Arcimoto, Inc. (FUV) CEO Mark Frohnmayer on Q2 2019 Results - Earnings Call Transcript

Aug. 14, 2019 9:45 PM ETArcimoto, Inc. (FUV)2 Comments
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Arcimoto, Inc. (NASDAQ:FUV) Q2 2019 Results Conference Call August 14, 2019 5:00 PM ET

Company Participants

Greg Falesnik - Investor Relations

Mark Frohnmayer - Chief Executive Officer

Greg Falesnik

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Arcimoto Second Quarter 2019 Earnings Webcast. During today's presentation, all parties will be in a listen-only mode. This conference is being recorded today, August 14, 2019, and the earnings press release accompanying this webcast was issued at the close of market today.

At this time, I'll turn the call over Mark Frohnmayer, CEO of Arcimoto. Mark, the floor is yours.

Mark Frohnmayer

Thank you, Greg and good afternoon everybody. It is a beautiful day here in Eugene, Oregon, and happy to be having this call. I'm going to start out by giving for those who are recent to the story. I'm going to do a brief outline of our Arcimoto as a company. Then a play short factory tour video for those of you who have not actually been out on onsite. Talk about our remaining compliance milestones to get into delivery of vehicles and then a bit about the road ahead.

So, Arcimoto's mission is catalyse and shift to a sustainable transportation system. We are a mission driven company, trying to solve this problem on the screen. We are right now on a strong upward climb of the truly inconvenient exponential growth curve in carbon in the atmosphere, and transportation is a big piece of that problem. And the particular piece of transportation that we're going after is everyday mobility. So looking at the disconnect between the footprint of vehicles on the road today, and the way that we actually use those vehicles, which is typically one or two at a time. You can think of Arcimoto as kind of a classic disruption story, not in the Silicon Valley, everything is disruptive sense but more in the traditional Clayton Christensen sense of, a disruptive innovation is one that we see utility threshold for a market at a much lower cost.

And so if you think of Arcimoto versus -- the Arcimoto vision versus electric car vision, we're looking at shaving two-thirds of the wage, three quarters of the battery, a big piece of the footprint in order to hit a price point that lands where a toy would cost, or a used car, or a golf cart rather than the average cost of the new car. And that really is key to the disruption thesis of the company. So the first eight years of the company were all about finding new utility threshold and finding the product that would actually meet that utility threshold at that disruptive wage cost and efficiency level that eighth generation is the foundation of the Arcimoto platform.

So the big takeaway for us from a venture perspective is that the vehicle market is huge. If you look at 70 million cars, the 132 million motorcycle produced every year, parcel delivery, two delivery going from a $30 billion a year market to a $365 billion market in the next 10 years. And looking at all these various slices of the vehicles market and addressing them with a single new vehicle platform.

So the Arcimoto platform starts with the Fun Utility Vehicle where consumer facing brand, we started from a consumer quest for a sustainable transportation solution. So we think it's important to lead with a consumer product, carries two passengers very comfortably, I'm sort of at six foot four, our sizing dummy for the vehicle. And to be able to fit two large guys comfortably in a vehicle that can park three to a space is really a significant differentiator of the Arcimoto from basically every other product out on the road that we have seen.

This picture is the feature we call Rockstar Parking Comes Standard. So not only is a vehicle incredibly manoeuvrable through the urban environments, has plenty of everyday range, can include four enclosure doors, storage and so on. But it's also exceptionally easy to park and that has implications, both in terms of reducing driver frustration, as well as really direct cost benefits for the delivery version of the vehicle.

So the second version of the product family that we announced -- we actually announced two additional products on Arcimoto platform earlier this year. One of them was the Deliverator and this is one we are going directly after last mile delivery shifting pattern in the delivery market space where companies like Amazon are going from two day delivery to one day delivery, to just in time delivery. Those new models of delivery call for new types of vehicles. And the Deliverator packs an incredible amount of storage space on to a very small vehicle platform. So the benefits of manoeuvrability of the Arcimoto and the benefits of parkability of the Arcimoto, both have direct implication on the bottom line for vehicle delivery services.

