Fisker - Q3 2022

Transcript

Operator (participant)

Hello, and welcome to today's Fisker Inc. third quarter 2022 earnings call. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to our host today, Frank Boroch, Vice President of Investor Relations and Treasury. The floor is yours. Please go ahead.

Frank Boroch (VP of Investor Relations and Treasury)

Thank you, Elliot. Hello, everyone, and welcome to Fisker's earnings call. As the operator mentioned, my name is Frank Boroch, VP of Investor Relations and Treasury here at Fisker. Joining me on today's call are Henrik Fisker, Chief Executive Officer and Chairman, Dr. Burkhard Huhnke, our Chief Technology Officer, and Dr. Geeta Gupta-Fisker, our Chief Financial Officer and Chief Operating Officer. Before turning it over to Henrik, be advised we'll be making 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 our 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 (CEO and Chairman)

Thank you, Frank, and hello, everyone. We really appreciate you joining this call today. I want to begin by thanking all our teams and stakeholders for the strong support this year and the incredible progress we have made so far in 2022. Despite the ongoing global turbulence, we have successfully navigated the challenging environment, closely collaborating with our partners to protect our start of production timeline. 2022 progress continues at a strong pace. The Ocean program is on track for start of production in a couple of weeks, to be exact, November seventeenth. Our reservations have continued to grow. We now have over 62,000 reservations and orders for the Fisker Ocean.

Customers are really responding to the Fisker Ocean's class-leading and industry-first features, and we got quite a few of those, and sold out of calendar 2023, the US allocation for Fisker Ocean Ultra and Fisker Ocean Sport trims in response to the IRA. The balance sheet remains solid at over $800 million in cash, and business continues to scale. The Fisker team is now approximately 700 globally, and I expect that we'll probably get close to 800 before the end of this year. We are driven by strong growth in India, which gives us around-the-clock capabilities to design the software and services that will go into our vehicles pre- and post-production. The organic marketing efforts continue. We were just at the Paris Motor Show and then followed by the Oslo Motor Show, our Norwegian debut.

We also debuted the Ocean in various regions of the U.S., both on the East Coast, New York, Washington, and then in Texas, and internationally in Sweden as well. Stay tuned for more pop-up events. We have seen they have been really successful and quite low-cost marketing events. On the Ocean update, our priority number one has been to launch a high-quality Fisker Ocean that has class-leading features and class-leading range. Ocean testing and validation has progressed well over the quarter. Burkhard will share some more details, but there's a few that I just want to highlight right away. We finalized real-world hot climate testing, and that was completed in Death Valley, California, where it was up to 122 degrees Fahrenheit and everything performed extremely well.

We also improved the maneuverability and overall ride and handling of the vehicle. The Ocean suspension has been developed for enhanced agility in all conditions, and I've personally driven this vehicle and it just feels amazing. Same with the braking efficiency, regeneration optimization for maximized energy recovery, and a consistent pedal feel. Overall, spent a lot of time driving the vehicle. I think that's one of the very important things for having an excellent vehicle. It's gotta be fun to drive, it's gotta be safe to drive, it's gotta handle well and I think the Ocean fulfills all that. To the manufacturing update, as I noted a moment ago, the Ocean SOP is on November seventeenth.

Our start of production signifies high-quality hardware built at Magna with all the investments we have made and getting to a place where we can increase ramp month by month. We have worked closely with our suppliers through design verification and parts validation, testing and parts have been migrating from prototype to home line tools to serial tools. Getting to high quality and stable high volume ramp-up production typically takes about 12 months. We deliberately plan our production ramp to ensure mature supplier parts tooling, mature part and mature software to provide the highest quality vehicle to our earliest customers. We have developed a detailed four stage ramp-up plan to ensure parts suppliers follow our anticipated production ramp volumes. Our 2023 quarterly production plan is as follows. Q1 over 300 units.

Q2 ramps quickly up to over 8,000 units, and Q3 again ramps even higher to over 15,000 units. In Q4, we reach the remainder of 42,400 units. This is the detailed plan that we have created so far. However, of course, if everything goes as planned, which I expect it to do, we would try to see if we can, together with our suppliers, increase the volume in the end of the year. That obviously is something we will discuss closer towards the mid of next year. Geeta and Burkhard will also discuss these four stages in more detail later in the presentation. On the Ocean demand, it has been strong as we approach SOP and continue to build awareness through organic marketing efforts.

Reservations continue to increase, more than 62,000 reservations and orders for the Fisker Ocean. We are also focused on ramping up suppliers to support increased production numbers, as I mentioned earlier. Just before the Inflation Reduction Act was signed into law, we acted quickly and enabled Fisker Ocean reservation holders to enter into a binding contract to potentially retain eligibility for the old federal EV tax credit. In less than a week, we sold out our U.S. allotment of Fisker Ocean Sport and Ultra trim levels. We support solutions that provide more choices for consumers and level playing field as we look to grow the EV market in the U.S. and continue to advocate for a meaningful transition period, which drives us to a clean future for all.

