Fisker - Q3 2021

Transcript

Operator (participant)

Good evening. Thank you for attending today's Fisker Inc. third quarter 2021 earnings call. My name is Erin, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Dan Galves, with Fisker. Thank you, Mr. Galves. You may proceed.

Dan Galves (VP of Investor Relations)

Thanks a lot, Erin, and welcome everyone to Fisker's earnings call. Joining me on the call today, as usual, are Henrik Fisker, Chief Executive Officer; Dr. Burkhard Huhnke, Chief Technology Officer; and Dr. Geeta Gupta-Fisker, Chief Financial Officer and Chief Operating Officer.

Before turning it over to Henrik, be advised we will make forward-looking statements within the meaning of the federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These risks include those set forth in the press release we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of today. We disclaim any obligation to update any forward-looking statements except as required by law. We'll reference our financial measures that do not conform to generally accepted accounting principles or GAAP during today's call, including non-GAAP operating expenses.

This information may be calculated differently than the non-GAAP data presented by other companies. Quantitative reconciliation of non-GAAP financial information to the directly comparable GAAP financial information appears in today's earnings release. With that, I'm happy to turn the call over to Henrik.

Henrik Fisker (Chairman and CEO)

Thank you, Dan. Welcome everybody. I've got some real interesting news I want to share in the end of my presentation, but I'll just start with some high-level bullets around the business. We are still on target with the Ocean to launch it in November next year. In fact, we're gonna start ramping up the prototype build with Magna already in Q1 next year.

We have, of course, already made some prototypes, but from about end of Q1 next year, we expect to start building two vehicles a day. I think that's pretty outstanding, well over eight months before we launch the vehicle, and that will make sure when we launch, we can ramp up quickly into the high-quality vehicles, and that's on target. We also now hired a lot more people.

We continue to hire probably somewhere between 20 to sometimes 30 people a month. We have well over 300 people in the company now. Our balance sheet remains solid with about $1.4 billion in cash. Also we continue to accelerate our reservations. I'll talk a little bit about our marketing push as well. Just gearing up to the unveil of the Ocean here at the L.A. Auto Show, where the PR day starts the 17th. We'll actually have a special event the day before which we will stream worldwide. We are really excited about that. We're gonna talk a little bit more about that closer to that event date.

We also have got into a validation phase that Burkhard will discuss and get a little bit more into detail about. Of course, at the show where we are in L.A. Auto Show, we are going to really talk about the specifications of the vehicle, show our brand-new designed interior with some pretty amazing features, definitely some that currently don't exist in any vehicle to date. I'm super excited about that. Also, we have made progress on the Pear program, and actually, our internal team have come up with an expanded strategy around our FF-PAD development method.

What we are looking at is much more Fisker IP sharing between the Ocean and the Pear, meaning a lot more components that we have developed and created IP on throughout the Ocean program. What that means to the Ocean is that when we launch the Pear in 2024, we're gonna start being able to use some of these components in both vehicles in much higher volume that ultimately will actually lower the Ocean's bill of materials, the cost of the Ocean even more. I'm also really excited about that.

Let me get to marketing and sales. We have expanded this the team dramatically. We have hired an agency which we are working with on creating marketing materials. We are really waiting to, of course, kick off our big marketing push to around the 17th of November when we show the car. We obviously needed the vehicles to feature in advertising, online, digital media, et cetera. All this is in the works right now. We are gonna launch both in U.S. and Europe, major campaigns.

I think we have some real edgy, cool stuff, and I'm really excited about it, and that's gonna go full blast from seventeenth of November, and I expect that we will start seeing major acceleration in our reservations at that point in time as we obviously got to get more known across both the U.S. and Europe. We've also made progress on our ESG initiatives.

We are really looking at, you know, wanting to be able to explain more details and use real primary data about the full cradle to cradle life cycle analytics. As we get closer towards our start of production, we'll get more into details on that.

Now let me return to sort of the real big news here, which is our new signed deal with the CATL for batteries. I wanna elaborate a little bit about why this is such a big deal. We are gonna launch very uniquely the Fisker Ocean with two different battery chemistries, of course, two different packs. We already are running tests on these packs. Of course, they're going into all the prototypes as well next year.

What's unique about these two different packs is the base pack actually is amazing when it comes to cost because it's using LFP and that's a much lower and that's how we are partly able to achieve the low cost of the Fisker Ocean, specifically in that base price of $37,499, which I think is unrivaled by any competitor. Also, the type of range we're gonna have there is gonna be more than adequate probably for most people and quite good actually. Of course, we have the second battery, which is NMC.

The advances of that battery is not only in the cell, but really in the pack, and also what we have done with the structure of the vehicle in terms of the design of the pack itself. Our pack is not the skateboard pack. It's not the typical square space you see in every single EV out there. It has a slightly different configuration, which we're not planning to show off to our competitors too soon. But what it allows us to do is get the world's longest range in our segment for an SUV and in our price class.

Of course, you can make a $150,000-$200,000 car with incredible range, but to make a vehicle, you know, between $50,000 and $60,000 with such a long range that we have achieved, I think is really magnificent, and it really shows what a phenomenal engineering team we have, great partnership we're having with CATL. I'm really excited to show those numbers at the L.A. Auto Show.

In fact, we will have models that people can choose between. We've got the sport model, which will have the LFP battery, extremely well priced. Then we have the two other models, which we'll reveal the names of at the L.A. Auto Show. Both of those two will have the longest range in the segment.

