Workhorse Group Inc.
Q3 2018 Earnings Call Transcript

Published: 7 Nov 2018

[Operator:]

Ladies and gentlemen, greetings, and welcome to Workhorse Group's Third Quarter 2018 Investor Conference Call. As a reminder, this conference call 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, Jesse and good afternoon everyone. We appreciate each of you for taking the time to join us for our call. Before the market opened, we issued a press release and filed our Form 10-Q with our results for the third quarter ended September 30, 2018. Copies of both documents are available in the Investor Relations section of our website. In a few moments, I’m going to turn the call over to our CFO, Paul Gaitan, who will provide a brief Q3 overview, as well as walk you through our financial results for the quarter. After that, our CEO Steve Burns will come on the line and provide an update on our business and touch on some of our operational milestones and highlights from the quarter. 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 related to our business. And with that, I will turn the call over to Paul Gaitan. Paul?

[Paul Gaitan:]

Thanks, Duane. And thank you to all who are joining us for today's call. This morning, we issued a press release, as well as filed our form 10-Q with the SEC, both of which discuss and detail the results of our operations from the quarter. I recommend going through those materials to get more color on some of the information being discussed today. And now to our financial results for the third quarter of 2018. Sales for the quarter were $11,000 which was down from $3.1 million which we reported in the same period of 2017. The decrease in sales was primarily due to a decrease in volume of truck shift in the quarter. We believe our year-over-year comparison should not be considered as meaningful representation of the current capacity of our business or potential interest in our vehicles. Our net loss in the third quarter of 2018 improved compared to Q3, 2017 from $12.4 million or $0.35 per basic and diluted share to $5.5 million or $0.12 per basic and diluted share. The improvement in net loss is also due primarily to a decrease in volume of trucks sold and significantly reduce R&D spending. Selling, general and administrative expenses rose for the quarter due to a couple of nonrecurring items. Workhorse settled several legal related issues. Combined expenses for the quarter for legal and settlement cost totaled $500,000. Additionally, we incurred certain cost related to the capital raise in August. Lastly as some of you may be aware, we previously issued warrants to Arosa Capital Management in July of this year in connection with the debt offering which have significantly contributed to the period-over-period increase in interest and change in fair value line items on our income statement. More specifically, the interest expense line item includes both traditional interest expense on the principal balance of the debt and the accretion of the warrant granted with the Arosa loan which is treated similarly to a debt discount for accounting purposes. The change in fair value line item represents the uptake of the company's quarterly valuation of our outstanding warrants with Arosa which has decreased in value during the period since the decline in the company’s stock price. As we said on previous calls with now $60 million plus backlog we have a significant need for capital in order to finance these orders in hand. We’re currently in an ongoing process pursuing multiple types of investment to support the long-term health and viability of our business. I will provide to the extent that I am able according to regulation FD requirement a brief update on the current state of those processes now. First and foremost our goal with respect to future financing to secure strategic partners in our industry related space such as transportation and energy, as well as traditional institutional investors. As we grow our capital structure must evolve accordingly. As it relates to the equity offering international securities I previously mentioned, the equity offering had net proceeds of $10.9 million. These funds were used to retire the mortgage on the Loveland property, paydown aged accounts payable and provide funds for future operations. Now with the financial side of things behind us, I want to turn the call over to Steve Burns, Workhorse CEO, to give an overview of the quarter, as well as discuss some of our operational highlights and outlook for the remainder of 2018. Steve?

