Workhorse Group Inc.
Q1 2018 Earnings Call Transcript

Published: 13 May 2018

[Operator:]

Ladies and gentlemen, greetings, and welcome to Workhorse Group's First Quarter 2018 Investor Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse President and Chief Operating Officer, Mr. Duane Hughes. Thank you. Mr. Hughes, you may begin.

[Duane Hughes:]

Thank you, and good afternoon, everyone. We appreciate you for taking the time to join us for our call. After the market closed, we issued a press release and filed our Form 10-Q with our results for the first quarter ended March 31, 2018. Copies of both documents are available in the Investor Relations section of our website. In a few moments, our CFO, Paul Gaitan, will provide a brief update on our financials. And then Paul will turn the call over to Steve Burns, our CEO, who will provide an update on our business, touch on some of our operational highlights from the quarter as well as discuss some of our recent progress. But before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and is part of our year-end update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2017 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors relating to our business. And with that, I would like to turn the call over to our CFO, Paul Gaitan. Paul?

[Paul Gaitan:]

Thank you, Duane. As we indicated in our last call, we are focused on the preparation for launching our higher volume N-GEN and W-15 platforms in the third and fourth quarters of 2018 with an emphasis to improve upon our ongoing operations and income statement. In Q1, we shipped 5 units with another 110 and growing in our current backlog. Sales for the first quarter of 2018 were recorded at $560,000, down from $1.6 million in the same period of 2017. This was also a drop from our record performance in Q4 2017, where we demonstrated our improved production capability. The net loss in the first quarter of 2018 was also down compared to Q1 2017, from a loss of $7.9 million or $0.31 per basic and diluted share to $6.4 million loss or $0.16 per basic and diluted share. This is due primarily to more favorable gross profit. Now before I turn the call over to Steve, I'd like to take a minute to address a few 2017 items. First, as you may have seen from the Form 8-K that we filed today, we recently encountered 2 issues in our reported full year 2017 consolidated financial statements and have made the determination that they should be restated. We found that the accrued liabilities account on the December 31, 2017, consolidated balance sheet was actually over accrued by $700,000, which was caused by applying an improper and higher rate of allowance to the number of vehicles that had been sold during the effective period. In addition, we had an in-transit shipment of inventory that was not properly recognized on our balance sheet and caused our expense to be overstated. We now have additional internal controls in place to assure that those items will not occur again. Coinciding with the 8-K filing, we have filed the 10-K/A with the SEC reflecting these corrections. We did not have any reason to believe that there are further issues beyond those just discussed. Second, we also recently announced the financing agreement, which I will elaborate on briefly here. At the end of April, we announced the closing of a private placement of 531,066 shares of the company's common stock at an average price of $2.72 for gross proceeds of $1.44 million. The private placement was led by existing investors and insiders, including Workhorse Chief Executive Officer and Director, Steve Burns; as well as H. Benjamin Samuels and Gerald Budde, who are also Directors of the company. This is a tremendous vote of confidence by Workhorse stakeholders. This additional capital is intended to strengthen our balance sheet to allow us to continue the pursuit of our near-term company objectives. For additional information regarding the restatement and private placement agreement, please reference their respective Form 8-Ks, all of which have been filed with the SEC. Now I'll turn it over to Steve. Steve?

[Stephen Burns:]

