Canoo - Q2 2024

Transcript

Operator (participant)

...Greetings, and welcome to the Canoo Second Quarter 2024 Earnings Call. At this time, all participants are on a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to John Wolfe, Vice President, Capital Markets and Investor Relations. Thank you, John. You may begin.

John Wolfe (VP, Capital Markets and Investor Relations)

Thank you, Paul. Thanks everyone for joining us. Welcome to our Q2 2024 earnings call. During the call today, Tony will update you on our business and strategy, Greg will provide an update on our financing activities, and Ramesh will go over the Q2 financial results and discuss the OpEx and capital efficiencies we continue to generate. Please be advised that we may make forward-looking statements based on current expectations. These are subject to significant risks and uncertainties, and our actual results may differ materially. For discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release and on our most recent Form 10-Q and 10-K, and other reports that we may file with the SEC, including Form 8-Ks.

All of our statements are made as of today and are based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we'll discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in today's earnings release, which can be found in the IR section of our website. With that, I'll hand it over to Tony.

Tony Aquila (CEO)

Thanks, John, and thanks everyone for joining us today. We will review our recent achievements and give some insights into announcements we expect to conclude in the coming quarter. As we advance into manufacturing, we are finalizing build specs and configurations with our most significant fleet customers. Once complete, we will align our supply chain and announce our projected delivery and allocation schedules for 2025 and into 2026. Turning to the quarter, Q2 2024 was our largest revenue quarter, $605,000. Our lowest cash outflow was approximately 50% lower than Q2 2023. On May twenty-fourth, we delivered our first right-hand drive configured LDV 190s to the USPS, approximately 75 days of mail delivery in Atlanta, Georgia, in some of its seasonally wet, hot, and humid weather conditions.

We recognized revenue from phase three of our DoD DIU battery testing program awarded to us earlier this year. Our customers have logged over 34,000 miles of real-world industrial use cases. The platform stability is attributed to our extensive partnership testing with our customers over the past few years. Our SM model took its first step, service, maintenance and repair. This team is called QRF, a quick reaction force, which functions similarly to military and aviation and has resonated well with our fleet, government, and military customers. We also successfully deployed our first OTA updates to customers to enhance functionality and benefits to client workflows, often within 48 hours from request to update. On June 24th, we received advanced manufacturing assets of Arrival U.K. in Oklahoma. 44 containers announced in the last quarter, with an additional 6 arriving this quarter for a total of 50 containers.

We are in the process of commissioning these assets, which advances our focus on vertical integration. On July 29th, our OKC facility's Foreign Trade Zone designation was approved for full activation after inspection and approvals from U.S. Customs and Border Protection. On the international front, we announced a 20-vehicle purchase agreement with Jazeera Paints, with the option to expand to 200 initial deliveries expected in late to second quarter of 2024 and first quarter of 2025. With the quarter, we had multiple debuts in the U.K. of our 130 and 190 LDVs of our right-hand drive commercial platform, and we hosted and attended numerous fleet shows and customer rides and drives on test tracks. On July 3, Red Sea Global concluded intense on-location testing in multiple environments. The pilot lasted 45 days in peak temperatures and conditions.

We received numerous design awards in the quarter, including the prestigious Red Dot Award, the Green Good Award, and the One to Watch at the Great British Fleet Show in the U.K. Now, let me give you a preview of what to expect from us in the coming quarters. ... Finalizing customer configurations. We have been focused on locking down specifications with our large fleet customers, which will inform our production and allocations in 25 and visibility into 26. We continue refining our customer acquisition, partnership, fulfillment, and post-delivery services model, which includes customer deployment and testing of vehicles configured for specific use cases and commercial terms and conditions expected by our clients. Walmart is an example. It was July of 2022 when we announced Walmart's order.

We partnered with the Walmart team and completed two years of extensive testing and refining of specifications and use cases for our customers' workflows. There are other examples of large customers in varying phases of how we work hand in hand to finalize specs and schedule. With USPS, our modular platform, we believe, is a good match with their need for a commercially available right-hand drive vehicle built for purpose. We are focused on the upcoming USPS RFP for electric vehicles expected later this year or in early Q1 of 2025 for an estimated 10,000-12,000 units in that RFP. More on international expansion, targeting large fleet customers in our targeted geographies. The U.K. debuted at three commercial fleet shows in the quarter, engaged with eight of the 15 largest fleets.

