Arcimoto, Inc. (NASDAQ:FUV) Q2 2022 Earnings Conference Call August 15, 2022 5:00 PM ET
Company Participants
Jesse Fittipaldi – Interim CEO
Douglas Campoli – CFO and Treasurer
Terry Becker – COO
Eric Fritz – Chief Marketing Officer
Lynn Yeager – Chief Experience Officer
Kevin O’Rourke – Chief Commercial Officer
Conference Call Participants
Jesse Fittipaldi
Good afternoon, everyone and welcome to our Arcimoto’s Q2 2022 Stakeholder Update Webinar. I’m Jesse Fittipaldi Interim-Chief Executive Officer. To start out, I want to call your attention to our Safe Harbor disclaimer regarding forward-looking statements.
This note identifies risk factors that may cause our actual results to differ materially from the content of forward-looking statements for the reasons we cite in our SEC filings. Today, we will hear from the executive team who will give a snapshot of the business, our challenges and rapid growth in key areas. For those of you that I haven’t met yet, I look forward to meeting you soon.
I’ve been with Arcimoto since 2015 and until my new role as interim CEO, I was the Chief Strategy Officer. I’m delighted to be in this new role, and I’m thankful for the company employees, executives and our Board for believing in me to carry out the Arcimoto vision and mission. Our mission is to catalyze the shift to a sustainable transportation system.
We have invented ultra-efficient electric vehicles on a platform capable of providing sustainable solutions to a wide range of modern transportation challenges. Since 2019, we have produced and delivered these vehicles to consumers. Our vehicles share the same key technology across all our platforms. And the variation of each of these products is a different tool used to solve a specific logistics problem.
They are designed to move the people, food, parcels and equipment that in today’s transportation ecosystem are moving with oversized costly vehicles that cause significant environmental impact. Our next step is to scale our production volume, reduce the cost of our product, and prove out our factory design and automation strategy to accelerate sales and growth and achieve profitability.
In the long term, we intend to leverage a replicable production model to expand manufacturing capabilities in other communities across the world. This is how we make a difference. Today, we will discuss financials production, marketing, customer experience and commercial sales. Our team recently achieved a production rate of six vehicles per day, which represents an annual run rate of 1200 vehicles per year.
While we have just achieved our highest production quarter to-date, we continue to generate negative gross profit. As we remain on the early phases of our production curve. We expect gross profit to improve as we continue to scale our production volume, and implement key cost down initiatives. As we ramp up production, we’ve deployed a comprehensive marketing sales strategy to meet our production cadence.
These initiatives are laying the groundwork for future sales. This quarter, we’re also announcing a revision to our full year production target. As with many of our peers in the vehicle manufacturing space, we have faced various supply chain headwinds in 2022 that have created bottlenecks in the production, including inverter chip shortages.
To be clear, more important than the aggregate number of vehicles produced while we remain at a gross margin deficit is it we plan to reach the production rate of 12 vehicles a day by the end of the year, representing an annual run rate of 2400 vehicles per year. Focusing on making and selling more products to achieve profitability is how we plan to become a great company.
We face the same challenges as most American manufacturers, but we have a firm grasp around the key issues and our team has a clear plan to address these challenges. The company will kick us off with the financials. Doug Campoli will take us off with financials.
Douglas Campoli
Hi, my name is Doug Campoli. I’m Arcimoto’s Chief Financial Officer and Treasurer.
102 FUVs were produced in the second quarter of 2022 and almost 16% increase over our previous quarterly record 41 were sold at an average sales price is $21,658 forward deployed into marketing or other companies and 20 were deployed into rental operations and the balance will be moved into rental or fixed assets.
Tilting Motor Works sold their quarterly record of 35 units with an average sales price of $12,296. As of June 30, 2022, there are 400 happy customers on the road as brand ambassadors. We now have 98 FUVs and our growing rental fleet available for revenue generation, along with a total of 79 FUVs allocated to marketing R&D and internal fleet use.
Second quarter, revenue increased 109% year-over-year even with production shutdown, for most of the first quarter during the move to the ramp year-to-date revenue increased by 2% compared to the same period in 2021. Tilting Motor Works second quarter revenue grew over 10 times compared to the same period in 2021 and accounts for almost 26% of total year-to-date revenue.