As you know right now, the longest range for sale here in the U.S. inside that $50,000-$60,000 for either an SUV or crossover is about 326 miles, and we'll be well over that with both these two other vehicles, and I'm really excited about that. What's also unique about our powertrain is the efficiency because at the end of the day, we have an SUV.

I didn't wanna you know sort of skip out here and just do another hatchback crossover with great aerodynamics that doesn't really look that great. We wanted to create a vehicle that can sell globally in the fastest-growing market in the world, which is SUVs. That's what people love. They love the utility, they love the looks, and that's what we're going for. We wanna be different than our competitors.

Despite having that, larger SUV vehicle with all the utility that comes with it, we still have a vehicle that's class-leading in range. Of course, as I mentioned, it's partly to do with CATL, it's partly to do with our energy-dense battery pack, it's partly to do with how our vehicle actually is designed and engineered in terms of the space for the battery, and then our incredible powertrain, which we're gonna talk more about, at the L.A. Auto Show as well.

One thing I will say that we haven't announced yet is that every version of the Ocean will have silicon carbide inverters, also the base vehicle. That is part of what contributes to our really, really high performance powertrain, long range, really efficient. I think what's interesting here is why would we be ahead of the competition?

Well, we chose all this technology this year. When you get a Fisker Ocean in 12 months from now, your technology is the newest of the newest. If you buy any other car next year, most likely that technology was chosen three years ago. That's why we're different, and that's why we're gonna be class-leading. I now wanna hand it over to Burkhard to talk a little bit more about the details of what we're doing on the Ocean program. Burkhard?

Burkhard Huhnke (CTO)

Yeah. Thanks, Henrik, and welcome everyone. As Henrik said, the sourcing process for Ocean is down to just a small few parts, off-the-shelf items. We have moved into this industrialization phase of the program. This involves, of course, the series of both virtual and physical prototype builds that already began earlier this year and will be ongoing through most of next year.

We need to do the hard work to ensure all the components are seamlessly integrated, that we are on track to hit all the attributes we planned for the car, and that it will meet all the safety, performance, durability standards in all weather conditions, and that it can be manufactured with the quality. Testing of our first build, so-called Mule 1 was completed some time ago.

This was primarily to test the correlation of virtual safety testing with physical results. The Mule 2 build is complete and testing is ongoing. This continues the Mule one testing, but also adds powertrain, the battery electrical system function, and the platform durability. We also test complete vehicle function in hot and cold weather in this phase.

Finally, as you can see from the photos on the earnings release, we are very happy to have started the next prototype build at our manufacturing facility in Graz using production intent components. I can say it's super helpful, very helpful to build prototypes in the actual production facility, which is unusual for a startup. The body shop is operational, and once general assembly is up and running, the shop has capacity to produce up to two cars per day.

I'm very proud of our technical teams, both at Fisker and Magna, for accomplishing a lot in a short period of time. We have the right plan to achieve on-time start of production. That's been through all the required tests and validation work to prove quality, buildability, and durability from the start. Thanks. Now I'll turn over to Geeta.

Geeta Gupta-Fisker (CFO and COO)

Thank you, Burkhard Huhnke, and welcome everyone. Really excited to be here today. Overall, I can say I'm really pleased with what we've accomplished as a team in preparation for the Fisker Ocean SOP, which is now just a year away. Over 90% of the Fisker Ocean bill of materials is now sourced and the remaining components mostly just off-the-shelf parts.

The sourcing process was definitely not easy, but ultimately, we were successful in procuring a significant amount of advanced technology, which will result in an amazing product packed with class-leading features. Beyond sourcing, the development process of Fisker Ocean has taught us a lot. In various components and various technologies at both a system and a subsystem level has resulted in exciting Fisker-owned intellectual property that we intend to put to use on all our future vehicle programs, as Henrik just alluded to now.

Our recent announced battery reservation agreement with CATL marks our final long lead and one of the most critical items in the vehicle. Of course, the two companies have been working together on development, validation, and testing since last year, and now we're really pleased that we can share with the public a committed long-term capacity agreement.

I want to make a statement that we actually visited CATL in 2019 and have spent three to four years developing trust and a phenomenal relationship with leadership at CATL. It's evident from the quote that the president of CATL made in our joint press announcement. We have a committed supply of over 5 GWh per year capacity initially.

This includes two different chemistries, as Henrik mentioned, a long-range NMC chemistry based pack, which is a high-capacity pack in the cathode that supports segment-leading range and a high-value pack which uses LFP in the cathode that supports the compelling price of Fisker Ocean Sport while providing range and acceleration consistent with the much more expensive EVs.

We see this as a very deep and strategic relationship with CATL, and as part of our contract, we have the ability to jointly plan 12 months ahead of time to increase our capacity as we see demand in the market, including opportunities to localize production in various countries globally over time. We are now knee-deep working with our suppliers and partners on the test and validation phase, as Burkhard mentioned, supported by a robust set of timelines, milestones, and shared deliverables.

As we move from the sourcing phase to the industrialization phase, I have been able to turn my personal focus to the balance sheet, as well as preparing the business to scale by focusing on our operations, hiring, and building processes. We took action to bolster our balance sheet in August this year, raising $667.5 million in a convertible note offering at 2.5% interest rate and a 30% conversion premium through a capped call.

We used part of the proceeds to fund a capped call. Re-emphasize, we had a 30% conversion premium, and we used part of the proceeds to fund a capped call that takes the effective conversion price to $32.57 or 115% of the stock price at the time of the convert.

This was an efficient way to bolster the balance sheet and de-risk funding for our additional vehicle programs. The timing was by choice. It was not out of a need. The capital call signals our confidence in the future value of the company based on our internal view of both progress to date and the stellar product line we intend to launch.