Mandated EV adoption creates substantial tailwinds, positive initial feedback on our LDV 130 and LDV 190 vehicles as a unique fit for the U.K. LCV market. Configurations, specifications, discussions for expected pilots to start in Q4. Red Sea Global pilot concluded successfully. It was 45 days, over 3,000 miles in rigorous desert conditions, sand, rock for 80% of the miles. Heat, 50% of the days were over 100 degrees, with max of 120 degrees Fahrenheit and average ambient temperature of 99 degrees. We are focused on next steps, as we outlined above, about our customer engagement model. We continue to make targeted progress in our supply chain harmonization. During the week of August 5, we held our inaugural supplier engagement event at our OKC facility. We hosted representatives from approximately half of our BOM suppliers.

The suppliers were able to connect with our long-term vision through vehicle drives and factory tours. It was the first time we've been able to open up the factory for their visits. We aligned on a path forward and continue to refine this as we ramp production together in the manufacturing phase. We continue to work on harmonizing our supply chain and finalizing our capital and debt instruments, including PO financing, especially since we only build sold units for grade A BBB creditworthy clients for 2025 and 2026. We expect this to reduce the cost of capital and maximize our flexibility to access other sources of capital, including incentives and non-diluted sources. We are in discussions with multiple Tier 1 financing partners. More to follow at the appropriate time. Ramping up Oklahoma's workforce.

As we accelerate the manufacturing phase, we are continuing the migration of our workforce to our Oklahoma and Texas facilities. With that, I will now turn it over to Greg and look forward to answering questions after Ramesh's session.

Thank you, Tony. I spend a lot of time with our team on the road with investors, customers, and suppliers. It's been gratifying to see our model play out despite a difficult macro environment, and I'm proud to see the progress being made every day and week with our team at Canoo. It's not always evident from the outside, but it's a lot of work to build a dynamic company that is positioned to win in the long term. And it's important to be in the trenches with a dedicated team you trust that produces results. We have a lot of great things happening at Canoo, and as you can tell, we're excited to share them.

Remember, our team is not focused on the short term, month to month or quarter to quarter, but are instead focused on the long game, putting the building blocks together for long-term success and value appreciation. It's been volatile. We appreciate our supporters, customers, suppliers, investors, and other partners. Shifting to capital and resources, not every team has a chance to work with a visionary CEO like Tony, that has built global businesses in the past and is also a large funding partner. We're fortunate to have him leading our team. Growth doesn't take place in a straight line, and we need to be nimble and make tough choices at each phase. As you've heard from us before, our capital raising efforts are designed to carefully match the needs of our business while minimizing dilution.

During the quarter, we raised $40 million of capital, which purposefully matched our cash outflows. The funding allowed us to progress our manufacturing, to pursue significant testing, and to engage new customer deployments. The capital markets remain choppy, but the company has been creative and scrappy. Our funding success reflects the consistent access to capital from a wide variety of sources, but it's carefully balanced. It. But it is a careful balance as we navigate the landscape. During Q2, we were able to secure financing, which was 35% prepaid advance, 40% from our partners at AFV Partners, preferred convert, and 25% creatively structured as an advance on a tax refund. This quarter represents the first time we've raised a material amount of capital from non-dilutive sources, and we are pursuing others.

Thus far in Q3, we have accessed funding from the PPA to bring total year-to-date capital raised of $104 million. We are continually evaluating financing opportunities that best limit shareholder dilution, but and we have been actively marketing Canoo with funds and family offices with a range of financial flexibility to continually diversify our shareholder base. We have been pleased with the significant number of financing opportunities we have been able to evaluate. Additionally, the substantial daily dollar volume of our shares of around $6 million-$7 million a day enhances options in accessing equity capital markets. But we do need to take a balanced approach, and as Ramesh will share, we have been very focused on managing our capital and outflows.

Further, we recently were added to the Russell Indexes, and we believe this makes us an attractive option for institutional investors as we move forward. We will continue to manage the finances with our broader team in a disciplined way and raise incremental capital that meets the needs of the business advancing into manufacturing. Now I will hand it over to Ramesh to cover the financial section.