Thanks, Paul, and good afternoon to everyone who is joining us on the call today. This afternoon, we issued a press release as well as filed our Form 10-Q with the SEC, both of which discuss in detail the results of our operations from the quarter. I recommend going through those materials to get more color on some of the information we'll be discussing today. For the purpose of this afternoon's call, I plan to provide commentary on our substantial achievements through the first quarter and beyond. I will also discuss some of the key operational highlights since our last call about two months ago, broken down into our various vehicle and aircraft segments. And now I'll provide a brief outlook before we turn it over to questions. It is clear 2018 is about evolution for Workhorse, including the first quarter. The evolution begins with our transition towards the next-generation N-GEN electric delivery van platform and the W-15 electric pickup truck. The N-GEN has been operating for the last few weeks on real-world routes 7 days a week in the San Francisco Bay area. The N-GEN chassis is also designed to be used with the W-15 electric pickup truck. This approach provides us with scalability and reduced costs as we move towards high-volume production. And as if that's not enough, Workhorse has made undeniable progress with the SureFly, perhaps the first-ever FAA experimental-approved vertical take-off and landing aircraft that has flown with a pilot. And even more, the real-world HorseFly drone deliveries that are happening on a daily basis here in Americas currently. It is without a doubt that Workhorse is executing on some of America's first, not to mention most innovative technologies. I truly believe this will change the way the world works. We made a clear decision to shift our production priorities. We have begun the process of adopting our assembly operation in preparation for the large-scale manufacturing that we expect will come from the N-GEN and the W-15 customer demand. As we forecasted in our prior call, sales this quarter were down compared to the prior year. In part, this is due to the continued focus on our transition to large-volume production. Additionally, it's important to note before we can begin certain production operations, we have to purchase parts upfront, which also impacts our production time line. In the meantime, we've increased the capacity of our assembly line to 20 units per day, and we're heading to a 30-unit per day threshold. At 30 units per day, we have the ability to produce nearly 2,000 units per quarter, enabling us to achieve our sales projections and our goal of gross material margin positive production rates. We also have ample space to add capacity as needed to meet our future projections. We're also seeing our sales and customer funnel expand. As you know, our contract with UPS begins with the first 50 of up to 1,000 engine units to be deployed. UPS has publicly stated that the N-GEN could replace tens of thousands of vehicles in their fleet. Beyond UPS, we are also engaged in promising discussions with other last-mile delivery fleets, which include parcel delivery, grocery business as well as communications, telecommunications, utilities and municipalities from multiple fleets, representing many thousands of vehicles in total. With that high-level overview finished, I'm now going to shift gears and provide some commentary related to our various vehicle and aircraft segments, beginning first with our N-GEN electric delivery van and the W-15. For the N-GEN and the W-15, as I mentioned a moment ago, the N-GEN is our next-generation electric delivery vehicle. While we continue the work of adopting our factory such that it can assemble production-ready N-GENs and W-15s on a larger scale, we're currently closing in on our first month of real-world deliveries in San Francisco Bay area with our initial production in N-GEN vehicle. This vehicle has been delivering 270 packages a day on average and traveling about 55 to 70 miles round-trip on their daily routes. Within 2 weeks, we are scheduled to deploy our second N-GEN vehicle on route. We continue to learn, identify enhancements and further demonstrate proof of performance. In the same project scope, we've also had 2 Workhorse E-series vehicles on route in the Cincinnati area performing live deliveries since November 2017. I believe we've had over 30,000 packages delivered on those routes. These real-world deliveries not only give our customers further confidence in our technology but also enable us to have real-life learnings that help us design and build an unmatched for-purpose delivery vehicle. In terms of orders and interest, we have existing orders and significant interest from some of the world's largest fleets for the N-GEN vehicle, in addition to the UPS contract. With our current $300 million worth of preorders from letters of intent for the W-15 electric pickup truck. Combined with the interest in the N-GEN, it is clear to us that fleets are turning the corner from evaluating an idea and total cost of ownership of electrification to now putting in place the operational strategy to deploy electric vehicles across their delivery fleets. We should also mention the cargo and delivery van segment is the fastest-growing segment in the U.S. commercial automotive space. This alone has changed the opportunities for Workhorse. From a 25,000-unit per year step van market to the more than 265,000 cargo and delivery van in new market for the N-series platform. All told, the N-series and W-15 represent nearly 1 million vehicle market sold directly to commercial fleets each year in U.S. SureFly. Let's now discuss the SureFly. I'm incredibly excited that nearly a week ago, we successfully flew the SureFly untethered in the presence of the FAA. The video footage has since been uploaded to YouTube, which you can see through our website. We believe this manned, hovered test flight is the first such flight of an electric vertical take-off and landing aircraft in United States that has experimental approval from the FAA. This is a significant achievement, not only the flying, but flying with a human pilot on board and FAA approval. Moving forward, we are still on target for late 2019, early 2020 to achieve full type certification from the FAA, which should aid our first-mover advantage in this exciting new field. Beyond that, our intention is still to spin-off this portion of the business into its own separate publicly-traded entity, hopefully by year-end. Upon achievement of the spin-off, SureFly, Inc., would be the first pure-play public company in vertical take-off and landing space, which is a very remarkable achievement on its own right. Having said that, given the incredible potential of this technology and the amount of focus and resources it delivers, we feel it's on the best interest of our shareholders and the future of SureFly, Inc. shareholders that we provide SureFly with this opportunity to spread its wings. Moving on to the HorseFly. We are just excited about the progress being made in the drone delivery space and specifically by HorseFly. I mentioned earlier that we are now performing daily deliveries using our HorseFly delivery drone and our patented electric truck/drone technology. This may sound understated, but in reality, this is as significant as an event as the SureFly flying. HorseFly has FAA approval, it's demonstrating success and probably -- and perhaps more importantly, gathering critical data for use by the FAA and our potential customers, as they look to integrate drone delivery into their operations. All deliveries we are making are tracked and the data is recorded via Workhorse's Ares software system, which provides customers opt-in functionality, delivery monitoring and much more. We believe the patented HorseFly truck launch drone system is the first major innovation to last-mile delivery process since the invention of the package delivery truck. And with the knowledge that we have gained in building electric delivery trucks for last-mile delivery, we believe that a drone/truck delivery system can drive significant cost savings in the growing last-mile delivery segment. USPS, just a brief comment on our USPS progress. You know people are eagerly awaiting the decision-making process as it relates to the $6 billion to $7 billion, 180,000 vehicle replacement opportunity. I'd just like to remind everyone again that we are still under specific ground rules that limit our ability to discuss the program in any detail. And at this time, our vehicles continue through the durability testing and evaluation stages. And while we have no news to report today, we can say that we are happy with our progress as it continues to be tested. Financial strategy, as we continue to grow, we recognize the need for our capital structure to evolve as well. To that extent, we are pursuing multiple capital sources with significant funding capabilities. On the equity side, this includes both strategic partners and traditional institutional investors. In parallel, we are exploring options to establish a debt facility to support our growth. We believe the combination of equity and debt financing will provide a more robust platform to support our growth. Outlook. Altogether, our comprehensive portfolio has positioned Workhorse as the leading U.S. commercial electric vehicle OEM. Collectively, our vehicles have logged nearly 3 million road miles with data points along those routes being signaled every 10 seconds to our servers while they're on the road. We continue now to expand our Tier 1 supplier network, and we now have defined systematic and controllable path through volume and scale production. We look forward to updating you on our progress throughout 2018. And with that, we're ready to open up the call for your questions.

