The following discussion and analysis is intended to help the reader understand FF's results of operations and financial condition. This discussion and analysis is provided as a supplement to, and should be read in conjunction with FF's Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K (this "Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to FF's plans and strategy for FF's business, includes forward-looking statements that involve risks and uncertainties. FF's actual results may differ materially from management's expectations as a result of various factors, including but not limited to those discussed in the section entitled "Risk Factors" above and "Cautionary Note Regarding Forward Looking Statements" below. The objective of this section is to provide investors an understanding of the financial drivers and levers in FF's business and describe the financial performance of the business. Unless context otherwise requires, all references in this section to the "Company," "FF," "we," "us," "our" and similar terms refer toFaraday Future Intelligent Electric Inc. , aDelaware corporation, and its consolidated subsidiaries. References to "PSAC" refer toProperty Solutions Acquisition Corp. , aDelaware corporation, our predecessor company prior to the consummation of the Business Combination (as defined herein), and "Legacy FF" refers toFF Intelligent Mobility Global Holdings Ltd. , an exempted company with limited liability incorporated under the laws of theCayman Islands , together with its consolidated subsidiaries, prior to the Business Combination.
Cautionary Note Regarding Forward-Looking Statements
This Report includes 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"). These forward-looking statements can be identified by the use of forward-looking terminology, including the words "believes," "estimates," "anticipates," "expects," "intends," "plans," "may," "will," "potential," "projects," "predicts," "continue," or "should," or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. Such statements include, but are not limited to, any statements relating to our financial and business performance, market acceptance and success of our business model, our ability to expand the scope of our offerings, and our ability to comply with the extensive, complex, and evolving regulatory requirements. These statements are based on management's current expectations, but actual results may differ materially due to various factors. The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control), and 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 under the section titled "Risk Factors" in Item 1A above. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation (and expressly disclaim any obligation) to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under the section titled "Risk Factors" in Item 1A above may not be exhaustive. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
Overview
Faraday Future Intelligent Electric, Inc. (together with its consolidated subsidiaries, "FF," "the Company," "we," "us" or "our") is aCalifornia -based, global, shared, intelligent, mobility ecosystem company founded in 2014 with a vision to disrupt the automotive industry. 99 -------------------------------------------------------------------------------- OnJuly 21, 2021 ,Faraday Future Intelligent Electric Inc. (f/k/aProperty Solutions Acquisition Corp. ("PSAC")), aDelaware corporation, consummated the previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated as ofJanuary 27, 2021 (as amended, the "Merger Agreement"), by and among PSAC,PSAC Merger Sub Ltd. , an exempted company with limited liability incorporated under the laws of theCayman Islands and wholly-owned subsidiary of PSAC ("Merger Sub"), and Legacy FF. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Legacy FF, with Legacy FF surviving the merger as a wholly-owned subsidiary of the Company (the "Business Combination"). Upon the consummation of the Business Combination, PSAC changed its name fromProperty Solutions Acquisition Corp. toFaraday Future Intelligent Electric Inc. , and FF's Class A Common Stock and Public Warrants began trading on The Nasdaq Global Select Market ("Nasdaq") under the ticker symbols "FFIE" and "FFIEW," respectively. With headquarters inLos Angeles, California , FF designs and engineers next-generation, intelligent, connected, electric vehicles. FF intends to manufacture vehicles at its ieFactoryCalifornia production facility inHanford, California , with additional future production capacity needs addressed through a contract manufacturing agreement withMyoung Shin Co., Ltd. ("Myoung Shin"), an automotive manufacturer headquartered inSouth Korea . FF has additional engineering, sales, and operational capabilities inChina and is exploring opportunities for potential manufacturing capabilities inChina through a joint venture or other arrangement. Since its founding, FF has created major innovations in technology, products, and a user-centered business model. FF believes these innovations will enable FF to set new standards in luxury and performance that will redefine the future of intelligent mobility. FF's innovations in technology include its proprietary Variable Platform Architecture ("VPA"), propulsion system, and Internet Artificial Intelligence ("I.A.I.") system. We believe the following combination of capabilities of FF's products, technology, the recent upgrade to PT Gen 2.0, team, and business model distinguish FF from its competitors:
? FF has designed and developed a breakthrough mobility platform – its proprietary
VPA.
? FF’s propulsion system provides a competitive edge in acceleration and range, enabled
by an expected industry-leading inverter design, and propulsion system.
? FF’s advanced I.A.I. technology offers high-performance computing, high speed internet
connectivity, Over the Air (“OTA”) updating, an open ecosystem for third-party
application integration, and a Level 3 autonomous driving-ready system, in addition to
several other proprietary innovations that enable FF to build an advanced,
highly-personalized user experience.
? Since inception, FF has developed a portfolio of intellectual property, established
its proposed supply chain, and assembled a global team of automotive and technology
experts and innovators to achieve its goal of redefining the future of the automotive
industry. As of
globally.
? FF’s B2C (business-to-customer) passenger vehicle pipeline over the next five years
includes the FF 91 series, the FF 81 series, and the FF 71 series.
? FF believes that the FF 91 will be the first ultra-luxury EV to offer a
highly-personalized, fully-connected user experience for driver and passengers. Based on
certain management assumptions, including the timely receipt of
million of additional funding, which commitments have been secured as part of the Sixth
Amendment, and approval by stockholders of the proposal to increase FFIE’s authorized
shares of Class A Common Stock from 815,000,000 to 1,690,000,000, increasing the total
authorized shares from 900,000,000 to 1,775,000,000, which approval was obtained during
the special meeting of stockholders held on
equipment installation and commissioning work at the ieFactory
effectiveness of certain expense reduction and payment delay measures, and timely and
successful testing and certification, FF expects start of production of the FF 91
Futurist at the end of
users anticipated to begin before the end of
100 --------------------------------------------------------------------------------
? Subject to future financing, FF plans to produce and deliver its second passenger
vehicle, the FF 81, which will be a premium, mass-market electric vehicle
positioned to compete against the Tesla Model S, Tesla Model X, the BMW 5-series,
and the Nio ES8.
? Subject to future financing, FF plans to develop a mass-market passenger vehicle,
the FF 71. FF expects to start production and deliveries of the FF 71 subsequent to
production and deliveries of the FF 81. The FF 71 will integrate full connectivity
and advanced technology into a smaller vehicle size and is positioned to compete
against the Tesla Model 3, Tesla Model Y, and the BMW 3-series.
? Subject to future financing, FF plans to develop a Smart Last Mile Delivery
(“SLMD”) vehicle to address the high-growth, last-mile delivery opportunity,
particularly in
the last-mile delivery segment, allowing FF to expand its total addressable market
and avenues of growth.
FF has adopted a hybrid manufacturing strategy consisting of its refurbished manufacturing facility inHanford, California and a collaboration with Myoung Shin inSouth Korea . FF is also exploring other potential contract manufacturing options in addition to the contract manufacturing agreement inSouth Korea along with the possibility of manufacturing capacity inChina through a joint venture or other arrangements. All passenger vehicles as well as the SLMD vehicle are expected to be available for sale in theU.S. andChina , with potential expansion to European markets.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies. Any such election to not take advantage of the extended transition period is irrevocable. FF is an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. FF expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.
Segment Information
FF has determined that FF operates as one reportable segment, which is the
design, development, manufacture, engineering, sale, and distribution of
electric vehicles and related products in the global market.
Impact of COVID-19 on FF’s Business
The residual effects of the COVID-19 pandemic continue to impact global and domestic economic conditions, which have affected our operations, our suppliers and other business partners. The impact of COVID-19 includes changes in consumer and business behavior, pandemic fears, market downturns, restrictions on business, and individual activities have created significant volatility in the global economy and have led to reduced economic activity. Consequently, we have experienced increased levels of overall cost inflation and challenges within our supply chain. Such residual impact also continue to create a disruption in the manufacture, delivery, and overall supply chain of vehicle manufacturers and suppliers and has led to a global decrease in vehicle sales in markets around the world. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans, restrictions, quarantines, stay-at-home or shelter-in-place orders, and business shutdowns. For example, FF's employees based inCalifornia have been subject to stay-at-home orders from state and local governments. The extent of the continuing impact of the COVID-19 pandemic on FF's operational and financial performance is uncertain and will depend on many factors outside FF's control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of 101 --------------------------------------------------------------------------------
the pandemic on the global economy, including FF’s supply chain, and on the
demand for consumer products. Future measures taken by government authorities in
response the COVID-19 pandemic could adversely affect FF’s construction and
manufacturing plans, sales and marketing activities, and business operations.
In response to the pandemic,Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") administered by theUnited States Small Business Administration ("SBA"). In 2020, Legacy FF received a Paycheck Protection Program ("PPP") loan in the amount of$9.2 million . The Company was notified byEast West Bank that a principal amount of$9.0 million as well as accrued interest of$0.2 million relating to the PPP loan had been forgiven as ofDecember 31, 2021 . The Company paid an amount of$0.2 million inApril 2022 to settle the PPP loan. The extent of the residual impact of the COVID-19 pandemic on FF's operational and financial performance is uncertain and will depend on many factors outside FF's control, including, emergence of new variants and mitigation measures imposed to control outbreaks as a result of such new variants; the availability, distribution and effectiveness of vaccines; and the impact of the outbreak of new variants and any mitigation measures imposed as a result of such variants on the global economy, including FF's supply chain, FF's construction and manufacturing plans, sales and marketing activities, and business operations and on the demand for consumer products. Such residual impact may further slowdown FF's ability to ramp-up FF's production program on time to satisfy investors and potential customers. Any further delay to production will delay FF's ability to produce and deliver the FF 91 and begin generating revenue. FF does not currently anticipate any material impairments as a result of COVID-19; however, FF will continue to evaluate conditions on an ongoing basis. Even after the COVID-19 pandemic has subsided, FF may continue to experience an adverse impact to its business as a result of the global economic impact and any lasting effects on the global economy, including any recession that has occurred or may occur in the future. Refer to the section titled "Risk Factors" in Item 1A of this Annual Report on Form 10-K for a full discussion of the risks associated with the COVID-19 pandemic. Business Combination OnJune 24, 2021 , the registration statement on Form S-4 (File No. 333-255027), initially filed with theU.S. Securities and Exchange Commission ("SEC") onApril 5, 2021 (as amended, the "Registration Statement"), relating to the Business Combination was declared effective by theSEC , and (ii) PSAC established a record date ofJune 24, 2021 and a meeting date ofJuly 21, 2021 for its special meeting of stockholders, where the Business Combination was approved. For purposes of the discussions in this section related to conversion on the closing of the Business Combination of all issued and outstanding Legacy FF Ordinary Stock into shares of Common Stock of FFIE in accordance with the terms and conditions of the Merger Agreement and the settlement of liabilities in conjunction with the closing of the Business Combination, we refer to that parties' right to receive Class A and Class B Common Stock.
Recent Developments
The following major milestones and events took place during the year ended
? Announced that
additional position of Head of Manufacturing Operations, on an interim basis.