Ramesh Murthy (CFO)

Thank you, Greg. Now let me walk you through the results for the second quarter of fiscal year 2024. We continued to focus on our financial discipline. Key accomplishments include the following: As Tony mentioned, we had a record revenue of $605,000 in this quarter, derived from our USPS delivery and the Defense Innovation Unit's contract. Moving to the income statement. Our second quarter 2024 results are as follows: Research and development expenses totaled $16.8 million for the quarter, primarily compared to $38.6 million in the prior year period, a 56% reduction from Q2 of 2023. Our expenses were primarily driven by final engineering improvements, support for our pilot programs, and testing as well.

SG&A expenses, excluding stock-based compensation, totaled $20 million for the quarter, compared to $23.9 million in the prior year period, a 16% reduction from Q2 of 2024. The Q2 2024 also reflects an 11% sequential reduction when compared to the prior quarter of Q1 of 2024. As it relates to our key non-GAAP metrics, here is a summary. 38% or a $23.7 million negative quarterly adjusted EBITDA improvement from negative $62.3 million in Q2 of 2023 to negative $38.6 million in Q2 of 2024. 20.1% or $9.7 million quarterly adjusted EBITDA improvement from negative $48.3 million in Q1 of 2024 to negative $38.6 million in Q2 of 2024.

80.6% or negative 2.53 adjusted net loss per share improvement from -3.14 per share in Q2 of 2023 to -0.61 per share in Q2 of 2024. Now, turning to the cash flow statement. We ended the quarter with cash, cash equivalents, and restricted cash of $19.1 million. Net cash provided by financing activities for the three months ended June 30, 2024, was $38.7 million, compared to $76.2 million in the prior year period. Cash used in operations for the three months ended June 30, 2024, was $35.9 million, compared to $62.3 million in the prior year period. $35.9 million cash outflow for the quarter is towards the lower end of the previous guidance provided in April of 2024.

We will continue to optimize our working capital needs now and in future quarters. Our cash outflows from investing activities was $2 million for the three months ended June 30, 2024, compared to $15.5 million in the prior year period. We reaffirm our cash guidance as we have come in the lower range of the spend, as we continue to focus on manufacturing as well as move into our Oklahoma facilities. Additionally, based on our current projections, due to the pacing of capital and supply chain harmonization, we expect our Adjusted EBITDA to be between negative $120 million and negative

$140 million for the second half of 2024. Let me turn it back to Tony for closing remarks. Tony?

Tony Aquila (CEO)

Thank you, everyone, for joining us today, and we look forward to answering some questions. I would like to do a special thanks out to the teams that worked incredibly hard during our tests and-

... United Kingdom, Saudi Arabia. These were extensive, long deployments, and often put in use cases in weather conditions that were extreme. We love testing our vehicle in the worst conditions possible. This is the best way to build the character of the vehicle, and it's a tribute to the perseverance, innovation, and creativity, coupled with the scrappiness of a hungry team, and therefore, on behalf of the executive team, we thank all of you. In addition to that, we'd like to give our thanks to the supporters who have been great and across multiple continents. We look forward to advancing in the quarter and bringing some more progressive and meaningful and value-creating news ahead. With that, turn it back to John for questions.

John Wolfe (VP, Capital Markets and Investor Relations)

Paul, we'd like to poll for questions now. Thank you.

Operator (participant)

We will now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Dan Ives with Wedbush Securities. Please proceed with your question.

Dan Ives (Analyst)

Yeah, thanks, and good job on the progress this quarter. So could you just like, in terms of the capital raise, it... Do you expect it's going to be the same every quarter, given the needs, whatever the capital you'll be able to raise, and sort of that philosophy will continue for the next, at least few quarters?

Tony Aquila (CEO)

Yeah, I think that's a great question, Dan. So, you know, to kind of dig deeper into that. So, as you know, Dan, I've been criticized for raising, you know, incremental capital. You know, I do believe, as you know, we've discussed that, you know, the more money a company has, as we've seen, from some of the others that have fallen, is the burn rate gets too high. You know, we focused on being scrappy, funding the company based on milestones and key events. And I think that is where we actually started to turn to the favor of how the business has learned to operate. And we'll continue to do that because, you know, right now, from my personal perspective and perspective of our executive team, you know, we're way under par.

And so therefore, you know, it makes no sense to do anything other than to do exactly as we're doing during these volatile capital markets.

Dan Ives (Analyst)

Got it. And in terms of just when you think about order flow and demand, and, you know, it just depends on customers that are coming through Oklahoma. And does it feel like the conversations are changing? Like, they're like, relative to, let's say, like, six months ago to where they are today.