And then finally, we introduced the Rapid Responder, which takes the benefits of the Arcimoto platform and applies them to security, law enforcement and emergency response. So both the Deliverator and the rapid responder are vehicles that we have prototyped. They will follow the Fun Utility Vehicle in terms of the development process. So once we have finalized and are actually delivering the Fun Utility Vehicle to customers later on this year then we will begin the finalization process for those two products.

One of the real advantages of the Arcimoto platform is that basically about 90% -- we're estimating 90% plus of the parks from all of those three platform vehicles will be shared, meaning that we're expecting a much shorter development cycle on the Rapid Responder and on the Deliverator than on the market entry product with the Fun Utility Vehicle.

So our initial market entry plan is based around experienced rental. So you can think of three different generations of vehicle go-to-market strategies, the traditional model being of course franchise dealerships or cars, where a franchisee buys vehicles from a manufacturer and then sells them to customers. Tesla and others have said that that's not a well set up for electric vehicles that leaves -- that takes a lot of margin out of the middle. And so opened up direct to consumer retail stores that of course carried with it significant operational and capital investment overhead.

We believe that the rental experience model is the ultimate win-win where instead of franchising vehicle sales, we are franchising rentals as a company like Hertz would. But unlike Hertz, we own our own vehicle -- unique vehicle product and manufacturing process in the market. And so our franchisees will purchase vehicles and rent them to customers, we'll take franchise fee and then a little bit off of the top line for ever forward.

And that is going to be our key driver for the in-market vehicle experience. So instead of you coming into a store and taking a test drive, you rent a vehicle for a half of day or for a full day. And then by the end of that day, we are convinced that you will have come up with lots of reasons why you should have an Arcimoto in your own driveway.

We have announced several rental partnerships in this last -- in quarter two, we announced a partnership in Costa Rica, and a partnership with GoCars in San Francisco. So for those of you who are familiar with the San Francisco market, the GoCars are little three-wheeled tour vehicles. They have about 80 vehicles in their fleet and they're going to replace about half of those with Arcimoto's. And one of the key technology capitals of the world, we'll have a high degree of visibility coming very soon out of the gates after we actually launch the product.

We have spent the last, almost last couple of years since our initial public offering, provisioning our manufacturing plants and preparing from production, finalizing the product. So the Arcimoto manufacturing plant really embodies our production model. I think of this somewhat like a microchip. We have functional areas within the factory footprint. And those areas are designed to be replicated in order to build the scale.

So I'm going to play you guys a video. This is for those who have not had a chance to actually see the factory for themselves. And I'm going to just start it up right now.

[Audio/Video Presentation]

So for any folks for whom that video came through a little choppy, you can actually see the whole thing. We just posted it to our YouTube channel. And the significance of that last vehicle rolling off, this is actually the very first Evergreen Edition, Fun Utility Vehicle, to hit the road. So we are not in full production yet but we are building production vehicles. So we have a few last little steps of compliance to work through but we have -- the line is fully up and running, building up inventory in anticipation of the completion of compliance.

So last month, in a letter to all of our stakeholders, I led out our three final hurdles; the break system testing, which have been delayed largely due to weather; lighting compliance testing; and then finally, the efforts to finalize the seatbelts in the frame. So break system testing is complete. In terms of lighting compliance, we have only a single position left that had yet to pass the four key photometry, visibility, colorimetry and effective projected luminous lens area test that are -- those are the front turn signals.

And we now have one candidate turned signal at the lab and one more that will get there at the end of this week. We have a final test on the headlights, the out of focus test, which is next week. And then we mechanical testing or pass through certification for all of the lighting about 70% complete. And we are anticipating that maybe completed as soon as the end of next week. And then finally, when it comes to the seatbelts in the frame, we have worked collaboratively with our seatbelt manufacturer to really do -- to do the deep dive on Arcimoto's new three plus two seatbelt system.

So we've gone through several realms of belts with our seatbelt manufacturer. We have validated those belts and anchorages as of this morning. And we are doing a final full vehicle confirmatory sled test that is on the docket for August 26th, that's a week from Monday. So those tests -- sleds will go out on Saturday and make the trek across country.

In terms of funding, Arcimoto continues to attract financing on terms that we believe are favorable to the company and favorable to our stakeholders. And we expect to access additional financing on substantially similar terms. So key goals for the rest of this year, obviously get into production and deliver hundreds of Evergreen Edition Fun Utility Vehicles. We'll be -- our engineering team will complete the Rapid Responder and Deliverator. We will open key destination rental locations so those starting in on the West Coast, primarily in California from the Bay area on down, and then in other sunny locations around the country and around the world.