? Announced its sponsorship and attendance at the 2022 Pebble Beach Concours
d’Elegance taking place from
available for demo rides and made a special appearance on the Concept Lawn on
? Announced the FF 91 Futurist, the Ultimate Intelligent TechLuxury EV, was officially
certified to have a robust rating of 381 miles of EV range from theU.S. Environmental Protection Agency ("EPA").
? Announced that
independent registered public accounting firm for the year ending
effective
accounting firm.
? Announced that a thorough independent external investigation found that allegations
that certain directors were conspiring to pursue an unnecessary bankruptcy of the
Company were without merit.
102 --------------------------------------------------------------------------------
? Announced an agreement relating to its governance dispute with FF Top. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Recent Developments -Recent Governance Developments” for more
information.
? Announced the resignation of
Financial Officer, effective
Company followed the successful completion of key milestones in the Company’s
reporting and fundraising activities, and was not a result of any disagreement with
the Company’s former independent auditors or any member of Company management on
any matter of accounting principles or practices, financial statement disclosure,
or internal controls.
? Appointed
effective
Chief Accounting Officer of Romeo Power, Inc., and spent over 13 years with PwC.
Ms.
?
firm as of and for the year ending
2022.
? Announced the achievement of Production Milestone #6, completion of construction and
equipment installation in final vehicle manufacturing areas at FF’s
? Announced the
as a zero-emissions vehicle (ZEV). The ZEV program is part of CARB’s Advanced Clean
Cars package of coordinated standards that control smog-causing pollutants and
greenhouse gas emissions of passenger vehicles in
? Announced senior management changes as it continues to bolster its leadership team
and ready the FF 91 Futurist for full-scale production:
Senior Vice President, Product Execution.
Business Development. Xiao Ma becomes acting head of Product and Mobility
Ecosystem.
? Hosted a Global Investor Business Update meeting on
plans to start production of FF 91 Futurist in
management assumptions disclosed elsewhere in), financing progress and completion
of product upgrades.
? Announced that the FFIE Board of Directors has appointed FF China CEO Xuefeng (“XF”)
Chen as Global CEO of Faraday Future.
removed as Global CEO by the FFIE Board of Directors following a comprehensive
evaluation of the Company’s performance since it went public in
? Announced the selection of Innovusion’s Falcon LiDAR to power the FF 91’s
autonomous driving system.
Subsequent to
place:
? Announced 356 non-binding, fully refundable pre-orders as of
2023. Pre-orders are fully refundable, non-binding, paid deposits for the
FF 91 Futurist vehicles available initially for sale to customers in the
deposit, depending on the edition selected, for customers in the
up toCNY 50,000 orCNY 20,000 deposit, depending on the edition selected, for customers inChina .
? Announced Faraday Future’s return to the Consumer Electronics Show, CES 2023, in
? Announced that the Company and the China Huanggang Government (“City of Huanggang”)
have also reached the non-binding Cooperation Framework Agreement for promoting its
? Announced the shipment of one of the latest production-intent FF 91 Futurist testing
vehicles to
infrastructure compatibility along with other hardware and software applications.
103 --------------------------------------------------------------------------------
? Announced that FF is targeting a start of production date for its flagship FF 91
Futurist of
investors, at the Company’s
Recent Governance Developments
? As previously disclosed, from June to
dispute over various terms of the Shareholder Agreement as then in effect, including
relating to FF Global’s right to remove its designees from the Board of Directors. On
settlement with FF Top, the largest holder of the Company’s Common Stock, including
with respect to the composition of the Board, resignation of Ms.
the Heads of Agreement, on
mutual release agreement (the “Mutual Release”), pursuant to which, the Company and FF
agreed to a mutual general release of claims and to settle fully and finally all
differences between them, including any differences that arose out of the Company
directors’ service as a director, employee, officer or manager of the Company up
through and including the date of the Mutual Release subject to customary exceptions.
See “Management – Governance Agreement with FF Top and FF Global” for more information.
Pursuant to the Heads of Agreement, FF Top and FF Global caused all actions in the
Global and/or any of their respective controlled affiliates as of the effective date of
the Heads of Agreement, naming the Company or any of its directors or officers to be
dismissed without prejudice as of
Shortly following the execution of the Heads of Agreement, FF Global began making
additional demands of the Company which were beyond the scope of the terms contemplated
by the Heads of Agreement and pertained to, among other things, the Company’s
management reporting lines and certain governance matters. On
Global alleged that the Company was in material breach of the spirit of the Heads of
Agreement. The Company believes it has complied with the applicable terms of the Heads
of Agreement, and disputes any characterization to the contrary. Such disputes divert
management and Board resources and are costly. There can be no assurance that this or
any other dispute between the Company and FF Global will not result in litigation. See
“Risk Factors – Risks Related to FF’s Business and Industry – Disputes with our
stockholders are costly and distracting.”
On
their resignation from the Board effective immediately. On
Vogel also tendered his resignation from the Board effective on
his receipt of a supplemental release pursuant to the Mutual Release.
? On
Replacement FF Top Designees” stating, among other things, that FF Top was nominating
Ms.
asserted the right to nominate Ms.
Swenson’s resignation because such resignation was not effected in accordance with
the Heads of Agreement, and thus, the provision that
empty until the Annual Meeting did not apply. FF Top maintained that it believed that
current level of FF Top’s beneficial ownership of the Company shares, in light of
substantial dilution in its ownership of the Company shares based on recent financing
transactions entered into by the Company. See “Management – Governance Agreement with
FF Top and FF Global" for more information.
104
--------------------------------------------------------------------------------
? On
Voting Agreement. Pursuant to the FF Top Amendment, FF Top (among other things)
reaffirmed its commitment under the FF Top Voting Agreement, in light of the
extension of the maturity date of the Bridge Notes under the Third Amendment, to vote
all of its shares of the Company voting stock in favor of the proposal to approve
(for purposes of the Nasdaq listing rules) the issuance, in the aggregate, of shares
in excess of 19.99% of the total issued and outstanding shares of the Company Common
Stock pursuant to the Financing Documents at the special meeting of the Company’s
stockholders held on
Amendment are conditioned on (i) the appointment of Mr.
nominee, as applicable), in lieu of Ms.
Company as the fourth FF Top designee no later than
Nominating and Corporate Governance Committee of the Board with respect to the Nasdaq
independence rules and legal compliance and criminal compliance) (provided that if
Committee of the Board, then FF Top will be permitted to nominate another individual
to the Board); and (ii) constructive engagement by Mr.
the Board, directly with representatives of FF Top on certain additional governance
and management matters and, to the extent the Chairman of the Board so determines, in
his discretion, such matters will be put to a discussion and a vote of the full
Board. On
2022, Mr.
immediately. See “Certain Relationships and Related Person Transactions – Certain
Relationships and Related Person Transactions – the Company – Voting Agreements by FF
? On
as of
removed from the Global CEO position by the Board onNovember 26, 2022 .
? On
Execution, resigned from the Company. On
on the role of Senior Vice President, Product Execution, effective immediately.
? On
resignation was effective on
was appointed to the Board, effective immediately, following the resignation of Mr.
Liu. On
which resignation was effective on
Sun was appointed to the Board, effective immediately, following the resignation of
Shareholder Agreement. On
resignation from the Board, which resignation was effective immediately. On December
27, 2022, Mr.
following the resignation of
his resignation from the Board, which resignation was effective immediately.
remains a consultant of the Company as an independent contractor until
2023, at which time both parties will mutually reassess the relationship. On January
25, 2023, Mr.
following the resignation of
? On
the Board approved Mr.
the Board, as well as FF’s product, mobility ecosystem, I.A.I., and advanced R&D
technology departments reporting directly to
ecosystem, capital markets, human resources and administration, corporate strategy and
and controls to be determined by the Board after consultation with the Company’s
management. The Company’s remaining departments continue to report to Mr.
Based on the changes to his responsibilities within the Company, the Board determined
that
Exchange Act and an “executive officer” of the Company under Rule 3b-7 under the
Exchange Act.
105
--------------------------------------------------------------------------------
? On
Agreement (the “Amended Shareholder Agreement”) with FF Top and, solely for purposes
of certain amendments to the Heads of Agreement, FF Global, which amended and
restated the Shareholder Agreement, as amended by the Heads of Agreement. Pursuant to
the Amended Shareholder Agreement, (a) FF Top has the right to nominate certain
designees to the Board, (b) the Company agreed not to elect to be treated as a
“controlled company” as defined under Nasdaq rules, (c) the Company agreed to
cooperate with any written requests by FF Top relating to any pledge, hypothecation
or grant of shares of Common Stock, (d) FF Top informed the Company that FF Top
expects certain proposals to be submitted to Company stockholders for approval to
amend provisions of the Company’s Amended and Restated Charter related to voting
power of Class B Common Stock, FF Top designees to the Board and written consent of
stockholders, (e) the Company agreed not to enter into any transaction or series of
related transactions that would require a shareholder vote under Nasdaq Listing Rule
5635(d) (without giving effect to Section 5635(f) thereof) without FF Top’s prior
written consent, which written consent shall not be unreasonably withheld,
conditioned or delayed, (f) the Company agreed that investors under the SPA shall
have the right to enter into any voting agreement or grant a voting proxy, at any
time and on any terms, with or to FF Top with respect to any shares of Common Stock
held by such investors, (g) FF Top agreed (i) to vote all shares of Common Stock that
it beneficially owns in favor of an increase in the Company’s authorized shares of
Class A Common Stock from 815.0 million to 1.69 billion (as such number may be
adjusted due to any stock split, reverse stock split or other similar corporate
action after
to consider such proposal (as such meeting may be adjourned or postponed) and (ii)
not to transfer, convert or otherwise take any action that would result in the
conversion of any shares of Class B Common Stock into Class A Common Stock of the
Company prior to the Company’s receipt of shareholder approval for an increase in the
number of authorized shares of Class A Common Stock in accordance with the foregoing,
(h) (i) FF Top released and waived claims it or any other “FF Top Parties” (i.e., FF
Top,
Holding LLC, a
affiliates, and their respective successors and assigns) may have had against the
Company and the Company Parties (described below; such claims, the “FF Top Claims”)
relating to matters occurring at any time after
execution of the Amended Shareholder Agreement (the “FF Top Release”), and (ii) the
Company released and waived any and all claims it or any other “Company Parties”
(i.e., the Company and each of the Company’s controlled affiliates, each individual
currently serving as a director or on the management team of the Company or any of
its controlled affiliates, and the respective successors and assigns of any of the
foregoing) may have against FF Top Parties relating to any matters occurring at any
time after
Agreement, and (i) the Company, FF Top and FF Global agreed that certain conditions
in the Heads of Agreement have been satisfied, that there are no Definitive Documents
(as such term is defined in the Heads of Agreement) beyond the Heads of Agreement and
the Amended Shareholder Agreement, and to certain other amendments of the Heads of
Agreement. See “Management – Governance Agreement with FF Top and FF Global” for more
information.
Recent Financing Developments
? On
with
convertible senior secured notes financing and the potential for an additional
funded within 90 days after the initial closing.
