Workhorse Group Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, greetings and welcome to Workhorse Group's First Quarter 2020 Investor Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host Workhorse, Chief Operating Officer, Dr. Rob Willison. Thank you. Dr. Willison you may begin.

Thank you, operator, and good morning, everyone. We appreciate you taking the time to join us for our call. Before the market opened, we issued a press release with our first quarter results for the period ended March 31, 2020, a copy of which is in the Investors Relations section of our website. Workhorse is releasing financial results today as well as its quarterly filing on Form 10-Q. In a few moments, I'm going to turn the call over to our CFO, Steve Schrader, who will walk us through our financial results for the quarter. After that, our CEO, Duane Hughes will provide an update on our businesses, as well as provide an outlook for the remainder of the year. 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 quarterly update. The Safe Harbor provision identifies risk factors that can cause actual results to differ materially from the content of our forward-looking statements. Our 2019 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, Steve Schrader. Steve?

Thanks, Rob, and thank you to all who are joining us for today's call. This morning, we issued a press release, which discusses the results of our operations for the quarter. Additionally, as Rob just mentioned, we filed our Form 10-Q today. I recommend going through both materials to get more color on some information being discussed today. Now to our financial results for the first quarter ended March 31, 2020, as many of you who have been following Workhorse are aware, and as we indicated on the last earnings call, we shared with you that the COVID-19 virus delayed material component shipments four to six weeks. Those delays moved our first deliveries to the second quarter, which is why we have no meaningful revenue in this quarter. Sales for the first quarter of 2020 were recorded at $84,000 compared with $364,000 in the first quarter of 2019. Cost of goods sold increased to $1.7 million from $1.4 million in the first quarter of 2019. The increase is primarily driven by an increase in tooling costs for the C-Series production. Selling, general and administrative expenses increased to $5.6 million from $2.1 million in the same period last year. The increase in selling general and administrative expenses was due primarily to increases in consulting expenses, higher employee-related costs and the $1 million payment related to ST Engineering Hackney for acquisition of certain assets. Research and development expenses increased to $1.9 million from $1.4 million in the first quarter of 2019. The increase in research and development expenses was primarily due to finalizing the design of the C-Series. Other income was $865,000 compared to $0 in the first quarter of 2019, due to additional shares received for the LMC investment related to our anti-dilution provisions. Interest income increased by $14.8 million, with $13 million of income in this quarter compared to an interest expense of $1.8 million from the same period last year. The significant increase in interest income was due to the mark-to-market adjustment for warrants issued to lenders and the change in fair value of our convertible note both based upon a lower stock price at quarter-end compared to the 2019 year-end. Finally, net income was $4.8 million compared to a net loss of $6.3 million in the first quarter of 2019. As of March 31, 2020, we had cash, cash equivalents and short-term investments of $16.8 million compared to $23.9 million as of December 31, 2019. You may have seen last week, we filed a Form S-3 registration statement commonly referred to as a shelf offer, to give us the ability to raise capital in the future once the registration statement is effective. This is a procedural move as our previous S-3 had expired. As we mentioned in the previous call, we continue to pursue with various parties a credit revolver, which we believe is the best match with our current capital need of ramping up our truck production. With that, overview completed, I'll now turn the call over to our CEO, Duane Hughes to discuss some of our major operational updates and provide an outlook for our business in the current quarter and for the rest of the year.

