel-related expenses primarily include salaries, benefits and stock-based compensation. Selling, general, and administrative expenses also include allocated facilities costs, such as office, rent and depreciation expenses, professional services fees and other general corporate expenses. As we continue to grow as a company, build out our sales force, and commercialize the Lucid Air and planned future generations of our electric vehicles, we expect that our selling, general and administrative costs will increase. We are incurring additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations, and professional services. Selling, general, and administrative expense decreased by $74.8 million, or 30%, for the three months ended September 30, 2022 as compared to the same period in the prior year. The decrease was primarily attributable to lower personnel-related expenses of $116.4 million (decrease in stock-based compensation expense of $139.3 million, offset by $22.9 million increase due to our growth in headcount), partially offset by higher utilization of contractors and professional fees of $19.4 million, and increases in other general corporate expenses of $10.1 million, allocated facilities costs of $6.2 million, and sales and marketing expenses of $4.3 million. The stock-based compensation expense was lower primarily due to initial recognition of the cumulative expense recognized for the three months ended September 30, 2021 related to the RSUs upon the closing of the Merger. Selling, general, and administrative expense increased by $108.2 million, or 24%, for the nine months ended September 30, 2022 as compared to the same period in the prior year. The increase was primarily attributable to higher utilization of contractors and professional fees of $37.5 44 million, and increases in allocated facilities costs of $23.5 million, other general corporate expenses of $18.5 million, and sales and marketing expenses of $14.5 million. The increase was also attributable to higher personnel related expenses of $9.7 million ($90.6 million increase due to our growth in headcount, partially offset by lower stock-based compensation expense of $80.9 million). The stock-based compensation expense for the nine months ended September 30, 2021 included expenses recognized related to the RSUs upon the closing of the Merger, and the fourth closing of the Legacy Lucid Series E preferred stock issuance. Other Income (Expense), net The following table presents our other income and expense, net for the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 $ Change % Change 2022 2021 $ Change % Change Other income (expense), net: Change in fair value of forward contracts $ — $ — $ — *nm $ — $ (454,546) $ 454,546 (100) % Change in fair value of convertible preferred stock warrant liability — — — *nm — (6,976) 6,976 (100) % Change in fair value of common stock warrant liability 140,146 (24,787) 164,933 *nm 998,319 (24,787) 1,023,106 *nm Transaction costs expensed — (2,717) 2,717 (100) % — (2,717) 2,717 (100) % Interest income 24,373 — 24,373 *nm 27,284 — 27,284 *nm Interest expense (7,613) (76) (7,537) *nm (22,521) (111) (22,410) *nm Other income (expense), net 665 249 416 167 % 9,898 (151) 10,049 *nm Total other income (expense), net $ 157,571 $ (27,331) $ 184,902 *nm $ 1,012,980 $ (489,288) $ 1,502,268 *nm *nm - not meaningful Change in Fair Value of Contingent Forward Contracts Our contingent forward contracts provided the holder the right to purchase Legacy Lucid Series D preferred stock and Legacy Lucid Series E preferred stock in future periods and were subject to remeasurement to fair value at each balance sheet date. Changes in the fair value of our contingent forward contracts were recognized in the condensed consolidated statements of operations and comprehensive loss. Change in contingent forward contracts liability decreased by $454.5 million, for the nine months ended September 30, 2022, as compared to the same period in the prior year. The Legacy Lucid Series E contingent forward contracts were settled during the six months ended June 30, 2021, and there are no future earnings adjustments pertaining to the contingent forward contracts. Change in Fair Value of Convertible Preferred Stock Warrant Liability Our convertible preferred stock warrant liability related to the warrants to purchase shares of Legacy Lucid Series D preferred stock was subject to remeasurement to fair value at each balance sheet date. Changes in the fair value of our convertible preferred stock warrant liability were recognized in the condensed consolidated statements of operations and comprehensive loss. All issued and outstanding shares of Legacy Lucid Series D preferred stock were settled in February 2021 and there will no longer be future earnings adjustments pertaining to the convertible preferred share warrant liability related to Legacy Lucid Series D preferred stock. We recorded a loss of $7.0 million for the nine months ended September 30, 2021 due to the changes in fair value of the convertible preferred stock warrant liability related to Legacy Lucid Series D preferred stock upon the exercise and settlement of all outstanding warrants to purchase Legacy Lucid Series D preferred stock. Change in Fair Value of Common Stock Warrant Liability Our common stock warrant liability relates to the Private Placement Warrants to purchase shares of Lucid Group common stock that were effectively issued upon the Closing in connection with the reverse recapitalization treatment of the Merger. Our common stock warrant liability is subject to remeasurement to fair value at each balance sheet date. Changes in the fair value of our common stock warrant liability were recognized in the condensed consolidated statements of operations and comprehensive loss. The Private Placement Warrants remained unexercised as of September 30, 2022. The liability was remeasured to fair value, resulting in gains of $140.1 million and $998.3 million, respectively, for the three and nine months ended September 30, 2022, and was classified within change in fair value of common stock warrant liability in the condensed consolidated statements of operations and comprehensive loss. See Note 9 “Common Stock Warrant Liability” to our condensed consolidated financial statements included elsewhere in this Quarterly Report for more information. 