Workhorse Group Inc (WKHS) 2018 Q3 法說會逐字稿

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.

Thank you, Jessie, and good morning, 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'll turn the call over to Paul Gaitan, Paul?

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 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 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 recorded in the same period of 2017. The decrease in sales was primarily due to a decrease in volume of trucks shipped in the quarter. We believe our year-over-year comparisons should not be considered as meaningful representations 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 shipped and significantly reduced R&D spending.

Selling, general, and administrative expenses rose for the quarter due to a couple of non-recurring items. Workhorse settled several legal-related issues. Combined expenses for the quarter for legal and settlement costs totaled $500,000. Additionally, we incurred certain costs related to the capital raised 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 a 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 updates of the company's quarterly valuation of our outstanding warrants with Arosa, which have decreased in value during the period due to the decline in the company's stock price.

As we've said on previous calls, with the now $60 million plus backlog, we have a significant need for capital in order to finance these orders in hand. We are 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 requirements, a brief update on the current state of those processes now.

First and foremost, our goal with respect to future financing is 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 through National 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, pay down 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?

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 our main activities. And the first up to bat 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-lightweight truck. It gets the equivalent of 50 miles per gallon. For reference, a typical gasoline truck carrying similar cargo capacity gets about 5.5 miles per gallon. Just think about the ramifications of that kind of change. I think our team really hit it out of the park with this truck and we are, after a great deal of R&D, have really come to the table with a significant change in electric delivery vehicles.

In Q3, using N-GEN prototypes, we delivered over 100,000 packages in San Francisco and Ohio during our testing. Now we have commenced early manufacturing on the 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 engine to be what we feel is the best and most efficient local delivery van, we also designed it with the goal of 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 at a profit. So it is no small feat to have a design, a factory, a supply chain, and a service system all operating in sync 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 buy the parts in advance of the builds. As we have discussed several times on these calls and again on this call, we have sought such financing and we are continuing our efforts to find a financing partner for our key components on terms that are fair and equitable to Workhorse.

Finally, we are excited that we can now announce one of our new marquee customers for the N-GEN truck and that is DHL. DHL signed a purchase order for an initial batch of N-GENs. 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've retained 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 race 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 advisors. It's also relevant to note that we are currently in late-stage discussions with a branch of the US military to begin joint testing of the SureFly. We will provide details on that relationship as we are permitted going forward.

Moving on to the W-15 electric pickup truck, again with 6,000 pre-orders from major fleets, the W-15 represents our largest revenue potential within the Workhorse stable of vehicles. We have worked hard to ensure that much of the N-GEN chassis and the drive train are portable over to the W-15 product line. Although we have not secured the tooling for the body panels, the panels are already designed and proven via our concept truck.

Our goal is to make fleets more efficient and able to do their job better via our trucks. And our goal continues to be the first US 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 are 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 can 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 Instructions) Our first question is coming from the line of Carter Driscoll with B. Riley.

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

This is Steve. Thanks for asking, Carson. We've had our major customers up here to inspect the product in process as we got closer and closer to production. And, of course, since -- and that's why we talk about delivering 100,000 packages with 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'd say the first two, we're delivering to a customer on or about Thanksgiving and so they've given the go-ahead. And UPS wants a few tweaks, nothing major, and so theirs are coming soon after.

Great and are we are still optimistic about the ramp kind of getting going in the second half of '19?

If financing comes in earlier, we hope it's earlier. We're ready as far as factory and recipe and bill of materials. So it's strictly contingent on financing, but we're hoping it's earlier. We hope it starts in early '19.

Right and along that same line, so you mentioned you're pursuing capital raising options, can you comment on the specific type of capital raising vehicles you're looking at or anything else along those lines?

Yes, I'm going to let Duane take that. He's mostly involved in that effort, doing a good job there.

Yes, as Paul alluded to in his remarks, we have numerous conversations going on with a number of potential strategic and related to the transportation energy side 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 to buy the parts and so on. So, to date we are engaged in a number of discussions. We continue our search to add even more to that queue of potential strategics.

I'd like to one thing. I think it's important to note, as we've discussed many times, we have sought financing for parts. Now, for the first few years of producing trucks, we were upside down on the cost of the truck, as we moved towards enough volume to change that dynamic. Here, but when we realized that really was a tough road to go and we thought let's -- that's why we started from scratch with the N-GEN, something we could build at a profit. And it's just much easier, it turns out it's -- I shouldn't say easier, but there's a much better chance we feel of getting a good strategic to help us finance this stuff given that it's profitable. Tough to ask somebody to do it when it's not profitable on a material basis. So, I think -- we feel a new sense of optimism towards that effort.

Great and then one last one for me here is how are you planning to grow revenues ahead of this second half '19 ramp of the UPS vehicles?

You mean absent of -- well first of all now with multiple customers, it's not just UPS. So we, you know the bulk of our revenues -- well, of course, selling the SureFly is, I don't know if you count that as revenue per say. I don't know what it'll be listed as, but it is obviously capital coming in, non-dilutive. So that is a big part of what we expect to happen. Probably before--

You know I'd say our truck sales pipeline is filling up rather nicely with a number of different types of companies who use the delivery vans. And so from a sales force perspective as well as our relationship with Ryder, we fully expect to fill the queue, to maximize our ability to deliver in '19, above and beyond the roughly 1,100 units we currently already have on order.

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

A couple on my end. 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? You know what's needed for working capital? What's needed for CapEx? Just where the money would go?

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 that pop up in production that might need some small CapEx but essentially what normally is, you know tens or hundreds of millions of dollars of CapEx to get something like this going, we feel we're on top of that.