? On
Senior Secured Promissory Notes, to amend, among other things (a) the SPA, (b) that
certain Convertible Senior Secured Promissory Note in favor of FF Simplicity in the
principal amount of
certain Convertible Senior Secured Promissory Note in favor of FF Simplicity in the
principal amount of
? On
million under the SPA, subject to the completion of due diligence by the Company of
Senyun and its financing sources.
106 --------------------------------------------------------------------------------
? On
SPA (the “Third Amendment”) with FF Simplicity as administrative and collateral agent
and purchaser, Senyun as purchaser, and
? On
(the “Fourth Amendment”) with FF Simplicity as administrative and collateral agent
and purchaser, Senyun as purchaser, and
? On
(the “Senyun Amendment”) with FF Simplicity as administrative and collateral agent
and Senyun as purchaser.
? On
SPA (the “Fifth Amendment”) with FF Simplicity as administrative and collateral agent
and Senyun as purchaser.
? On
Agreement (The “Sixth Amendment”) with FF Simplicity as administrative and collateral
agent and Senyun, FF Top, FF Simplicity, FF Prosperity, Acuitas and other purchasers.
? Beginning on
amount of the outstanding convertible notes issued by the Company in a private
placement pursuant to a Second Amended and Restated Note Purchase Agreement, dated
as of
convertible notes issued under the NPA, the “ATW NPA Notes”), into shares of Class
A Common Stock, as follows below:
Total Principal
Amount of
ATW NPA Notes Total Number of Shares
Converted Conversion of Class A Common
Conversion Period (in thousands) Price Stock Issued
August 16, 2022 to September 14,
2022 $67,218 $0.84 to $2.29 64,843,850
? On
with an exercise price of
Class A Common Stock, resulting in net cash exercise proceeds to FFIE of
million.
? On
each with an exercise price of
shares of Class A Common Stock.
? On
awards, each exercisable into one share of Class A Common Stock, as part of the
Company’s 2021 Stock Incentive Plan. Vesting terms include annual vesting in 25%
increments from the vesting start date, 100% vesting as of the vesting start date,
and vesting upon the start of FF 91 production.
? On
Investors, pursuant to which, on
million in aggregate principal amount of the outstanding ATW NPA Notes for
6,269,031 newly issued shares of Class A Common Stock, reflecting a price per share
of Class A Common Stock of
? On
pursuant to which, on
aggregate principal amount of the outstanding ATW NPA Notes for 5,227,837 newly issued
shares of the Class A Common Stock, reflecting a price per share of Class A Common
Stock of
ATW NPA Notes.
107
--------------------------------------------------------------------------------
? Between
Trading LLC converted portions of the aggregate principal amount of the outstanding
convertible notes of
conversion price of
Common Stock.
? Between
Trading LLC exercised 43,874,615 SPA Warrants using exercise prices of
15, 2022 and
Warrants using an exercise price of
Class A Common Stock.
? On
initial commitment of
right, but not the obligation, to issue and sell to
shares Class A Common Stock subject to customary conditions including an effective
registration statement for the resale of such shares. FFIE has the right to increase
the
The shares will be sold to
VWAP at the time of funding, and generally limited to one-third of FFIE’s trading
volume during such time period. On
registration statement on Form S-1 (File No. 333-268722) to register shares of Class
A Common Stock to be issued under the SEPA.
Special Committee Investigation
As previously disclosed onNovember 15, 2021 , the Board established a special committee of independent directors ("Special Committee") to investigate allegations of inaccurate Company disclosures, including those made in anOctober 2021 short seller report and whistleblower allegations, which resulted in FFIE being unable to timely file its third quarter 2021 Quarterly Report on Form 10-Q, Annual Report on Form 10-K for the year endedDecember 31, 2021 , first quarter 2022 Quarterly Report on Form 10-Q and amended Registration Statement on Form S-1 (File No. 333-258993). The Special Committee engaged outside independent legal counsel and a forensic accounting firm to assist with its review. OnFebruary 1, 2022 , FFIE announced that the Special Committee completed its review. OnApril 14, 2022 , FFIE announced the completion of additional investigative work based on the Special Committee's findings which were performed under the direction of the Executive Chairperson, reporting to the Audit Committee. In connection with the Special Committee's review and subsequent investigative work, the following findings were made: In connection with the Business Combination, statements made by certain Company employees to certain investors describing the role of Mr.Yueting Jia , the Company's founder and former CEO, within the Company were inaccurate and his involvement in the management of the Company post-Business Combination was more significant than what had been represented to certain investors.
? The Company’s statements leading up to the Business Combination that it had
received more than 14,000 reservations for the FF 91 vehicle were potentially
misleading because only several hundred of those reservations were paid, while the
others (totaling 14,000) were unpaid indications of interest.
? Consistent with FFIE’s previous public disclosures regarding identified material
weaknesses in its internal control over financial reporting, the Company’s internal
control over financial reporting requires an upgrade in personnel and systems.
? The Company’s corporate culture failed to sufficiently prioritize compliance.
?
subsequently leased to the Company was not disclosed in FFIE’s corporate housing
disclosures.
? In preparing FFIE’s related party transaction disclosures, the Company failed to
investigate and identify the sources of loans received from individuals and
entities associated with Company employees.
108 -------------------------------------------------------------------------------- In addition, the investigation found that certain individuals failed to fully disclose to individuals involved in the preparation of FFIE'sSEC filings their relationships with certain related parties and affiliated entities in connection with, and following, the Business Combination, and failed to fully disclose relevant information, including but not limited to, information in connection with related parties and corporate governance to FFIE's former independent registered public accounting firmPricewaterhouseCoopers LLP . The investigation also found that certain individuals failed to cooperate and withheld potentially relevant information in connection with the Special Committee investigation. Among such individuals were non-executive officers or members of the management team of FF, and remedial action was taken with respect to such individuals based on the extent of non-cooperation and/or withholding of information. The failure to cooperate with the investigation was taken into consideration in connection with the remedial actions outlined below with respect toJerry Wang , and withholding of information also affected the remedial action taken with respect toMatthias Aydt . Based on the results of the investigation, the Special Committee concluded that, except as described above, other substantive allegations of inaccurate FF disclosures that it evaluated, were not supported by the evidence reviewed. Although the investigation did not change any of the above findings with respect to the substantive allegations of inaccurate FF disclosures, the investigation did confirm the need for remedial actions to help ensure enhanced focus on compliance and disclosure within FF.
Based on the results of the Special Committee investigation and subsequent
investigative work described above, the Board approved the following remedial
actions designed to enhance oversight and corporate governance of the Company:
? the appointment of
created position of Executive Chairperson of FF.
? Dr.
and receiving a 25% annual base salary reduction;
? the removal of
as Chief Product & User Ecosystem Officer of FFIE. Certain dual-reporting
arrangements were eliminated with respect to
directly to
“Risk Factors – Risks Related to FF’s Business and Industry –
Global, over which
Company’s management, business and operations, and may use this control in ways that
are not aligned with the Company’s business or financial objectives or strategies or
that are otherwise inconsistent with the Company’s interests. Such significant
influence may increase if and to the extent the current members of the Board and
management are removed and replaced with individuals who are aligned with
and/or FF Global.”
role was limited from a policy-making position to focusing on (a) Product and
Mobility Ecosystem and (b) Internet, Artificial Intelligence, and Advanced R&D
technology;
?
Definition and a director of FFIE, and currently Senior Vice President, Product
Execution and a director of FFIE, being placed on probation as an executive officer
for a six-month period, during which period he remained a non-independent member of
the Board, which probationary period has since ended;
? the appointment of
the composition of Board committees, including
his role as Chairman of the Board and Chair of the Nominating and Corporate
Governance Committee and becoming a member of the Audit and Compensation Committees
of the Board;
Governance Committee; and
theNominating and Corporate Governance Committee of the Board;
? the suspension without pay of
resign from FF on
109 --------------------------------------------------------------------------------
? the assessment and enhancement of FF’s policies and procedures regarding financial
accounting and reporting and the upgrading of FF’s internal control over financial
accounting and reporting, including by hiring additional financial reporting and
accounting support, in each case at the direction of the Audit Committee;
? the implementation of enhanced controls around FF’s contracting and related party
transactions, including regular attestations by FF’s employees with authority to bind
FF to contracts and related party transactions, for purposes of enabling FF to make
complete and accurate disclosures regarding related party transactions;
? the implementation of a comprehensive training program for all directors and officers
regarding, among other things, internal FF policies;
? the separation of
Secretary; and
? certain other disciplinary actions and terminations of employment with respect to
other FF employees (none of whom is an executive officer).
As ofFebruary 27, 2023 , FF is continuing to implement certain of the remedial actions approved by the Board. However, certain of these remedial actions are no longer in effect. For instance,Ms. Swenson resigned from the Board onOctober 3, 2022 . Moreover, effective onFebruary 26, 2023 , certain departments within the Company report to bothMr. Jia and Mr.Xuefeng Chen , including the Company's user ecosystem, capital markets, human resources and administration, corporate strategy andChina departments, subject to processes and controls to be determined by the Board after consultation with the Company's management. The Company's product, mobility ecosystem, I.A.I., and advanced R&D technology departments report directly toMr. Jia , while the remaining departments continue to report to Mr.Xuefeng Chen . Further, based on the changes to his responsibilities within FF, the Board determined thatMr. Jia is an "officer" of the Company within the meaning of Section 16 of the Exchange Act, and an "executive officer" of the Company under Rule 3b-7 under the Exchange Act. In addition to the above, the Company strengthening its compliance policies and procedures, including the hiring of a Compliance Officer with the title of Deputy General Counsel (hired inMarch 2023 ), who will report on a dotted line to the Chair of the Audit committee, and a Director of Risks and Internal Controls. However there is no assurance can be provided that the remedial measures that continue to be implemented and additional actions by the Company to enhance its compliance policies and procedures will be implemented in a timely manner or at all, or will be successful to prevent inaccurate disclosures in the future. Please see "Risk Factors - Risks Related to FF's Business and Industry - FF is taking remedial measures in response to the Special Committee findings. There can be no assurance that such remedial measures will be successful. In addition, there can be no assurance that such remedial measures will be fully implemented in light of the recent corporate governance agreements with FF Top and FF Global." However, pursuant to the Heads of Agreement, FF has implemented certain governance changes that impact certain of the above-discussed remedial actions. OnOctober 3, 2022 ,Ms. Swenson tendered her resignation from her role as both Executive Chairperson and member of the Board effective immediately. In addition, onOctober 3, 2022 , Mr.Scott Vogel resigned from the Board effective immediately and Mr.Jordan Vogel resigned effective onOctober 5, 2022 upon his receipt of a supplemental release pursuant to the Mutual Release. OnOctober 28, 2022 , Mr.Brian Krolicki tendered his resignation from the Board effective immediately. OnDecember 15, 2022 , Mr.Lee Liu tendered his resignation from the Board, which resignation was effective onDecember 18, 2022 . OnDecember 18, 2022 , Mr.Jie Sheng was appointed to the Board, effective immediately, following the resignation ofMr. Liu . OnDecember 25, 2022 , Mr.Edwin Goh tendered his resignation from the Board, which resignation was effective onDecember 26, 2022 . OnDecember 27, 2022 , Ms.Ke Sun was appointed to the Board, effective immediately, following the resignation ofMr. Goh .Mr. Sheng andMs. Sun are designees of FF Top pursuant to the Amended Shareholder Agreement. OnDecember 26, 2022 , Dr.Carsten Breitfeld tendered his resignation from the Board, which resignation was effective immediately. OnDecember 27, 2022 , Mr.Xuefeng Chen was appointed to the Board, effective immediately, following the resignation ofDr. Breitfeld . OnJanuary 20, 2023 , Mr.Qing Ye tendered his resignation from the Board, which resignation was effective immediately.Mr. Ye remains a consultant of the Company as an independent contractor untilNovember 18, 2023 , at which time both parties will mutually reassess the relationship. OnJanuary 25, 2023 , Mr.Chui Tin Mok was appointed to the Board, effective immediately, following the resignation ofMr. Ye . See "Management - Governance Agreement with FF Top and FF Global" for more information. Subsequent to FFIE announcing the completion of the Special Committee investigation onFebruary 1, 2022 , FFIE, certain members of the management team and employees of FFIE received a notice of preservation and subpoena from the staff of theSEC stating that theSEC had commenced a formal investigation relating to the matters that were the subject of the Special Committee investigation. FFIE, which had previously voluntarily contacted theSEC in connection with the Special 110 -------------------------------------------------------------------------------- Committee investigation inOctober 2021 , is cooperating fully with theSEC's investigation. The outcome of such an investigation is difficult to predict. FF has incurred, and may continue to incur, significant expenses related to legal and other professional services in connection with theSEC investigation. At this stage, FF is unable to assess whether any material loss or adverse effect is reasonably possible as a result of theSEC's investigation or estimate the range of any potential loss. In addition, inJune 2022 , FF received a preliminary request for information from the DOJ in connection with the matters that were the subject of the Special Committee investigation. FF has responded to that request and intends to fully cooperate with any future requests from the DOJ.
