WKHS (2019 - Q3)

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

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 and filed our Form 10-Q with our results for the third quarter ended September 30, 2019, 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 walk us through our financial results for the quarter. After that, our CEO, Duane Hughes, will come on the line to provide an update on our business as well as provide an outlook for the remainder of the year. 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 as 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 2018 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 would like to turn the call over to our CFO, Paul Gaitan. Paul?

Thanks, Rob, and thank you to everyone, 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 the results of our operations for the quarter. I recommend going through those materials to get a more detailed look on some of the information being discussed today. And now to our financial results for the third quarter. As many of you who have been following Workhorse are aware, we are in the final stages of transitioning from our first generation vehicles to our new next generation vehicles, which are now known as the C Series. The absence of significant revenue is primarily due to our migration to this new platform. Selling, general administrative expenses in the third quarter of 2019 decreased 24% to $2.6 million from $3.4 million in the third quarter of 2018. The decrease related primarily to lower spending in areas such as advertising and outside consulting. Research and development expenses in the third quarter of 2019 increased 13% to $1.6 million from $1.4 million in the third quarter of 2018. This increase in R&D expenses was due primarily to added development costs partially offset by lower third-party consulting costs. In summary, total operating expenses in Q3, 2019 decreased 13% to $4.2 million from $4.8 million in the same period last year. The decrease in total operating expenses was due to the lower SG&A spending previously mentioned and it was offset by the higher R&D spend also just mentioned. Net loss in the third quarter was $11.5 million, compared with a net loss of $5.5 million in the third quarter of 2018. The greater net loss was due to higher interest expense in the third quarter of 2019 compared to the third quarter of 2018. Interest expense in the current year period included a $4 million mark-to-market adjustment compared to interest income from a $1.5 million mark-to-market adjustment in 2018 for warrants issued to lenders. For clarification, the cash interest expense in the quarter was $900,000. On our previous call, we discussed the negative impact of the mark-to-market warrant liability on our net income. More specifically, we experienced an increase in the fair value of the company's warrant liability, which was driven by the increase in the company's stock price during the second quarter of 2019. During the fourth quarter of this year, the company identified an accounting correction impacting those results from the second quarter. The correction is primarily related to those warrants issued in July of 2018. The result is a reduction in interest expense and warrant liability. Last Friday, the company issued an amended 10-Q for the second quarter, reflecting the correction. The impact on the company's second quarter financial statements was to reduce interest expense by approximately $16.9 million and to reduce the warrant liability by the same amount for the previously recorded mark-to-market adjustments. During 2019, Workhorse has been working to remedy a self-identified material weakness. We have conducted and substantially completed a review of our internal controls. And we are now in the process of implementing enhancements to those internal controls to address any gaps identified during the design review. We believe the aforementioned enhancements will strengthen our internal control over financial reporting and should remediate the material weaknesses identified. With that overview completed. I'll now turn the call over to Workhorse CEO, Duane Hughes to discuss some of our major operational updates and provide an outlook for our business for the remainder of 2019.