[Steve Burns:]

Thank you, Paul. And again I wanted to welcome everyone to the call. Today I'm going to keep my comments fairly brief so we can get right to your questions. First let’s start with a quick recap of main activities. And the first update here is the N-GEN all electric delivery truck. For those of you less familiar, the N-GEN or next generation truck is a ground-up new design where we set out to remake the local delivery truck. The N-GEN is an all-wheel-drive low floor ultra-light truck. It gets equivalent of 50 miles per gallon. For reference, a typical gasoline truck and a similar cargo capacity gets about 5.5 miles per gallon. Think about the ramifications of that kind of change. I think our team really hit it out at the park with this truck and we are after a great deal of R&D have really come to the table with a significant N-GEN in electric delivery vehicles. In Q3 using the N-GEN prototypes, we delivered over 100,000 packages in San Francisco and Ohio during our testing. Now we have commenced early manufacturing in our production version. We have fully completed the first of three vehicles and are in process of making the next two. In addition to engineering the N-GEN to be what we feel is the best and most efficient local delivery van, we also designed it with a goal producing each truck on a profitable basis from a per truck standpoint. I think most folks are aware that the current passenger car companies that are making electric vehicles are struggling to make them into profit. So it is no small feet to have a design, a factory, a supply chain and service system all operating in sink to build profitable vehicles. I want to be clear when I say profitable, it is on a material margin basis. Although the factory has been reconfigured to make up to 30 vehicles a day, we are currently only making a few vehicles due to lack of proper financing as Paul mentioned earlier. Financing that is required to by the parts in advance of the builds. As we have discussed several times on these calls and again on this call, we have sort such financing, and we are continuing our efforts to find a financing partner for our key component on terms that are fair and equitable to Workhorse. Finally we’re excited that we can now announce one of our new marquee customer for the N-GEN truck and that is DHL. DHL is trying to purchase order for an initial batch of engines. Our growing customer base includes the likes of UPS, FedEx, and DHL and we remain incredibly excited about the opportunity it provides to change the game in last mile delivery. Next is our SureFly. As we previously announced a few months ago we retain an investment banking firm to help us find a buyer for SureFly. We are continuing our efforts in this process. We are confident that we will be able to find an appropriate buyer given the worldwide rate to get to electric flight and that we feel SureFly is a leader in this race. While we continue looking for the best buyer, we have maintained a rapid pace of development on the SureFly, and are progressing through the FAA procedures as we seek full type certification. We have a talented team of aeronautical, software, mechanical and electrical engineers on the team, as well as seasoned test pilot and aviation advisers. It’s also relevant to note that we are currently in late stage discussions with the branch of the U.S. military to begin joint testing of the SureFly. We will provide details on that relationships as we are permitted going forward. Moving on to the W-15 electric pickup truck. Again with 6,000 preorders from major fleets, the W-15 represents our largest revenue potential within the Workhorse stable vehicles. We have worked hard to ensure that much of the N-GEN chassis and drive train our portable over this W-15 product line. Although we have not secured the tool for the body panels, the panels are already design and proven via our concept trucks. Our goal is to make fleets more efficient and able to do their job better to be our trucks. And our goal continues to be the first U.S. OEM to offer an electric pickup truck. Lastly on the United States Postal Service contract, we continue with the testing for the USPS of our prototypes. We're quite pleased with the results to-date, but as previously stated the USPS has restricted all parties that are participating in the bid from commenting on the program. So that's about all we say about that. We look forward to updating you on our progress in the coming months. I think we're now ready to open the call up for questions. Operator, if you can please provide the appropriate instructions.

[Operator:]

[Operator Instructions] Our first question is coming from the line of Carter Drisscol with B. Riley. Please proceed with your question.

[Carson Sippel:]

This is Carson Sippel on for Carter Drisscol. I just have a few quick questions. First can you comment on the process of the trial phase for the 50 vehicles and along those lines what are you expecting in terms of feedback to hear from them?

[Steve Burns:]

This is Steve thanks for asking questions. We've had our major customers up here to inspect the product in process as we get closer and closer to production. And of course - and that’s why we talked about delivering 100,000 packages to our drivers in these early trucks so we could learn and refine it a lot as much as we could before the customers came up to see it. But I say the first two we're delivering to a customer on or about Thanksgiving. So they’ve given a go ahead and UPS wants a few fleets nothing major and so those are coming soon after.

[Carson Sippel:]

And are we still optimistic about the ramp kind of getting going in the second half of 2019?

[Steve Burns:]

If financing comes in earlier, we hope its earlier we’re ready as far factory and recipe and build materials. So it’s strictly contingent on financing but we hope it starts in early 2019.