South Korea Contract Manufacturing
InFebruary 2022 , the Company entered into a definitive contract manufacturing and supply agreement withMyoung Shin Co., Ltd. ("Myoung Shin"), aSouth Korea -based automotive manufacturer and parts supplier, to manufacture the Company's second vehicle, the FF 81. The agreement has an initial term of nine years from the start of production of the FF 81, which is scheduled as early as 2024. Pursuant to the agreement, Myoung Shin shall maintain sufficient manufacturing capabilities and capacity to supply FF 81 vehicles to the Company in accordance with the Company's forecasts and purchase orders. The Company and Myoung Shin will each manufacture and supply certain FF 81 parts that Myoung Shin will use in the manufacture and assembly of FF 81 vehicles.
Financing Discussions and New Convertible Note and Warrant Financings
The Company has received financing commitments for the funds required for the start of production of the FF 91 assuming timely receipt of funds, but might need to raise additional capital in the event such financing commitments are not received in a timely manner. Although FF has successfully obtained commitments sinceAugust 2022 from several investors totaling$267.0 million in convertible note financing, subject to certain conditions, and continues financing discussions with multiple parties, FF has experienced delays in securing additional funding commitments, which have exacerbated the supply chain pressures on FF's business. These factors, in addition to the continued rise in inflation and other challenging macroeconomic conditions, have led FF to take steps to preserve its current cash position, including implementing headcount reductions and other expense reduction and payment delay measures. Further efforts, including additional headcount reductions, may be undertaken in response to FF's financial condition and market conditions. Based on certain management assumptions, including the timely receipt of$38.4 to$58.4 million of additional funding, which commitments have been secured as part of the Sixth Amendment, and approval by stockholders of the proposal to increase FFIE's authorized shares of Class A Common Stock from 815,000,000 to 1,690,000,000, increasing the total authorized shares from 900,000,000 to 1,775,000,000, which approval was obtained during the special meeting of stockholders held onFebruary 28, 2023 , timely completion of key equipment installation and commissioning work at the ieFactoryCalifornia inHanford, California , suppliers meeting our supply chain requirements, the implementation and effectiveness of certain expense reduction and payment delay measures, and timely and successful testing and certification, FF expects start of production of the FF 91 Futurist at the end ofMarch 2023 , coming off the line in early April, and deliveries to users anticipated to begin before the end ofApril 2023 . There is no assurance FF will be able to timely receive sufficient funding under existing financing commitments to produce and deliver the FF 91 Futurist on that timeline or at all. If unable to receive sufficient funding, FF will be required to obtain new financing commitments, which may not be available to it under reasonable commercial terms. Further, there cannot be any assurance that FF will be able to develop the manufacturing capabilities and processes, or secure reliable sources of component supply to meet the quality, engineering, design or production standards, or the required production volumes to successfully grow into a viable business. There is also no assurance that FFIE stockholder approval of an authorized share increase will be obtained in a timely manner or at all. OnAugust 14, 2022 , FF entered into a definitive Securities Purchase Agreement (the "SPA") withFF Simplicity Ventures LLC , an entity affiliated withATW Partners LLC , andRAAJJ Trading LLC for$52.0 million of committed near-term convertible senior secured notes financing subject to certain conditions (which was increased onSeptember 23, 2022 to$57.0 million , which increase was subsequently terminated upon the funding of the initial$10.0 million tranche of SPA Notes to Senyun, which occurred onOctober 27, 2022 , another$10.0 million onNovember 15, 2022 , and another$10.0 million inDecember 2022 ), and the potential for an additional$243.0 million of incremental senior secured convertible notes financing to be funded within 90 days after the initial closing. A committed amount of$52.0 million ($43.3 million net of original issue discount and transaction costs) has been funded to date. OnSeptember 23, 2022 , FF and certain investors affiliated withATW Partners LLC entered into a Warrant Exercise Agreement (the "Warrant Exercise Agreement"), pursuant to which, subject to the satisfaction of certain minimum trading price, minimum trading volume and certain other Equity Conditions (as described below), FF will have the right, exercisable on one or more occasions prior toJanuary 23, 2023 , to require theATW Investors to exercise on a cash basis (each, a "Forced Exercise") certain warrants held by theATW Investors , in part, in exchange for newly issued shares of Class A Common Stock in an amount not to exceed (a) for any single Forced Exercise,$7.0 million in 111 -------------------------------------------------------------------------------- aggregate exercise price, and (b) for all Forced Exercises in the aggregate, the difference of (x) the maximum exercise price amount allowed under the Warrant Exercise Agreement (which is approximately$20.0 million ) less (y) the aggregate exercise price of any voluntary exercises of the same warrants held by theATW Investors after the date of the Warrant Exercise Agreement. The "Equity Conditions" are defined in the Warrant Exercise Agreement to include (among others): (a) the effectiveness of one or more registration statements under the Securities Act, (b) the availability of the Annual Report on Form 10-K contained in such registration statement(s) for the resale of the applicable Warrant shares, (c) the continued listing of shares of the Company's Class A Common Stock on a national securities exchange, (d) no occurrence of any "Price Failure" (i.e., the VWAP of the Class A Common Stock failing to exceed$0.85 per share (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations or other similar transactions) on any two (2) trading days during the ten (10) trading day measurement period immediately preceding the relevant determination date), subject to certain permitted adjustments, and (e) no occurrence of any "Volume Failure" (i.e., the aggregate daily dollar trading volume (as reported on Bloomberg) falling below$10.0 million on any two (2) trading days during the ten (10) trading day measurement period immediately preceding the relevant determination date). OnSeptember 25, 2022 , FFIE entered into a Joinder and Amendment Agreement withSenyun, FF Simplicity and RAAJJ Trading LLC , for the purchase of up to$60.0 million under the SPA (with potential increase to$90.0 million ), of which$35.6 million (net of original issue discount and transaction costs) has been funded to date. The initial$10.0 million tranche was funded onOctober 27, 2022 , the second$10.0 million tranche was funded onNovember 15, 2022 , and the third$10.0 million tranche was funded in parts on different dates inDecember 2022 . OnOctober 24, 2022 , FFIE entered into a Limited Consent and Third Amendment to the SPA with FF Simplicity as administrative and collateral agent and purchaser, Senyun as purchaser, andRAAJJ Trading LLC as purchaser. OnNovember 8, 2022 , FFIE entered into a Limited Consent and Amendment to the SPA (the "Fourth Amendment") with FF Simplicity as administrative and collateral agent and purchaser, Senyun as purchaser, andRAAJJ Trading LLC as purchaser. OnDecember 28, 2022 , FFIE entered into a Letter Agreement and Amendment to the SPA (the "Senyun Amendment") with FF Simplicity as administrative and collateral agent and Senyun as purchaser.
On
the SPA (the “Fifth Amendment”) with FF Simplicity as administrative and
collateral agent and Senyun as purchaser.
OnFebruary 3, 2023 , FFIE entered into an Amendment No. 6 to Securities Purchase Agreement (The "Sixth Amendment") with FF Simplicity as administrative and collateral agent and Senyun, FF Top, FF Simplicity, FF Prosperity, Acuitas and other purchasers. As of the date this Annual Report on Form 10-K is filed, we have received$70.0 million ($62.2 net of original issue discount and transaction costs) under the Sixth Amendment. FF is actively engaged in confidential discussions and negotiations with entities affiliated with FF Top and other potential investors with respect to purchasing incremental convertible senior secured notes and/or convertible junior secured notes on the same terms asFF Simplicity Ventures LLC under the SPA. There can be no assurance that FF will be able to successfully obtain additional incremental convertible senior secured note purchasers under the SPA or other debt or equity financing in a timely manner or on acceptable terms, if at all. In particular, the Company is currently conducting due diligence on potential financing sources. This process has been time consuming and may result in the Company not being able to consummate any financing from these or other financing sources on a timely basis or at all. If we are unable to raise sufficient additional funds in the near term, we may be required to further delay our production and delivery plans for the FF 91, reduce headcount, liquidate our assets, file for bankruptcy, reorganize, merge with another entity, and/or cease operations. FF's cash needs after the start of production of the FF 91 will depend on the extent to which FF's actual costs vary from FF's estimates and FF's ability to control these costs and raise additional funds. Any challenges in supplier engagements, delays in ramping capacity or labor at theHanford facility or for sales and service engagements, rising prices of materials, or ongoing global supply chain disruptions may further increase the need for additional capital to produce and deliver the FF 91 series. In particular, recently, some suppliers have threatened to terminate their relationship with the Company because of late payments or requested accelerated payments and other terms and conditions as a result of our past payment history and concerns about the Company's financial condition, leading to less favorable payment terms than the Company had anticipated, and delaying or putting at risk certain deliveries. FF is in active negotiations with these suppliers to minimize these risks. Apart from the FF 91 series, substantial additional capital will be required to fund operations, research, development, and design efforts for future vehicles. 112 --------------------------------------------------------------------------------
Components of FF’s Results of Operations
Key Factors Affecting Operating Results
FF’s performance and future success depend on several factors that present
significant opportunities but also pose risks and challenges including those
discussed below and in the section titled “Risk Factors” in Item 1A of this
Annual Report on Form 10-K.
