Canoo announced during the Q3 Earnings Release that they would hit "start of production" on November 17th, and then on the 18th they tweeted the following "We reached a milestone by declaring SOP on 11/17 of our LV & LDV. "
You might be wondering how Canoo could start the process so soon - seeing as we already announced a window for Canoo's SOP and it wasn't supposed to open until December 13th at the earliest. So what gives, is Canoo skirting NHTSA requirements? No, It's probably nothing nefarious like that. We are not lawyers or experts on the topic but there are probably multiple ways to define what "Start of Production" means. We'll come back to this point later...
There is quite a bit to unpack but without rehashing the prior go to market strategy, lets just do a quick review of the relevant bits.
ARKANSAS:
Bentonville Building # 1 - We believe this was for upfitting and modifications
Bentonville Building # 2 - "Advanced Industrialization and Low-Volume Production Facility for small package delivery vehicles." Supposedly 15,000 annual max capacity, although Canoo upped that and said they were targeting 20k for 2023 production.
Bentonville Headquarters - This was supposed to end up inside Building # 2
Tech Hub R&D Center, Fayetteville - probably in relation to the University of Arkansas campus there.
OKLAHOMA
Tech Hub R&D Center, Tulsa
Customer Support & Financing Center, Oklahoma City
Software Development Center, Tulsa
Canoo signed a 10 year lease on Bentonville Building #1, and it sat mostly empty thereafter being used to showcase gammas to media and hosting some events for test drives. Canoo had started preliminary pre-construction efforts for a renovation, code named "Project Paddle", however this never got any further than that stage. We believe that currently a section of the building is being subleased to a Walmart subcontractor named goTRG who handles returns and overstock for larger items or expensive electronics for Sams Club and Walmart. Building #2 had site work started but also stalled out the same time as Project Paddle. It's not clear if Canoo was paying for this work to happen or if the land owner/developer CrossMar had covered the costs incurred.
The R&D, software and support/financing centers never had a lot of information given on them. Canoo had signed a contract with OK State for $5M in performance incentives for the various centers but to our knowledge, Canoo still hasn't received any of that money.
New Go To Market Strategy
It's not new so much as it is refined. Instead of a low volume production facility in Bentonville, it's being moved to Oklahoma City. Although the site itself seems large enough to be expanded beyond just low-volume manufacturing. It's located at 9528 W Interstate 40 Service Road, OKC. It includes a main 500,000-square-foot building, a 12,000-square-foot training center and a 37,000-square-foot office space. Terex, the prior owner who manufactured forklifts and boomlifts, closed the plant earlier this year and moved operations to Mexico.
This facility is almost move in ready. Obviously it will still require some renovation work to fit their robotics but overall will require less work than starting with a blank space as their original plan was in Bentonville. According to the press release, it will house a vehicle assembly line, a paint shop and an upfitting center. It remains to be seen if Canoo intends to put the Customer Support and Financing divisions within this facility. The R&D and Software centers are likely to still happen in Tulsa as Canoo seems to be in a committed partnership with the George Kaiser Family Foundation and Tulsa leadership. As far as production capacity, Tony said that OKC will ramp up beginning in the second half of 2023 and reach a 20,000 unit run rate by end of the year. To be clear, that means they intend to reach a level of production efficiency and scale to make 380+ vehicles a week by that time, not that they will produce 20,000 vehicles within the year. Beyond 2023, it was forecasted that Canoo will be able to reach a 40,000 run rate by end of 2024 "with opportunities for expansion."
Currently Canoo is hoping to land $1M more in performance incentives, this time from the city of Oklahoma City. According to this report, Canoo filed a packet with the City Council indicating they intend to make $347M in capital improvements to the site. In order to qualify for the incentives, if approved, Canoo needs to add "550 new jobs over a three-year period and the average first-year wage for the new jobs will be more than $71,000" One of the financial analysts covering Canoo asked Tony if they will be double-spending on equipment that ends up in both OKC and Pryor. The response was that government and military opportunities were going to large and eventually, after Pryor's Mega Microfactory was operational, the OKC facility "would become a defense and specialty products site"
With a view to financials and timing, of course, it would have been better if they had been able to start and complete Bentonville instead of this but it didn't work out that way. At this point in time it does seem that a pivot to OKC aligns with company and shareholder long term interests.