Rental started gaining revenue traction in tourist locations and we expect continued quarterly revenue growth across all reporting segments. We generated negative gross profit of $4.6 million in the quarter. However, cost of goods sold as a percentage of revenue has decreased sequentially in each of the last two quarters. The main driver behind the year-over-year increase in COGS is increased production volume and increased overhead as we build the infrastructure to ramp production.
Year-to-date, the FUV average sales price was $23,544 as we ramp production and continue to increase efficiencies in our manufacturing processes, we anticipate leveraging our fixed cost structure to drive improved gross profit per vehicle. Year-to-date, Tilting Motor Works has had an average sales price of $12,296 and an average COGS of $8,847, which is a 36% margin.
Operating expense also increased as we build out the infrastructure for higher production volume. The three main drivers of this increase were one, increase headcount to increase sales and marketing efforts, and three, increased research and development spend to reduce the per vehicle cost of the FUV developed new products and scale production.
We ended the quarter with approximately $5 million cash and cash equivalents. Year-to-date June 30, 2022 net cash received from the sale of equity was approximately $16.4 million cash from the issuance of debt consisted of approximately $4.5 million from a long-term convertible note and approximately $65,000 from equipment financing. Approximately $103,000 cash was received from the exercise of employee options warrants. We have successfully utilized the at-the-market offering with minimal impact on the stock price.
Terry Becker
Hi, I’m Terry Becker, Chief Operating Officer at Arcimoto.
As anticipated, Q2 showed a significant increase in production over Q1. Q1 was intentionally slated to move the production assembly line from the amp to the larger ramp facility. Also, the first four months of 2022 were dedicated to designing an upgraded battery configuration along with the required validation testing.
While production of vehicles in Q1 was minimal, these efforts resulted in a record quarter of production in Q2. Supply chain issues have certainly made the continuous flow of production difficult in the past two years. The supply chain in Q2 through the present continues to challenge us with the uncertain availability of some critical parts. As a result, we are revising the anticipated production schedule for the remainder of 2022.
Automation is key to Arcimoto’s ability to scale. The machines and fabrication equipment that have been put into service since the company went public have been with the intent to minimize labor and maximize the efficiency and quality, fabrication of metal parts and machining have been in place since building the AMP facility in 2017 and those solutions continue to scale as we grow.
Coming online presently is our own state-of-the-art automated vacuum forming plant for body panels which should eliminate the struggles of scaling production with an outside source. As well the coating processes that are needed for paint and powder coat application are being brought in-house over the next three quarters to overcome the challenges and logistics of outside suppliers.
Battery assembly automation is another vertical integration decision that when complete will enable high volume production with minimal labor requirements. Going forward the plans scale up for production capability supports the company forecast. With the addition of fabrication equipment, vertical integration and added labor to the final assembly line, we are focused on intentional phases that increase production capacity as we grow.
Eric Fritz
Hi, I’m Eric Fritz, Chief Marketing Officer.
Similar to other areas of the organization marketing has been focused in 2022 on building out the team, focusing our efforts on lead generation and assisting the customer experience and sales teams in warming up those leads for conversion. To that end, we made several key hires on our events team to further increase attendance, participation and sponsorship of meaningful events that feature demo drive opportunities, which include tentpole 9.20 events such as electrify Expo and fully charged live, as well as our own ride of the Argonauts tour.
In Q2, we set a record for most customer rides, but we call around here butts and seats, and we expect this number to keep climbing as we close out the summer months in Q3. Additionally, and I don’t want to steal Lynn’s thunder here, but we’re starting to see those leads convert as the customer experience teams works those leads through the sales funnel.
Similarly, the digital marketing team has taken what we’ve learned from years of experimenting with minimal online ad spend, and limited ad content and started to focus its efforts and increase spend in Q2, resulting in a dramatic increase in traffic and ad response. We saw checkouts initiated nearly doubled from Q1 to Q2. And again, we expect continued growth in Q3. Lynn will talk about lead conversion and our efforts there.
But as we streamline the order and delivery process through web optimization, and additional financing options such as freedom Road, which came online in Q2, we expect those leads to convert at an even higher rate, or to convert directly off of our marketing efforts more consistently.