We'll roll out our product delivery and service networks. We are charging well down the path on the development of vehicle options and upgrades, things like air conditioning, soft doors, both soft half doors and soft full size doors. At the same time that -- once we're in production at initial Evergreen volumes, we're going to be preparing for mass production for the following years. So again, step one is deliver. We are anticipating that we will be delivering and starting production. This quarter we actually have begun producing vehicles and are building up inventory now, that white vehicle was the very first Evergreen Edition Fun Utility Vehicle.

And then within 12 to 18 months, the plan as to ramp up to a rate of production of 200 units per week, which is the equivalent of 10,000 units per year. And as of the end of the quarter, there is an error on this slide, this is actually at the end of quarter two, we had 4,128 preorders and then at an average sales price anticipated $17,000. We look at that as $70 million in anticipated revenue.

So in quarter two, we actually also began really telling Arcimoto story to a larger global audience. We -- I was invited to speak at the Singularity University Summit in Thailand, just got back from Boston at Canaccord Genuity's conference, and talking about the Arcimoto platform vision as a solution for the global transpiration problem. We saw a great reception in Southeast Asia, in Thailand, in China, in Taiwan, in Korea. And we are anticipating that the factory model that we have built, we see a two step scale up process. One is to take those basic functional units of the factory of the amp design, very capital efficient flexible manufacturing program and replicate those functional units within our own global headquarters. And then ultimately is to take Arcimoto in a box and replicate it all over the planet.

As we look out over the out years, this is really just to show you in very broad strokes where our heads are at in terms of what we see as the long-term potential for the product family, and what that looks like both in terms of the potential for revenue generation, as well as battery purchasing power, which is really our -- one of our key cost reduction objectives over the coming years.

So a little note about the sector. We are an electric vehicle company. We are building a platform that is ideally suited to last mile delivery to autonomous daily transport, we -- to vacation rental, to vehicle sharing opportunities. We really see the Arcimoto platform as being at the confluence of pretty much every major trend in mobility today. And as we look out at the rest of the market, we see significant amounts of investment going on in this sector at reasonable valuations and that -- the transition from fully into a production and delivery company, is when we would have the opportunity to begin tapping into those larger pools.

So that is all you have -- all I have for my planned remarks. And then I would like, at this point, to open it up to Q&A. So if you have a question, there is a Q&A interface and you can ask a question. And I will do my best to answer. So here we go.

Question-and-Answer Session

A - Mark Frohnmayer

So there has been an effort to standardize -- to put what is called the auto side, which is three wheeled vehicle that has -- that drives like a car as a special class and a lot of states was. That was work that was done largely by Elio Motors, and then AAMVA, which is the American Association of Motor Vehicle Administrators, came out with broad definitions for what an auto cycle is. We actually helped in that process in like 2012, or 2013.

And so we have been -- the particulars of the Arcimoto as it is a handlebar steered vehicle, it doesn't fall into those auto cycle categories. So we have been working on a state-by-state basis, focusing on our key early states first. We, over the course of this year, we've gone from on the order of 14 states that don't require a motorcycle license to drive the Arcimoto up to 19. There are only now about five states, I believe, that require a helmet for all ages to use the Arcimoto.

So we've actually made significant progress so far, and we've seen warm reception from legislators who have -- see one, that the vehicle is incredibly easy and intuitive to operate. It takes -- the learning curve is basically zero. And that the vehicle solves really a pressing need for state carbon reduction goals. So we've had receptive audiences where we're going and we expected as roll out into large market. We're going to continue that effort, particularly once we have production vehicles on road.

I should also add that we are leveraging our community of both interested potential customers, as well as preorder customers to right their legislators and help with those lobbing pushes. And we expect to do more of that in the future.

So next, do you think electric scooters, such as Spin and Lime in urban areas are going to erode the bottom end of the potential market since they have already -- "already provided a sustainable shift in resources"? If not, why not? If so, what are your plans to combat them?