Thank you, Paul. Well done. And welcome to everyone joining us this morning. We appreciate this opportunity to update you on our business since we last spoke in August. And that period of roughly three months, we've concentrated nearly all of our engineering staff and effort on bringing our next generation vehicle through the final stages of early production. We also focused on additional near term opportunities that will have financial benefits for the company. I'll begin with our agreement with Lordstown Motors. Yesterday, we announced that we had signed an intellectual property licensing agreement with Lordstown Motors Corporation, which concurrently acquired the Lordstown Assembly Complex from General Motors. This transaction is tremendous value to Workhorse, it represents non-dilutive equity and potential revenue streams through licensing, royalties, and engineering services from Lordstown Motors Corporation. The assembly complex includes a 6.2 million square foot manufacturing facility on 740 acres with more than 1200 robots and an experienced workforce that has been producing automobiles for generations. Under the terms of the agreement, Workhorse is granting LMC an intellectual property license related to our electric pickup truck platform in exchange for a 10% non-dilutive equity stake in the company. Workhorse is also entitled to a licensed fee equal to 1% of the gross sales on the first 200,000 units sold. Additionally, the agreement cost for LMC to prepay a portion of the royalty and an amount equal to 1% of their capital raise. As you may recall, Workhorse has letters of intent for nearly 6000 of W-15 electric pickup trucks. This represents revenue of approximately $300 million. We will receive a 4% commission on each letter of intent we convert to LMC. Workhorse will further benefit by monetizing our existing technology through licensing agreements that would otherwise require us to raise hundreds of millions of dollars to bring the W-15 to market, and doing this would significantly dilute our shareholders. Having an affiliated company with this level of automotive production capacity Workhorse footprint unrivalled in commercial electric truck manufacturer. I'm going to move on to our Duke partnership at this point. As you know, I spent a great deal of time on our last call highlighting our alliance with Duke. We do believe this alliance with the largest or one of the largest utilities in the United States is a first of its kind industry leading partnership, whereby the combined resources of both companies will provide an end-to-end turnkey solution. These solutions include depot wide infrastructure build out, building automation, energy management, battery financing and leasing, and of course, Workhorse electric vehicles. The Duke Alliance along with the battery leasing options will help us overcome one of the biggest objections to fleets buying Workhorse electric vehicles at scale. Ultimately, our alliance with Duke Energy allows Workhorse the ability to deliver the best performing and most affordable electric truck to benefit all our customers and stakeholders. At this point, I'm going to pass the call to Rob to discuss updates on our next generation vehicle process.

Thank you, Duane. I want to talk about some significant advances with respect to our C series project, externally known and previously referred to as the next generation or engine. As we conclude the engineering testing and certification process, we will begin fulfilling our backlog of orders with 1000 cubic foot and 600 cubic foot versions, now known as the C1000, and C650. During pre-production, we build out a series of mules for testing and certification validation. On November 5, we held an information and demonstration session with our partner, writer system, and other key fleet executives. During the sessions, we had riding drive demonstrations for both the C1000 and C650 platforms. The feedback was unanimously positive. Customer appreciated the new design approach including available safety features, and overall size and utility of the vehicles. They commented on the unique benefits including low floor access, structural composite design, driver sight lines, and other advanced technologies. We look forward to processing orders from Rider in the near future for these vehicles. The design and configuration of the C Series platform expands the range of customers Workhorse can attract beyond the all-important package delivery companies. In total the C Series of products will include a family of 250, 450, 650, 1000 and 1200 cubic foot models. They will also include a refrigerated cold cube package in two flatbed variants. I'll turn this back to Duane who can complete the update on this quarter.

Thanks, Rob that was a good update. I'm going to talk about SureFly at this point. At the beginning of October, we filed an 8-K with the SEC announcing two exciting developments with our aerospace division. First, we entered into an asset purchase agreement with MOG for the sale of SureFly. MOG is a $3 billion New York Stock Exchange listed aerospace and defense company. Under the terms of the agreement MOG intends to acquire the assets of SureFly for a cash purchase price of $4 million plus an all-important joint venture with Workhorse for HorseFly last mile drone delivery systems. Under terms of the agreement Workhorse and MOG will each own 50% of the joint venture. Workhorse will contribute the HorseFly assets, and MOG will contribute complementary assets, intellectual property and technology. The purpose of the JV is centered around the sharing and advancement of technology and IP related to the development of unmanned aerial systems. We feel strongly that partnering with MOG and their pedigree in aerospace will accelerate our path to revenue with the HorseFly solution across multiple verticals. Now I'll talk a bit in more detail about the HorseFly delivery drone system. We recently announced that we have partnered with Unmanned Systems Operations Group or USOG. They are a provider of end-to-end unmanned mobile medical delivery logistics. Together, we are participating I'm sorry in a pilot drone delivery program. The program takes place in the San Diego area, with a goal of pursuing delivery programs for healthcare providers, pharmacies and specialized medical career services. The HorseFly system conforms to the FAA standards for UAV operations in the United States. Additionally, USOG has patent pending package configurations that enable HorseFly to make several deliveries on a single flight rather than one delivery of one package at a time. USOG is vision is to enable nationwide medical deliveries by UAV. We look forward to continuing our work with us USOG, the FAA, and other stakeholders on safe, secure and timely delivery. My last point will be about the United States Postal Service. With respect to the next generation delivery vehicle program, Workhorse can only provide information which is already in the public domain. Therefore, we cannot answer any questions or entertain discussions related to the program. This position is not new with that said, however, public knowledge that Workhorse participated in and fully completed the United States Postal Service NGDV prototype development and testing phase in early March of 2019. As has been the case throughout this process, any further information or announcements will be issued by the U.S. Postal Service. We look forward to updating you on our progress in all of these areas going forward. We're now ready to open up the call for your questions. Operator, please provide the appropriate instructions.