45 Transaction Costs Expensed In connection with the Merger, the Company incurred $38.9 million in one-time direct and incremental transaction costs, consisting of banking, legal, and other professional fees. Transaction costs incurred by Lucid were allocated on a relative fair value basis between equity and liability-classified instruments deemed to be issued for financial reporting purposes at the Closing by Lucid. The Company’s $36.2 million transaction costs allocable to equity-classified instruments, including the common stock and public warrants, were charged as a direct reduction to Lucid’s additional paid-in capital of the gross proceeds remitted to Lucid from Churchill. The Company’s $2.7 million transaction costs allocable to liability-classified instruments measured at fair value, including the private warrants, were charged to the condensed consolidated statements of operations and comprehensive loss upon the Closing for the three and nine months ended September 30, 2021. Interest Income Interest income of $24.4 million and $27.3 million, respectively, for the three and nine months ended September 30, 2022, primarily consisted of interest, as well as amortization and accretion of purchase premiums and discounts on our investments of available-for-sale securities. Interest Expense Interest expense consists primarily of contractual interest and amortization of debt discounts and debt issuance costs incurred related to the 2026 Notes issued in December 2021, interest and commitment fee as well as amortization of issuance costs incurred associated with ABL Credit Facility and GIB Credit Agreement, and interest on our finance leases. Interest expense increased by $7.5 million and $22.4 million, respectively, for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year, primarily related to the 2026 Notes issued in December 2021. Other Income (Expense), net Other income (expense), net primarily consists of foreign currency gains and losses and dividend income from our investments. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Other income (expense), net increased by $0.4 million and $10.0 million, respectively, during the three and nine months ended September 30, 2022 as compared to the same periods in the prior year, primarily due to changes in foreign currency exchange rates and dividend income from our investments. Provision for Income Taxes Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Provision for income taxes 149 22 127 *nm 540 31 509 *nm *nm - not meaningful Our provision for income taxes consist primarily of U.S. state and foreign income taxes in jurisdictions in which we operate. We maintain a valuation allowance against the full value of our U.S. and state net deferred tax assets because we believe it is more likely than not that the recoverability of these deferred tax assets will not be realized. The provision for income taxes increased by $0.1 million and $0.5 million, respectively, for the three and nine months ended September 30, 2022 as compared to the same periods in the prior year, primarily due to changes in taxable income of our foreign operations. 46 Liquidity and Capital Resources Sources of Liquidity As of September 30, 2022, Lucid had approximately $3.85 billion of cash, cash equivalents and investments. Our sources of cash are predominantly from proceeds from Lucid’s de-SPAC transaction with Churchill (plus PIPE), and the issuance of convertible debt. We expect that our current sources of liquidity together with our projection of cash flows from operating activities will provide us with adequate liquidity over at least the next 12 months, including investment in funding (i) ongoing operations, (ii) research and development projects for new products/ technologies, (iii) production and manufacturing ramps at existing manufacturing facilities in Casa Grande, Arizona, (iv) Phase 2 of construction at AMP-1 in Casa Grande, Arizona, (v) the construction of AMP-2, (vi) expansion of retail studios and service centers, and (vii) other initiatives related to the sale of vehicles and/ or technology. We anticipate our cumulative spending on capital expenditures to be approximately $1.2 billion for the fiscal year 2022 to support our continued commercialization and growth objectives as we strategically invest in manufacturing capacity and capabilities, our retail studios and service center capabilities throughout North America and across the globe, development of different products and technologies, and other areas supporting the growth of Lucid’s business. Our future capital expenditures may vary and will depend on many factors including the timing and extent of spending and other growth initiatives. We expect our operating expenses to increase in order to grow and support the operations of a global automotive company targeting volumes in line with Lucid’s aspirations. As of September 30, 2022, our total minimum lease payments are $486.3 million, of which $7.3 million is due in the current fiscal year. We also have non-cancellable long-term commitments of $291.2 million, primarily relating to certain inventory component purchases. For details regarding these obligations, refer to Note 14 “Leases” and Note 15 “Commitments and Contingencies”. 