Tony Aquila (CEO)

I think when you sign up for a test with a customer, like, we won't even write an order unless we've actually, you know, had our wheels on the ground with the customer and their workflow. So I think that has changed the conversation. Our conversations have steadily progressed, and I think also, you know, going back to being criticized in the beginning heavily about shifting to just fleets and government and military focus, these are the mandated markets. They are resistant to the economic because they're policy-driven activities as well as deep institutional, coupled with the fact that we've built a platform that gives a return on capital for our clients. So the conversations have been advancing right down to the specifications because our platform allows for some built-for-purpose modifications on the assembly line.

So that has done really well. People like things like our quick, you know, reaction force. You know, 86% of all the activities over the quarter was over-the-air, with, you know, only having to deploy advanced teams. And I think focusing in on customers that we can domino into markets like the U.S. Post Office, helping us launch into the U.K., and other right-hand drive markets so that we can get... And, you know, with getting our FTZ approval active now and the ability to build a couple millions more sq ft on our site, you know, we have the ability to entice partners to bring into the area as they become partners to our global expansion and delivery of our platform.

And obviously, it reduces our BOM cost, which makes it more cost-efficient for our customers. We're very focused on having the most affordable and the most durable, and when you sign up for the worst tests, like, we love it because we learn something, and we often modify something, and it makes our product better. Most people don't like signing up for those things. In this industry, you probably heard few that have.... but this is where we like to start.

Dan Ives (Analyst)

Great, thanks.

Tony Aquila (CEO)

Thanks, Dan.

Operator (participant)

Thank you. Our next question is from Michael Legg with The Benchmark Company. Please proceed with your question.

Michael Legg (Analyst)

Thanks. Impressive print, guys. It's nice to see all the progress being made. Wanted to dig down a little bit into the supplier event you had and understand the supply chain, where it's positioned today. How, how are we, you know, with suppliers moving forward? With the, you know, it obviously appears that a lot of the fleet orders seem to be on the horizon. So just kinda give us a walkthrough of where we are supply chain-wise, please.

Tony Aquila (CEO)

Yeah. So look, I think, you know, we have a debt to pay to our suppliers for their patience, you know, 'cause when I took over the business, I changed the direction of the company, which had an implication to, you know, many of our supporting suppliers. You know, we went to a military-grade product, industrial grade, repairability, redesign, you know, so we threw a lot of shock into the system, completely different customer base. And, you know, we have to kind of reharmonize all of that. You know, we are at a place now, and that's why we had the event, which about 52% of the BOM was represented at the event.

They got to see the factory, how it's coming together, how we're doing it in phases, how we're scaling according, you know, to volume and CapEx, so we don't get ahead of ourselves like others. And, and, you know, then we put the people behind the wheel and put them in aggressive driving conditions, which they had a blast. And, you know, that really created a connection for them with what the pieces they've been supplying or the pieces we've been changing on them, they got to see the why, 'cause we put them in an aggressive, you know, test track environment, similar to the way we tested with our customers. And they walked away proud, and that, that means a lot.

We now need to harmonize our capital into our supply chain, but we won't do that until we lock our high volume customers' specs down. So we can actually... 'cause remember, our model is, we only build sold units. I wanna get out of the business of building to sell, and I wanna be very tightly integrated on multiple levels with our clients on a multi-year basis. And that is what we're focused on every single day. With our supply chain now, we had to put them on a bit of a hold cycle until we could get to this phase. You know, we got lucky in being able to buy, you know, a lot of equipment at all-time lows when we entered this industry, where it was at all-time highs.

So, you know, look, it's gonna take us a while to continue to prove ourselves, but hopefully, you know, the things that are being seen will be eventually recognized in the value of the company.

Michael Legg (Analyst)

And just on the customer side, you know, Red Sea Global, you had the favorable test there. The Jazeera Paints, obviously, Ford, it looks like it's coming through, working with Walmart for two years. You mentioned about, you know, putting together a delivery schedule at some point and communicating that with us.

Tony Aquila (CEO)

Yes.

Michael Legg (Analyst)

What do you think the timing of that may be?