What that really means, in sort of layman words, is that of course, everyone in the US got told about the Inflation Reduction Act in about August this year, and that was gonna take effect in January 2023. Obviously, nobody can plan for a US manufacturing plant in four to five months, so we think it's realistic to give a couple of years chance to actually figure out how we get to US manufacturing. That's really what we are encouraging the US government to think about. We are seeing there already are discussions between EU and US to maybe loosen some of these rules, which I think will be meaningful. Okay, last month, we revealed many new features of the Fisker Ocean that are super cool.

The user interface, cargo trays, for example, for driver and passenger seat, hidden glove box, rear seat controls, which is really cool for if this vehicle is used for ride-hailing, et cetera. We have a digital rear view mirror where you really don't need to care about your rear window if it's clean or not, or if you have filled up the trunk, you can always see out through the rear. A super cool feature. There's other features that you will see and discover when we start delivering our vehicles.

As we get closer to SOP and continue to be increasingly transparent with respect to our product and what customers are getting and for what price, our extensive human-centered design process led us to update our web and mobile experiences, and we will roll out a new Fisker connected app on November seventeenth this year with continual updates into the spring. We will also introduce our new 3D configurator on November seventeenth, redesign navigation, vehicle order, and transaction flow, as well as the seamless ways for our customers to interact with the vehicles. All of this will be available in multiple languages. We also plan to localize our reservation and ordering process in several additional countries in first half of 2023, including large potential markets such as China and India.

In addition to opening the reservation process to these large global markets, we have started to examine opportunities for local production in India, which I recently visited, where we see significant potential for the Fisker PEAR. We are going out in phases, which will help plan our production forecast and after-sales infrastructure build-out. While the PEAR is already planned to be manufactured in the U.S. with Ocean, we are in exploratory discussions about U.S. manufacturing with several parties. This could include licensing our Ocean platform and the sale of emission credits to an OEM partner. In the interim, we continue to advocate, as I've mentioned earlier, for consumers who have more choices and also to see that we can get a manufacturing plan here in the U.S. at the right time.

Okay, let's get to the Pear update. On target with the cost of this vehicle, signed off concept and phase, exterior design fully signed off and interior signed off. Now into execution, continue to transition engineering and purchasing teams to Pear. We are using a lot of internal people now for the Pear program, which obviously reduces cost as we develop it in-house. We are already engaging suppliers for the Pear. There's incredible number of suppliers that are interested in working on the Pear. Pear production and sales are expected to start in 2024, and the base version is still expected to be priced under $30,000.

The way we're able to do that is by looking at the PEAR as a mobility device rather than a traditional car, which allows us to prioritize different things in the vehicle and lowering the cost in certain areas of vehicle that wouldn't have been normal if you thought about it as a typical car development process. Coming back regarding the IRA, we have started examining with Foxconn factory investments needed to position PEAR production for IRA compliance over time. Our production partner, Foxconn, started planning for lean production system. Our reduced product and process complexity will lead to a more profitable vehicle. All core manufacturing processes will be done in-house, stamping, body, paint, GA, and PT. The Foxconn factory will have a smart automation maintenance digital factory and production facility.

The industrialization phase will focus on state-of-the-art equipment and tools, people qualification, and launch quality management. Final phase of production readiness will be process control verification and quality control check. Stamping will be capable for big dimensional and complex parts. The body shop will be flexible, integrated, and modular structure. The paint shop will have brand new ecosystem, which will be the most environmentally friendly. General assembly will have effective and efficient production lines. Current PEAR reservations have exceeded just about 5,000 reservations. Let me talk a little bit about marketing events and experience centers and partnerships. Due to our strong Ocean demand pipeline and uncertain macro environment, our marketing spend has become more targeted and shown increased effectiveness.

For example, in the past few months, we have experienced a roughly 10% uplift in premium trim configurations, and that's really due to this targeted marketing, digital marketing that we are doing in-house. We recently shared that our first lounges will open next year. While the construction delay is unfortunate, the later lounge opening bolsters our liquidity. If only Magna could build lounges too. We have been very active with our organic marketing events and more flexible pop-ups to allow our prospective customers to experience the Ocean. Our current US Ocean road tour connects with customers in multiple cities and states, including several debut locations. We followed a similar approach in Europe with debuts that I mentioned earlier in Sweden and Norway.

In light of our strong reservation and order pipeline and the ongoing global market turmoil, we have moderated our marketing spend to certainly focus on remaining 2023 trim allotments. I know it's exciting to see, of course, a lot of incredible marketing from us, but it really wouldn't make sense to spend $ millions in marketing knowing that we are pretty much sold out for next year. So I would rather spend these $ millions on new product and getting them faster to market than early marketing. In September, we announced a partnership with Wallbox, who will be our global partner for home EV charging solutions. We are pleased to provide class-leading, competitively priced chargers for Fisker owners. I think this is really gonna be an easy-to-use, class-leading Wallbox, a Wallbox charger.

Advanced sustainability, let's talk a little bit about that because that's one of our brand pillars, and our commitment to sustainability is unwavering. We are proud that the Ocean will be produced in Magna's carbon-neutral plant in Austria, and the Ocean will contain over 50 kilos of recycled polymers and bio-based materials, more than any other vehicle we know currently on the market. In August, we published our inaugural ESG impact report in advance of the Fisker Ocean November 2022 SOP date, demonstrating our foundational commitment to the environment and social responsibility and transparency. We have seen progress in our ESG ratings, such as the upgrade in the MSCI ESG score from BB to BBB rating. This rating is better than many of the larger OEMs and our competitors.