[Operator Instructions] Our first question comes from Jeff Osborne with Cowen and Company. Please state your question.

Nice to hear on the progress with everything moving forward. A couple questions on my end. I was wondering with the C Series can you just talk about what the backlog is. I think in the past you talked about a little bit over 1000 trucks with UPS and other partners?

Yes great question and thanks Jeff for being online and asking. As we stated in the past, our backlog is a little over 1100 units represents about $70 million. But the most exciting part I would tell you is that after our first day of the ride and drive 00:17:10 TRC, this past week, we've actually picked up yet another order. I'm not prepared to be able to name that company just yet, nor the number of units, but we are able to report that after the ride and drive we have picked up a new order. So we expect to see many more orders coming from that, clearly working with our partners like Ryder and what we're doing with Duke. So we're really eager and excited that we've demonstrated that first product, and it's getting the acceptance that it's getting.

It's good to hear you on the C Series. You mentioned the mules and the testing and the ride and drive. Have you received all certifications that you need or can you just give us an update on what the pending checklist items are to move forward with this production story?

Sure, this is Robert Willison - most of the testing is being done at TRC. The sequence of some of those tests will stretch out for the next few weeks, but we're progressing through our list. At this point, we don't see anything that would require any redesign at all is going very well.

So do you think I guess - my follow-up would be then, do you anticipate producing a reasonable in the 10s of units in Q1 or I would - it sounds like in response to that question that Q4 doesn't have much production at all. Yeah but how do we think about the start of next year and the pacing against delivery of that backlog?

Yes, certainly, we will begin production this year and are ramping up as any vehicle we're looking at how rapidly we can produce those and we will fulfill that backlog as quickly as we can.

Yes, we have designed Jeff that - as we've designed the vehicle and the production process in our Union City plant. We plan to get through the entire backlog into 2020 with additional vehicles behind that as well.

Okay, it’s good to hear a couple other quick ones. There was one item in the 10-Q that I don't believe you mentioned on the call, but the VT Hackney transaction on October 31. Can you talk about what that was, what you're getting for $7 million?

At this point, I can't give you that I can tell you - yes, I can repeat what's in the 8-K and so on. There are a couple of milestones with that transaction. I'm not prepared at this point to talk about what the assets are. But it's safe to say that the initial million dollar payment happens at a point when one set of criteria takes place. And then of course, in the future with another set of criteria should things go the way they are planned. Then the additional $6 million payment, or they could drawdown the stock that's in there as a backstop.

And just so I'm clear Duane, is this tied to the C Series progress or is it some other program?

It's not tied to the C Series.

And then, last few ones here - can you just you've highlighted the Duke momentum for the past six months, and obviously you need trucks to sell to use that partnership. But can you talk about, what has transpired over the past six months. Are there physical locations from UPS into the other partners that have been identified, essentially what I'm asking is there a pipeline that's ready to go as the vehicles are produced or is this still something that will be more gradual in its evolution in 2020?

No, I think they have already identified specific locations I won't say which customers at this point I'll let them speak to that later. But yes, they have identified locations, we actually have the battery leasing projection models, and are updating our staff as well as other sales mechanisms in order to begin putting that battery leasing program into place.

Yes, we have pricing on the battery lease and the terms and things so it's fairly well along.