On the operational side, as Henrik mentioned, we've also had a phenomenal year in hiring. We were 100 people last year. We now have over 300 employees. That includes 20 extremely seasoned vice presidents have done a great job in building their own departments and the entire organization.

We have empowered our entire company with a very attractive performance-based restricted stock unit bonus, which has not only motivated our existing employees to be part of the success of Fisker, but is also helping us immensely in retaining and hiring talent in this hot EV market. We are now working with our advisors on setting up global entities worldwide and IT systems that take us from a development company into a revenue-generating product company with customers worldwide.

Henrik covered the work we need to build out the customer experience functions that are critical to launching a successful product. Our products are the number one focus, but if you don't have right IT systems in place to support those products, the business simply cannot scale.

Now turning to our results and outlook. Our operating expenses in Q3 aligned very closely with internal expectations. Capital expenditures were way below our expectations. As many of you know, CapEx is lumpy and very reliant on timing of billings and suppliers, which can sometimes be hard to predict. Our forecast assumes timely billing, and it's been slower than we expected despite ongoing work. That billing activity has picked up significantly so far in Q4, so we have good visibility that CapEx will increase meaningfully in Q4, as implied by our guidance.

Operationally, the increase in R&D in Q3 versus Q2 Was primarily the result of increased headcount, increased prototype spending and modest engineering design and integration refinements as we enter into our industrialization phase. We expect a more modest sequential increase in Q4 on headcount and as the prototype work continues to ramp. The increase in SG&A expense in Q3 versus Q2 was a result of a higher headcount.

Higher SG&A to more than double in Q4 due to kickoff of marketing campaigns to build our brand, including significant spending on the L.A. Auto Show unveil of Fisker Ocean and activities surrounding that event. We will begin to accrue lease expenses on our flagship L.A. Experience Center property we recently signed. Now turning to outlook. As noted in the press release, our overall OpEx plus CapEx guidance stays unchanged at $490 million-$530 million.

There has been adjustments in the categories. Our R&D increased $15 million at the midpoint. This is related to refinement of the test and validation plan for the remainder of 2021. Our SG&A increased by $10 million due to a more robust marketing plan for Q4 and the flagship store lease I mentioned earlier. Higher OpEx is offset by about $25 million lower CapEx spending, which is related to receiving late invoices from suppliers.

Work is progressing on track, but we spend time refining when we are likely to be billed for the work. Overall, I'm extremely proud of our entire Fisker team for all the accomplishments we've made so far in 2021.We have a lot of work ahead of us for sure as we enter the critical industrialization phase, but we have a lot of confidence in the plans we have established to execute a fantastic, profitable product on time and budget, and I can't wait to unveil the Fisker Ocean at the L.A. Auto Show. We're now happy to take your questions.

Dan Galves (VP of Investor Relations)

Thanks, Geeta. Erin, can you please compile the queue?

Operator (participant)

Certainly. We will now begin the QA session. If you would like to ask a question, please press star followed by one on your touchscreen keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. We will pause here briefly to allow questions to generate.

The first question comes from Jeoffrey Lambujon with Tudor, Pickering, Holt & Co. Please proceed.

Jeoffrey Lambujon (Managing Director)

Good evening, everyone. Thank you for taking my questions. My first one's on batteries. You know, I appreciate the detail in yesterday's release and some of the teasers from today's call on the characteristics and also how you spoke to the L.A. Auto Show in two weeks for much more detail, which we're very much looking forward to. Is there anything more you can give us just today, as we think about pack costs between the two chemistries and any more detail on the range, as you think about those would be helpful as well?

Henrik Fisker (Chairman and CEO)

You know, we wanna give our customers all the information they need and desire, but we don't wanna give all the information what our competitors want. I don't think it makes any sense for us to give the exact price of our batteries. But I think what we can say is we know that they're on par with some of the biggest car companies in the world in terms of cost. You know, the real advantage here in terms of cost of the pack is the fact that we are using LFP in the base vehicle.

I don't think there's any vehicle in our class right now in the U.S. that's using that. There might be one other that's using it, going to use it, but I think that's one of the bigger advantages. The advantage is that we design our battery volume in our pack, so we can get quite a lot of power out of the LFP because LFP, part of the reason it's lower cost is also it's not as energy dense as NMC, so you won't get the same power. But if you have more volume, you can get a pretty good amount of power into the vehicle. That, I think, is what's gonna set the Ocean apart. Also maybe

Jeoffrey Lambujon (Managing Director)

Thank you.

Henrik Fisker (Chairman and CEO)

Yeah, go ahead.

Jeoffrey Lambujon (Managing Director)

You go ahead.

Henrik Fisker (Chairman and CEO)

No, I was just gonna say, you know, range. You asked about the range. I mean, we kinda wanna wait and surprise people at the L.A. Auto Show. But I think the real key again here is some people, you know, may not really need to carry a giant battery around, and therefore we have that LFP solution which makes us extremely price competitive. But if you do want range, then we do have a really cool long range. And like I said, it will be the world's longest range in our segment and our pricing. Of course, please don't compare us to, you know, vehicles that cost $80,000, $100,000, $150,000.

If you compare us to vehicles in our price class and the type of vehicle our vehicle is, we will have the longest range in the world in the Ocean in the two versions that sits above the base sports version.