Finally, Q2 saw some big wins on the lobbying front. We helped pass legislation in Alabama and Maryland, which modified their auto cycle definitions so that drivers will no longer need a motorcycle endorsement or a helmet to operate the FUV. This is just one step in the process of opening a state for vehicle sales, which can include acquiring manufacturer and dealer licenses, establishing service partners and determining delivery capability and options.
We most recently went through this process for Hawaii, and we are proving the pace of jumping through these hoops with each new state and are moving through them as fast as we can.
Lynn Yeager
Hi, I’m Lynn Yeager, Chief Experience Officer.
As Eric mentioned, our focus has been on expanding our lead base and drive engagement. In Q2, we added additional rental partners including Susie’s Mopeds in San Juan Island, and Temecula wine tours in California. And the feedback thus far has been awesome. The more that we can support and understand their value within each unique market we can help optimize each business.
As we look at KPIs for both channels of our butts in seats, we are seeing great results in volume and conversion. We are building our funnel for future sustained business and growth over time. So we have the demand to take us into future quarters. I’d like to review some of those KPIs. Customer drive funnel primary KPI is demo drives to order and preorder conversion driven by rentals, events and appointment demo drives.
Average time to order post drive is four to five months. Q2 versus Q2 last year we had a 931% increase in butts in seats Q2 versus Q1 we had a 416% increase in butts in seats. Conversion average is 8% through Q1 with recent drives at 4% currently. We aim to increase conversion through higher drive volume paired with thoughtful and increased frequency of engagement throughout the customer journey.
Our customer rental funnel, customer rental experience, conversion, primary KPI is rental to order in preorder conversion and direct rental revenue. This is driven by owned and partner operated business. Average time to order post drive is two to three months. Q2 versus Q2 last year was a 209% increase in rental volume. Q2 versus Q1 was a 94% increase in rental volume.
Q2 sales was $53,818 versus Q2 last year at $16,618 a 224% increase year-over-year. Our conversion average is 12% to Q1 with recent rentals at 7%. We are targeting to increase volume and expand into new key markets. We recently added Temecula Wine Tours GoCars San Diego After Dark, Susie’s Mopeds, Sarasota and press release the Hawaii rental opening for August 20.
We are also planning to balance seasonality on our engagement by expanding into markets viable for each season, such as key locations for spring and summer and opposite markets for fall in winter. For example, Friday harbor in the summer and Palm Springs in the winter. We are already seeing strong results in Q3 and pacing it to exceed Q2 drive and rental volume. We continue to focus on our lead and drive engagement with plans to expand into new markets.
Kevin O’Rourke
Hi, everybody, Kevin O’Rourke here Chief Commercial Officer with Arcimoto.
In quarter two, we initiated our first New York City pilot program with JOCO focusing on local delivery using the delivery rater. JOCO is the world’s first light electric vehicle sharing platform for delivery drivers renting their vehicles to gig drivers across the city to provide right sized and sustainable forms of delivery.
While JOCO traditionally has focused on local delivery using e-bikes, adding the delivery rater to their fleet is a way for them to provide their clients with a larger capacity vehicle designed to operate efficiently within the city. Pilot programs with key clients like JOCO provide us with the information that we need to bring the delivery rater into the commercial market. And thus far JOCO feedback has been extremely helpful in that regard.
[Video Presentation]
Jesse Fittipaldi
Yes, hello, everybody. That video makes me very happy to hear all of that stuff. I hope people heard some good stuff in there. Dwayne Lum also joins us. He wasn’t in the video this time. He’s our Chief Product Officer wanted to recognize him here at on this team. Key player and just incredible add to the team welcomed Dwayne. Fritz want to take us away?
Question-and-Answer Session
A – Eric Fritz
Sure. So Q&A section, we once again, pulled some of the top questions from the Say platform and if you guys want to get questions in on these earnings calls, and that’s the way to do it. So register on Say and get your question in there. We’ll kick it off. Will the current EV Bill help Arcimoto and if so what are your plans to utilize this opportunity?
Jesse Fittipaldi
Fritz, you want to answer that one?
Eric Fritz
Sure, sure. So first of all, obviously, you know, we’re encouraged you know that we’re able to see some movement on EV tax credits as a whole. And the passing of this bill is a solid step forward the industry and you know shows that there is interest in addressing adoption of EVs at the federal level. Unfortunately, EV tax credit, for two and three wheeled vehicles were not included in the Inflation Reduction Act.