Looking ahead, we are nearing completion of our first draft life cycle assessment of this vehicle. This measures the carbon footprint from upstream sourcing in outbound logistics, manufacturing, the use phase, and end of use. I'm super optimistic about Fisker's future. I'm really exciting. I can't wait to go to Magna next week, where we actually have invited journalists and also analysts that would be able to drive our vehicles. Very excited to see what the outside world think about our vehicle. Our team have done an amazing effort in incredibly short time. I'm looking forward to host journalists and analysts next week at Magna on their test track, and of course, get a tour of the plant as well, and seeing Oceans being built on the assembly line.

For now, over to Burkhard, our Chief Technology Officer.

Burkhard Huhnke (CTO)

Yeah. Thank you, Henrik. Beginning with Fisker Ocean. Final engineering testing and validation has progressed quite well over the last few months. On October seventeenth, we achieved engineering sign-off for production start, effectively transitioning our efforts from engineering the vehicle to manufacturing and ramping production. As Henrik mentioned, we remain on track to achieve SOP in two weeks. We have finalized two major workflows in automotive software, functional safety and cybersecurity. We have been following the cybersecurity engineering process, a holistic guideline for secure automotive software development, which has been developed by International Organization for Standardization. It covers software security throughout the entire life cycle of our vehicle and is currently being tested on Ocean with penetration and fuzz testing from independent third parties, from component to system to vehicle and back-end.

Furthermore, we are complying with the functional safety integrity levels of ISO, which have been assessed during Ocean architecture and development phase and have been implemented. It's a risk-based safety standard for all automotive, electronic and electrical safety-related systems, where we have all safety measures defined to control random hardware failures or mitigate their effects. In the next couple of weeks, we will enable the automation in order to achieve short commissioning times, automate and parallelize process sequences of the vehicle electronics at various process locations. These include assembly inspection, vehicle-specific configuration, software update of control units, as well as end-of-line vehicle state to get process optimized for a carefully planned ramp-up phase in Q1. From where we sit today, our supply chains continue to recover and position us for a successful SOP.

We are collaborating closely with all our partners across the supply chain to ensure their planning cycles include our 2023 ramp-up and beyond. For the past couple of months, I, along with several of the other Fisker technical leaders, have been in Graz, Austria, working directly with Magna's team. It's important to be over at Magna Steyr to remove time zones and be there physically to bring everything together to deliver the product. The performance and energy of both Fisker and Magna teams has been phenomenal. There's been great collaboration and lots of fun and enthusiasm as we work through the home stretch of delivering the product. We've also had the opportunity to give test drives to independent third parties on the track at Magna Steyr.

The feedback has been great, and they view the Ocean as a very impressive and unique SUV with excellent driving performance and dynamic specs. Our team has worked hard to prove steering calibration, ride comfort, road noise isolation, and powertrain efficiency for more refined driving experience. As I mentioned on the last earnings call, in August, we entered the PTO build phase, which is done on the series manufacturing line and is the final build before serial production. We have been using these PTO builds for final validation and testing of complete vehicle performance, comfort, and functions. Using one of the latest pre-PTO builds, we've revealed a demo version of the UI/UX at the Paris Motor Show a few weeks ago. We also implemented Fisker Android Partition to create independence and make the UI/UX our own.

The Ocean's class-leading 17.1-inch rotating screen enhances the user experience and allows the user to enjoy videos, gaming, and other rich content. The screen is fully tested and implemented into the vehicle. Similarly, the over-the-air systems has been in place and running in our pre-production vehicles, which we have been using to optimize and improve vehicle performance and reliability characteristics. Fisker is building a cloud-first data collection and OTA platform. Fisker OTA platform will be capable of reaching every vehicle and allows for flexible update strategy tailored to each vehicle owner and their preferences in a safe, secure, and compliant manner, truly aiming to deliver on the concept of software-defined vehicles. Fisker data collection and machine learning-based analytics are using state-of-the-art open source and managed cloud services to deliver on the promise of predictive maintenance and individualized customer care experience.

The Ocean's OTA system will be an efficient way to update our vehicles real time and also provide opportunities for additional post-sale revenue by offering certain features to be purchased by customer over the air. In addition, Fisker will continue to build on our existing over-the-air updatable platform supported by 5G and Wi-Fi 6, including digital life cycle management with the highest level of security always updated with the newest in our software and technology improvements. With our seamless compute from cloud to edge, the car becomes smarter and even safer over its lifetime. We are currently in the Ocean certification process to confirm all safety requirements, and we continue to progress through the homologation phase. As an example, last month, we completed the U.S. roof crush test with production body and performed successfully as we had expected.