[Carson Sippel:]

On the same lines you mentioned you’re pursuing capital rating options. Can you comment on this specific type of capital ratings vehicles you’re looking at or anything else along those lines?

[Steve Burns:]

Yes, I’m going to let Duane take that he is mostly involved in that effort doing a good job there.

[Duane Hughes:]

As Paul alluded to in his remarks we have numerous conversations going on with a number of potential strategic and we write to the transportation energy size of the business, as well as financial institutions. So we’re looking at both equity type investments, as well as like PO financing options or debt financing options to allow us supply the parts just going. So today we are engaged in a number of discussions, we continue our search to add even more to that queue of potential strategic.

[Steve Burns:]

I’d like to add one thing, I think it’s important to note as we discussed many times we have short financing four parts. Now for the first few years of producing trucks, we are upside down on the cost of the truck as we move towards and volume to change that dynamic. Here, while we realized that really was a tough road to go and we thought less - that's where we started from scratch with the engine something we could build at a profit. And it is much easier turns out - I sense they are easier but there is much better chance we feel of getting a good strategic to help us finance this stuff given that it is profitable - tough to ask somebody do when it’s not profitable on a material basis. So I think we feel a new sense of optimism towards that effort.

[Carson Sippel:]

And then one last from me here, how you are planning to grow revenue ahead of the second half 2019 ramp of the UPS vehicles?

[Steve Burns:]

Do you mean absence of - well first of all now with multiple customers it’s not just U.S. UPS. So we - the bulk of our revenues well of course, selling the SureFly is I don’t know if you count that as a revenue per se, I’m going to be risk add but it is obviously capital coming in non-dilutive. So that is a big part of what we expect to happen.

[Duane Hughes:]

I’d say our truck sales pipeline is growing up rather nicely with a number of different types of companies who use the delivery vans. So from a sales force perspective as well as our relationship with rider, we fully expect to fill the queue to maximize our ability to deliver 2019 above and beyond the roughly 1100 units we currently already have on Workhorse.

[Operator:]

Our next question is coming from the line of Jeff Osborne with Cowen and Company. Please proceed with your question.

[Jeffrey Osborne:]

Is there a way that we could sort of peel back the onion on the 60 million that you talked about in terms of financing what's needed for working capital, what’s needed for CapEx just where the money would go?

[Steve Burns:]

I’ll take the first shot at that Jeff. CapEx, relatively small CapEx. The factory has been reconfigured, the R&D spending is dramatically down now as we come to the conclusion of all the development process and now in production. There could be some surprises to pop up in production that might need some small CapEx, but essentially what normally is tens or hundreds of millions of dollars CapEx its gets something like this going. We feel we’re on top of that. Parts, these vehicles on average let’s say I think a round number as you could say let’s say $16000 a truck depends on how many customer orders they get price more or less according to the volume. But if you use that as an average and for the margin we're shooting for in the early times here, again this is round numbers for you. I think that’s certainly $45,000 or $50,000 per truck on parts. So that can kind of give you over $60 million backlog in what we will need for parts. And we are - of course batteries are the bigger parts - biggest cost of the vehicle and we buy those from commercial battery makers so we feel like that is something we can get financed first. So the most expensive part is the part that I think is easier for somebody to finance. But the whole thing is here the flywheel going, we don’t need all that money in advance. We start building, we deliver those trucks we get it and by the end of 2019 we hope to be more of a conventional OEM where we’re getting credit from our suppliers and we can churn the vehicles, make the vehicles and get paid for the vehicles but somebody have to pay those supplier. So that’s the way its generally done but it’s a chicken in the egg thing, and we feel aside - normally the hard part is get the orders and we have the orders and we have the product. We have the factory and we have the supply chain. So the last piece is financing and we’re endeavoring to get that done.

[Jeffrey Osborne:]

I thought Steve you made reference to something about the body panels - having funding is that part of the parts mechanism or is the body panel design that done?