They had originally been included in the Bill Back Better Bill, which was the kind of precursor to the IRA, but they were later scratch and the final IRA bill, which is, you know, just one of the many compromises that had to be made in order to pass the bill. So that said we continue to work with our state and federal lobbying and advocacy groups to help educate legislators on the advantage of vehicles like ours lighter-weight, ultra-efficient, right-size vehicles, you know, regardless of the number of wheels on them.
Jesse Fittipaldi
Awesome, thanks, Fritz great answer.
Eric Fritz
What is the current order backlog for all FUVs and MLMs?
Jesse Fittipaldi
Lynn, you got that one, you’re muted.
Eric Fritz
Lynn your muted.
Lynn Yeager
Thank you. I’ll take this one. I do think it’s a good opportunity to clarify the order funnel definition. So orders are defined as someone placing a non-refundable order that starts the production process. There are five steps in our production process that will happen over a few months until delivery. So customers in some form of order stage currently have a 95% conversion to delivery. We did end Q2 with 41 customers in order backlog.
And we’re encouraged by our order pacing thus far in Q3. As far as preorders are defined, we define them as strong leads who placed a refundable deposit. These customers have priority for ordering when ordering is available to them, depending on the state, or when a product is available. Our open states are listed on our website and we update those as we announce new states, we had a total of 1,000 preorders of MLM at the end of Q2. And we are highly encouraged by our positive response from our product announcements recently.
Jesse Fittipaldi
Thank you, Lynn.
Eric Fritz
Does the company have an update on potential fleet sales? Are there any large contracts to expect? Since used by government agencies can be a massive driver of revenue? Have any governments reached out to Arcimoto, or vice versa?
Jesse Fittipaldi
Kevin it sounds like that’s in your wheelhouse?
Kevin O’Rourke
Yes, I think you’re right I’ll definitely take this one. So you all know that I can’t necessarily talk about any future sales or contracts that are in the works today. However, I can say that the team has engaged in many positive conversations. And we continue to build this said team to increase the frequency and the quality of those deals that we’re currently working on.
For example, the most recent addition to our commercial sales team is [Dorothy Moshevsky], who brings more than 25 years of experience in the restaurant industry to our Arcimoto. This type of experience within a specific market positions Arcimoto, as an expert business partner within that arena. And speaking of specific vertical markets, we and most of our investors we speak with believe that the delivery rater is going to be a disruptive solution within the final mile delivery space. And that is why that we’re working so diligently to build the strongest commercial partnerships in the industry today.
Jesse Fittipaldi
Thank you, Kevin.
Eric Fritz
Supply chain bottlenecks preventing production scaling, and when do you think they will be resolved, just muted, but I think that’s a Terry question.
Terry Becker
Thanks, I’ll go ahead and take that one. Yes, the supply chain issues definitely have been a problem for us here in the last couple of years. And the bottlenecks currently being dealt with include things like the intermittent delivery of certain key parts, motors, they’re related inverters. They’ve been susceptible to chip shortages. The displays have also been susceptible. Also, the quantities shipped to us have been dependent on the suppliers being able to scale with us.
So our Chief Materials Officer Chad Boardrow, is engaged daily, along with his team with the supply chain partners and focuses on solutions. Many different solutions required to keep the parts flowing. Two other areas of supply chain services have been the coating of material parts, and the production of thermoform plastic body panels.
These are two areas that Tim Hynen the Director of automation solutions has either already implemented or he’s in the process of bringing them in-house vertical integration of manufacturing processes that can be automated beyond the capability of the lowest part suppliers. Makes sense for us to specially when we fully utilize the capacity that we put in place. We keep an eye on the efficiency of capital expenditure this way. And it really is working out for us and Tim’s doing a great job there. So Thanks, Tim.
Jesse Fittipaldi
I concur thanks, Terry.
Eric Fritz
Our rental centers performing as expected and are they profitable?
Jesse Fittipaldi
Lynn Yeager rental expert.
Lynn Yeager
I will take this one. So the rental revenue is growing and pacing to our expectations that we’ve set around utilization and sales. We’ve also restructured our customer experience centers to optimize both the rental side and the sales functions within we have a few different rental models currently, between owned and revenue shared structures. Our own rentals offset the OpEx needed for sales and delivery operations within the centers.