Our safety specialist was even able to walk over to the car and open the door after the roof crush test, which shows the incredible safe structure of the Fisker Ocean. Our team is also running certification tests at IDIADA in Spain. This month, we will conduct the US and European range testing with range results expected next month. We expect to complete European whole vehicle type approval and US homologation in February. We had originally planned an earlier customer software release only for Europe, but we've decided to skip this software drop to reduce any risk and focus on highest product quality, reliability and software stability at launch. Consequently, we decided to synchronize all final functional safety relevant software releases with the certification process and will update software for all customer cars which we are producing from now until February. Now to touch on PEAR.

Specifically, PEAR engineering is continuing to ramp and as Ocean gets closer to SOP, we are transitioning more and more resources from the Ocean program to the PEAR program. We have finalized the concept and now in the first prototype phase of the E/E architecture. The PEAR will have a truly revolutionary electrical architecture with the many ECUs in a traditional vehicle consolidated down to a few central computer units. The consolidation of ECUs and the addition of smart zonal gateway compute adds tremendous capability, but also lowers mass, reduces complexity of the wiring harness, and lowers the overall bill of material cost. This development of competence and supply chain partnerships, leveraging advanced silicon and software solution is enabling us to execute a fully next-generation electrical architecture for Fisker PEAR.

We have built an amazing team in-house, design and development competence on the entire hardware and software stack, both in the U.S. and India, that is focused on meeting our commitments and driving results that support rapid scaling of our business. Thank you. I will now turn the call over to Geeta.

Geeta Gupta-Fisker (CFO and COO)

Thank you, Burkhard and welcome everyone. In the current volatile market backdrop, we have demonstrated resilience, discipline, ability to manage complexity and find solutions, whether it's supplier issues, solving problems, or balance sheet management. With just a couple of weeks until SOP, our number one priority is ensuring our final testing, certification and homologation timelines remain on track. We expect to have Ocean vehicles on the road by year-end with a small commercial fleet delivery to Magna of 15 vehicles in December. We expect retail customer deliveries following European and US homologation, as Burkhard mentioned, in February 2023, providing us with time to bring all suppliers along for ramp readiness. As Burkhard noted, we have seen further improvements in supply chain, including semiconductors and logistics.

Our program and supply chain task force conducts regular reviews with critical suppliers on-site, off-site, to confirm tools, part maturity, and ramp readiness impact on suppliers from energy and inflation crisis or part shortage, so we can support suppliers with alternative ideas or pivot to completely different solutions. Staying on the supply chain topic, commodity pricing aside from lithium has moderated since our last call. For example, steel, which is more important for the Ocean than aluminum, is down 60% year-on-year. With respect to battery-specific raw material prices, while lithium carbonate has continued to rise, we don't believe this trend will continue as seen with some other key battery raw materials like lithium nickel and cobalt. These have decreased meaningfully from their early 2022 peaks and are forecasted to continue declining. We're actively working with our battery partner to discuss how we can jointly normalize these prices.

Pricing pressures in China and the lower NEV demand should also help ease some of the battery commodity prices. Energy pricing has also come off the boil. In fact, just last week, natural gas prices dipped below zero briefly, illustrating the improved supply situation versus a few months ago. In addition, the strong dollar has mitigated inflationary pressures for us as well, since many of our supplier contracts are euro-denominated. The euro has depreciated versus the US dollar and is currently bouncing around to its lowest levels in 20 years since 2002. As a reminder, our contracts factor in commodity prices, inflation, productivity and forex foreign exchange, some of these critical elements that will be calculated on a quarterly or annual basis as we ramp up production.

If forecasts for slower economic growth next year come to fruition, we would expect further commodity and supply chain relief. As a result, we will have better visibility of the actual impact to our BOM further in 2023 when we ramp. As we've mentioned before, 2023 production will be back-end loaded, reflecting our deliberate early production strategy to ensure we deliver a high-quality vehicle to our customers. When we start production on November seventeenth, we begin with the same high-quality production we will have at scale, but at a much lower volume. Over the next several months, we will work with suppliers to ensure we have the same quality at higher volumes as we will in the initial low phase. Let me elaborate on our four-stage production ramp-up plan that we have developed from now till the end of 2023.

Stage one, from SOP on November 17, 2022 to March 31, 2023, and as Henrik mentioned, we're targeting over 300,000 units. All vehicles will have parts of serial tools from supplier home line and each tool will go through multiple quality loops to achieve the desired intent. The parts from these tools have to meet the dimensional fit, finish, and appearance standards. Parts dimensions and appearance are checked and confirmed within the plant at the cubing event, where cubing is an aluminum body master with zero tolerance. There's process validation at all supplier sites. Number two, complete vehicle testing will be finished during this stage. Product audits will focus on 2,500+ statistical checkpoints and the vehicle-intensive test will focus on validation of vehicle functions with 1,600+ function checks, including driving dynamics, acoustics, infotainment, and other features.

Supplier readiness is integral to hitting our next stage of ramp in Q2, and we have assembled a great team of specialists from SQE material planning to manage suppliers. This team is responsible for supplier readiness, supplier production tool delivery to home line, manufacturing equipment, and process implementation, including debug and end-of-line measurement and testing plan for achieving the required quality and part production rate to meet our volume ramp. To mention a few deliverables, end-of-line check, part quality loops and complete car quality will be completed and confirmed. The manufacturing output or jobs per hour will be run in full automation. Finally, during this first stage, we will establish successful completion of process verification in the plant, where plant production readiness will be confirmed and proven. Over-the-air update testing will be finished at this stage to activate features to upgrade software and for automated commissioning.