[Operator:]

[Operator Instructions] Your first question comes from Thomas Boyes with Cowen and Company. Please state your question.

[Thomas Boyes:]

Couple of quick ones for me. How should we think about the operating expense for the company over the next several quarters? I know it's been higher just because of the R&D and getting the prototyping done and then on the legal expense side, just getting the SureFly's spin-off set. Absent those items, what, kind of, will be a better run rate do you think for that over the next couple of quarters?

[Stephen Burns:]

Paul, you want to take that one?

[Paul Gaitan:]

We try to flex our SG&A and R&D with the funds available. And at the same time, we realize that we have to -- make sure we don't get too far behind the curve. So for instance, some of the SG&A staffing that we've added to make things a little more robust for us in the finance area and in our compliance support are absolutely key for us if we're going to have a delivery vehicle platform that's good for all 50 states and meeting all of the regulatory issues. At the same time, on the SG&A side, as we grow larger, our operations are going to become more and more complex. We spoke about our ERP coming online. That came up a little over a year ago. And since then, we've implemented our inventory and purchasing modules and manufacturing modules. So those are all the things that you really need to have to be a larger company, targeting where we're at, where we're talking and set up hundreds of units, thousands of units a year.

[Thomas Boyes:]

One of the other things too, is just discussing the W-15 pickup truck. Looking at the bill of materials for that vehicle, is there anything that you could identify as the biggest component there that you have headroom for improvements as far as cost reduction? Or is it really getting to that gross margin breakeven or gross margin positive stance really just completely made on volume scale?

[Stephen Burns:]

So it was kind of a dual effort that got the product gross part -- gross margin for us -- gross margin positive. Engineering, the cost down, best we could, given all the learnings from the 3 million miles we've done. And then coupled with, in the end, you've got to have some volume, which is why we just made the conscious decision not to build in orders of 50 and a 100 at a time. Just you can't get there. So the combination too, we're very proud of the engineering effort. And it's a supplier - the supply chain is critical. They have to work with you both on product. And they have to believe you're going to have volume in order to -- for them to tool up. So it's an orchestrated dance. It's a tough dance, but that's, that's the most exciting part. We are -- to have clarity on your supply chain, your engineering, your regulatory, your assembly plant, all the things that go into this, have that all teed up and that's we are singularly focused on getting to volume.

[Thomas Boyes:]

And then just one last one for me. Given that the N-GEN is now out in the wild in San Francisco, kind of, being used, what are really the gating factors for the pickup truck? The punch list of things that you need to be taking down in order to see that kind of hit that same mark?