That's great to hear. My last question is, just as we start up production late this year, and through the growth of 2020, and delivering against the backlog. How do we think about what the OpEx needs of the organization are, especially in light of the JV that's been form for some of your other initiatives and the lack of clarity on the Postal Service? Is the current run rate sustainable or do you think, it's up 20%, 30% from these levels, any sort of high level broad strokes about capital budgeting for OpEx in particular for next year would be very helpful?

Sure, I'll take a part of that question. This is Paul Gaitan, the CFO OpEx is going to be relatively flat will certainly have some R&D to finalize things for the last details on production but in terms of SG&A, no that would continue to be flat. And then as far as CapEx that should be relatively modest for us as we work through more of a manual build process as opposed to relying heavily on automation at the initial low volumes.

This is Robert Willison, I just wanted to throw in because this is an all composite vehicle. There's no welding - the traditional labor intensive manufacturing process is greatly streamlined. It's a very simplistic bolt-on component type manufacturing. So from a capital intensive -

CapEx?

CapEx structure we're in pretty good shape.

[Operator Instructions] Our next question comes from Paul Largo with Wells Fargo. Please state your questions.

Hi Duane, and everyone, thank you for the update today. You had a lot of progress in a number of different fronts over the past few months and it's great to hear about that. Looking at the press release regarding VT Hackney, can you expand on the relationship that you have had beyond the original pilot vehicles for the postal contract. Are there any current or were there any more partnerships that you engaging with them?

Not partnerships per se as would be with the Postal Service’s you point out. But of course, as a supplier of - I should say, as a manufacturer of custom body components and so on there is relationships that we have in terms of supplier to vendor relationships, if you will but nothing similar to how you referencing with the Postal Service.

And a follow-up question regarding electrification of hubs on a larger scale, to what extent do you feel that has or has not been an obstacle in obtaining larger orders from fleet customers who maybe feel they're not equipped to charge a vehicle on a large capacity in short periods of time?

Yes, that's a really good question, Paul and I appreciate it again, I made a comment or a reference to the fact that really the depot wide electrification program we're doing with Duke is really designed to overcome that obstacle. Because clearly to your point is if you acquire electric trucks and you can't charge them at night, then you can't use them the next day because you have to go out with a full load of juice there, if you will, in order to get through your route. You can't pull over and charge and then start all over again. So the Duke alliance as well as working with other partners, if you will, but the Duke alliance is designed to do depot-wide electrification. So as we take on large scale orders, it will be combined through the Duke battery leasing program, and then the Duke team would be out in force at those depots providing the electrification, I'm sorry - the charging infrastructure that is necessary throughout that - also can include thing such as solar panels on the roof of the depot, so rather than say charging or paying call it $0.08 to $0.12 a kilowatt hour. They're able to bring those costs down because of the solar side down to $0.03 to $0.04 a kilowatt hour.

And last question sort of a follow-up I think maybe for Rob on the rollout of vehicles from Union City. In the past, we would get a little bit more in terms of number of projections per month per quarter. And I know Duane you mentioned full completion of at least the pending orders in 2020. Can you maybe give a little more color on what we can expect in a ramp up Q1 versus Q2 next year?

I can't really give projections per se, but we will say we're working aggressively with our partners and because it's a backlog, we will ramp up as quickly as the slowest part is available.

Yes, I would add further Paul, and this is Duane again. As we've modeled it out and put it into the spreadsheets and so on to identify what capacities are. We recognize that somewhere in that 14 units a day range, we would then start looking at adding further automation to the facility to help us reduce the amount of manually - that we would be involved at that point. But we believe that we can get to 14 to maybe as many as 20 units a day rather quickly I’ll say in order to not only fulfill the backlog, but get us to a point where the scale of the growth we're talking about is easily achieved.

[Operator Instructions] 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 WKHS@gatewayir.com. I'd now like to turn the conference call back to Mr. Hughes for his closing remarks.

Thank you again for joining us on the call today. We really appreciate the opportunity to give you the update and respond to the questions that came through. I especially want to thank our employees, our partners and 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?

Thank you. This concludes today's conference, all participants disconnect. Have a great day.