Battery Module Manufacturing
We've already covered this plant when it was first announced, but lets review it again since we have new information on Canoo's strategy and the Panasonic TIF failed. It will be located in Mid America Industrial Park just up the street from the future site of Canoo's planned Mega Microfactory. Canoo says the facility will have a capacity of 3200 MWhs. One Megawatt hour is equal to 1000 kilowatt hours(kWh). Each Canoo Lifestyle Van is supposed to come standard with an 80 kWh battery pack. So this facility, once it has ramped to capacity production levels, will put out enough modules to sustain 40,000 vehicles, possibly more if they also offer LDVs with a smaller battery pack to fleets who don't need as much range.
As covered above, this target is inline with the guided amount of EVs expected to be produced by Canoo in OKC by the end of 2024. It's also worth noting again that thanks to manufacturing their own battery modules, Canoo will qualify for a $10 per kWh tax credit thanks to the Inflation Reduction Act which doesn't expire until the end of 2032. This means at full production of 3,200,000 kWhs this facility will generate $32M in tax rebates, annually! If we discount 2023 and 2024 in order for them to ramp to full production, we can calculate that from 2025 through 2032, Canoo could receive roughly $256M back in rebates, from this single facility alone. This seems striking because its over 70% of Canoo's current market cap.
Keep in mind that Canoo will have to expand or open additional battery manufacturing facilities to supply the Mega Microfactory which has a projected output of 300k units annually.
SOP, again.
Here is where things start to get a bit murky. If we use Tony's words and the company's public guidance given to OKC city council, we can make some calculated assumptions.
It would seem Canoo's contract manufacturer started production with intent to make 15 vehicles this year while Canoo is still awaiting final certifications from government regulatory bodies. Tony said they would complete certifications in Q1 of 2023, and deliver saleable vehicles at the back end of Q1. Key word being "saleable" - the 15 vehicles they're making by years end won't produce any revenue. So why state they're starting production if they're not going to actually make something to sell for 3+ months? Good question, we can ask the same thing of Fisker. Fisker started production on the same day as Canoo and also said they were only going to produce 15 vehicles this year, supplying the vehicles to their CM partner Magna. The saleable vehicles they do make in 2023 won't be delivered until February at the earliest. The big difference between Fisker's and Canoo's SOP is pomp and circumstance. Fisker had a big media day for it while Canoo didn't have anything expect for a tweet the following day stating they "declared" SOP and reached another milestone.
Is making 15 vehicles some kind of magic number to hit to ensure you can pass certifications? Maybe, or perhaps Canoo is making a point by starting SOP on the same day and matching Fiskers target. Fiskers market cap is over $2B, roughly 500% higher than Canoo. Of course comparing the two companies isn't quite apples to apples. Fisker has significantly more cash on hand with long terms plans using a contract manufacturer; Canoo is currently funding operations with equity financing but has positioned themselves with amazing growth opportunities using their own facilities in an environment that is friendly to the reshoring of American manufacturing.
The point of this article isn't to dive into a comparison of Fisker and Canoo so make what you will of the fact they both started SOP on the same day with the same targets with roughly the same time frame for saleable deliveries and yet are priced so wildly different, even discounting cash on hand and risk of execution. So why didn't Canoo make a bigger deal out of SOP? Well, it would appear it was more of a formality for them, checking a box that allowed them to say they hit another milestone that makes it easier to negotiate terms with financiers and potential clients. "Start of Production" can probably be defined in multiple different ways. At the moment Canoo's target audience is commercial fleet owners with excellent credit, not regular retail customers. Their production capacity is already sold out through 2024 so this might explain the lack of efforts to publicize it beyond those who listened into the earnings release. Still, it would have been nice for Canoo to at least have put out a press release to let shareholders confidently celebrate it with them.