2026 Notes In December 2021, Lucid entered into a purchase agreement pursuant to which we issued $2,012.5 million of the 2026 Notes. The 2026 Notes accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2022. The 2026 Notes will mature on December 15, 2026, unless earlier repurchased, redeemed or converted. Before the close of business on the business day immediately before September 15, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events. From and after September 15, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 18.2548 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $54.78 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. As of September 30, 2022, we were in compliance with applicable covenants under the indenture governing the 2026 Notes. International Manufacturing Expansion On February 27, 2022, the Company announced that it has selected King Abdullah Economic City (“KAEC”) in the Kingdom of Saudi Arabia as the location of its first international manufacturing plant and signed related agreements with the Ministry of Investment of Saudi Arabia, the Saudi Industrial Development Fund, and the Economic City at KAEC. The agreements are estimated to provide financing and support of up to $3.4 billion in aggregate over the next 15 years to build and operate a manufacturing facility in the Kingdom. The operations at the new plant would initially consist of re-assembly of Lucid Air vehicle “kits” pre-manufactured in the U.S. and, over time, production of complete vehicles. 47 Saudi Industrial Development Fund (“SIDF”) Loan Agreement On February 27, 2022, Lucid, LLC, a limited liability company established in the Kingdom of Saudi Arabia and a subsidiary of the Company (“Lucid LLC”) entered into a loan agreement (as subsequently amended, the “SIDF Loan Agreement”) with SIDF, a related party of Public Investment Fund (“PIF”), which is an affiliate of Ayar Third Investment Company, the controlling stockholder of the Company (“Ayar”). Under the SIDF Loan Agreement, SIDF has committed to provide loans (the “SIDF Loans”) to Lucid LLC in an aggregate principal amount of up to SAR 5.19 billion (approximately $1.4 billion); provided that SIDF may reduce the availability of SIDF Loans under the facility in certain circumstances. SIDF Loans will be subject to repayment in semi-annual installments in amounts ranging from SAR 25 million (approximately $6.7 million) to SAR 350 million (approximately $93.2 million), commencing on April 3, 2026 and ending on November 12, 2038. SIDF Loans are financing and will be used to finance certain costs in connection with the development and construction of AMP-2. Lucid LLC may repay SIDF Loans earlier than the maturity date without penalty. Obligations under the SIDF Loan Agreement do not extend to the Company or any of its other subsidiaries. SIDF Loans will not bear interest. Instead, Lucid LLC will be required to pay SIDF service fees, consisting of follow-up and technical evaluation fees, ranging, in aggregate, from SAR 415 million (approximately $110.5 million) to SAR 1.77 billion (approximately $471.1 million), over the term of the SIDF Loans. SIDF Loans will be secured by security interests in the equipment, machines and assets funded thereby. The SIDF Loan Agreement contains certain restrictive financial covenants and imposes annual caps on Lucid LLC’s payment of dividends, distributions of paid-in capital or certain capital expenditures. The SIDF Loan Agreement also defines customary events of default, including abandonment of or failure to commence operations at the plant in KAEC, and drawdowns under the SIDF Loan Agreement are subject to certain conditions precedent. As of September 30, 2022, no amounts were outstanding under the SIDF Loan Agreement. Ministry of Investment of Saudi Arabia (“ MISA”) Agreements In February 2022, Lucid LLC entered into agreements with MISA, a related party of PIF, which is an affiliate of Ayar, pursuant to which MISA has agreed to provide economic support for certain capital expenditures in connection with Lucid LLC’s on-going design and construction of AMP-2. The support by MISA are subject to Lucid LLC’s completion of certain milestones related to the construction and operation of AMP-2. Following the commencement of construction, if operations at the plant do not commence within 30 months, or if the agreed scope of operations is not attained within 55 months, MISA may suspend availability of subsequent support. Pursuant to the agreement, MISA has the right to require Lucid LLC to transfer the ownership of AMP-2 to MISA, at the fair market value thereof, minus an amortized value of the support provided in the event of customary events of default including abandonment or material and chronic low utilization of AMP-2. Alternatively, Lucid LLC is entitled to avoid the transfer of the ownership of AMP-2 by electing to pay such amortized value. The agreements will terminate on the fifteenth anniversary of the commencement of completely-built-up (“CBU”) operations at AMP-2 at the latest. During the three and nine months ended September 30, 2022, the Company received support of SAR 366 million (approximately $97.3 million) in cash, of which $70.7 million was recorded as deferred liability within other long-term liabilities and $26.6 million was recorded as a deduction in calculating the carrying amount of the related assets on the condensed consolidated balance sheet. There are no unfulfilled conditions and contingencies attached to the payments received. 