Our stage two is in Q2 2023, targeting an assembly of 200-700 vehicles a week. As Henrik mentioned, targeting over 8,000 units during the quarter. At this phase, all parts will be off serial tools with no deviations. They will be capable of meeting production volumes at the required rate per week. Entire manufacturing process equipment and facility will be running under series condition. OTA will be fully automated and integrated within the manufacturing process. 100% quality check, like water test, dynamic driving, vehicle inspection, will be done on all vehicles. The suppliers will also be required to perform a run at rate to meet production volumes. This process will assist in verifying that production volumes can be met without any deviations and also identify any bottlenecks that have to be addressed. Stress tests for manufacturing, supply chain and suppliers will be performed.

High volume vehicle quality release process will be used after checks, validation and confirmation is achieved. Introduction of new variants, the Sport, Ultra and right-hand drive will be integrated into supplier production sites and verification process will start for this new content. Also manufacturing integration, validation and confirmation will start for these new variants. Quality assurance and loops will continue with the known processes and parts. Stage three. In Q3, we will start a steady state of ramp to achieve our annual 42,400 units of production next year for our two-wheel, four-wheel, all the trims, right-hand drive and left-hand drive with launch in all our launch markets. All tools will be serial and high volume with all features launched in automated systems. Manufacturing for high volumes will focus to streamline the production processes with efficient and effective process improvements.

Fully integrated state-of-the-art lean production system will be established by this stage. Stage four, a ramp above 50,000 annual units to meet higher demand in both Europe and potentially U.S. until a U.S. production solution is established, as Henrik talked about. Developing new features with OTA launches, further manufacturing efficiency activities to improve output and quality. Again, to recap what we mentioned in today's press release, by quarter, we plan to produce over 300 units in Q1 2023, over 8,000 units in Q2 2023, over 15,000 units in Q3 2023 and Q4, the remainder to achieve the total plan of 42,400 units.

To ensure successful SOP of Fisker Ocean on November seventeenth and support production ramp up thereafter, our Fisker IT team implemented several integrated digital platforms and solutions, including product data management system to seamlessly integrate real-time manufacturing needs with vehicle production. Intelligent solutions to forecast demand and manage supply chain procurement for over 160 suppliers and 2,000 parts globally. Solutions to accurately streamline customer orders to manufacturing orders, solutions to track vehicle manufacturing and delivery progress and provide real-time updates to customers. As part of our digital ecosystem to provide seamless and best-in-class sales and service experience to our customers, we are developing a scalable global digital retail storefront platform for all our customers. This platform supports multilingual, multicurrency and localization need and is integrated with our Fisker app, in-car HMI, our website and our partner ecosystem systems to enable end-to-end services to our customers.

This platform will be enabled in phases beginning December 2022, and it will continue to evolve, adapt, and advance as our customers provide feedback on their preferences. Some of the services that are availed by the platform to the customer and accessed via Fisker app are as follows. Schedule test drive, vehicle delivery, pickup and service appointments at preselected Fisker sales or service center or at a requested location, including your home. Real-time interaction via Fisker app with our sales and service advisors and technicians for follow-ups, approve recommended repairs, sign and pay invoices, accessing our partner services for roadside assistance, collision repairs. The digital retail platform is also the platform for our retail service advisors and technicians to manage all operations at our retail outlets. Some of them are as follows.

Pre-delivery inspections of vehicles sold or serviced for our customers, manage all sales and service work orders, coordinate triage of service issues among engineers and service technicians to find solutions, tracking service provided by our partners for roadside collision and providing frequent updates and seamless experience to our customers. We have developed a detailed end-to-end plan that positions us for a successful high volume ramp in our first year of production. We're excited with the Ocean program, progress to date and we look forward to sharing our progress each quarter against the comprehensive roadmap I just outlined. Now turning to our Q3 results, balance sheet and 2022 outlook. Our Q3 operating expenses of $140 million, or $128.8 million ex-stock compensation expense, was consistent with our internal expectations and full year spending guidance.

Capital expenditures of $57.3 million increased slightly from Q2 levels due primarily to the timing of CapEx billing. Operationally, R&D increased in Q3 versus Q2, primarily due to lumpier milestone timing in Q3. Increase in SG&A expense quarter over quarter was due to employee growth and recognizing SOP milestone-based restricted stock awards from an accounting standpoint, which is non-cash. Unfavorable forex losses in Q3 as we had purchased certain euros.

Earlier this year to take advantage of weakening euro combined with accruing for a portion of the SOP restricted stock awards increased our Q3 net loss by $16.8 million. Our balance sheets remain solid. We finished Q3 with over $824 million in cash, better than we had expected due to weak euro, disciplined spending and opportunistic ATM usage. During the quarter, we brought in approximately $116 million from our $350 million at the market equity program, which is part of our $2 billion shelf that we filed with SEC. As demonstrated in our prudent year-to-date cost management, we remain focused on executing against our plan while preserving adequate liquidity.