Faraday Future Vehicle Production and Delivery
FF expects to derive revenue from sales of the FF 91. Based on certain management assumptions, including the timely receipt of$38.4 million to$58.4 million of additional funding, which commitments have been secured as part of the Sixth Amendment, and approval by stockholders of the proposal to increase FFIE's authorized shares of Class A Common Stock from 815,000,000 to 1,690,000,000, increasing the total authorized shares from 900,000,000 to 1,775,000,000, which approval was obtained during the special meeting of stockholders held onFebruary 28, 2023 , timely completion of key equipment installation and commissioning work at the ieFactoryCalifornia inHanford, California , suppliers meeting their commitments on program deliverables including parts, the implementation and effectiveness of certain expense reduction and payment delay measures, and timely and successful testing and certification, FF expects start of production of the FF 91 Futurist at the end ofMarch 2023 , coming off the line in early April, and deliveries to users anticipated to begin before the end ofApril 2023 .
The FF 81, FF 71, and SLMD electric vehicle models are in various stages of
planning or development and expected to be released after the FF 91 depending on
availability of adequate funding and other strategic factors.
Production and Operations
FF expects to continue to incur significant operating costs that will impact its future profitability, including research and development expenses as it introduces new models and improves existing models; capital expenditures for the expansion of its manufacturing capacities; additional operating costs and expenses for production ramp-up; raw material procurement costs; general and administrative expenses as it scales its operations; interest expense from debt financing activities; and selling and distribution expenses as it builds its brand and markets its vehicles. FF may incur significant costs in connection with its services once it delivers the FF 91, including servicing and warranty costs. FF's ability to become profitable in the future will depend on its ability to successfully market its vehicles and control its costs. To date, FF has not yet sold any electric vehicles. As a result, FF will require substantial additional capital to develop products and fund operations for the foreseeable future. Until FF can generate sufficient revenue from product sales, FF will fund its ongoing operations through a combination of various funding and financing alternatives, including equipment leasing and construction financing of theHanford, California , ieFactoryCalifornia , manufacturing facility, secured syndicated debt financing, convertible notes, working capital loans, and equity offerings, among other options. The particular funding mechanisms, terms, timing, and amounts are dependent on the Company's assessment of opportunities available in the marketplace and the circumstances of the business at the relevant time. Any delays in the successful completion of its ieFactoryCalifornia manufacturing facility will impact FF's ability to generate revenue. For additional discussion of the substantial doubt about FF's ability to continue as a going concern, see Note 2, Liquidity and Capital Resources in the notes to the Consolidated Financial Statements for the year endedDecember 31, 2022 included elsewhere in this Annual Report on Form 10-K and for further details on liquidity, please see the "- Liquidity and Capital Resources" section below. Revenues FF is a development stage company and has not generated any revenue to date. FF's anticipated introduction of the FF 91, its first vehicle, is expected to generate FF's future revenue while other vehicles are in development. 113 --------------------------------------------------------------------------------
Operating Expenses
Research and Development
Research and development activities represent a significant part of FF's business. FF's research and development efforts focus on the design and development of FF's electric vehicles and continuing to prepare its prototype electric vehicles to exceed industry standards for compliance, innovation, and performance. Research and development expenses consist of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for FF's employees focused on research and development activities, other related costs, depreciation, and an allocation of overhead. FF expects research and development expenses to increase as FF continues to develop its vehicles. FF anticipates an increase in activities in theU.S. andChina , where FF's research and development operations are primarily located.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation) for FF's employees focused on sales and marketing, costs associated with sales and marketing activities, and an allocation of overhead. Marketing activities are those related to introducing FF's brand and its electric vehicle prototypes to the market. FF expects selling and marketing expenses to continue to increase as FF brings its electric vehicles to market and seeks to generate sales.
General and Administrative
General and administrative expenses consist primarily of personnel-related costs, (including salaries, bonuses, benefits, and stock-based compensation) for employees associated with administrative services such as legal, human resources, information technology, accounting and finance, other related costs, and legal loss contingency expenses, which are FF's estimates of future legal settlements. These expenses also include certain third-party consulting services, certain facilities costs, and any corporate overhead costs not allocated to other expense categories. FF expects its general and administrative expenses to increase as FF continues to grow its business. FF also anticipates that it will incur additional costs for employees and third-party consulting services now that it operates as a public company.
Loss on Disposal of Property and Equipment
Loss on disposal of property and equipment relates to the abandonment of certain FF 91 program construction in progress assets, primarily vendor tooling, machinery, and equipment, due to the redesign of the related FF 91 components and implementation of FF's cost reduction program. Charges associated with disposals are recognized within operating expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Non-operating Expenses
Change in Fair Value Measurements
Change in fair value measurements consists of the losses and gains as a result of fair value measurements of certain financial instruments which FF records at fair value. Changes in fair value measurement of related party notes payable and notes payable have decreased following the Business Combination as the majority of the liabilities converted to equity or were paid in cash.
Related Party Interest Expense
Related party interest expense consists of interest expense on notes payable with related parties. Related party interest expense has decreased relative to prior periods, as the majority of related party notes payable converted to equity upon completion of the Business Combination.
Interest Expense
Interest expense primarily consists of interest on outstanding notes payable,
capital leases, certain supplier payables, and vendor payables in trust.
Interest expense decreased as the majority of notes payable and vendor payables
in trust were either settled in cash or converted to equity upon completion of
the Business Combination.
114
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Other Expense, net
Other expense, net consists of foreign currency transaction gains and losses and other expenses such as bank fees and late charges. Foreign currency transaction gains and losses are generated by revaluation of debt and the settlements of invoices denominated in currencies other than the functional currency. FF expects other expense to fluctuate as FF continues to transact internationally.
Loss on Extinguishment or Settlement of Related Party Notes Payable, Notes
Payable and Vendor Payables in Trust, net
Loss on extinguishment or settlement of related party notes payable, notes payable, and vendor payables in trust, net consists of losses resulting from the settlement of related party notes payable, notes payable, and vendor payables in trust. Results of Operations
To date, FF has not generated any revenue from the design, development,
manufacturing, engineering, sale or distribution of its electric vehicles.
Please refer to Part I, Item 1A. Risk Factors for a full discussion on the risks
and uncertainties related to costs.
Comparison of the Years Ended
Year Ended December 31,
(dollars in thousands) 2022 2021
Consolidated Statements of Operations
Operating expenses
Research and development $ 311,084 $ 174,935
Sales and marketing 20,772 17,118
General and administrative 116,437 97,905
Loss on disposal of property and equipment 2,695 64,191
Total operating expenses 450,988 354,149
Loss from operations (450,988) (354,149)
Change in fair value measurements (69,671) (22,700)
Interest expense (7,236) (30,181)
Related party interest expense (3,879) (16,663)
Other expense, net (12,544) (5,668)
Loss on settlement of related party notes payable, notes payable,
and vendor payables in trust, net
(7,690) (86,904) Loss before income taxes (552,008) (516,265) Income tax provision (61) (240) Net loss$ (552,069) $ (516,505) Research and Development Year Ended December 31, Change (dollars in thousands) 2022 2021 Amount % Research and development$ 311,084 $ 174,935 $ 136,149 77.8 % The increase in research and development expense of$136.1 million for the year endedDecember 31, 2022 , compared to the prior year, was primarily due to the increase in engineering, design and testing (ED&T) services of$120.8 million and professional services related expense of$9.1 million as the Company re-engaged suppliers and made significant purchases of ED&T services to progress the development of the FF 91; an increase in personnel and compensation related expenses and stock-based compensation expenses due to increased headcount of$37.6 million and$3.7 million , respectively; an increase in information technology related expense due to increases in business activities and headcount of$8.6 million , partially offset by a decrease in miscellaneous expenses of$54.1 million , primarily due to expensing a one-time amount of$50.0 million for a 115 -------------------------------------------------------------------------------- non-exclusive, perpetual, irrevocable, and sublicensable license to use a platform owned by Liankong, a subsidiary ofGeely Holdings , and recognition stock-based compensation expense of$7.6 million related to restricted stock awards issued as a bonus to employees and other service providers in connection with the closing of the Business Combination during the year endedDecember 31, 2021 with no comparable activity in 2022. Sales and Marketing Year Ended December 31, Change (dollars in thousands) 2022 2021 Amount % Sales and marketing$ 20,772 $ 17,118 $ 3,654 21.3 % The increase of$3.7 million in sales and marketing expense for the year endedDecember 31, 2022 , compared to the prior year, was primarily due to an increase in personnel and compensation related expenses of$4.7 million , and employee benefits relates expenses of$0.4 million due to an increase in headcount; an increase in marketing expenses due to an increase in marketing efforts of$2.9 million , partially offset by primarily restricted stock awards issued as a bonus to employees and other service providers in connection with the closing of the Business Combination during the year endedDecember 31, 2021 , with no comparable activity in 2022 and other overhead expenses including IT dues and subscriptions of$5.2 million . Year Ended December 31, Change (dollars in thousands) 2022 2021 Amount % General and administrative$ 116,437 $ 97,905 $ 18,532 18.9 % The increase of$18.5 million in general and administrative expense for the year endedDecember 31, 2022 , compared to the same period in the prior year, was primarily due to an increase in professional service expenses related to the Special Committee investigation in the amount of$49.3 million ; an increase in personnel and compensation related expenses of$9.7 million due to headcount changes; an increase in insurance related expenses of$10.6 million , partially offset by legal expense of approximately$20.0 million related to additional accruals for contingent legal liabilities related to the year endedDecember 31, 2021 , with no comparable activity in 2022; decrease in general expenses of$15.5 million primarily related to expenses recognized in connection with issuance of restricted stock awards as compensation for prior salary reductions during the year endedDecember 31, 2021 with no comparable activity in the year endedDecember 31, 2022 ; decrease in stock based compensation of$5.2 million due to a decrease in headcount specifically in G&A, a decrease in engineering, design and testing related expense and other overhead expenses primarily due to allocations of expenses to Research and development and Sales and Marketing of$5.1 million , a decrease of$1.4 million related to information technology related expenses, a$1.4 million decrease in depreciation and amortization expenses, a decrease of$1.2 million in rent and related expenses and a$0.7 million decrease in non-capitalizable equipment and furniture.
Loss on Disposal of Property and Equipment
Year Ended December 31, Change
(dollars in thousands) 2022 2021 Amount %
Loss on disposal of property and equipment
$ (61,496) NM The decrease in loss on disposal of property and equipment during the year endedDecember 31, 2022 , compared to the prior year is due to the write off of$64.2 million relating to the abandonment of certain construction in process assets including vendor tooling, machinery and equipment. This was due to the redesign of various FF 91 components and implementation of FF's cost reduction program during the year endedDecember 31, 2022 .