[Stephen Burns:]

Yes, the reason the N-GEN came out first, it's although they're the same platform underneath, the pickup truck is a more complicated vehicle only because it's a 5-passenger vehicle with all the regulatory that goes around that. And what people expect from a modern-day pickup is a lot. So very, very rough and tumble. So we - and the other thing is the N-GEN, because it's geared for delivery folks, which have defined routes for the most part, the all-electric engine is more popular than the hybrid or the range-extended engine. In the pickup truck, it only comes as a range extender. So having two powertrains underneath, it's just more complicated, and the regulatory really kicks in a lot when you have gasoline on board. So that's the reason for the, kind of, staggered approach. But having the underpinnings, the same chassis, the same brakes, the same steering columns, the same electric motors, the same -- a lot of the same is -- those are leverages you dream of and you have to do that consciously way upfront. So we started that effort way upfront when we started the post office design.

[Operator:]

[Operator Instructions] Our next question comes from Carter Driscoll with FBR. Please state your question.

[Carson Sippel:]

This is Carson Sippel on for Carter Driscoll. And I was wondering, have you explored any partnerships or development opportunities in Class 7 and 8 vehicles? And if so, do you think hydrogen fuel cells will play a role here?

[Stephen Burns:]

Carson, this is Steve. I'll take a stab at that. We are -- we had to dial down the innovation meter and new product meters so that we can get to market with these and get profitable. But with all the, kind of, electric semis coming out, we really think we could play a hand in there. But we're going to wait until we got on top of the pickup truck before we do that, but it is a viable market. We do have a hydrogen truck on route with FedEx. We're using a partner's fuel cell on that. And in package delivery, it's -- the infrastructure might not be there, the fueling infrastructure for hydrogen, but certainly, on a highway, there's a lot of people threatening them to do it. So it could be a viable thing. We wanted to have our hand in there. Essentially a hydrogen fuel cell vehicle is really an electric vehicle. Hydrogen acts as a basically a charging mechanism for the battery pack. So the underlying everything is on electric vehicle, and that's what we have. So switching now to internal combustion generator or range extender for a hydrogen one, we wanted to make sure we have the ability to do that, if that is a direction some fleets want to go. But hydrogen has ebbed and flowed for 20 years. We just -- we don't want to be in the prediction game of when it happens. We just want to be ready in case it happens.

[Operator:]

[Operator Instructions] Our next question comes from [Mike Silivan] with Maxim Group. Please state your question.

[Unidentified Analyst:]

Steve, a question. I know we're making package deliveries. The revenues from the package delivery side and the ramp that hopefully we're seeing, are those included in the numbers for the quarter? Or do we see them going forward? And the other question is as far as the drone delivery, are we planning on monetizing -- we have the patent from a drone delivery, from a truck. How do we monetize that side of the business?

[Stephen Burns:]

I don't know - as far as the revenue from the package delivery from the San Francisco effort, it's fairly small, of course, it's only one truck, expanding to two next week. So I don't know if Paul is breaking that out separately. Are you, Paul?

[Paul Gaitan:]

No. It's immaterial in our revenue number.

[Stephen Burns:]

On the drone side, Mike, it's a great question. But again, a drone to supplement a package car, a package truck on top of it, it eliminates a lot of driver cost on a particular package delivery. It uses $0.03 a mile electricity. So almost, almost -- I mean, it's just phenomenally less expensive, but again, it's got to be coupled with a truck. Having a driver close by within a mile or two is what the FAA likes to see. That's why we're not flying these from a warehouse or anything like that. But we think it's the perfect combination to really bring the first meaningful change. We're electrifying the fleet, right? But it's still a truck with 4 wheels going door to door. And which has been refined to nth degree over these 100 years of doing that. So drone delivery represents -- and I think everybody's aware, it's not a long shot to say that package delivery is only going to increase, right? Last-mile delivery vehicles and mechanisms and people are one of the fastest-growing segments. And we find ourselves as the only electric package delivery truck company in United States, and also of course, the only one with a drone on the top. And that's protectively the patent you're speaking of. So we think we're well positioned. And we don't have to wait for the market to come. The market is right in the middle of this huge disruption of how last-mile delivery happens. And just we think we are really well positioned for it.

[Operator:]

At this time, this concludes 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. Burns for his closing remarks.

[Stephen Burns:]

Just like to again thank everyone that supports us and follows us, and we're excited about the future.

[Operator:]

Thank you. This concludes today's conference call. All parties may disconnect. Have a great day.