Parts, you know, these vehicles on average let's say, I think for round numbers, you could say, let's say $60,000 a truck. Depends on how many customer orders they get priced more or less according to their volume. But if you use that as an average and for the margin we're shooting for in the early times here, again just as round numbers for you, I think let's assume we need $45,000 or $50,000 per truck on parts. So that can kind of give you on our $60 million backlog, you know what we will need for parts. And you know we are -- of course the batteries are the biggest parts, biggest cost of the vehicle. And, you know we buy those from commercial battery makers, so we feel that that is something we can get financed first. So the most expensive part is the part that I think is the easiest for somebody to finance.

But the whole thing is to get the flywheel going. We don't need all that money in advance. You know we start building. We deliver those trucks. We get it. And by the end of '19, we hope to be more of a conventional OEM where we're getting credit from our suppliers and you know we can turn the vehicles, make the vehicles and get paid for the vehicles by the time we have to pay those suppliers. That's the way it's generally done, but it's a chicken and the egg thing. And, we feel excited.

Normally, the hard part is get the orders and we have the orders. And we have the product and we have the factory. And we have the supply chain. So, the last piece is financing and we're endeavoring to get that done.

Got it. I thought Stevie made reference to something about the body panels not having funding. Is that part of the parts mechanism or is the body panel design not done.

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

Okay.

The 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 body work of a pickup truck are dramatically different than a delivery van, which is pretty straight and boxy. So, and the regulatory around a pickup truck is tougher. But when we were -- 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 and the concept vehicle that we made was all made out of that math.

Got it.

All on tooling, so. The design is done and proven and accepted. And that's what the orders are based. They saw that design and accepted it. So, it's just a matter of getting the tooling made.

That makes sense. 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 2020 launch?

No, we're really, really trying to keep that in '19. So that's why we talked about you know there's a couple things. The body, the interior, even the safety elements inside that pickup truck, although we were very, you know, we're making it out of kind of new components, you know composites and carbon and not steel and aluminum, so that part is different. But, you know, our body is not revolutionary. We think our secret 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 N-GEN chassis and drive train, we really keep an eye towards well 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 sauce and the thing that's going to sell it to customers, the chassis and the drive train, are progressing.

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

Well, I'd say -- only -- if we had the money today to buy the parts, you know it's probably a 60-day thing for the parts. So, yes, we will endeavor to get as many as we can afford to get out this quarter. We have parts for -- we probably have parts that we can, with our limited capital currently and that are on order and to get here in time, I think ten might be a safe bet.

Got it and then the last question I had is just around the structure of the SureFly deal and the Arosa investment. If you can remind us of (A) when SureFly is sold, my understanding is that there will be a capital infusion as part of that into the company and I believe there was a minimum price on SureFly. I don't know if those terms are still the same. But can you just remind us of the mechanics of that investment? And then also another variable that I would be interested in understanding, is there any sort of expiration on that transaction that if you and the event you were unable to find a buyer of SureFly by just arbitrarily March of '19, for example, does that contract sort of self-destruct, so to speak?

Well, just to remind folks, so in our Arosa contractual 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 or 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 want 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 this hugely 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 advantages of that, even though it may be in a private company.

So we were on that path anyway. But it's formalized now and we have you know 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.

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

Actually most of my questions have been answered, so I've just got a little bit. How long does it take to build the N-GEN truck?

Well the parts, I don't know if you're talking about the parts, there's a 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 a day when we're ramped up here. So, I'm not sure -- do you mean minutes per build?

Yes.

Or--

No, no, no, I was trying to figure out, taking into account, the pops from you know it's like okay, we're going to do ten cars. It's going to take you about 60 days to deliver them or 20 or 30 or whatever it is, depending on the financing of course.

Yes, you can get small parts quickly from these vendors. But you know 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 should have mentioned this, what we're really excited about is on these trucks compared to our previous trucks, almost all the electrical components are from tier 1 manufacturers. And that, you know it's interesting that the better part -- you know tier 1 is better quality. They are usually less expensive because they're building the product for someone else as well. And (B) you 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 in our quantities to have all tier 1 suppliers is -- we're really excited about that. Part of that is the attraction that if we win the post office, for example, that's a lot of parts they'd be selling us. So the large orders up front from the likes of UPS have helped spark tier 1 vendor confidence. So when we say we can do ten this year even, that's -- you know we can get small quantities like that and it's just -- that's strictly a function of our financing.

Is the financing thing, is that creates the possibility of a chicken and egg thing with the USPS contract?

The 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 removed from that. Even though we're the subcontractor that builds the chassis and the drive train, of course, which is the bulk of the vehicle, but no that won't be -- for the USPS that will not be an issue for us.

Okay so then I assume the prime will take care of any--

The prime is responsible for all that.

Financing and all that sort of stuff.

Yes.

Yes.

And that's why we were not the prime, quick candidly. We just did not have the wherewithal to do that.

Right. Do we know who the prime is? Is that something that's out there?

Yes, it's called VT Hackney. They're a body builder.

Okay.

But they have the financial wherewithal to be a prime.

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

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

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

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

Got it. So how many orders do you have -- like firm orders for the N-GEN now?

1,090 trucks on order today. Let me correct that, 1,090 N-GEN orders and 5 E-GENs.

Which is the older product.

(Operator Instructions) We do have a follow-up question coming from the line of Jeff Osborne with Cowen and Company.

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 to 12-month test in a constrained area maybe like California or wherever it's going to be. But maybe any thought process on how long you've been pursuing DHL and what the scope is? That would be helpful.

I would tell you that it is similar in terms of start small and grow larger. It's not quite as small as when we started with 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 sample of vehicles relatively immediately. 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.

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 wkhs@liolios.com. I'd now like to turn the call back over to Mr. Burns for his closing remarks.

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.

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