We really see actually that those that -- the micro-mobility and the mini-mobility, which is the category that Arcimoto would fall into, are actually complementary categories. So the push for electric scooters and electric bicycles exposes a much wider audience to the, really the fun factor of -- and the fun and clean aspects of electric transportation. But the Arcimoto can do so much more than a last mile scooter. We really look at the Arcimoto as the last 10 mile solution of the last 30 miles solution. It's the vehicle that can get you all over your community in comfort, goes on all the roads, yet still maintains the benefits of small form transportation.

So next question. Where will all the vehicles for the recently announced foreign partnerships be built and what priority will they get over existing reservations for people not on the East Coast? So this is I believe in reference to the announcement of the deal with Costa Rica. The way we look at this is that we have always planned to have in market experience for potential future customers.

So as we go into markets, we are going to have one channel of vehicles that goes off to our preorder list. And then for those of you who remember our business plan before, we're going to do experienced rental, we were going to do a retail store. And so this is -- that has always been the plan. We're anticipating that eventually probably about 30% of our vehicles will go to in market rental operations and fleet operations with the balance going to consumer vehicles.

And so I would expect that it will probably be a little bit less than that for the initial ramp just because we have so much pent up demand from our very, very patience preorder customers. Thank you all for bearing with us through this vehicle finalization process. We are confident that the changes we have made and the continued refinement will have made it worth the wait.

So then with the first production vehicle scheduled to hit the road soon, explain and maintenance and warranty plans for respective buyers? So the Arcimoto is going to come with a three year, 36,000 mile warranty. We're planning on doing service in a variety of ways. In markets where we have rental outlets, we will -- our rental outlets, some will double as service centers. We're also talking to major in market service providers. So those who do basic automotive service can service basically all of the ware items on the Arcimoto. And then we also plan to have a mobile service option, so basically service in your drive-way.

How much cash is needed to get to the sustainable production target of $200 per week, and how are you going to fund it? So we're looking at a variety of tools for the next stages of growth of the company. And primarily we're looking at basically an inventory line of credit that will fund parts of that production ramp. But basically, I think the key here is that we are planning to stay at basically a relatively consistent volume once we hit a rate of around a 100 a month. We're going to stay at a consistent production volume until we have the tools to really step up. And that's to the point of the slide on production is just where we're going to -- step one is deliver -- get into the market at low volume, and then a major push to reduce cost and increase scale that we'll see a step function up. Basically, we're anticipating middle to late next year.

So the question, next question is based on your pilot builds and subsequent teardowns. Can you get to 200 vehicles per week in the Eugene factory? If not then what has to happen? So we believe that our manufacturing line and the tools that we have in place can get to a 200 per week production volume in the facility that we have now. I'm anticipating that probably the major piece that we'll need to address in order to hit that number with our current facilities is going to be park storage.

So the line is set up for it, the manufacturing equipment is set up for it. But currently, we don't have the space for inventory that is -- and works in progress. So the nice thing is where we are located, we actually have plenty of open space around us. We have a very large parking lot that we could put a tent up in, or the like or build a structure that will fit. So we think we can do that where we're at. In order to hit the production volumes that we want to hit, going forward, beyond that of course we'll need more space.

Next question is, is AC is ready to go, or can be sold as an add-on later and plugged in by the consumer? AC, we have our first air conditioning prototype ready to go, but it is not ready to go as a for sale option yet. That is an area of active development and we're expecting to have that done in relatively short order. It probably won't be a consumer plug-in it would be something that would be an add-on that would be done by a professional service, one of our service providers.

Next question is, will the same seat belt be used in the front and rear? Will both belts have pretensioners and load limiters? So it's the same belts. We actually do a 3 point and a 2 point in the front and in the rear, there is no pretensioner, there is no load limiter. But the 3 plus 2 is sort of -- this is a model actually that we borrowed from the BMW C1. It's in attempt to get closer to the functionality of a 4 point belt, but using conventional seat belts that are easy to get in and out of.

And next question is, when do you really expect to deliver your first vehicle? We are expecting to broader our first vehicles in this quarter. And so basically, if you look at them that the milestones ahead, it is possible we'll be done with all vehicle testing within the next couple of weeks. And then there will be a, quite a bit of additional documentation as the test reports come in. And we fold them into all of our compliant certifications. But you can be assured that the team is really working at full, full steam to get vehicles out on the road to our customers.