Tony Aquila (CEO)

Yeah, it's a good question. So we work like a tech company with our customers. We don't say a lot, you know, we don't. You notice we're not out bragging about any of the things we've done with Walmart in the last two years, or what we've been doing for, frankly, over a year with the Red Sea. You know, we let our clients decide what they communicate. We see ourselves as a part of their competitive advantage, and so, you know, eventually this will become super surprising information, but it'll be because we respect our customers. We function like a TGM, not an OEM, and these things are deeply integrated into their strategy. So, you know, in the quarter, we anticipate a few of those to fully bake through.

Of course, we have indications that they would like to make them public, and we will follow through accordingly.

Michael Legg (Analyst)

I look forward to-

Tony Aquila (CEO)

I hope that answers your question as well as our discipline.

Michael Legg (Analyst)

Yep, it does. Great. Look forward to hearing them as they come through. And then just the last question: the R&D, the SG&A, were very well controlled this quarter, much better than I had modeled, and the EBITDA guidance is much better than I had modeled. So I assume the SG&A and R&D levels going forward should remain somewhat similar here, or can you just comment on that, please?

Tony Aquila (CEO)

Yeah. You know, look, we're pacing ourselves right now. I think we're entering a phase, and that's why we talked about, you know, that we made it known that we're talking to the capital partners for this next phase. You know, we're gonna be very disciplined about how we deploy capital. You know, I think, you know, it's gonna be key to the survival of those, as the industry emerges here. And in addition to that, you know, depending on how that capital terms and conditions flow, obviously, we're focused on as much managing dilution as much as we can, which is difficult at this time... but over the long run, you know, we're building a big company here, so, you know, we understand.

That may vary a little bit based on capital inflows, but not a lot, because, you know, one thing I talk to the team about all the time is, it's not how much money you have, it's how effectively you can deploy it. In this phase of a company's life, you do not get 100 cents on the dollar of efficiency. You have to humbly look at what your leakage is and continuously be tightening your belt and your system. I think the team is finally maturing in this area, and understanding. You know, every $100,000, $150,000 is a software engineer. Every, you know, $70,000 is advanced manufacturing personnel. So, you know, it's starting to resonate as a culture.

You know, it's a refounding in this company, and I think, you know, I'm pretty proud of how they were very disciplined in the quarter, although we still had leakage that, you know, I'm constantly on their case about.

Michael Legg (Analyst)

All right. Well, thank you. Congrats on the progress and look forward to continued progress over the year. Thanks.

Tony Aquila (CEO)

Thanks. Thank you.

Operator (participant)

Thank you. Our next question is from Craig Irwin with Roth MKM. Please proceed with your question.

Craig Irwin (Analyst)

Hi. Good evening. Thanks for, thanks for taking my questions. So Tony, I wanted to ask a little bit about the, the characteristics of the customers, that you, you look to support with, uh, your early deliveries in 2025. Are there any specific, things that you're highlighting or you're, you're prioritizing as you look to allocate production in 2025? And would you be looking to primarily serve a small handful of, strong, well-established, long-term adopters, or to seed the market with, many, opportunities, where some can end up being larger than others over the next few years?

Tony Aquila (CEO)

Yeah. So, so, and that's, that's a great... Dave, that's a good question. Sorry, Craig.

Gregory Ethridge (SVP, Finance)

Sorry, Craig.

Tony Aquila (CEO)

It's a good question. What we've done is we focused on a few customers that have high volume, multiyear requirements and an implementation schedule in their internal system, often because of infrastructure charging, that aligns with our ability to scale. So we're really trying to pair off all these things so we're in harmony. In addition to that, you know, it takes time, you know, when you work with sophisticated customers like Walmart, the Post Office, the Red Sea, these are Jazeera Paints. They're very focused on what these vehicles do and the return on capital on every mile. So, you know, from our perspective, we will always, as long as we can, focus on the few that allow us to sell the many.

It's much more of a judo model than a boxing model, and that's one of the ways we keep our costs under control. You know, we look at the United States like 50 countries under a flag and a currency. We are rolling out methodically through the U.S. in alignment with our customers, and so we're not scattered, we're not weakened, we're not burning capital, you know. We're really focused on being profitable, you know, starting to break through at 24,000 units production. So, you know, this is. And that excludes software revenue and accessories. So I hope that answers your question on, you know, we're just focused on the grade A, triple B credit spread, high volume, multiyear buyers that align with us, and we can deliver it for a purpose.