And our shared models are – lighter and objects and have higher profitability potential. So we will continue to expand on all types of experience centers to support both our rental revenue growth and our consumer sales and delivery needs.
Jesse Fittipaldi
Thanks, Lynn.
Eric Fritz
And then with some product development questions that I kind of aggregated, what can we expect on the product development front, specifically around DC fast charging and or full enclosure?
Jesse Fittipaldi
Dwayne?
Dwayne Lum
Sure, I’ll handle that one. So we’re constantly engaged with the market and listening to customers, needs and wants and desires. And so our product development is really driven by those customer requirements.
To that end, we’ve heard repetitively and recognize the need for climate control, but in both extreme heat and cool environments, so we’re prioritizing full enclosure as a key priority that we’re working on.
Additionally, you know, we look at things like body systems, variations in body types so that we can address new performance requirements and or market opportunities. In addition to that, we’ve heard directly from fleet customers and others that DC fast charging is a key feature for them. As such, we’re working with open and universal standards for electric vehicles to combine single phase AC, three phase AC and DC high speed charging for both Europe and the US.
Jesse Fittipaldi
Awesome, thanks Dwayne.
Eric Fritz
In what exact way will the company get more funding?
Jesse Fittipaldi
Doug?
Douglas Campoli
Yes, thank you. So project is sense, which we’ve talked about in the past is ongoing, and we can’t talk about specific opportunities until the funding has been closed. We will continue using the ATM to fill any gaps in funding in the meantime. We’d like to give a big shout out to our Arcimoto finance and legal teams, both internally and externally for the tremendous work they’ve been doing on these fronts.
Jesse Fittipaldi
Me too, it’s good, great team. I’d like to take a moment to talk about all of this stuff is relevant. All the things that we’re talking about finance, and capital efficiency, we say those words a lot. But I think it’s important for folks to understand our Arcimoto’s perspective. And that sets up, you know, what is a healthy company in regards to that?
And sometimes it’s difficult to understand that because we aren’t, we’re not, we’re in a different position than most companies like Ford or Tesla or companies have been doing things for a long time we’re in this growth phase so, according to a very smart acquaintance. Okay, the traditional most frequent killer of startup, large manufacturing companies, is forward conditions. Too much inventory deployed.
Without enough customers, not enough inventory deployed to many customers. Too much CapEx deployed without enough customers, not enough CapEx deployed, too many customers. So many times, you will see companies build a $2 billion factory, thinking they’re going to have a bunch of sales come in their way, when they should have made payroll. Okay, so Arcimoto isn’t looking at some number that is dictated by what we think the market can do.
We’ve created a cadence of production that gets us to profitability with a reasonable expenditure of capital. So at any moment, when we take a step to the next level, are we talking about financing that is reasonable, or a deployment of capital that is reasonable and available in the marketplace or have we positioned ourselves built out the company to strong put that capital in a place where we can’t use it, making it much harder to get funding?
Okay so, mission here is, what is the best path to profitability, are we doing that at the right pace where the market is? And I truly believe this team has worked really hard together both on the sales side and the production side, to make agreements to what that cadence is, okay. Want to talk about our friend and the change recently with Mark Frohnmayer. I want to say I love Mark Frohnmayer.
I love what he has, what the opportunity is that he has given all of us here at Arcimoto to work at a truly amazing company, culturally awesome product going after something that really matters it. I think it gets all of us up every day with a smile on our face. Thank you Mark for that, he’s a true inspiration to work with. He’s a great friend and a shining light. I can’t wait to see the great things you will create as our Chief Vision Officer doing the things you love.
We’re looking forward to your return after a much needed break for this venture he has been driving for 15 years. Thank you, Mark to all I hope I see you on the team. I hope you see what I saw today on this an call amazing team, a great mission steadily improving in the right direction. Do we have a fun sign off today? Did we figure one out Fritz are we doing. Are we doing our best impression of Blue Steel?
Eric Fritz
Well, we had a great Terry outtake, but I don’t think we got it prepped well enough for the sign off. So yes just yes your best Blue Steel work just fine.
Jesse Fittipaldi
Everybody’s – I’m not doing it by myself. Everybody’s best impression if Blue Steel here we go. Okay, all right.
Eric Fritz
Thanks everyone.
Lynn Yeager
Thanks, everyone.
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