Jeoffrey Lambujon (Managing Director)

Understood. Appreciate it. I understand that we'll have to wait a couple more weeks to really get the detail. My second one's just on marketing. There's clearly a lot going on, as you all highlighted, just preparing for the L.A. Auto Show and the marketing push to kind of accompany the unveil with the experience center lease secured and the growth in the customer experience teams. I was wondering if you could just talk a bit more about the game plan for the marketing part of the strategy as you think about growth and reservations over time.

Henrik Fisker (Chairman and CEO)

Yeah. We are creating content right now, and we'll continue creating content over the next couple of months. What I mean by content is you've got to make real exciting videos that can be used as online digital, you know, ads and engagement with different potential customers. We have hired some unique agencies that are specialized specifically in digital and AI, et cetera, how we reach the right customers.

At the end of the day, you know, I know a lot of people just saying, "Why don't you start blasting a whole bunch of stuff out now?" I think it would be a waste of our money. We are still 12 months away from delivering. We're sold out, you know, well into 2023. My expectation of our marketing teams are that we will have at least 50,000 reservations before we start production next year. I think we have a really strong marketing plan that is comprised of online content, other means of marketing and PR. We are creating unique PR moments.

We obviously are in Hollywood and therefore already planning and have already secured us being in a couple of different films and TV series. Of course, we have also planned a host of events throughout U.S. and Europe, and then we are gonna open experience centers. We have a whole new strategy that nobody's used before when it comes to displaying our vehicles and how we deliver our vehicles. It's all about creating the ultimate experience, I believe.

I think the automotive industry is still far behind in experience. You look at how quick you can order a pair of shoes on Amazon and then, you know, what happens when you order a car and how long it takes to get and how many papers you have to sign, and considering it's maybe $40,000 or $50,000, how is that experience?

We wanna create and be the number one in experience in the world. That goes from everything, how you interact with the brand to how you purchase the vehicle, a flexible lease the vehicle, how your ownership goes throughout the time of your vehicle, what we're gonna do with OTA update, et cetera. All that, of course, we're gonna elaborate on over the next 12 months to show how we think we're taking the lead in many of these areas.

Dan Galves (VP of Investor Relations)

Jeff, I just have one more point to add. I mean, as we had put in the press release, we've got over 70,000 registered app users. You know, we think it's pretty unusual for people to reserve a product more than a year in advance when they don't know what the content and features is. We're really happy with our reservations today. We think, you know, just talking about the details of the content, the pricing of the entire Ocean lineup, the range, all of these, details about the car triggers, you know, quite a few of those registered app users to reserve.

It also helps with fleet sales because most fleets are certainly not going to get into, you know, detailed discussions about a product that they don't know exactly what the content is, and that's all gonna come out in two weeks. Can we go to the next question please, Erin?

Jeoffrey Lambujon (Managing Director)

Thank you all very much.

Dan Galves (VP of Investor Relations)

Thanks, Jeff.

Operator (participant)

Absolutely. Thank you, Mr. Lambujon. The next question comes from Joseph Spak with RBC. Please proceed.

Joseph Spak (Managing Director)

Thanks very much, everyone. Going back to the battery announcement, which seems important here, two questions. One, the decision to go to LFP to offer, you know, a more compelling, you know, low-end vehicle, does that at all change your potential demand outlook for that variant? And then secondarily, if you could just sort of talk about your scope to grow your allocation of gigawatts with CATL over time if needed?

Henrik Fisker (Chairman and CEO)

Yeah. It was always our plan. Well, always, since quite a while, it was our strategy to, you know, use our vehicle or put our vehicle in a much higher potential buyer group than you normally see. If you look at all the electric vehicles out there today that are SUV or crossovers, let's forget the hatchbacks, they are all very expensive, and they're all sort of staying pretty much within a narrow spectrum of pricing.

I think the unique thing about the Ocean is that we start at $37,499 for any of this. That is an amazing price. You know, the average price of a car today, I think, has gone over 40,000 now. We are really among what you would really consider affordable and reachable for everyone.

Secondly, with our Flexee Lease, when we start that, again, we're gonna attract a whole new buyer group that very few other car companies have the ability to reach because of the way we structure our Flexee Lease. We can give the car back anytime. Absolutely, I think that we have a real possibility once we get production going to potentially scale up on the side of LFP.

Finally, your question about CATL and what happens if we, for example, see that we can sell a lot more cars than we expect. As Geeta mentioned, and maybe that slipped through the cracks, but we actually have in our agreement the possibility to increase our volume significantly with CATL. Really, we don't have any limit on it, quite frankly.

We just have to have a 12-month planning heads-up. If I see in the middle of next year that we have terrific sales on the reservation numbers, we can call CATL and say, "Look, we need X amount more," whether it's double or triple or whatever it is, from, you know, 12 months later. Now it's just a matter of how many vehicles can we sell.

I'm really excited about this specific battery deal, because it allows us that, and I think very few other startups probably have that ability. Also remember, most other startups are buying cells and making their own packs. In this case, you know, CATL is making the packs, and we get a full finished solution to us, and that gives, from my point of view, also some other advantages down the line.

Joseph Spak (Managing Director)

Great. Thanks. Maybe just a second question on, you know, the upcoming L.A. Auto Show, and you're gonna show these vehicles. I mean, how soon after that do you open a configurator so you start to get a sense of that mix so you can, you know, properly let your suppliers know, you know, how long does that process sort of need to be, and when should we expect that configurator to open?

Henrik Fisker (Chairman and CEO)

We're already working on that. That's gonna be open the day of, the 17th.

Joseph Spak (Managing Director)

Okay.