Turning to our outlook, as noted in the press release, we expect to be at the lower end of the 2022 overall non-GAAP OpEx plus CapEx guidance of $715 million-$790 million, driven by disciplined cost management, leveraging our India software and engineering center, lower PEAR spend, as Henrik mentioned, as we brought in-house a lot of the development work and a favorable FX. As a reminder, bulk of this year's spend is launching the Ocean plus costs of running the business along with minor PEAR R&D expenses. I'm proud of the entire Fisker team for all the accomplishments year to date and the unwavering focus on launching an amazing on-time vehicle, which will come to fruition in just two weeks. We continue to show agility and resilience and adjust whenever we need to stay on track.

Next week, very excited to welcome journalists and analysts to see and drive the Fisker Ocean and also experience our production line at Magna Steyr's plant in Austria. We're now happy to take your questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. Our first question comes from Jeff Osborne from Cowen and Co. Your line is open.

Jeff Osborne (Managing Director)

Software that you mentioned would be rolled out through February. Can you just elaborate on what needs to happen between now and then to update that would be helpful? The follow-up question I had was just on how would the mechanics of a potential license and credit sale agreement for the Ocean in the US work?

Frank Boroch (VP of Investor Relations and Treasury)

Hey, Jeff, can you repeat the first part of the question? It cut out over here.

Jeff Osborne (Managing Director)

Yeah, no problem. I was asking for Burkhard, who alluded to get homologation that there was some software updates between now and February that needed to be done. I'd wanted to better appreciate, you know, what specifically the software attributes were for to get that homologation that we should be watching for. The second part of the question was just on, I think there was reference to potentially licensing the Ocean for a U.S. manufacturing facility, which I'd assume would be CapEx favorable to you. I just wanted to understand how the mechanics of something like that would work.

Burkhard Huhnke (CTO)

Yeah. I take the first part about the software update in February. We are running currently through the certification process, which is the homologation process for Europe and U.S., and we are waiting for the official certificate. When we get that, we will synchronize software updates with this certificate. It's just an update of the latest software versions, which we'll synchronize with the certificate. For the second part.

Jeff Osborne (Managing Director)

Is that ADAS or body control or what type of software is it?

Burkhard Huhnke (CTO)

No, it's mainly functional safety relevant software, which has to be certified. That's potentially brake systems, for instance, this has to run through a specific reviews and certification process.

Jeff Osborne (Managing Director)

Thank you.

Henrik Fisker (CEO and Chairman)

The second part of the question regarding Ocean, licensing a platform and manufacturing. We have been already in detailed discussions with a couple of groups, big OEMs, international carmakers, about licensing our platform and jointly producing this platform here in the U.S. One version would be of the other OEM that they obviously would design their own top hat, et cetera, on it, and then it would be our version, the Ocean. Yeah, of course, that would be favorable to us because there would already be an existing plant. Obviously we have great value in the Ocean IP that would offset some of these investments that we would normally have to do. Secondly, we have looked at licensing the Ocean platform just separately without necessarily tied into manufacturing.

We are also talking to larger OEMs about the sales of emission credits. That's something that's ongoing as well. Finally, we are looking at a strategic partner as well for the PEAR program to kind of introduce the PEAR in some unique markets that we haven't announced yet. A lot of stuff's going on, but I think some of these discussions and negotiations might have been a sort of little bit of a reaction to the Inflation Reduction Act, where probably a few companies feel they need to get quicker to the table with an EV made in America.

As everyone knows, if you start development of a car from a clean sheet of paper, specifically if you're on traditional OEM business as your own processes, that normally takes you four years. Of course, if we license the Ocean platform, we could probably get that vehicle to market in 22 months or less, for, you know, a much lower price. I think there is some interest there we have seen, and it's something we definitely would like to be opportunistic about. I think there's some good progress, and I'm very confident that we will have U.S. manufacturing, because of course, as you know, also our manufacturing partner, Magna, have also talked about potentially setting something up in the U.S.

I think we have enough different options that we can choose between over the next couple of months to make sure that we get Ocean manufactured here in the U.S.

Jeff Osborne (Managing Director)

That's great to hear. I appreciate it, Henrik.

Operator (participant)

Our next question comes from Joseph Spak from RBC Capital Markets. Your line is open.

Joseph Spak (Equity Research Analyst)

Thank you. Team, thanks for the detail on the production plans and the cadence of that. I was curious though, how we should think about delivery times, especially from Austria to the U.S. and presumably most of that's on the West Coast. You know, is it 2-3 weeks? Because obviously there's gonna be, you know, a lag between what's produced in Graz and when the vehicle's delivered and recognized.