What happens after the 15 vehicles are built hasn't been communicated very well. Tony's stated during their last ER that "SOP starts this month with our contract manufacturing partners on our own equipment. Following these initial builds, we will then aggressively shift all our equipment and focus to our new facility during Q1 and Q2 of 2023 as we start production." and the tweet mentioned above reads "Following 15 initial builds, we'll shift to our OKC facility in Q1 '23." Based on how these statements are worded, there has been some people loudly suggesting that Canoo is paying a CM to set up a manufacturing line, produce 15 vehicles and then shut everything down waiting for OKC to be ready starting in Q3 2023. Although we can't definitively state that isn't the case, it doesn't seem very logical or the most likely scenario.
What seems more plausible is Canoo has enough robots and machinery for multiple assembly lines. The Contract manufacturer will have set up a single line, capable of producing 10,000 units. When the OKC facility is renovated they will begin installing additional equipment there while still operating the line under the CM. After OKC has turned on and is steady in production, we can then see having the CM wind down operations and move that equipment over to OKC.
We foresee the following outline happening:
Q4 22 11/14 - EPA Application
Q4 22 11/17 - CM SOP
Q4 22 - Deliver "Screaming Eagle" to US Army
Q4 22 - Produce 15 LV/LDVs by years end
Q4 22 - Begin renovations on the battery module facility.
Q1 23 - Complete renovations and install equipment for the battery facility.
Q1 23, Feb - Close on OKC Facility and begin renovations
Q1 23 - Complete Certifications for US homologation
Q1 23 - Open virtual Show Room for customer ordering and configurations.
Q1 23 - Delivery of first saleable vehicles!
Q2 23 - Battery Module SOP? Could happen in Q1 but no firm timeline given.
Q2 23 - Begin installing equipment in OKC(assuming renovations are complete)
Q2 23 - Deliver Crew Transport Vehicles to NASA
Q3 23 - Second SOP in OKC and enter "Production Hell"
Q4 23 - Production Hell, continued
Q2 24, May - Artemis 2 Launch, Canoo CTVs deliver astronauts to the Launch Pad.
Q4 24, Production Hell continued, maybe? Targeting 40k run rate by years end.
What about Bentonville?
Canoo won't abandon Arkansas, in our opinion. Consider the following:
They still have a long lease left on Building #1, one could imagine they'll use it for service and/or upfitting for the Walmart specific delivery vehicles.
It's no secret that Walmart wants their vendors and partners to have a presence in Bentonville. Originally this was supposed to be within building # 2. Now we imagine it'll be incorporated into the other building they already have leased.
Canoo has $100M in tax incentives and a 1000 vehicle order lined up with Arkansas already. Although they haven't signed a DA with the state yet.
The university of Arkansas is opening the UA Institute for Integrative and Innovative Research in Fayetteville funded by a $200M grant from the Walton's - likely where Canoo will establish one of their R&D Tech hubs at.
Tony is on the Arkansas Council on Future Mobility still. Their report is due to Governor Hutchinson by the end of this month.
Tulsa and Bentonville have established a mobility corridor between the two cities to create a "Super Region for Advanced Mobility".
C.R.E.A.M., Get the Money
These plans for production are great - but they need to pay for it to make it happen.
Canoo ended the last quarter with just $6M in the bank. That is scary, considering they are projecting needing to spend between $100M and $140M in Q4 alone. Canoo had a small cash infusion from Tony & AVF of $10M and another $20M from YA leaving $190M available in the PPA agreement and $170M in the ATM. However, the PPA and ATM aren't free money. They dilute the current shareholders considerably when prices are this low and they continue to add downward pressure on the stock price which in turn has the potential to remove access to the programs. Canoo needs non-dilutive financing, and they need it soon. Tony has been talking about non-dilutive funding for many quarters now and yet nothing has materialized. It's dissatisfying but understandable since the capital markets started to implode late last year and everyone began tightening their purse strings. When going after asset-backed credit was first mentioned, Canoo has somewhere north of $200M in assets but weren't able to land any loans with it. Now Canoo has $500M in assets and $750M in binding orders. Combine that with the Inflation Reduction Act and a national focus to electrify fleets, it seems reasonable that Canoo should be able to secure the money this time around.
Per Tony during the ER, "We are in the final phases of evaluating multiple options to finance the Oklahoma facility [that we have been] working on for quite some time...we are in the final stage of a fixed asset financing facility for our machinery and equipment."