Henrik Fisker (Chairman and CEO)

People go in and configure their vehicles, and then we're gonna expand on the configurator later, and introduce more features on it. You will be able to go in and configure your car. You're gonna have all the different option packages shown, the different features, and that's quite a lot of them. A lot of them are segment leading in my opinion. That's all gonna be available already on the seventeenth of November.

Joseph Spak (Managing Director)

Great.

Dan Galves (VP of Investor Relations)

Thanks a lot, Joe.

Operator (participant)

Thank you, Mr. Spak. The next question comes from the line of Adam [Thulberg] with Morgan Stanley. Please proceed.

Speaker 11

Hi all. Adam [Thulberg] here for Adam Jonas. Question on the batteries. For the 5 GW, or the initial 5 GW, where will they be sourced from, which country? You know, you guys have made the emphasis of ESG with a view of making the most sustainable EVs in the world. Obviously battery is pretty dirty business as we sit here today. What steps have you made with the CATL partnership that helps you secure a, you know, sustainably sourced battery supply?

Geeta Gupta-Fisker (CFO and COO)

Yeah, great question, Adam. First of all, obviously CATL is in China, so the batteries are coming clearly from China. They have a pretty elaborate sourcing mechanism when it comes to different raw materials. We do have a responsible supplier policy that we announced earlier this year that we put in place that we share with all our suppliers. With respect to CATL, of course, they have a copy of our policy.

Now as we get into industrialization, we look at the source of some of the raw materials, but also very importantly, CATL themselves have put together very extensive recycling program, and we will be working very closely with them on looking at end of life use and looking at recycling. What can we do to make, of course the carbon footprint lower.

Now, in addition to that, you know, I don't wanna sit here and talk about CATL's plan, but of course, today they have 65, 66-odd GWh capacity, and as everybody knows, it is now the biggest battery company in the world, and they have plans to go global, which means that they will be in countries outside China making cells, and we are knee deep in discussions with them on their global plans as well since we are a global company and will produce not only the Ocean, but of course the Pear program and other variants on the Ocean platform.

Henrik Fisker (Chairman and CEO)

I also just wanna add one thing on the sustainability. On our flexible lease program, we are working on actually keeping the vehicle all the way to end of life and recycling the entire vehicle. If we lease it out for 12 years, which I would consider pretty much end of life, we are recycling the vehicle after that. You are looking at a complete, you know, closed circuit really. Not to mention of course the fact that we will get a lot more profitability out of each battery. You know, being able to lease this vehicle over 12 years, you're talking about more than 250% margin on these vehicles long term.

Speaker 11

That's some helpful color. Thank you. One more if I could squeeze it in. You know, obviously you guys are an outside party to this transaction, but you know, it was announced, what was it? A month or two ago about Foxconn's plans to try to buy the Lordstown, Ohio plant from Lordstown Motors. Has there been any discussions between you and Foxconn about, you know, the potential for making Pears at that facility should that deal go through or any color on, you know, potential production facilities for the Pear? Thanks.

Henrik Fisker (Chairman and CEO)

No, I think yeah, I think we already mentioned that that's our intent to produce the Pear in that facility. You know, it's a giant facility which can probably get up to close to 500,000 vehicles a year. Again, that gives huge potential for us in the growth of the Pear that initially you are looking at a greenfield that would have started with 150,000 vehicles a year. Obviously in that facility, if it turns out we're a lot more successful than we thought we could be, then you know, we could probably move up to the 250,000 vehicles. That ultimately is our own goal short term. Long term, I think we can sell much more than that.

It does allow us to move a lot faster, and we're constantly in contact with Foxconn as we jointly work on the Pear program. Of course we are discussing not only the place of manufacturing because that I think is sort of determined, although as you mentioned, Foxconn have to do their own final deal. If that deal comes through, that would be the place.

We're also looking at intelligent manufacturing in terms of being able to take cost out of the vehicle. As I mentioned earlier, we have an extensive program within Fisker of sharing parts with the Ocean, which means we don't have to go out and procure these parts and sort of design them from scratch.

What we can do is go out to our current suppliers and saying, "Actually, we need more of that part instead of, you know, whatever a year, we now need 400,000 a year." That means that you're able to lower the pricing for both the Pear and the Ocean. All these discussions are constantly going on.

Dan Galves (VP of Investor Relations)

Thanks a lot, Adam. Appreciate it. Erin, can we go to the next please?

Operator (participant)

Absolutely. Thank you. The next question comes from John Murphy with Bank of America. Please proceed.

John Murphy (Managing Director)

Good afternoon, guys. Just a very simple question. What does the 5 GWh capacity imply as far as your pack or vehicle, you know, just given different chemistries here, just curious what you think that implies or what does it imply based on your mix?

Henrik Fisker (Chairman and CEO)

We know exactly what it implies, but we're not gonna, you know, elaborate on that. Again, I think for the customer, it's super important to know the range. I don't think they need to know the configuration exactly, what battery pack or exactly how we were able to pack it. That's something all our competitors would love to know, but that's not something that we're here to talk about at this point. It'll probably come out close to launch because that would take a lot longer than to copy it.

John Murphy (Managing Director)

Okay. Just a second question. The ESG life cycle analysis. I'm just... You know, why you think it's necessary to do that and what you think the conclusions will lead to. I mean, could this, you know, put you in a position to do more green bonds or more ESG cap raises? I'm just curious what the motivation is there, what you think the conclusions will be, and if that opens the door to more funding.

Henrik Fisker (Chairman and CEO)

Well, first, the motivation is we wanna be the world's most sustainable car company. We have clearly said that, and we are trying to do everything we can to make that a reality. That takes a lot of work in a lot of different areas. As I mentioned before, we are going in with the Ocean in a CO₂ neutral factory next year. That's part of it. Then there's all the materials we use, and then there's recyclability. You know, it's who we are as a company, as a brand. Dan, maybe you can elaborate a bit on it.