Henrik Fisker (CEO and Chairman)

It takes about four weeks, could be four to five weeks to get vehicles from Europe into the U.S. I think that the advantage we have right now is we can obviously start shipping cars and then they can be flashed once they're over here. We won't see that initial lag. Once you're in production, there is that lag. Obviously the advantage is in Europe, if we would have had to ship them the other ways that we're shipping from Graz straight into all the European countries with you know, being able to deliver you know, the next day or a few days later. It's a give and take there. Geeta, do you want to

Geeta Gupta-Fisker (CFO and COO)

Yeah, I just wanna add that we are looking at four ports here in the US, both in the East Coast and the West Coast, and that will maximize our capability to make use of logistics, both East Coast and West Coast. Some ports are faster to process. Of course, you know, we're thinking exactly what you're thinking, when do you realize or recognize those vehicles. An ideal scenario will be that early in the quarter, the production will be routed for North America, and the later quarter will clearly recognize in Europe. We are working those fine logistics out and the aim would be that as we progress the ramp during the year, we also get to increase our efficiency between production and deliveries.

Joseph Spak (Equity Research Analyst)

I guess just, and I know it's sort of just timing, but the you know, 300 units produced in the first quarter, and you're talking about retail deliveries in February, I mean, those are gonna have to be European deliveries, right? Like, it's gonna be. It'll still be a bit before they come to the States.

Henrik Fisker (CEO and Chairman)

No, because we can ship. We are producing vehicles starting seventeenth of November this year. As soon as we have produced vehicles, we can ship them over to the U.S. and they can be here for mid-February and we can just flash the vehicles. Now, we will still produce a majority of these vehicles in late in Q1. A majority of the vehicles will be in that Q1, as Gita just mentioned, delivered in Europe because towards the end of each quarter, we will prefer to deliver vehicles in Europe.

Joseph Spak (Equity Research Analyst)

Okay. Just going back to Henrik, some of your comments on U.S. manufacturing plan. Obviously, the game changed a little bit with the IRA Act. Like you said, you know, it sounds like you're evaluating some stuff in the near term, some which might have some you know quicker options. But then as you mentioned, like a new facility would take a couple of years. But it did sound, and correct me if I'm wrong, like that's something you would sort of evaluate. I just wanna understand if that's also with a partner or that would be sort of more of a standalone type of operation that you'd look to take on here.

Henrik Fisker (CEO and Chairman)

I would say all the options we are looking at now are with partners.

Joseph Spak (Equity Research Analyst)

Okay. Thank you.

Operator (participant)

As a reminder to ask any further questions, please press star followed by one on your telephone keypad now. Now time to James Picariello from BNP Paribas. Your line is open.

James Picariello (Equity Research Analyst)

Hi, guys. Just of the 42,400 units, what percentage of those vehicles have you committed through a binding contract? I'm sorry if I just missed this, if you had answered it to Joe's question. You know, how should we be thinking about in the second half of next year, you know, the split across Extreme, Ultra and Sport trim levels in terms of that production? Thanks.

Geeta Gupta-Fisker (CFO and COO)

Yeah, I can take that question. You know, we have our launch vehicle, which is the Ocean One, and that's a volume of 5,000 units. That's already been signed and committed as we've publicly communicated. Ahead of the IRA, we did take a certain number of binding orders, so we are sold out of our U.S. allocation for Sport and Ultra. In the recent few weeks, we've seen an increase in configuration on our configurator for the Extreme, and that is obviously our highest trim level. What we're anticipating is as we deliver Ocean Ones between Q1 and Q2, we will start to convert in January customers who wanna take the Extreme since we believe that it's a phenomenal value for money.

We've done a detailed benchmark study on what's out there on offer in both Europe and U.S., and we can't see any other vehicle that actually competes with what we are offering. We anticipate that we will get a phenomenal number of reservations for the Extreme. In addition to that, we also think that this is a community of customers that are not that strongly impacted by rising interest rates, and they are looking for a great product, they are looking for an EV, and we will be able to convert them. We suspect that we will have a big bias towards Extremes once we are out of the Ocean Ones.

James Picariello (Equity Research Analyst)

Got it. That's very helpful. Can you just quantify, 'cause that was gonna be my follow-up. What actually is the U.S. allotment for the Sport and Ultra trims for next year? Is there a way to talk about that?

Geeta Gupta-Fisker (CFO and COO)

You know, we haven't disclosed that yet at this point in time. Obviously, as we open up the configurator in Q4 and we start taking up Extreme orders, I think you'll get more color on that probably in the earnings calls. We'll disclose that quarter-over-quarter as we convert customers.

Henrik Fisker (CEO and Chairman)

I mean, I think just to add to that, I think you would have seen other manufacturers prioritizing only the high-end model. It's my view that we could probably have sold only Extremes next year, but we created a small allotment for Sport and Ultra simply because we had some very early reservation holders and we thought it would be nice for them to be able to get their vehicle next year. It's clear that a vast majority of our sales next year will be Extremes and, of course, the Ocean One to start with. That also means that our average selling price will be pretty close to $70,000 in the first year, which is very high.

James Picariello (Equity Research Analyst)

Yeah. Yep. I know you've kept this as a trade secret, so I'll give it a shot to ask. Can you talk about the size of the battery packs for, you know, for the Ultra and Extreme trims and then the LFP battery in the Sport?

Henrik Fisker (CEO and Chairman)

Could I ask a back question? Why would you like to know that? Isn't it more important that you know the range as a customer?

James Picariello (Equity Research Analyst)

Yeah. Just curious on the efficiency of the powertrain. I mean, that's where the question comes from.