Craig Irwin (Analyst)

That makes a lot of sense. So as we look towards this production, can you maybe help us unpack what some of these announceable milestones could be that we could see from Canoo? You know, as sort of external observers of your progress. You know, will there be announceable order commitments that we should expect, you know, exiting the year? Are there other commitments to the factory that we'll learn about publicly? What else should we be possibly looking for?

Tony Aquila (CEO)

Yeah. So we, you know, again, I'll come back to being a tech company. So just like the tech companies you cover, Craig, you know, they're much more IP guarded, you know, rollout guarded. You know, like I said, we see ourselves as a competitive extension with our partners of their business. And so, you know, I think we'll enter an era where you'll start to see those customers that want to announce what they're going to do, you know, be in announcing it. And, you know, we do anticipate some of that coming through in the quarter.

Craig Irwin (Analyst)

Great. Well, congratulations on the progress here. I'll, I'll go ahead and jump back in the queue.

Tony Aquila (CEO)

Thanks, Craig. Thanks again.

Operator (participant)

Thank you. Our next question is from Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro (Analyst)

Thanks. Good afternoon, everybody. Can you talk a little bit about just, you know, just from an update perspective, the relationship with Walmart and kind of where things stand and kind of how we should think about the, like, deliveries over time? I know it's a longer term, but just any changes to the relationship and how should we be thinking about that?

Tony Aquila (CEO)

... You know, one of the great things about our customer base is they actually appreciate no BS, right? I mean, they understand supply chain problems in quantums beyond ours. You know, we have 180 or so suppliers. You know, many of our customers have hundreds of thousands. And so we've learned a lot from them. But they've actually really appreciated, one, the fact that we wanted real testing before we signed up. Two, we wanted to make sure they had a multi-year view of what they needed for us, so we did not get whipsawed either in requirements and specifications. And so, you know, we concentrated on people who were really who really had a long-term view of their business like we do.

And I think that, you know, those elements have aligned well for us. These are customers that get a high return on capital by moving to an electric platform. They're also very... We're very targeted on customers that have, we don't have any range anxiety or charging issues, for auxiliary charging until their full infrastructure is in place. So, you know, balancing all those things out, we've targeted, you know, if you take Saudi Arabia, it's not only, you know, the Crown Prince has not only done some amazing things for the environment, but he's also, you know, liberated, the environment so that everyone can drive. So you'll get multiple expansion per rooftop of vehicles per household, you know, as well as their commitment to ecological distribution and service maintenance and repair activities on their sites.

They're very progressive in this way, as you probably know. You know, just in the Red Sea Global project, I believe $30 billion has been invested so far. They are also very focused on return on capital, and demonstrating to their guests, you know, a very cost-efficient, ecological experience. Same thing we see with our other customers. So, you know, we've been able to be insulated. I think targeting in the U.K., which I give credit to Ramesh for leading the charge for us in opening the market. You know, great thanks to many of the people who worked with me in the other company that I built in the U.K., in joining us and helping us get integrated with the top customers. You know, we'll be in testing.

Again, we signed up to test in their specific use cases in Q4, in the wet, cold, and difficult weather in the United Kingdom. We're trying to cover the gamut. I think that's one of the things electric vehicles have failed to do, is to get, if you will, muddy and bloody with the product and really test it, because that... If we don't do that, the anxiety with the customers is too high, and you also get surprised. So, you know, these vehicles take a licking and they're built for it. So, they're repairable, and, you know, we've learned a lot.

This testing has saved our shareholders a tremendous amount of money because I have been around multiple vehicle launches for 40 years in the data side of this, and I would say this is one of the toughest products for its specific market use case at the best return on capital out there.

Stephen Gengaro (Analyst)

Great. No, thank you for all the detail. That's helpful.

Tony Aquila (CEO)

You bet, Matt.

Operator (participant)

Thank you. Our next question is from Amit Dayal with H.C. Wainwright. Please proceed with your question.

Amit Dayal (Analyst)

Thank you. Good afternoon, everyone. So Tony, with respect to, you know, the equipment that is now needed to complete the production setup, you know, outside of the Arrival assets, are there any other sort of critical equipment that you need to, you know, get ready for production?