Dan Galves (VP of Investor Relations)

Yeah. I think the point of the life cycle analysis is, it's not enough to just say you have a climate neutral car or a kind of a low emission car. You know, you really need to prove it. You need to measure it, and you need to measure all points of the life cycle from upstream sourcing all the way to end of life, like Henrik said. You know, there's actually an ISO standard for doing a life cycle analysis. It really takes a lot of hard work. But we have the plan in place. We're ongoing on that plan, and really the intent is to be able to measure and prove, you know, how sustainable our vehicles are going to be.

Henrik Fisker (Chairman and CEO)

Maybe one thing I can just add is that the reason I think we have the possibility to be number one in the world on this point is because, you know, we are building everything from scratch. We don't have a legacy that we have to tear down and get rid of. You know, we are going all out, and we have gone all out on this from when we started the company. It's been a focus always. It's not a fad we just kind of came up with a couple of months ago. This is something that has always been one of our main brand pillars and will continue to be one of our main brand pillars.

John Murphy (Managing Director)

Great. Thank you.

Dan Galves (VP of Investor Relations)

Thanks, John. Erin, I'm just gonna break in for a second. You know, as we have done, you know, every earnings call so far, we've collected retail investor questions from the Say Technologies platform. I'm just gonna go through a few of those, and then if we have time, we'll get back to the analyst queue. The first one, there were several questions about kinda competition and differentiation. The first question is what differentiates Fisker from the other EV makers? What is unique about Fisker's proprietary systems?

Henrik Fisker (Chairman and CEO)

I think we have a unique design, that's obvious. You will see that when we get in the vehicle as well. The user experience will be phenomenal. It's a whole new take on what a user experience should feel and look like once you get in the vehicle. It's headed up by our head of user experience here from Microsoft and his team, that really, I think none of them comes from the automotive industry almost.

Most people come from gaming, other areas of the digital industry. We have taken a whole new take on that, and I think that's gonna be really, really different. The sustainability aspect, we already talked about it. I think it's a huge differentiator.

I think a lot of young people today want to identify themselves with a brand that stands for something meaningful. We have already seen that in the over 18,600 orders or the reservations we have. The powertrain performance in our class is fantastic on all levels. That includes, as I said before, class leading in range. But not only that, we have a very unique system in our price range that makes you pretty much feel like a Formula One driver or makes you drive extremely safe in icy wet conditions. It's something we will elaborate on when we launch the vehicle in two weeks. It's phenomenal. I've driven it.

I've gone out on a test track and being able to drive our vehicle, about 10 miles faster through a corner than any other vehicle without this device. So that's something that we're gonna be talking about. I think the value for money. You know, everybody's going out making luxury EVs, and quite frankly, I think we're gonna have a flooded market with luxury EVs. Even the traditional car companies are making luxury EVs.

We are tackling the market not just with a little tin can hatchback, you know, under $40,000. We are tackling the market with the most desired type of vehicle in the world, which is an SUV. I think you're gonna be impressed, and everybody's gonna be impressed when they see the value for money we're able to give, in this vehicle.

Part of it is that we have been able to work with our suppliers very closely on getting the right pricing because they believe in our volume, because they believe in the design and the desirability of the vehicle. Don't forget, the suppliers have access to all the secret details behind the curtain of how our vehicle is gonna perform. They have access to how it truly looks, how it truly is gonna be experienced, and they believe in us. That's why we have a lot of amazing long-term partners like CATL stepping in to be part of this adventure.

Dan Galves (VP of Investor Relations)

Thanks, Henrik. Next about the solar sunroof, how much power will it generate or how useful is it? Burkhard?

Burkhard Huhnke (CTO)

Thanks for the question. At this point, we believe that under good, not perfect, but good conditions, the technology can generate around 1,000 miles per year of completely climate neutral free driving. There's a lot of IP in this technology. We developed our unique converter to enable direct charging of the high voltage battery, the solar roof. To understand the question directly, we believe the optional solar roof will be very useful, and more importantly, expect the solar cell technology get more efficient and lower in cost over time, which is why we are very excited to believe we are on the cutting edge here.

Henrik Fisker (Chairman and CEO)

Maybe one thing I just wanna add to what Burkhard just said and kind of show it in a different way. We also internally calculated out what it would mean for the average driver for every time you would completely charge the vehicle. If you think about some sort of what is the total range of the vehicle, I would say the way to look at this as well is that it could increase the total range of the vehicle about 25 miles if you calculate out how many times you charge the vehicle over a year.

There's many ways to look at this, and obviously, yes, you do have to live in an area where there's a fair amount of sun, but most of our vehicles right now are actually reserved in those areas.

Dan Galves (VP of Investor Relations)

Got it. Thanks, Henrik. We have also had a bunch of questions about sales and marketing, as you would imagine, a couple weeks before the auto show. The simplest one was, what can we expect when the Fisker Ocean launches in 2022. You know, we've covered a lot of this. Anything to add?

Henrik Fisker (Chairman and CEO)

Yeah, I think, you know, a couple things I didn't add was, we're gonna, of course, have media drives next year. Then, of course, later, really in the end of 2022 or probably more in 2023, we're gonna start with customer test drives. Also leading up to all that, I think it's about creating brand awareness globally.