Henrik Fisker (CEO and Chairman)

Yeah, I know, but that's also what our competitors are. We'll be announcing that when we have to, and I think it's gonna be closer to its homologation. We might include it in our configurator on the seventeens. We haven't decided that yet. But what we know right now is that we have one of the most energy-dense battery packs on the market today, but what we have been able to go out and compare with. What we also know is we have the, by far, the longest range of any SUV or crossover in our price range. I think that's really what's appealing to the customers.

James Picariello (Equity Research Analyst)

Right. Appealing to the questions. I appreciate it. Thank you.

Frank Boroch (VP of Investor Relations and Treasury)

All right. Now we'll take a few of the retail and investor questions that were submitted online. Henrik, this one's for you. How do you plan to offset the loss of the $7,500 federal incentive for the Ocean?

Henrik Fisker (CEO and Chairman)

I think that we were very smart to go out and offer the opportunity for people to actually close a deal on our vehicles and get that $7,500, and it was quite a lot of people who did that. I am not so worried next year because as Geeta mentioned already, I think the customers who's buying the Extreme. I don't think that customer is going for a vehicle just because they get that tax reduction. They wouldn't buy a vehicle they don't like just because of a tax reduction. Secondly, it's my opinion that I think that Europe and U.S. will come to some agreement of a transition period for the EV incentives, specifically in the IRA.

I would expect that to be a couple of years, and I think that will give another leeway. In terms of the product, we already have an incredible well-priced product, so I'm not really worried about that. We're also seeing an uptick kind of a fast growth, I would say, in Europe in demand, and can always shift more demand to Europe as well.

Frank Boroch (VP of Investor Relations and Treasury)

Thank you, Henrik. Next question. What are your production delivery volume targets for 2022 and 2023? Any updates on U.S.-based manufacturing of the Ocean?

Geeta Gupta-Fisker (CFO and COO)

I'll take that. So as I walked through my script, I laid out a plan on how we get to 42,400 units in 2023, which is based on a very detailed, full-stage supply ramp-up and vehicle assembly plan from November 17 till the end of next year. As I also mentioned, we are delivering a small fleet of 15 physical Oceans to Magna in December. We expect U.S. and EU homologation in February, and then, of course, retail consumer deliveries to follow thereafter. With respect to U.S. manufacturing, I think as Henrik mentioned earlier, we've been approached by several OEMs who are interested and excited both in Ocean and PEAR platforms. Since Ocean is near term, it's obviously a very exciting product.

We are looking at what we can do jointly with an OEM. As Magna, our production partner, have also publicly announced that they are also looking at potential U.S. production of EVs in general. We are also looking to work with them or hear from them on what the plans are.

I can imagine in the next couple of years, we will have a plan to have U.S. manufacturing for the Fisker Ocean.

Frank Boroch (VP of Investor Relations and Treasury)

Thank you. The next question. The information on the mobile app has not changed since February. Can we expect any content updates and any relevant data to be added in the next month or so, Henrik?

Henrik Fisker (CEO and Chairman)

As I mentioned earlier, there will be a huge update on November seventeenth, both on our website, our mobile app, and we will have our new interactive configurator. I just looked at it's amazing. All this will be updated on November seventeenth, and then we'll actually continue updating it, specifically, both the app and the configurator. There are some real cool new features, and we'll continue adding to that. Obviously, once you become an owner of an Ocean, then you'll be able to use your app and interact with your vehicle as well.

Frank Boroch (VP of Investor Relations and Treasury)

Thank you. Last question. Looks like reservations have slowed down, currently the lowest monthly month-over-month gain in the last two years. What other means are you thinking about over the next year to boost reservations or orders of a Fisker Ocean?

Henrik Fisker (CEO and Chairman)

I think I mentioned earlier again that we have purposely lowered the spend on marketing. I think we're right now in a global turmoil, on many different fronts. I see no point in spending marketing dollars right now when we're sold out for next year. I see that we really will start spending serious marketing, dollars in Q2 next year. And obviously that will make a lot of sense because at that point, we'll have multiple, Fisker lounges that's open, where people can actually go and see the vehicle, order the vehicle, book a test drive. It's kinda wasted money if you spend too much marketing money right now because people are gonna come and ask, "Where can I test drive the car? Where can I see it?" It just doesn't make sense.

I think we're taking a really prudent approach. I think it's the right approach to start, you know, as I mentioned, spending serious marketing dollars in Q2 next year.

Frank Boroch (VP of Investor Relations and Treasury)

Thank you, Henrik. Elliot, that's all the time we have for questions. Henrik, any closing remarks?

Henrik Fisker (CEO and Chairman)

Yeah. I'm really super excited to go to Magna here on Saturday, flying over, see journalists and analysts next week, get them in the car. There's nothing like banging the metal and feeling the tires under you when we have been on Zoom for two years, creating this vehicle. I think it's gonna be super exciting. We got a tremendous vehicle, and I'm looking forward to host the lucky people that are over there. We obviously can't invite everyone, but I'm sure throughout next year, other people will get the chance to drive the vehicle as well. Again, super excited about it. Thank you everyone for joining the call.

Operator (participant)

Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.