So we are very happy with the performance of the vehicle. We're very happy with what this process has brought us. And we understand really everyone champing at the bit. Believe me, nobody more than I take to get the vehicles on the road and in the hands of our customers.

So next question is, how do you plan to protect your position and value proposition, i.e. patents and barriers to entry? This is a good question. So Arcimoto has a handful of key patents, two on the basic vehicle architecture. So the real innovation that we have been fighting for on the vehicle platform is how do you build a small footprint vehicle that feels like a much larger vehicle that carries two large adults very comfortably, yet fits three to a space. And that is what our architect patents are all about. It really is -- those are about how do you balance a three wheeled vehicle platform to make it stable on the road, even though it is small and light weight.

We also have key patents in the drive train, a novel battery interconnect, which is a crimp-based interconnect that has really nice properties of both mechanical and electrical properties that's applicable to higher power batteries. And we have a patent on our dual motor gear box. I would say that in terms of what are our barriers to entries of patents, we'll certainly play a part of that story. I think first to market with a real micro-mobility solution for the mass market, continued innovation in the space. So that people who are shooting for where we were, or not getting to where we are. And then a relentless focus on pure electric solution that is a new brand, a new market opportunity that is not weighed down by existing internal combustion engine products and branding and so on.

Next question is, do you have any other vehicle types in mind for the future? Well, yes. Yes, we definitely do. Next, is when do you project Arcimoto to need to raise funds again and how much? Would there be a share offering through debt? Actually this is on the funding slide addresses. We continue to be able to attract financing on terms that what we believe are favorable to the company and favorable to our stakeholders. And you can see that in our most recent filing. And we actually expect to be able to access additional financing on substantially similar terms.

Next question is, how long does it take to produce one vehicle? We, during our round-robin vehicle assembly and disassembly process, we peaked -- we peak at three vehicles a day. We are actually on a one vehicle per day production rate now. And we expect that once we are in market, we will rapidly ramp up to five vehicles per day? And then by the time that we're actually producing at that 200 vehicles per week rate, that's basically one every 20 minutes.

Are you exploring -- next question is, will there be periodic updates on certification and testing, or will we have to wait until November? Well, if we are successful in releasing the vehicle this quarter, there's basically one more month left in the quarter, and you will certainly see that announcement. This is something we have been building towards for a very long time, and we are truly champion at the bit to get vehicles on the roads into the market, and you will know the moment that happens.

Are you exploring the possibility of using lithium silicon batteries with silicon anodes? We are open to future battery technologies as they become cost effective and sold at scale in the marketplace. We are not actually -- we are not a battery cell manufacture. We build our own battery modules out of cells. So I would say, we are definitely open to the possibility of using the next chemistry du jour, whether it is a different anode-cathode construction, or solid electrolyte or whatever. It's just really going to depend on when those new technologies are in production at scale and accessible to us through our partners.

Next question is, what are Arcimoto's views on a merger buyout if the opportunity presented itself? We are -- so Arcimoto is a mission driven company. Our mission is to catalyze the shift to a sustainable transpiration solution -- system. I can see with the right partner, the right acquisition partner, that we could accelerate that mission. But again, we would make that sort of a decision through that particular lens.

And then final question is, would it be up for international purpose -- purchase UK base? So our focus today is getting into market on the road here in the U.S. And then the moment we are through U.S. compliance, we're looking at European compliance next. So, yes. And then of course, we're looking also elsewhere in the world in terms of both market and then production?

The final question is, is the white vehicle you showed in the video, one that is complete and will be provided to a customer? So the vehicle is complete, but for the items that yet have to be finalized in terms of certifications. So basically the front turn signals and then there was actually one body panel part that is the hinge cover that was not in place in the photo on that vehicle. But otherwise, it's a complete vehicle. That one will not be provided to a customer. That one is going to be an internal marketing vehicle for Arcimoto that was -- the customer vehicles are very close behind it on the production line. Some of our very first customer vehicles are in build right now, and just simply awaiting that final certification for delivery.

So with that, thank you all for participating this afternoon. It's nice to have such a large crew on August summer afternoon and evening. I would remind you all, if -- to head over to our YouTube channel and check out that factory tour, if it was a little choppy coming through on the call. And thank you all for your support.

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