As I mentioned before, we do have two amazing creative agencies that we have hired, that together with our creative teams, we are creating campaigns that we're gonna launch all over Europe and all over the U.S. They're gonna be starting that launch already on the 17th of November. I'm really confident in our marketing plan. I think it's phenomenal.

When we show the first experience center sometime, I think in the second quarter next year here in L.A., we have also taken a very different approach there. It's gonna be really, really different. Super cool. I think that will attract a lot of attention as well.

Dan Galves (VP of Investor Relations)

Great. Thanks, Henrik. Can we go back, Erin, to the analyst queue? We have a little bit more time.

Operator (participant)

Absolutely. The next question is from Jeff Osborne with Cowen. Please proceed.

Jeff Osborne (Managing Director and Senior Research Analyst)

Yeah, great. I had two quick ones. One on the commonality between Ocean and the other platforms. Can you talk about what the longer term OpEx and CapEx implications are of that? And the second question I had was just if you could further elaborate on the decision to use silicon carbide, what the incremental cost is relative to the incremental range that you'll be getting.

Henrik Fisker (Chairman and CEO)

I think on the second one, just to add that first, I don't think we wanna give anything away to our competitors on that one. I wanted to highlight that we have that high tech in our vehicles, even in the vehicle that's $37,499. I think that's what's really unique, and that comes back to the value that we offer our customers.

In terms of the shared parts between all our platforms, actually, we have spent a lot of time internally looking at how we can drive down costs long term by using common parts in many areas of our vehicles. It's still a program that we're in the middle of executing, we'll probably maybe talk more about that later. Maybe Geeta has a few things you wanna talk about in terms of CapEx.

Geeta Gupta-Fisker (CFO and COO)

Yeah. Hey, Jeff. Great question. It's Geeta here. Jeff, if you look at the Ocean, in terms of OpEx, I'll focus a little bit on R&D and where we've spent money. We obviously have hired, as we said, over 300 people, and we'll keep hiring. We are developing a culture of engineering. We're developing a deep learning and vehicle integration.

Second area, we obviously have third-party suppliers. Magna Steyr is a development partner. Again, we've learned a lot together. Third area is we have supplier ED&D. That's clearly the synergies that Henrik talked about, where there are certain carryover parts where once you've engineered them, you simply carry over the data, and that creates the commonality of parts.

The fourth critical area, which Burkhard talked about, I think, last earnings and today as well, is everything you do in prototype and testing. To create a globally homologated vehicle, all your crash models, your CAE, how you truly look at optimizing testing, how do you look at data, how do you put together a very high-quality vehicle? Those are clearly the key areas.

The other area when it comes to OpEx is obviously software. All the different control units, different parts, you've got to program software. We're learning as a team, and clearly you can carry over some of that stack, some of that coding onto your next generation of parts. Now all of that OpEx you can use across all your various different models.

Now let's come to CapEx. In some cases, we might be able to use existing tooling, increase capacity, lower the cost of parts across Ocean and other models. In some cases, for example, when it comes to Body in white or it comes to class A parts, or it comes to heavy parts, we may have to do local stamping. I think that there'll be huge synergies, a lot of things, and more importantly, we'll also be able to, with the commonality of parts, achieve our aggressive timelines.

Jeff Osborne (Managing Director and Senior Research Analyst)

Appreciate it.

Dan Galves (VP of Investor Relations)

Thanks, Jeff. Next question, Erin, please.

Operator (participant)

Thank you, Mr. Osborne. The next question comes from Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov (Equity Research Analyst)

Thanks for taking the question. I remember earlier this year you were lobbying for an adjustment to the EV tax credits partly to make sure there was a cap on the vehicle price of eligibility. It looks like something similar will be included in the Build Back Better Act. Given what you've seen from the legislation, are you happy with how it turned out?

Henrik Fisker (Chairman and CEO)

Well, first of all, when you say lobbying, I just want to make it clear to everyone in the call, we don't spend any money on lobbying. Our lobbying is our internal communication team putting things on the internet or on LinkedIn or wherever we can do it. Of course, we will call somebody.

Coming back to the plan, are you happy with how it turned out? I don't think it's turned out yet. I don't think it's been voted in yet. I personally don't want to talk politics, but I personally doubt it's gonna be voted in exactly this way, because if you have noticed, there is pretty much every major car company in the world, except for the three big ones in Detroit, have pretty much spoken out against this plan here.

It also violates agreements that the U.S. have with Canada, Mexico, and Europe. I think it remains to be seen whether it comes out this way, as it is now. However, I could imagine, and I think it still makes a lot of sense, to have a cap on, you know, the price of the EV that gets a tax credit. I think whether it's gonna be whatever is proposed now, maybe not, but I think there will kind of come a cap.

I think that's, of course, a big advantage for us because we have a very affordable vehicle, and it's a vehicle that pretty much fits in everybody's driveway. It's something everybody wants. You know, with a reasonable good EV credit, everybody might be able to afford it.

I think we're standing really, really well against the competition. At the end of the day, the automotive industry is all about product. It's not just about size. We have seen big car companies fail their models because they weren't desirable, even if they were the biggest in the world. We have seen some of the biggest car companies lose huge amount of market share. I think the market in five years will look nothing like it looks today. I think by 2030, 50% of all vehicles sold will be sold by none of the traditional car companies of today. It's an exciting time, and we're excited to take part of it.

Pavel Molchanov (Equity Research Analyst)

Okay, let me follow up on the mix of reservations. You've broken out, thank you for that, between fleet and consumer. Can you also give a geographic breakdown, for example, North America versus Europe versus China?