Change in Fair Value Measurements
Year Ended December 31 ,
Change
(dollars in thousands) 2022 2021 Amount %
Change in fair value measurements
The increased loss in fair value measurements of$47.0 million for the year endedDecember 31, 2022 , compared to the prior year, was primarily due to the issuances during the period of new notes, which contained significant original issue discounts, and warrants measured at fair value at each reporting period, resulting in a charge to fair value measurement expense 116 -------------------------------------------------------------------------------- due to their favorable conversion and exercise features, which was partially offset by notes payable, related party notes payable and warrant liabilities that were measured at fair value in the comparative period in 2021 and were converted during 2022. Interest Expense Year Ended December 31, Change (dollars in thousands) 2022 2021 Amount % Interest expense$ (7,236) $ (30,181) $ 22,945 (76.0) % The decrease in interest expense during the year endedDecember 31, 2022 , compared to the prior year, was primarily due to notes payable with a principal amount of$85.2 million that were outstanding during a portion of 2021 and settled upon closing of the Business Combination in 2021, with no comparable charges in 2022. Further decreases resulted from the repayment of$85.0 million of Ares notes payable principal in the year endedDecember 31, 2022 and interest related to finance leases as a result of the successful sale leaseback transaction of the Company'sGardena, California headquarters in the year endedDecember 31, 2021 . These decreases were partially offset by increases in interest expense related to the ATW NPA Notes which bore interest in 2022 due to the triggering of interest clauses, interest expense related to new Bridge Notes in 2022 with principal balances of$44.5 million .
Related Party Interest Expense
Year Ended December 31 ,
Change
(dollars in thousands) 2022 2021 Amount % Related party interest expense$ (3,879) $ (16,663) $
12,784 (76.7 %)
The decrease in related party interest expense for year endedDecember 31, 2022 , compared to the prior year, was primarily due to the Company's settlement of$91.4 million principal amounts of related party notes payable upon closing of the Business Combination inJuly 2021 , which accrued interest fromJuly 1, 2021 , toJuly 21, 2021 . Other Expense, net Year Ended December 31, Change (dollars in thousands) 2022 2021 Amount % Other expense, net$ (12,544) $ (5,668) $ (6,876) 121.3 %
The change in other expense, net was primarily due to change in unrealized loss
driven by change in exchange rate.
Loss at Settlement of Related Party Notes Payable, Notes Payable, and Vendor
Payables in Trust, Net
Year Ended December 31, Change
(dollars in thousands) 2022 2021 Amount %
Loss on settlement of related party notes
payable, notes payable and vendor payables
in trust, net $ (7,690) $ (86,904) $ 79,214 NM
The loss in the year ended December 31, 2022 , compared to the same period in the
prior year, relates to a modification of the conversion price as part of an
amendment to notes issued during the period, which was treated as extinguishment
for accounting purposes. The loss in the year ended December 31, 2021 represents
the conversion of certain related party notes payable, notes payable, and vendor
payables in trust to equity at $10 per share which was below the fair value of
the stock on the date of conversion in connection with the closing of the
Business Combination.
Liquidity and Capital Resources
As described in the "Overview" section of this MD&A, the COVID-19 pandemic
impacted FF's ability to raise funds and may have a material adverse impact on
future periods as FF prepares to bring its vehicles to market, including its
cash flows from financing activities, which fund its operations. The extent of
COVID-19's impact on FF's liquidity will depend upon, among other things, the
duration and severity of the outbreak or subsequent outbreaks and related
government responses, such
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as required physical distancing, restrictions on business operations and travel,
the pace of recovery of economic activity and the impact to consumers, all of
which are uncertain and difficult to predict. In addition, FF's ability to raise
additional funds is subject to a number of other material risks and assumptions.
Refer to Part I, Item 1A. Risk Factors for a full discussion of the risks
associated with the COVID-19 pandemic and other risks.
As of December 31, 2022 , the Company's principal source of liquidity was cash
totaling $17.0 million , which was held for working capital and general corporate
purposes.
The Company has received financing commitments for the funds required for the
start of production of the FF 91 assuming timely receipt of funds. Based on
certain management assumptions, including the timely receipt of approximately
$38.4 million to $58.4 million of additional funding, which commitments have
been secured as part of the Sixth Amendment, and approval by stockholders of the
proposal to increase FFIE's authorized shares of Class A Common Stock from
815,000,000 to 1,690,000,000, increasing the total authorized shares from
900,000,000 to 1,775,000,000, which approval was obtained during the special
meeting of stockholders held on February 28, 2023 , timely completion of key
equipment installation and commissioning work at the ieFactory California in
Hanford, California , suppliers meeting their commitments on program deliverables
including parts, the implementation and effectiveness of certain expense
reduction and payment delay measures, and timely and successful testing and
certification, FF expects to start production on the FF 91 Futurist at the end
of March 2023 , coming off the line in early April, with deliveries to users
anticipated to begin before the end of April 2023 . There is no assurance FF will
be able to timely receive sufficient funding under existing financing
commitments to produce and deliver the FF 91 Futurist on that timeline or at
all. If unable to receive sufficient funding, FF will be required to obtain new
financing commitments, which may not be available to it under reasonable
commercial terms. Further, there cannot be any assurance that FF will be able to
develop the manufacturing capabilities and processes, or secure reliable sources
of component supply to meet quality, engineering, design or production
standards, or to meet the required production volumes to successfully grow into
a viable business. There is also no assurance that FFIE stockholder approval of
an authorized share increase will be obtained in a timely manner or at all.
Since August 14, 2022 , the Company has obtained commitments from several
investors totaling $267.0 million in new convertible note financing and in
committed forced warrant exercise proceeds, subject to certain conditions. A
total of $171.4 million under these commitments has been funded to date, through
which the Company has received $150.4 million (net of original discount and
transaction costs). The Company had the right to force the conversion of the
warrants underlying the Warrant Reserve, as such term is defined in Note 14,
Stockholders' Equity, in the notes to the Consolidated Financial Statements for
the years ended December 31, 2022 included elsewhere in this Annual Report on
Form 10-K, for a total exercise price of $20.0 million in cash ($9.4 million of
which has been funded to the Company), upon the completion of certain milestones
and conditions. The right to force exercise of the Warrant Reserve expired upon
the holders exercising their warrants during 2023. In February 2023 , Senyun and
a purchaser affiliated with ATW Partners LLC exercised 20% of their respective
options to purchase additional senior secured notes and SPA Warrants of the
Company under the same terms as the Incremental Notes. The Company received
aggregated gross proceeds of $18.0 million ($16.2 million net of original
issuance discount) in exchange for such issuances. The Company has continued
financing discussions with multiple parties, but has experienced delays in
securing additional funding commitments, which have exacerbated the supply chain
pressures on FF's business. These factors, in addition to the continued rise in
inflation and other challenging macroeconomic conditions, have led FF to take
steps to preserve its current cash position, including reducing spending,
extending payment cycles and implementing other similar measures. If our ongoing
capital raising efforts are unsuccessful or significantly delayed, or if we
experience prolonged material adverse trends in our business, our production
will be delayed or decreased, and our actual use of cash, production volume and
revenue for 2023 will vary from our previously disclosed forecasts, and such
variances may be material. While FF is actively engaged in negotiations with
potential financing sources, there is no guarantee that it will be able to raise
additional capital on terms acceptable to it or at all. In addition to the risk
that FF's assumptions and analyses may prove incorrect, the projections may
underestimate the professional fees and other costs to be incurred related to
the pursuit of various financing options currently being considered and ongoing
legal risks. Incremental capital needs beyond March 2023 to fund development of
the Company's remaining product portfolio will be highly dependent on the market
success and profitability of the FF 91 and the Company's ability to accurately
estimate and control costs. Apart from the FF 91 series, substantial additional
capital will be required to fund operations, research, development, and design
efforts for future vehicles.
As described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Developments - Financing Discussions and New
Convertible Note and Warrant Financing," on November 11, 2022 , the Company
entered into a SEPA with Yorkville , which provides the Company the sole right,
but not the obligation, to direct Yorkville from time to time to purchase up to
$200.0 million ("Commitment Amount") of the Company's shares of Class A Common
Stock ("Commitment Shares") during the commitment period ending November 11,
2025 , at a 3% discount of the VWAP (as defined below) of the shares during the
three preceding days of each issuance. The Company has the option to increase
the Commitment Amount to up to $350.0 million during the commitment period. On
November 23, 2022 , the
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Company issued 789,016 Commitment Shares in satisfaction of the commitment fee
agreed upon in the SEPA. As of the date the Consolidated Financial Statements
were issued, the Company has not directed Yorkville to buy any shares of Class A
Common Stock. The Company shall not have the ability to draw funds under the
SEPA until the effectiveness of its registration statement on Form S-1,
initially filed with the SEC on December 8, 2022 (File No. 333-268722),
registering the resale by Yorkville of its shares of Class A Common Stock to be
issued under the SEPA (including the 789,016 Commitment Shares) and the
satisfaction of certain other conditions under the SEPA.
Any purchase would be subject to certain limitations, including that Yorkville
shall not purchase any shares that would result in it and its affiliates
beneficially owning more than 9.99% of the then outstanding voting power or
number of shares of Class A Common Stock or any shares that would exceed 19.99%
of all shares of Class A Common Stock and Class B Common Stock of the Company
outstanding on the date of the SEPA, unless Company shareholder approval was
obtained allowing for issuances in excess of such amount (the "Exchange Cap").
The Exchange Cap will not apply under certain circumstances, including where the
average price of all shares of Class A Common Stock equals or exceeds $0.62 per
share. On February 28, 2023 , the stockholders approved, as is required by the
applicable Nasdaq rules and regulations, advances of Class A Common Stock to be
issued under the SEPA, including the issuance of any shares in excess of 19.99%
of the issued and outstanding shares of Common Stock. The proposal was approved
on February 28, 2023 .
Despite the access to liquidity resulting from the SEPA when and if it shall
become effective, the Warrant Reserve and the unfunded commitments from the SPA,
the Company projects that it may require additional funds in order to continue
operations and support the ramp-up of production of the FF 91 to generate
revenues to put the Company on a path to cash flow break-even. Incremental
capital needs beyond March 2023 to fund development of the Company's remaining
product portfolio will be highly dependent on the market success and
profitability of the FF 91 and the Company's ability to accurately estimate and
control costs.
Since its formation, the Company has devoted substantial effort and capital
resources to strategic planning, engineering, design, and development of its
electric vehicle platform, development of initial electric vehicle models, and
capital raising. Since inception, the Company has incurred cumulative losses
from operations, negative cash flows from operating activities, and has an
accumulated deficit of $3,476.6 million as of December 31, 2022 . After the
closing of the Business Combination and the PIPE Financing on July 21, 2021 , the
Company received gross proceeds aggregating $991.0 million which it used to
settle certain liabilities and the remainder of which management has used to
finance the ongoing operations of the business.
The Company has funded its operations and capital needs primarily through the
net proceeds received from capital contributions, the issuance of related party
notes payable and notes payable (see Note 9, Related Party Notes Payable and
Note 10, Notes Payable), the sale of Preferred and Common Stock (see Note 14,
Stockholders' Equity) and the net proceeds received from the Business
Combination and the PIPE Financing (see Note 3, Business Combination) in the
notes to the Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K.
