Workhorse Group Inc.
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Ladies and gentlemen, greetings, and welcome to Workhorse Group's Second Quarter 2019 Investor Conference Call. As a reminder, this conference call is being recorded. It's now my pleasure to introduce your host, Workhorse's Chief Operating Officer, Dr. Rob Willison. Thank you. And Dr. Willison, you may now begin.

[Robert Willison:]

Thank you, operator, and good morning, everyone. We appreciate you for taking the time to join us for our call. Before the market opened, we issued a press release with our results for the second quarter ended June 30, 2019, a copy of which is in the Investor Relations section of our website. Workforce is releasing earnings today in advance of its quarterly filing on Form 10-Q, which is planned for Friday, August 9.

[Paul Gaitan:]

Thanks, Rob, and thank you to all who are joining us for today's call. This morning, we issued a press release which discusses the results of our operations from the quarter. Additionally, as Rob just mentioned, we plan on filing our Form 10-Q with the SEC later this week. I recommend going through both materials to get more color on some of the information being discussed today. And now to our financial results for the second quarter. Sales for the second quarter of 2019 were $6,000, which was down from $171,000 recorded in the second quarter of 2018. The decrease in sales was primarily due to a decrease in volume of trucks delivered. At this point in time, I want to stress that we believe year-over-year comparison should not be considered as meaningful representations of the current capacity of our business or potential interest in our vehicles. Selling, general and administrative expenses in the second quarter of 2019 decreased 33% to $2 million from $3 million in the second quarter of 2018. The decrease related primarily to lower spending in areas such as marketing and employee-related costs. Research and development expenses in the second quarter of 2019 decreased 36% to $1.2 million from $1.9 million in the second quarter of 2018. The decrease in research and development expenses was due primarily to lower product design and employee-related costs. Total operating expenses in Q2 2019 decreased 34% to $3.2 million from $4.9 million in the same period last year. The decrease in total operating expenses was due to the lower SG&A and R&D previously mentioned. As a result of the company's stock price increase during the quarter from $0.62 to $2.94, Workhorse recognized $31.1 million in noncash interest expense associated with the debt-related warrant liability. The net loss in the second quarter was $36.9 million compared with a net loss of $6.9 million in the second quarter of 2018. To be clear, excluding the noncash warrant liability interest expense, the Q2 loss would have been $5.8 million, which is $1.1 million less than in Q2 2018. As of June 30, 2019, the company had cash, cash equivalents and short-term investments of $23.5 million compared to $1.5 million as of December 31, 2018.

[Duane Hughes:]

Thanks, Paul, and well done. Welcome to everyone joining us this morning. We are eager to update you on our activities during the second quarter. We've been well focused on our engineering and development efforts to bring the N-GEN to market as expected, and we have been busy working on our strategic opportunities, including our Duke Energy alliance, monetizing the SureFly asset and, of course, as everyone on the call is likely anticipating, we will update you on our discussions as they relate to GM's Lordstown facility. Before I begin with the updates on the business, I'd like to address the elephant in the room and provide some context around what has been pretty widely reported in the press. Yes, I'm talking about Lordstown. We know that many of you have questions, but please understand we are currently not in a position to provide any material updates to this process beyond what has already been publicly provided through the General Motors press release as well as what is in the public domain from the extensive media coverage. But I'll start at the beginning.

[Robert Willison:]

Thanks, Duane. In my remarks today, I plan to address updates on our N-GEN platform. With respect to development of our N-GEN electric step van, that process remains on track, and we are still on schedule to begin delivery to our customers in the fourth quarter of this year. As I mentioned on the previous call, we have been testing drive train specific as well as other development mules, all of which are based on our N-GEN 1,000 cubic foot model, which is the model we plan to roll out first during initial production. These production-intent mules will allow for the refinement of fit and finish, noise vibration and harshness, assembly techniques and final driver ergonomics. As an update, the first of these test mules was taken to the Transportation Research Center, or TRC, in the East Liberty, Ohio, where we completed thermal testing and acceleration, regeneration runs for our propulsion system. The tests were conducted in a variety of use conditions, and while further data analysis is underway, we are pleased with the current results. We are also running a second testbed mule that has a number of final production-intent parts already installed. These components are running on a vehicle with a full payload that is operating in the field around the Detroit area. We have additional mules beginning to take shape. Initial parts are being fabricated for buildup. These will be used for regulatory testing, hot and cold chamber test breaking calibration as well as curb strikes and other durability testing at TRC. Our final mule is based on our 650-cubic-foot N-GEN and will begin fabrication in the coming weeks.

[Duane Hughes:]

Thanks, Rob. Good update. Of course, we will provide more definitive time lines and delivery schedules as the process continues to take final shape throughout the next few months. In summary, I'd like to emphasize our progress over the last six months. First, our company is in the healthiest cash position in our history. Second, we are quickly monetizing assets, such as the SureFly and the W-15 pickup truck. Third, and perhaps most important, we are focusing on what we do best, last mile delivery by moving into production with our N-GEN platform. And finally, we continue to strengthen our position as it relates to the U.S. Postal Service NGDV program. We look forward to updating you on our progress in all these areas as we further our mission of changing the way the world works. We're now ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

. And our first question today is coming from the line of Jeff Osborne with Cowen.