Henrik Fisker (Chairman and CEO)

Yeah, we are not taking any reservations in China at this point. We're in the middle of setting up a Chinese entity that should be set up later this year or I think within a month or so, fairly quickly. We need to have a Chinese entity to be able to actually take reservations because of data protection, taking deposits and all that stuff. That's gonna probably not happen before beginning of next year, and I'm really excited about that. I think we have a huge potential in China.

In terms of geographically between U.S. and Europe, we have done, I mean, zero brand awareness in Europe. We are gonna go to a European event next year, end of February, and that's really when we start the big push over there. Right now, just off my top, I would say probably about 85% of our reservations come from the U.S. or North America. I expect that rapidly to change to close to 50/50. It could even go higher in Europe.

When we think about in our segment, about half of all vehicles in Europe are sold business to business, meaning large banks or other companies are buying vehicles or leasing vehicles for their employees as an incentive because of certain tax rules, et cetera. We have already, as you know, secured several of these orders way ahead of even getting any specifications for our vehicle. We see a huge potential for our type of vehicle to be sold into these B2B.

Also, you know, we are targeting the top 100 companies in Europe that is focusing on ESG and sustainability. We think we are the most attractive vehicle on the planet right now to them. Alone between these companies, you're talking about hundreds of thousands of vehicles. I think we have a very good chance to take a huge chunk out of that in Europe. We'll see where this goes, but I have high expectations for sales in Europe or reservation in Europe on B2B.

Dan Galves (VP of Investor Relations)

Thanks, Pavel.

Pavel Molchanov (Equity Research Analyst)

Yeah, great.

Dan Galves (VP of Investor Relations)

Appreciate it. Okay, thank you. Erin, we have time for one more question, please.

Operator (participant)

Absolutely. The next question comes from Itay Michaeli with Citi. Please proceed.

Itay Michaeli (Equity Research Analyst)

Thanks, everybody. Good afternoon. Just two quick ones for me. One, just back to the Ocean with most of the sourcing now largely complete. Can you just talk about how you're feeling about the prior, you know, gross margin targets for the company at sort of the mid-range ASPs? And secondly, maybe for Henrik, you mentioned Flexee Lease a couple of times on the call. I'm just curious, just how predominant will Flexee Lease be as part of the initial strategy for the Ocean?

And meaning how comfortable are you taking the mix of Flexee Lease to something, you know, that's very material, very high in terms of the overall percentage of volume?

Henrik Fisker (Chairman and CEO)

The Flexee Lease, I think is a huge competitive advantage. However, it also is, of course, a product that really starts to make you a lot of money about three to four years later. After four years, you're kind of printing money because your car's been paid off. I mean, you're just having ownership of a product that somebody's just paying you money for every month with little or no service.

We, on top of that, we can sell various products over the air to these customers again and again and again every time somebody new comes in. Like I mentioned, over a 12-year period, you're talking about more than 250% profit margin. That's without selling any additional products.

It's a phenomenal, I think, product that we have come up with, and it's something that traditional car makers probably can't do because of dealers, and we can do it. I'm super excited about that. We have some you know internal discussions about how fast should we roll it out. I think we're definitely gonna go out and test the waters immediately when we start with you know a fairly lower number of vehicles because you know we're still a start-up and we'd like to get some cash in first.

As we test the waters, if we see that this is a huge success, we can obviously decide together with the right financial partners if we wanna take a much bigger market share than we have planned right now. I think there's a good potential that we most likely will be rather in a situation in the beginning where we probably can't build enough vehicles in the very beginning to fulfill the market. Once the full ramp up, it could be a way for us to increase our market share faster than we have planned today, in my opinion.

Geeta Gupta-Fisker (CFO and COO)

Yeah, Itay, I'll take the question you asked about gross margins. I think we feel really good about the content we've put in the car and the margins with respect to the content we've put in the car. Obviously, the world is still in trauma when it comes to logistics, and there are still some unknowns. I think, hopefully, as we get closer to our ramp up and volume deliveries, we have more visibility on there.

Now, let me touch on a couple of super exciting things. The first thing is obviously with the battery announcement, which being the biggest share of the BOM, we are very excited about what we've achieved for the volumes. I think with our relationship with CATL, it's only going to get better.

The second thing I wanna say is that when we originally were sourcing, commodity prices were quite high, and we feel good where we are with the BOM, and we need to monitor where commodity prices go up. Now, one thing that I wanna highlight, which is really exciting, that there is obviously the difference between aluminum and steel.

The research we've done shows that steel futures, they look far more favorable than aluminum. There is always some upside and downside risk. I think based on what we sourced the car and where we see some commodity pricing, I think we are in a really, really good place. We're in a very balanced place, Itay.

Henrik Fisker (Chairman and CEO)

I just wanna add one more thing about the flexible lease and the potential. If you saw the announcement about Hertz, which wants to lease a vehicle Tesla to a Uber driver for $300, I think it was about $330 a week. I mean, it's about $1,300 a month. We are leasing our base vehicle out on a flexible lease for $379 a month. I can double that price, make a 100% profit margin, and I think both the Uber guy and us will be really happy. There you see the advantages we have. Thank you.

Itay Michaeli (Equity Research Analyst)

Absolutely.

Dan Galves (VP of Investor Relations)

Thanks, Henrik. Thanks a lot. Thanks everyone for joining the call. Erin, that's all we have time for. If you could close out the call and we'll talk to everybody next quarter.

Henrik Fisker (Chairman and CEO)

Thanks, everybody.

Operator (participant)

That concludes the Fisker Inc. Q3 2021 earnings call. Thank you for your participation, and enjoy the rest of your day.