[Steve Burns:]

Well - I am sorry, my previous paragraph I just spoke to there was all about the delivery trucks right.

[Jeffrey Osborne:]

Okay.

[Steve Burns:]

A pickup truck, the pickup truck represents obviously the largest volume. We have $300 million worth of preorders for the pickup truck but it is also the most expensive to make. And you can imagine the contours and the bodywork of a pickup truck are dramatically different than a delivery van which is pretty straight and box seat. So and the regulatory around the pickup truck is tougher. So while we have not been able to pull the trigger on the tooling required for the body panels what I was saying was the math and the design of the body panels, which is a big first step of it that is done in the concept vehicle that we made. It was all made out of that math all in tooling. So the designers done improvement, and except - and then that's what the orders are based on, they saw that design and accepted it. So it's just a matter of getting the tooling made.

[Jeffrey Osborne:]

Just given that there's still some work to be done on the W-15, is it a safe assumption that we probably shouldn't be thinking about any deliveries in 2019 for that and that's more of a 2021?

[Steve Burns:]

No, we're really, really trying to keep that in 2019. So that's why we talked about - there's couple of things. The body, the interior, even the safety elements inside that pickup truck, although we're very out of kind of new components, composites, and carbons, and not steel and aluminum. So that part is different. But body is not revolutionary. We think - our super sauce is in the chassis and the drive train obviously, the electric drive train. And what I was trying to convey there is, all the work and testing that has gone into our engine, chassis and drive train, we really keep an eye towards would this work in the W-15 and can we make that in the factory. And so even though the body part of the W-15 is not progressing only because of financial constraints, the secret thoughts and the thing that's going to sell at the customers, the chassis and the driver train are progressing.

[Jeffrey Osborne:]

And just a few more if you don't mind. One, how should we think about Q4? You alluded to having three trucks, one finished, two under development. Is it safe assumption that deliveries of less than 10 just giving the working capital constraints is a safe assumption over the next quarter or two?

[Duane Hughes:]

If we had the money today to buy the parts, it's probably a 50 day thing for the parts. So yes, we will endeavor to get as many as we can afford to get out of this quarter. We have parts for - we probably have parts so we can - with our limited capital currently and that our own ordering to get here in time. I think 10 might be a safe bet.

[Jeffrey Osborne:]

And then the last question I had is just around the structure of the SureFly idea and the Arosa investment. If you can remind us of A) when SureFly is sold my understanding is that there'll be a capital infusion as part of that into the Company and I believe there was minimum price on SureFly. I don't know if the terms are still the same but can you just remind us of the mechanics of that investment and then also another variable that I'd be interested in understanding is, is there any sort of expiration on that transaction that is if you and eventually you're unable to find a buyer of SureFly but just arbitrarily March of 2019 for example, does that contract sort of self-destruct so to speak?

[Steve Burns:]

Well, I'll just remind folks so. In Arosa the cash arrangement with them for the financing they gave us, we had to do two things. We had to - well, A) commit to sell the SureFly, all our part of the SureFly, and retain an investment banker to do so. And there is a deadline to do that for next year. So we - however that came about not as really a mandate from them. We wanted to sell SureFly anyway just because we think that's best for the shareholders given the - what's happening in that space and we have essentially valuable asset that we think we can benefit A) the Company from a cash flow point of view, and B) our investors be able to reap the advantage of that even thought it maybe in a private company. So we're on that path anyway but it's formalized now and we have a good path to get there. It's difficult to say definitively when it's going to happen but it is - again, when we say worldwide race, it is a worldwide race and there's a lot of interest in people wanting to get into that race. So we feel confident we'll get it done in time.

[Operator:]

Our next question is coming from the line of Michael Brcic with National Securities.

[Michael Brcic:]

Actually most of my questions have been answered. So just had a little bit. How long does it take to build the N-GEN truck?

[Steve Burns:]

Well, the parts - I don't know if you're talking about parts - as far as the delay from the time you order parts before they get in from our suppliers and that's 60 days at a minimum. To actually build a truck, we're planning on building 30 day when we're ramped up here. So I'm not sure, give me minute per build or…?