48 Gulf International Bank (“GIB”) Facility Agreement On April 29, 2022, Lucid LLC entered into a revolving credit facility agreement (the “GIB Facility Agreement”) with GIB, maturing on February 28, 2025. GIB is a related party of PIF, which is an affiliate of Ayar. The GIB Facility Agreement provides for two committed revolving credit facilities in an aggregate principal amount of SAR 1 billion (approximately $266.2 million). SAR $650 million (approximately $173.0 million) under the GIB Facility Agreement is available as bridge financing (the “Bridge Facility”) of Lucid LLC’s capital expenditures in connection with AMP-2. The remaining SAR 350 million (approximately $93.2 million) may be used for general corporate purposes (the “Working Capital Facility”). Loans under the Bridge Facility and the Working Capital Facility will have a maturity of no more than 12 months. The Bridge Facility will bear interest at a rate of 1.25% per annum over 3-month SAIBOR and the Working Capital Facility will bear interest at a rate of 1.70% per annum over 3-month SAIBOR and associated fees. The Company is required to pay a quarterly commitment fee of 0.15% per annum based on the unutilized portion of the GIB Credit Facility. Commitments under the GIB Facility Agreement will terminate, and all amounts then outstanding thereunder will become payable, on the maturity date of the GIB Facility Agreement. The GIB Facility Agreement contains certain conditions precedent to drawdowns, representations and warranties and covenants of Lucid LLC and events of default. As of September 30, 2022 , the Company had outstanding borrowing s of SAR 51 million (approximately $13.6 million) from the Working Capital Facility, which was recorded within other current liabilities on the condensed consolidated balance sheets. As of September 30, 2022, available borrowings are SAR 650 million (approximately $173.0 million) and SAR 299 million (approximately $79.6 million) under the Bridge Facility and Working Capital Facility, respectively. As of September 30, 2022, we were in compliance with applicable covenants under the GIB Facility Agreement. ABL Credit Facility In June 2022, the Company entered into a new five-year senior secured asset-based revolving credit facility (“ABL Credit Facility”) with a syndicate of banks that may be used for working capital and general corporate purposes. The ABL Credit Facility provides for an initial aggregate principal commitment amount of up to $1.0 billion (including a $350.0 million letter of credit subfacility and a $100.0 million swingline loan subfacility) and has a stated maturity date of June 9, 2027. Borrowings under the ABL Credit Facility bear interest at the applicable interest rates specified in the credit agreement governing the ABL Credit Facility. Availability under the ABL Credit Facility is subject to the value of eligible assets in the borrowing base and is reduced by outstanding loan borrowings and issuances of letters of credit which bear customary letter of credit fees. Subject to certain terms and conditions, the Company may request one or more increases in the amount of credit commitments under the ABL Credit Facility in an aggregate amount up to the sum of $500.0 million plus certain other amounts. The Company is required to pay a quarterly commitment fee of 0.25% per annum based on the unutilized portion of the ABL Credit Facility. The ABL Credit Facility contains customary covenants that limit the ability of the Company and its restricted subsidiaries to, among other activities, pay dividends, incur debt, create liens and encumbrances, redeem or repurchase stock, dispose of certain assets, consummate acquisitions or other investments, prepay certain debt, engage in transactions with affiliates, engage in sale and leaseback transactions or consummate mergers and other fundamental changes. The ABL Credit Facility also includes a minimum liquidity covenant which, at the Company’s option following satisfaction of certain pre-conditions, may be replaced with a springing, minimum fixed charge coverage ratio (“FCCR”) financial covenant, in each case on terms set forth in the credit agreement governing the ABL Credit Facility. As of September 30, 2022, we were in compliance with applicable covenants under the ABL Credit Facility. As of September 30, 2022, we had no outstanding borrowings and $36.8 million outstanding letters of credit under the ABL Credit Facility. Availability under the ABL Credit Facility was $303.7 million as of September 30, 2022, after giving effect to the borrowing base and the outstanding letters of credit. We have generated significant losses from our operations as reflected in our accumulated deficit of $6.9 billion and $6.1 billion as of September 30, 2022 and December 31, 2021, respectively. Additionally, we have generated significant negative cash flows from operations and investing activities as we continue to support the growth of our business. The expenditures associated with the development and commercial launch of our vehicles, the anticipated increase in manufacturing capacity, and the international expansion of our business operations are subject to significant risks and uncertainties, many of which are beyond our control, which may affect the timing and magnitude of these anticipated expenditures. These risk and uncertainties are described in more detail in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report. 