The Company's ongoing liquidity needs will depend on the extent to which the
Company's actual costs vary from the Company's estimates and the Company's
ability to control these costs, as well as the Company's ability to raise
additional funds. The timely achievement of the Company's operating plan as well
as its ability to maintain an adequate level of liquidity are subject to various
risks associated with the Company's ability to continue to successfully close
additional sources of funding, control and effectively manage its costs, as well
as factors outside of the Company's control, including those related to global
supply chain disruptions, the rising prices of materials, potential impact of
the COVID-19 pandemic, and general macroeconomic conditions. Refer to Part I,
Item 1A, "Risk Factors" of this Annual Report on Form 10-K for a full discussion
of the risks. The Company's forecasts and projections of working capital reflect
significant judgment and estimates for which there are inherent risks and
uncertainties. The Company expects to continue to generate significant operating
losses for the foreseeable future. The plans are dependent on the Company being
able to continue to raise significant amounts of capital through the issuance of
additional notes payable and equity securities.
The Company has evaluated whether there are certain conditions and events, when
considered in the aggregate, that raise substantial doubt about the Company's
ability to continue as a going concern within one year after the date that the
Consolidated Financial Statements were issued. Based on its recurring losses
from operations since inception and continued cash outflows from operating
activities, the Company has concluded that there is substantial doubt about its
ability to continue as a going concern for a period of one year from the date
that the Consolidated Financial Statements for the years ended December 31, 2022
were issued.
There can be no assurance that the Company will be successful in achieving its
strategic plans, that the Company's future funding raises will be sufficient to
support its ongoing operations, or that any additional financing will be
available in a timely
119
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manner or on acceptable terms, if at all or that the Company will be able to
satisfy the closing conditions under its financing agreements. If events or
circumstances occur such that the Company does not meet its strategic plans, the
Company will be required to reduce discretionary spending, alter or scale back
vehicle development programs, be unable to develop new or enhanced production
methods, or be unable to fund capital expenditures. Any such events would have a
material adverse effect on the Company's financial position, results of
operations, cash flows, and ability to achieve its intended business objectives.
Significant Related Party Notes Payable and Notes Payable Facilities
The Company has been significantly funded by notes payable from related parties and third parties. The related parties include employees as well as affiliates of employees and affiliates and other companies controlled or previously controlled by the Company's founder and Chief Product and User Ecosystem Officer. For more information on the outstanding related party notes payable and notes payable as well as the related schedules of maturities, see Note 9, Related Party Notes Payable, and Note 10, Notes Payable, of the notes to the consolidated financial statements included in this Annual Report on From 10-K.
Related party notes payable consists of the following as of
and
December 31, 2022
Interest Interest
Expense for Expense for
Balance the Year the Year
Contractual Contractual as of Ended Ended
Maturity Interest December 31, December December
Note Name Date Rates 2022 31, 2022 31, 2021
Related party notes - China
(1) December 31, 2023 12.0% $ 4,651 $ 3,879 $ 3,369
Related party notes - China
various other Due on Demand -% 3,755 - -
$ 8,406 $ 3,879 $ 3,369
December 31, 2021
Net Carrying
Contractual Contractual Unpaid Value at
Note Name Maturity Date Interest Rates Balance 12/31/21
Related party notes - China Due on Demand 18.00% $ 9,411 $ 9,411
Related party notes - China various other Due on Demand 0.00% 4,244 4,244
Total related party notes payable $ 13,655 $ 13,655
Schedule of Principal Maturities of Related Party Notes Payable
The future scheduled principal maturities of related party notes payable as of
Year endedDecember 31, 2022 Due on demand$ 3,755 2023 4,651$ 8,406 Year endedDecember 31, 2021 Due on demand$ 13,655 120
-------------------------------------------------------------------------------- Notes payable consists of the following as ofDecember 31, 2022 andDecember 31, 2021 : December 31, 2022 Original issue Interest discount and Expense for the Contractual Unpaid Fair Value proceeds Net Twelve Months Contractual Interest Principal Measurement allocated to Carrying Ended December Note Name Maturity Date Rates Balance Adjustments warrants Value 31, 2022 Bridge Notes (4) October 27, 2028 10%$ 36,622 $ 264 $ (10,878) $ 26,008 $ 1,676 Notes payable -China other Due on Demand -% 4,997 - - 4,997 - Auto loans October 26, 2026 7% 100 - - 100 7$ 41,719 $ 264 $ (10,878) $ 31,105 $ 1,683 December 31, 2021 Original issue discount and Fair Value proceeds Net Contractual Contractual Unpaid Measurement allocated to Carrying Note Name Maturity Date Interest Rates Balance Adjustments warrants Value March 1, 2021 Notes March 1, 2022
14.00 %
$ 56,695 August 26, 2021 Notes March 1, 2022 14.00 % 30,000 1,011 (87)
30,924
June 9, 2021 Note 1 and Note 2 December 9, 2022 - % 40,000 8,503 (9,522)
38,981
August 10, 2021 Optional Notes February 10, 2023 15.00 % 33,917 12,283 (11,518)
34,682
Notes payable -China various other Due on demand - % 5,458 - - 5,458 Notes payable April 17, 2022 1.00 % 193 - - 193 Auto loans Various Various 121 - - 121 Total notes payable$ 164,689 $ 29,489 $ (27,124) $ 167,054
Schedule of Principal Maturities of Notes Payable
The future scheduled principal maturities of notes payable as of
2022
Year endedDecember 31, 2022 Due on demand$ 4,997 2026 100 2028 36,622 41,719 Years endedDecember 31, 2021 2022 130,772 2023 33,917$ 164,689 121
--------------------------------------------------------------------------------
Cash Flow Analysis
Presented below is a summary of FF's cash flows for the periods indicated
(dollars in thousands):
For the Year Ended
December 31,
2022 2021
Net cash (used in) provided by
Operating activities $ (383,058) $ (339,765)
Investing activities (123,222) (95,681)
Financing activities (6,721) 966,569
Effect of exchange rate changes on cash and restricted cash 1,038 (2,473)
Operating Activities
FF continues to experience negative cash flows from operations as FF designs and
develops its vehicles and builds its infrastructure both in the United States
and China . FF's cash flows from operating activities are significantly affected
by FF's cash investments to support the growth of FF's business in areas such as
research and development associated with FF's electric vehicles, corporate
planning, and general and administrative functions. FF's operating cash flows
are also affected by its working capital needs to support growth and
fluctuations in personnel related expenditures, accounts payable, accrued
interest, other current liabilities, deposits, and other current assets.
Net cash used in operating activities was $383.1 million and $339.8 million for
the years ended December 31, 2022 and 2021, respectively. The largest components
of FF's cash used by operating activities during the year ended December 31,
2022 were professional and contracted services totaling $124.6 million ,
compensation, benefits and related expenses totaling $120.4 million and prepaid
insurance totaling $21.7 million . Other movements were related to changes in
working capital.
The largest components of FF's cash used by operating activities during the year
ended December 31, 2021 were $90.0 million for wages and compensation related
expenses; $50.0 million for a non-exclusive, perpetual, irrevocable, and
sublicensable license to use a platform, the Geely License, owned by Liankong, a
subsidiary of Geely Holding ; $28.4 million for professional services and for
prepayment of software hosting costs. Other movements were related to changes in
working capital.
Investing Activities
Net cash used in investing activities was $123.2 million and $95.7 million for
the years ended December 31, 2022 and 2021 related to acquisition of property
and equipment.
Financing Activities
Net cash used in financing activities was
Cash used in financing activities during the year endedDecember 31, 2022 primarily consists of cash payments of$87.3 million for settling notes payable and accrued interest,$0.5 million for settling related party notes payable and accrued interest,$3.8 million for settling vendor payables in trust,$1.9 million principal pay down for finance lease liabilities, and$0.8 million for repurchase and retirement of Class A Common Stock. These were partially offset by$73.8 million in proceeds from the issuance of notes payable net of original issuance discounts,$9.5 million from the exercise of stock options and$4.2 million in proceeds from the exercise of warrants. Cash provided from financing activities during the year endedDecember 31, 2021 primarily consists of$229.6 million in cash proceeds from the issuance of Class A Common Stock, net of$0.2 million redemptions of as a result of the Business Combination,$761.4 million in cash proceeds from the PIPE Financing,$172.0 million in proceeds from the issuance of notes payable net of original issuance discounts, and$10.6 million from the exercise of stock options. These were partially offset by cash payments of$61.1 million for PIPE Financing transaction costs,$48.2 million for settling notes payable and accrued interest,$38.2 million for settling related party notes payable and accrued interest,$27.7 million for settling vendor payables in trust,$23.1 million for Business Combination transaction costs,$3.4 million for debt transaction costs, and$3.2 million for capital lease obligations. 122 --------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Restricted Cash
The exchange rates effect on Cash and Restricted Cash was negative for the years endedDecember 31, 2022 and 2021. The effects of exchange rate changes on cash and restricted cash result from fluctuations on the translation of assets and liabilities denominated in foreign currencies, primarily Chinese Yuan. Fluctuations in exchange rates against theU.S. dollar may positively or negatively affect FF's operating results. The effect of exchange rate change was a favorable$1.0 million and an unfavorable$2.5 million for the years endedDecember 31, 2022 and 2021, respectively.
Off-Balance Sheet Arrangements
The Company did not have any material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Thus, the Company did not have any off-balance sheet arrangements as ofDecember 31, 2022 and 2021.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent liabilities, and the reported amounts of expenses during the reporting period. Management has based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by FF's management. To the extent that there are material differences between these estimates and actual results, future financial statement presentation, financial condition, results of operations, and cash flows will be affected. Given the global economic climate and unpredictable nature and unknown duration of the COVID-19 pandemic, estimates are subject to additional variability and volatility. For a description of FF's significant accounting policies, see Note 1, Nature ofBusiness and Organization , and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Consolidated Financial Statements. Management believes the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of FF's Consolidated Financial Statements. 123 --------------------------------------------------------------------------------
Effect if Actual Results Differ
Description Judgements and Uncertainties from Assumptions
Stock-Based Compensation
The Company's stock-based compensation FF estimates the fair value of stock These estimates involve inherent
awards consist of options granted to options using the Black-Scholes uncertainties and the application
employees, directors and non-employees option-pricing model. Determining the of management's judgment. If FF
for the purchase of common stock. The fair value of stock-based compensation had made different assumptions,
Company recognizes stock-based awards under this model requires highly FF's stock-based compensation
compensation expense in accordance subjective assumptions, including the expense and its net loss could
with the provisions of ASC 718, fair value of the underlying common have been materially different.
Compensation - Stock Compensation share (when there is no public market
("ASC 718"). ASC 718 requires the for the share), the risk-free interest An increase in risk-free interest
measurement and recognition of rate, the expected term of the award, rate will reduce the estimated
compensation expense for all the expected volatility of the price of fair value of a stock option
stock-based compensation awards based FF's common shares, and the expected grant, while decrease in these
on the grant date fair values of the dividend yield of FF's common share. factors will have an opposite
awards.
effect.
The Company estimates the fair value Expected term – The estimate of the
of stock options using the
expected term of awards was determined Likewise, a decrease in Black-Scholes option pricing model. in accordance with the simplified volatility and expected term will For options with service conditions, method, which estimates the term based decrease the estimated fair value the value of the award is recognized on an averaging of the vesting period of a stock option grant, while an as expense over the requisite service and contractual term of the option increase in these factors will period on a straight-line basis. For grant for employee awards and the
have an opposite effect.
performance-based awards, stock-based contractual term of the stock option
compensation expense is recognized award agreement for non-employees.