[Michael Brcic:]

No, I was trying out figure out taking them account just the thoughts from like I say we're going to do 10 cars, it's going to take you about 60 days to deliver more 20 or 30 or whatever it is depending on the financing of course.

[Steve Burns:]

Yes, you can get small parts quickly from these vendors. But when you want to order 100 or 1,000 trucks at a time with the parts, you have to give them sufficient time to do that. The good news is and I shouldn't mention this, what we're really excited about is all these trucks compared to our previous trucks, almost all the electrical components are from Tier 1 manufacturers. And that - it's interesting that the better - Tier 1 is better quality, they are usually less expensive because they're building the product for someone else as well and we can count on their delivery times that they give you. So we should have better performance in the field and more predictable supply chain. So for a small vendor like us and our quantity to have all Tier 1 suppliers is really excited about that. Part of that is the attraction that if we win the post arbitrary example, that's a lot of parts they'd be selling us. So, the large orders upfront from the likes of UPS have helped spark Tier 1 vendor confidence. So when we say we do 10 this year even, that's - we can get small quantities like that and that's strictly a function of our financing.

[Michael Brcic:]

The financing thing, is that creates a possibility or a chicken and egg thing with the USPS contract.

[Steve Burns:]

USPS is different because we're not the prime there. The prime is responsible for all that. We're the subcontractor. So we're one step renewed from that. Even though we're the subcontractor that build - the chassis and the drive train, of course which is the bulk of vehicle. But, no, that won't be - for the USPS that will not be a issue for us.

[Michael Brcic:]

I assume the prime will take care of any financing and all activity?

[Steve Burns:]

Yes. And that's why we are not the prime quite candidly, we just did not have warehouse to do this.

[Michael Brcic:]

And you now use the prime or is that something that?

[Steve Burns:]

Yes, it's called VT Hackney. They're a body builder. But they have a financial ware with all to be a prime.

[Michael Brcic:]

Do they - is that relationship strictly for that or can I come in and help you with financing on some of these engines trucks and so?

[Steve Burns:]

Could. We haven't discussed that with them but certainly possible, it would make sense.

[Michael Brcic:]

But at this point you just don't want to muddy the waters with the USPS.

[Steve Burns:]

Well at this point we're trying to do - yes, while the USPS, but really for the financing of the trucks we're trying to find the strategic that benefits from electric trucks getting out there as well and bring us more than financing. And so that's our goal there.

[Michael Brcic:]

So, how many orders do you have like firm orders for the N-GEN?

[Paul Gaitan:]

1,090 trucks on order today - let me correct that, 1,090 N-GEN orders and five E-GENs, which is the older product.

[Operator:]

[Operator Instructions] We do have a follow-up question coming from the line of Jeff Osborne with Cowen and Company. Please proceed with your question.

[Jeff Osborne:]

Just one more - is there any chance you could give us a sense of scope on DHL? I assume it's a similar progression that you would be looking at for UPS in terms of starting fairly small and then hoping to scale that up after a 6 or 12 months test in a constrained area in either California or wherever it's going to be, maybe any thought process on how long you've been pursuing DHL and what the scope is? That would be helpful.

[Duane Hughes:]

I would say that it is similar in terms of start small and grow larger. It's not quite as small when we started UPS I think. DHL sees the performance of the vehicles we already have on the road today and the millions of miles they have. They have a level of confidence in what we're doing. Because of that proof-of-performance as Steve alluded to they have been here, they've already done their pilot review of the engine, vehicle, and are willing to accept their first handful of vehicles relatively as easily and we expect them to scale-up on a very quick basis to be equivalent if you will to what we're doing with UPS and others.

[Operator:]

Thank you. 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.

[Steve Burns:]

Thank you. Again, I would just like to thank everyone listening and everybody that invests in us and follows us. And we will continue to work hard and conquer this space.

[Operator:]

Ladies and gentlemen, thank you for joining us today for Workhorse Group's third quarter 2018 earnings conference call. You may now disconnect.