It's interesting they mention 'multiple options' of paying for the facility yet separately that asset backed financing is being used for the machinery/renovations. Seems like an indication that there is a preferred plan A and a back up plan if that falls through. Although we don't have a confirmed price that Canoo is paying for the OKC property, it was listed listed by Keller Williams Commercial for $39.6 million. It will be hard for Canoo to purchase this and make capital investments required to get it up and running using the equity financing currently available.
One of those options could be having a related party purchase the facility and leasing it from them. AVF already owns 55 million shares or 17.2% of Canoo, if they want to ensure the viability of their investment, it would be in their interests to make sure Canoo reaches the next phase of their manufacturing plan via such a maneuver.
There is also the hope for a ATVM loan from the Department of Energy. Although timing this one is tricky. Canoo hasn't ever acknowledged publicly that it has an application into the DOE for a loan but we're confident they have applied and are working their way through the gauntlet. Recently Jigar Shah, head of the Loans Program Office for the DOE, tweeted about Canoo(pictured above) in relation to someone talking about manufacturers providing tools and documentation to third parties for independent shops to be able to service their own vehicles. This at least confirms he's aware of Canoo and you can draw your own conclusions as to why he might be aware of details concerning Canoo's service strategy they haven't exactly been public about.
Back in March of this year, The LPO put out a statement concerning their FY 2023 budget request and gave some guidance on expected loan activity.
In Advanced Technology Vehicles Manufacturing Loan Program (ATVM), LPO expects to obligate approximately $5 billion in loans in FY 2022 and $13 billion in FY 2023 across various advanced technology vehicle and component projects.
In ATVM, the FY 2023 Request continues to support access to capital to revitalize and retool U.S. automotive manufacturing to compete globally, including in EVs and in securing advanced technology vehicle domestic supply chains from raw materials to parts
The Request supports the Tribal Energy Loan Guarantee Program (TELGP) in invigorating economic opportunities in tribal communities through the development of energy projects. The Request...allows LPO to continue utilizing the $2 billion loan authority Congress provided (Thanks to the IRA, the TELGP program was expanded by $18B to a total of $20B available.)
So far the DOE has given out $2.6B in conditional loans with the ATVM program this year. It's been above 4 months since they last announced a loan and with just a month left and $2.4B remaining in their target they are clearly behind but haven't stopped projecting that new loans are coming. It's possible the LPO stopped announcing anything while mid-term elections were heating up. Dealing with huge sums of government money causes everything you do to potentially be used for political ammunition. “But with great power comes great responsibility. Republicans are watching the money closely, getting ready to make political hay out of anything that goes south, like DOE's infamous $535 million loan guarantee for Solyndra in 2009.” - Politico article by Debra Kahn We mentioned the Tribal quote above because that program is also a possibility for Canoo to receive some non-dilutive financing, although much less likely. Tony has repeated mentioned how important their relationship with the Cherokee nation is and indicated that they are vital to being able to open up the battery manufacturing facility. "we have accelerated with the Cherokee Nation, our partnership, and are able to launch the battery assembly center in Pryor. So jobs are ahead of schedule in that area, which is very strategic for many reasons." The reason we say it's less likely is due to the funding requirements of the TELGP mean that the applying tribe would need to have significant ownership of the project in question, which adds a layer of complexity.
TL;DR
Canoo has a great a product with amazing IP and significant demand already booked for years to come. They have have the machinery, tooling, and pending agreements for the latest Oklahoma production plan to happen. Even if it's not the greatest form of financing being used today, they do access to capital and are on path to production. Canoo's WILL end up in customers hands sometime next year.
Canoo has nearly $500M in government incentives promised, hundred of millions more available in rebates for battery module construction, and if they land a DOE loan it's likely to be $500M to $1B. If they can land any significant non-dilutive financing, it should be very rewarding to current shareholders even accounting for the dilution that've been exposed to.
We'll follow up this article with a look into additional revenue sources for Canoo pertaining to Fleet Software, the Canoo App and licensing out their MPP IP - so stay tuned!
Authors disclosures: I am long Canoo - I own common shares, warrants and call options.