[Jeffrey Osborne:]

A couple of questions on my end. On the N-GEN side, Duane, I was wondering if you could give us an update on the backlog. Obviously, production is limited here, but I think the last update, you had around 1,100 units or so. And you talked about needing $60 million of funding, I believe, and you've obviously got $25 million of that and now the Duke relationship. But a two part question. One, is where does the backlog stand as production starts exiting this year? And then what working capital or additional capital is needed, if any, now that Duke's involved?

[Duane Hughes:]

Great. Very good questions, Jeff, and we appreciate you being on the line to ask them. I'll hit my side, and if Rob wants to add anything, he can. But in general, the backlog is still just over 1,100 currently but is in the -- as you would expect, we are beginning to grow that sales funnel by expanding that customer base, if you will, in the sales discussion. That represents roughly $70 million worth of orders in the queue, of which we will again begin delivering in Q4. But I'll speak to the financial side, we have our revolver with Marathon that allows us, and then Paul can jump in here too if he needs to, which really allows us to draw down based on purchase orders literally up to the amount of the purchase order. We can then acquire our parts, build the trucks, deliver them, and then we can always replenish that revolver and continue to borrow from it. So we -- from a facility perspective, that facility will provide us with what we need to deliver on our current backlog as well as beyond. As far as the precious equity that we raised in the $25 million round, that's really for current operating expenses and so on that we expect to get us through at least the end of the year. Again, if Paul wants to elaborate, he can. And finally, the Duke alliance, which we could spend a lot of time on that I'd like to talk about because it's so important to our profitability path, really enables us to, I'll say, lessen our BOM cost to our company, right, by Work -- I'm sorry, by Duke actually acquiring the components or the batteries themselves. They will continue to own the pack. We'll build the truck, put that battery pack in it. We'll keep the revenue from the sales price of the truck but will reduce our BOM cost by the amount of the battery cost upfront. Does that make sense, Jeff?

[Jeffrey Osborne:]

It does. No, that's very helpful. And just to confirm, the bulk of the backlog is the 1,000 cubic feet, not the 650 that you're just starting production of the mule?

[Duane Hughes:]

Yes. The bulk currently is, but I do expect in short order that the 650 will outpace the 1,000 cube vehicle because the number of different customers who use that particular platform certainly is a larger base than what uses the 1,000 cube.

[Robert Willison:]

And Jeff, I might add that one of the most powerful aspects of this design and approach that we're taking with the engine is it spawns a family of products at 650 cube, 1,000 cube, a 1,200 cube and a flatbed and other variations. So with a single design, it can be morphed into various models for different customers and markets.

[Jeffrey Osborne:]

Got it. That's helpful. And then the last one of the questions, I know you're limited on what you can say about Lordstown. But can you just elaborate on what the relationship would be hypothetically on the postal service vehicle as it relates to the W-15? Would the post office vehicle be made at that location and you would receive a similar yet-to-be determined license? I just want to make sure I understand what the mechanics are with those programs and as it relates to LMC Motors and your relationship with them?

[Duane Hughes:]

Yes, great question, and I appreciate it. I would answer like this. From the beginning, we viewed what we'll call as access to the Lordstown facility as a potential competitive advantage to further enable us to win the postal service contract, primarily just because of its size and so on, its ability to push through vehicles out of that plant. Not to mention, they've got 50-plus years of experience on how to build vehicles in that facility. So we see that as a differentiator and a strength to it, right? But beyond that, I would say that the opportunity exists. We plan to take advantage of that opportunity, but there's work still to be done to get there. With that said, I believe that it would be viewed as a positive event. And most importantly, I would say this. Because the W-15 that we built a couple of years ago was really -- was born from our design and development of our six prototype meals -- I'm sorry, six prototype postal service vehicles. We believe that when the new W-15 comes to market in Lordstown, because they can build the W-15, which is predicated on the same parts, the same underlying type of infrastructure, it would easily allow for the post office vehicles to also be built in Lordstown. So of course, we'll pay attention to what the U.S. Postal Service wants and what the best outcome will be for Workhorse in terms of profitability. But we do view the Lordstown plant as a potential game changer in that contract.

[Jeffrey Osborne:]

Got it. That's helpful, Duane. But just to clarify, the N-GEN will continue to be -- you have a chassis made in Indiana and then you'll align yourself depending on the variant with different body partners? Or would that also be transitioned hypothetically to the Lordstown facility as well?

[Duane Hughes:]

We anticipate building the entire vehicle at the Union City facility for the N-GEN platform, the 650 to 1,000 and 1,200 in flatbed that Rob's talking about. We believe we can fill that facility up with those variants of the N-GEN platform. We also would, of course, say that the N-GEN platform is -- there's a 200 cube version, if you will, that would be also the post office. So we have options with where to build them. We're looking for what makes the most sense from a profitability and a quality perspective and also what differentiates us in ways to win a contract of substantial size.

[Operator:]

. Thank you. At this time, this will conclude the company's question-and-answer session. If your question was not taken, you may contact Workhorse's Investor Relations team at [e-mail]. I'd now like to turn the call back over to Mr. Hughes for his closing remarks.

[Duane Hughes:]

Thank you for joining us on our call today. I especially want to thank our employees, our partners, our investors for their continued support. We much appreciate your continued interest in Workhorse and look forward to updating you on our next call. Operator?

[Operator:]

Thank you for joining us today for Workhorse Group's Second Quarter 2019 Earnings Conference Call. You may now disconnect at this time.