The Company does not expect to
over the expected performance change the dividend yield
achievement period of individual Expected volatility - The Company assumption in the near future.
performance milestones when the determines the expected volatility by
achievement of each individual weighing the historical average
performance milestone becomes volatilities of publicly traded
probable. industry peers and it own trading
history. FF intends to continue to
Fair value of Common Stock – Prior to consistently apply this methodology
the close of the Business Combination, using the same or similar public
there was no public market for Legacy companies until a sufficient amount of
FF’s Class A Ordinary Stock.
historical information regarding the Therefore, Legacy FF's Board of volatility of the Company's own Class A Directors determined the fair value of Common Stock price becomes available, Legacy FF's Class A Ordinary Stock at unless circumstances change such that the time of the grant of stock options the identified companies are no longer by considering a number of objective similar to FF, in which case more and subjective factors. The fair value suitable companies whose stock prices of the stock was determined in are publicly available would be accordance with applicable elements of utilized in the calculation. the practice aid issued by theAmerican Institute of Certified Public Risk-free interest rate - The risk-free Accountants titled, "Valuation of interest rate used to value awards is Privately Held Company Equity based on the United States Treasury Securities Issued as Compensation". yield in effect at the time of grant Legacy FF's Board of Directors granted for a period consistent with the stock options with exercise prices expected term of the award. equal to the fair value of Legacy FF's Class A Ordinary Stock on the date of Dividend yield - The Company has never grant. After the close of the Business declared or paid any cash dividends and Combination, the closing price of FF's does not presently plan to pay cash Class A Common Stock on the Nasdaq as dividends for the foreseeable future. reported will be used. Forfeiture rate - Stock-based compensation expense is reduced for forfeitures, which the Company estimates based on an analysis of actual forfeitures. The Company will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a significant impact on the Company's stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the estimated forfeiture rate is changed. 124
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Effect if Actual Results Differ from
Description Judgements and Uncertainties Assumptions
Fair Value of Ordinary Shares
Prior to the Business Combination, FF considered various objective and During 2020 and 2021 (prior to the closing
FF was required to estimate the subjective factors to determine the of the Business Combination), FF's estimated
fair value of the ordinary shares fair value of FF's ordinary shares as fair value of its Class A Ordinary Shares
underlying FF's stock-based of each grant date, including: remained relatively consistent, fluctuating
awards. The fair value of the between $2.449 per share as of March 31,
ordinary shares underlying FF's •Contemporaneous valuations performed 2020 ("March 2020 valuation") and $2.767 per
stock-based awards had been by unrelated third-party experts; share as of January 20, 2021 ("January 2021
determined in each case by FF's •The progress of FF's research and valuation"). As of April 20, 2021, FF's
Board, with input from management development; estimated fair value of its Class A Ordinary
and contemporaneous third-party •FF's stage of development and Shares was $7.948 ("April 2021 valuation").
valuation expert. FF believes that commercialization and FF's business
its Board has the relevant strategy; In order to estimate the fair value of FF's
experience and expertise to •Industry information, such as Class A Ordinary Stock, FF utilized more
determine the fair value of FF's external market conditions affecting than one valuation approach. The March 2020
ordinary shares. FF's Board the electric car industry and trends valuation was completed prior to the
intends all stock options granted within the electric car industry; contemplation of the Business Combination.
to be exercisable at a price per •Lack of marketability of FF's As such, income and market approaches were
share not less than the fair value ordinary shares; utilized in estimating the fair value. The
per share of the ordinary share •Likelihood of achieving a liquidity January 2021 valuation and April 2021
underlying those stock options on event, such as an initial public valuation used a Hybrid Method, applying a
the date of grant. In the absence offering, SPAC merger, or strategic probability-weighted expected return method
of a public market for FF's sale given prevailing market ("PWERM") to weight the indicated equity
ordinary shares, the valuation of conditions and the nature and history value determined under the option pricing
FF's ordinary shares had been of FF's business; model, income, and market approaches for the
determined using a hybrid method, •Prices, privileges, powers, scenario in which the Business Combination
which incorporated a preferences, and rights of our does not close, and the equity value implied
scenario-based method and an convertible preferred stock relative by the planned Business Combination.
option pricing method. The to those of FF's ordinary shares;
valuation was performed in •Forecasted cash flow projections for During 2020, FF experienced financial
accordance with the guidelines FF's business; hardship and was unable to satisfy its
outlined in the American Institute •Liquidity of stock-based awards liabilities, including payables in vendor
of Certified Public Accountants involving securities in a private trust, notes payable, and related party
Practice Guide, Valuation of company; and notes payable. Further, given these
Privately Held Company Equity •Macroeconomic conditions. financial hardships, FF was unable to
Securities Issued as Compensation.
successfully achieve its strategic plans,
The assumptions underlying these
including completing its manufacturing
valuations represented management's
facility in
best estimate, which involved inherent
from the sale of FF 91. Please refer to Key
uncertainties and the application of
Factors Affecting Operating Results and
management's judgment. The probability
Liquidity and Capital Resources and Going
of a liquidity event and the derived
Concern within FF’s Management’s Discussion
discount rate are significant
and Analysis of Financial Condition and
assumptions used to estimate the fair
Results of Operations for further details on
value of FF's ordinary shares. If FF
FF’s operations, capital resources, and
had used different assumptions or
going concern.
estimates, the fair value of FF's
The increase in value between the January
ordinary shares and FF's stock-based
2021 valuation and the
compensation expense could have been
due to FF’s progress towards the Business
materially different.
Combination. During the latter half of 2020,
FF started contemplating a
began taking the necessary steps to prepare
for the Business Combination with PSAC. The
necessary steps undertaken to prepare for
the Business Combination included meeting
with PSAC and investment bankers, discussing
timing expectations, and negotiating the
preliminary letter of intent between PSAC
and FF. As FF’s ongoing negotiations related
to the Business Combination reflected an
increased likelihood of a near-term exit
transaction and/or liquidity event, the
valuation of FF’s equity as of the January
2021 valuation and
into consideration the indicated equity
value implied by the negotiations as well as
the uncertainty inherent in the future key
milestones including execution of the Merger
Agreement and PSAC’s stockholder vote.
125 --------------------------------------------------------------------------------
Effect if Actual Results Differ
Description Judgements and Uncertainties from Assumptions
Fair Value Measurements and Fair Value of
Related Party Notes Payable and Notes
Payable
The accounting guidance for financial Fair value measurement applies to Certain of the related party notes
instruments allows entities to voluntarily financial assets and liabilities as payable and notes payable contain
choose to measure certain financial assets well as other assets and liabilities embedded liquidation premiums with
and liabilities at fair value (fair value carried at fair value on a recurring conversion rights that represent
option). The fair value option may be and nonrecurring basis. Fair value is embedded derivatives whose value is
elected on an instrument-by-instrument an exit price, representing the directly related to the fair value
basis and is irrevocable unless a new amount that would be received to sell of the Common Stock. As the value
election date occurs. If the fair value an asset or paid to transfer a of the Common Stock increases, the
option is elected for an instrument, liability in an orderly transaction value of these related party notes
unrealized gains and losses for that between market participants. As such, payable and notes payable
instrument should be reported in earnings fair value is a market-based
increases, and as the value of
at each subsequent reporting date. measurement that should be determined Common Stock decreases, the value
based on assumptions that market of these related party notes
FF has elected the fair value option for participants would use in pricing an payable and notes payable decrease.
certain related party notes payable and asset or liability. As a basis for
notes payable with embedded derivatives. considering such assumptions, the
The fair value of certain related party standard establishes a three-tier
notes payable and notes payable was value hierarchy, which prioritizes
determined using a yield method, the inputs used in measuring
fair
probability weighted for the likelihood of value as follows:
a liquidity event prior to maturity that
would result in the conversion of the notes Valuations for assets and liabilities
payable into ordinary shares. The traded in active exchange markets, or
probability of a liquidity event and the interest in open-end mutual funds
derived discount rate are assumptions used that allow a company to sell its
to estimate the fair value of FF's notes ownership interest back at net asset
payable carried at fair value. For further value on a daily basis. Level 1
discussion see Note 8, Fair Value of valuations are obtained from readily
Financial Instruments in the Notes to FF's available pricing sources for market
Consolidated Financial Statements included transactions involving identical
elsewhere in this Annual Report on Form assets, liabilities, or funds.
10-K,
Valuations for assets and liabilities
traded in less active dealer, or
broker markets, such as quoted prices
for similar assets or liabilities or
quoted prices in markets that are not
active. Level 2 instruments typically
include U.S. government and agency
debt securities, and corporate
obligations. Level 2 valuations are
usually obtained through market data
of the investment itself as well as
market transactions involving
comparable assets, liabilities or
funds.
Valuations for assets and liabilities
that are derived from other valuation
methodologies, such as option pricing
models, discounted cash flow models
and similar techniques, and not based
on market exchange, dealer, or
broker-traded transactions. Level 3
valuations incorporate certain
assumptions and projections in
determining the fair value assigned
to such assets or liabilities.
126
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Effect if Actual Results Differ from
Description Judgements and Uncertainties Assumptions
Income Taxes
FF recognizes deferred tax In evaluating the need for a The Company has recognized a full
liabilities and assets for the valuation allowance, management valuation allowance as of December
expected future tax consequences of considers the weighting of all 31, 2022 and 2021 since, in the
temporary differences between the available positive and negative judgment of management given the
carrying amounts and the tax bases evidence, which includes, among other Company's history of losses, the
of assets and liabilities. Deferred things, the nature, frequency and realization of these assets was not
income tax assets and liabilities severity of current and cumulative considered more likely than not. The
are measured using enacted tax rates taxable income or losses, future valuation allowance was $366,349 and
expected to apply to taxable income projections of profitability, and the $256,413 as of December 31, 2022 and
in the years in which those duration of statutory carryforward 2021, respectively. The ultimate
temporary differences are expected periods. realization of deferred tax assets
to be recovered or settled. The is dependent upon the generation of
effect of a change in tax rates on FF recognizes the tax benefit from an future taxable income during the
deferred tax assets and liabilities uncertain tax position only if it is period in which the temporary timing
is recognized in the Consolidated more likely than not that the tax differences become deductible.
Statements of Operations and position will be sustained on
Comprehensive Loss in the period examination by the taxing
that includes the enactment date. A authorities, based on the technical
valuation allowance is recorded when merits of the position. The tax
it is more likely than not that some benefits recognized in FF's
of the deferred tax assets will not Consolidated Financial Statements
be realized. from such positions are then measured
based on the largest benefit that has
a greater than 50% likelihood of
being realized. FF recognizes
interest and penalties accrued with
respect to uncertain tax positions,
if any, in its provision for income
taxes in the Consolidated Statements
of Operations and Comprehensive Loss.
Recent Accounting Pronouncements
See Note 1 in the sections titled "Recent Accounting Pronouncements" as referred to in FF's Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion about our recently adopted accounting pronouncements and the recently issued accounting pronouncements not yet adopted which are determined to be applicable to the Company.
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