49 Cash Flows The following table summarizes our cash flows for the periods presented (in thousands): Nine Months Ended September 30, 2022 2021 Cash used in operating activities $ (1,577,743) $ (745,401) Cash used in investing activities (3,289,021) (299,294) Cash (used in) provided by financing activities (165,566) 5,236,843 Net (decrease) increase in cash, cash equivalents, and restricted cash $ (5,032,330) $ 4,192,148 Cash Used in Operating Activities Our cash flows used in operating activities to date have been primarily comprised of cash outlays to support overall growth of the business, especially the costs related to inventory and sale of our vehicles, costs related to research and development, payroll and other general and administrative activities. As we continue to ramp up hiring after starting commercial operations, we expect our cash used in operating activities to increase significantly before it starts to generate any material cash flows from our business. Net cash used in operating activities increased by $832.3 million to $1,577.7 million during the nine months ended September 30, 2022, compared to the same period in the prior year. The increase was primarily due to the increase in net loss excluding non-cash expenses and gains of $308.4 million and an overall increase in net operating assets and liabilities of $523.9 million. The change in net operating assets and liabilities was mainly attributable to an increase in inventory driven by planned production ramp-up, and other current liabilities related to operating activities. Cash Used in Investing Activities We continue to experience negative cash flows from investing activities as we expand our business and continue to build our infrastructure. Cash flows from investing activities primarily relate to purchases of investments and capital expenditures to support our growth. Net cash used in investing activities increased by $2,989.7 million to $3,289.0 million during the nine months ended September 30, 2022, compared to the same period in the prior year, primarily attributable to purchases of investments of $2,726.7 million during the nine months ended September 30, 2022 and an increase in capital expenditures of $485.7 million, partially offset by proceeds from maturities of investments of $125.4 million and capital expenditure support received from MISA of $97.3 million during the nine months ended September 30, 2022. Cash (Used in) Provided by Financing Activities Since inception, we have financed our operations primarily from the issuances of equity securities, including convertible preferred stock, the proceeds of the Merger, and the 2026 Notes. Net cash used in financing activities were $165.6 million during the nine months ended September 30, 2022, compared to $5,236.8 million of net cash provided by financing activities for the same period in the prior year. The change was primarily attributable to gross proceeds of approximately $4,439.2 million from the Merger, proceeds from the issuance of Legacy Lucid Series E preferred stock of $600.0 million, proceeds from the exercises of public warrants of $173.3 million, and proceeds from short-term insurance financing note of $41.9 million during the nine months ended September 30, 2021, and remittance for tax withholding obligations in connection with vesting of the CEO time-based and performance-based RSUs through net settlement of $196.4 million during the nine months ended September 30, 2022. Critical Accounting Policies and Estimates The condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures in our financial statements and accompanying notes. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions due to the inherent uncertainty involved in making those estimates and any such differences may be material. 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, 2021 and Note 2 “Summary of Significant Accounting Policies” to our 50 condensed consolidated financial statements in Item 1 of Part I of this Quarterly Report. 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, 2021. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet activities or have any arrangements or relationships with unconsolidated entities, such as variable interest, special purpose, and structured finance entities. Item 3. Qualitative and Quantitative Disclosures about Market Risk. We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and due to inflationary pressure. Interest Rate Risk We are exposed to market risk for changes in interest rates applicable to our cash and cash equivalents, restricted cash, and investments. We had cash, cash equivalents, restricted cash, and investments totaling approximately $3.85 billion as of September 30, 2022. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, primarily issued by the U.S. government or liquid money market funds. We do not invest in financial instruments for trading or speculative purposes. We utilize external investment managers who adhere to the guidelines of our investment policy. Based on investment positions as of September 30, 2022, a hypothetical 100 basis point increase in interest rates would result in approximately $12.0 million incremental decline in the fair market value of our portfolio. Inflationary Pressure The U.S. economy has experienced increased inflation recently, including as a result of the COVID-19 pandemic. Our cost to manufacture a vehicle is heavily influenced by the cost of the key components and materials used in the vehicle, cost of labor, as well as cost of equipment used in our manufacturing facilities. As we continue our phased construction of our AMP-1 facility, increases in steel prices and cost of construction labor have led to higher capital expenditures. We expect that the inflationary pressure will persist for the foreseeable future.