Tony Aquila (CEO)

Yeah. So look, you know, we continue to, you know, I hate to say it, but be, you know, be the guys that, you know, kind of in visiting every garage sale in the industry. And in fact, we have a team that just specializes on it. And, you know, that's paid dividends. We have, you know, some paint areas, you know, that we currently have more costly manual steps, that, you know, as we move into more automation level, those are about the only things, plus a few, you know, little gap pieces of equipment. But we have everything else that we need in Oklahoma City, to do that. And the workforce that we've been hiring there, we're really impressed. We've been relocating a lot of people.

They really love the cost of living, the environment, you know, the taxes and so on. So, you know, it's coming together. It's, you know, it takes time to build a great company and, you know, and to do it in a tough market, you got to be very disciplined about it.

Amit Dayal (Analyst)

Understood. The approval for the, you know, the Foreign Trade Zone, how should we think about, you know, you guys benefiting from that? In the long term, obviously, the benefits are clear, but in the near term, is there any advantages that we may not have sort of considered previously with this approval?

Tony Aquila (CEO)

... Yeah, so, so it's a good question. So with us being able to, you know, the U.K. has, you know, been an amazing, the government has been amazing, engagement with us. We've, you know, because we have a track record there, for many, many years and have worked with the government in the past. So we, you know, they understand we're serious. They love the fact that we're focused on a few customers that benefit the government, because almost all the customers are government-assisted, funding. And in addition to that, they have stringent mandates that the new party, which has been elected, is reinforced. And they've lost all of their manufacturing in this category. You know, just recently, you know, India, you know, took Jaguar out of the United Kingdom.

We believe that with the free trade zones, we will be able to supply our MPP1 and create assembly jobs within the United Kingdom and eventually, you know, part of our supply chain that makes no sense to ship there. But we could bring those partners into the free trade zone, give them space in our building. So we're looking to build a long-term integrated model that is financially profitable for our customers as well as it is for our suppliers, and keeping the cost of capital and the advantage of geographic expansion at the lowest possible cost. So, you know, we move together, and this gives us the ability to kind of migrate into those markets. So the free trade zone is very, very important.

You know, we have 125 acres to work with directly on the I-40, if you've been there.

Amit Dayal (Analyst)

Got it. Thank you. Also, it was interesting to note that, you know, you are sort of now, you've kind of activated the OTA update capabilities. Can you talk a little bit about, you know, how complete this aspect of the, you know, customer experience is and you know, what needs to be done to, you know, finish sort of this feature?

Tony Aquila (CEO)

Yeah, we have an amazing... You know, I'm a software guy, so, like, I'm absolutely proud of our software team and their ability. I mean, to actually get customer requests in, and in 48 hours, turnaround a workflow is pretty, pretty awesome. You know, we've got a young, very creative team, and, you know, they're very engaged. They love what they're doing, you know, and we successfully are deploying, and, you know, pulling data for testing because these rigorous mile tests, you know, with these customers, help us refine our engineering and understand the longevity and the underwriting model of our warranty schedules. So because, you know, the post office is starting and stopping the vehicle every 50 feet, right? I mean, you know, if you will, it's idling out.

So, you know, it's got to be kept on temperature. You got optimized speeds, you got optimized braking, torque, you know, integrated workflows. You know, like I said earlier, we do keep that stuff guarded because that belongs to our customer as well. And, you know, you know, we just are getting about it and, you know, we'll be building them and deploying them and the vehicles get a lot of attention when the customers deploy them. The U.S. Postal Service, you know, some of the people commented that they, you know, had literally been delivering the mail for X number of years and met few people, but driving these vehicles, they have many of their customers come out and ask about it.

So it's cool to be able to do that, especially if the vehicle that's bringing the astronauts to the Artemis. I think we've put together the right things, and the vehicle has the right ergonomics that the drivers are respecting the vehicles a lot. We've had virtually no accidents, and which is insane in these use cases, because the drivers, one, the vehicle has great situational awareness, and two, when you respect them, they respect you.

Amit Dayal (Analyst)

Got it. That's all I have, Tony. Thank you.

Tony Aquila (CEO)

You bet.

Operator (participant)

Thank you. There are no further questions at this time. I would like to hand the floor back over to Tony Aquila for any closing comments.

Tony Aquila (CEO)

We'd like to thank everyone again, you know, especially our supporters, our believers. And for those of you that are our haters, you know, we'll prove ourselves piece by piece and hopefully convert you. With that, you know, we look forward to updating you in the quarter, and the team will have follow-up calls with those of you. Everyone, have a great rest of the quarter.

Operator (participant)

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.