Well done, Steve, and welcome everyone. We appreciate you joining us on our call this morning. Our remarks today will be a bit briefer than our prior call given not much time has passed since our year-end update a little over a month ago, which is not to say that we haven't been busy. As many of you know, because we provide vital support and infrastructure for the transportation and delivery sectors, we have been deemed an essential service, allowing us to continue working safely throughout the period. At a high level, in the first quarter, we completed several major roadmap objectives, which have us well positioned to execute on our production timeline, as well as improve our long-term corporate governance and competitive positioning, all of which I plan to elaborate on more fully. Moving to production. As Steve mentioned, at the outset of the COVID-19 pandemic we experienced a series of supply chain disruptions and pushed back our expected initial delivery date from Q1 to our current quarter. Having said that, we are pleased to report that we are still on track for the second quarter timeline. In addition, I'm reiterating our guidance of 300 to 400 delivery trucks produced in 2020, as long as our supply chain remains intact and we obtain the financing that Steve discussed earlier. Obviously, like every other business we have limited visibility on the total industry impacts of the virus, as many states are still under stay-at-home orders and other states are just beginning to allow some businesses to open. Because of the progress we've made to date and the comfort we have with respect to our supply chain and production capabilities going forward, we held in partnership with Ryder several successful ride-and-drive events with key fleet customers. As a result of the success of those events, I'm happy to share that we are now officially in the final stage of preparing a detailed production plan of when we can deploy vehicles into Ryder Systems' sales channel starting in 2020 and into 2021. We recently released a video on our website and through social media showing initial production at our Union City factory. Our employees are excited about getting up the production learning curve and ramping up production to meet our targeted units this year as well as increasing that in 2021. I now want to update you on an area that has suddenly become a very hot topic and we believe a strong business opportunity for us, our Horsefly Delivery Drone business. Over the past year, there has been a growing interest in our ground-based delivery vehicles with their integrated Horsefly drone capabilities as America and the global economy have become increasingly reliant on online ordering and at-home delivery. This interest has ballooned due to the COVID-19 virus, the individual stay-at-home orders, and the general feeling that some of these changes may have a permanent impact on the last mile delivery sector. With this need in mind, we began privately working in a coordinated effort with a select group to identify solutions that help emergency medical workers in our healthcare system at large. In late April, we partnered with UPS and Virginia's Center for Innovative Technology in tests evaluating the use of commercial drones. It is important to understand the ability to provide scale of small unmanned aerial systems to support various use cases to assist the U.S. healthcare system and expedite their response during the COVID-19 crisis. During our testing in Virginia, we flew 54 missions with our patented truck launch Horsefly Package Delivery System. Data collected is being used to determine how private sector drone operators can effectively supplement emergency response in certain patient care. Findings and recommendations will be included in a report to the White House and we look forward to continuing our work based on the feedback from that review process. We believe our systems low-touch standoff delivery capabilities will help save lives. We've made hundreds of autonomous drone deliveries in the national aerospace system over the last four years using our proprietary technology combined with our all-electric delivery vehicles. We have a comprehensive understanding of the benefits provided by drone delivery when speed counts. In the last several months, we've also seen significant and growing interest and use cases beyond emergency response. We are hearing from many businesses that this transition is not a temporary one and that we need to adapt to a new normal. With this industry shift in mind, we also believe there is now a more immediate need to protect our assets and related intellectual property in this field. As some of you may know, Workhorse currently holds a patent for operating parcel delivery aircraft from the top of delivery vehicles. Additionally, earlier this month, we filed a provisional patent application, which further protects the Horsefly Unmanned Aerial System or UAS and several of the system's key components and capabilities, including its ground control station, winch delivery mechanism, and aircraft structure. We feel strongly that all Workhorse electric delivery vehicles with their integrated drone capabilities are the most economical and efficient last-mile option currently available, making our solutions important today and critical in future applications. Going forward, we plan to build on our early leading position and we'll continue to evaluate beneficial partnerships as well as IP protection strategies and accomplish that goal. During the quarter, we also made some material improvements to our corporate governance and production oversight through the appointment of two automotive industry veterans to our Board of Directors. We welcomed Jacqui Dedo and Pamela Mader to our Board. Both Jacqui and Pamela have direct experience in the key areas Workhorse needs to continue in our transition to full-scale production. Jacqui brings over 30 years of global automotive off-highway, industrial and aftermarket experience to Workhorse, having held various leadership positions at Piston Group, Dana Holding, Motorola, and Robert Bosch Corporation, as well as two decades of board membership experience across a variety of automotive, transportation, and non-profit organizations including her current Board seat at Cadillac Products. She also has a proven background in managing full P&L responsibilities for major business units and entire companies responsible for up to $2 billion in revenue. Pamela Mader has over three decades of automotive industry experience with a proven track record in leading Fortune 100 manufacturing organizations, as well as supporting the development of emerging growth companies through various business advisory services. Pamela spent over 15 years at General Motors in a variety of leadership roles including numerous plant manager positions where she directed operations for the manufacturing of hundreds of thousands of vehicles annually. Jacqui's and Pamela's combined automotive experience at Fortune 100 companies managing major vehicle production efforts will be invaluable to Workhorse as we look to ramp up our capacity during the second half of this year. We look forward to the new ideas and fresh perspectives that will come from our improved corporate governance structure. With their additions, our Board has now expanded from six to eight including seven independent directors. Looking ahead, while the rest of the world continues to monitor the latest updates on the global virus spread, we too are continuing to proactively implement all health and safety guidelines recommended by the CDC, the World Health Organization, and other regulatory authorities. At this point, we feel cautiously optimistic that we are moving past the disruptions to our supply chain. Again, as an essential business under the government's guidelines, we will continue to operate as long as we can do so in a compliant manner while taking good care of our people's health and safety. I want to personally thank each and every member of our dedicated Workhorse team as we move forward carefully and deliberately. We remain committed to supporting our customers, employees, investors, and other key stakeholders as best we can during these unusual times. In conclusion, I'll provide a brief comment as we always do with respect to the United States Postal Service, Next Generation Delivery Vehicle program. Under our NDA, Workhorse is only able to provide information which is already in the public domain. As has been the case throughout this process, any further information or announcements will be issued by the postal service. We appreciate the continued interest we receive and we'll provide updates to the market as we are able. We do not have any updates to share at this time. That concludes my prepared remarks. Thank you all for your time this morning. We look forward to updating you on our progress going forward and we're now ready to open the call for your questions. Operator, please provide the appropriate instructions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Greg Lewis with BTIG. Please go ahead with your question.

Yes, thank you and good morning, everybody.

Good morning.

Hey, Duane, I was hoping you could elaborate on Horsefly. It seems like the medical sector is possibly increasing the demand for drone delivery systems. I have two main questions. First, do you believe this is speeding up residential deliveries? Any insights you can share? Secondly, it's a bit more complicated. How might the rise in drone deliveries impact our financials? Currently, we’re not accounting for this in Workhorse's projections. As we look ahead to 2020 and perhaps into 2021, how should we approach understanding its potential benefits for Workhorse's bottom line?

Thank you for your question, Greg. I’d like to include Steve, our CFO, in my response. You are correct regarding the acceleration of drone technology. The COVID-19 pandemic and the urgent medical response have certainly highlighted the need for more efficient execution, which positively impacts our commercial drone business. Our technology, particularly our patented last-mile delivery and truck-launched drone capabilities, has always been seen as a competitive advantage, allowing us to enter the market faster than others developing similar technologies. This advantage stems from the existing visual line of sight regulations and our ability to ensure that our drones can reach homes across the country daily. That said, we do have clear plans for expanding beyond visual line of sight operations, which can be facilitated through the FAA by obtaining necessary certifications for our commercial package delivery customers and ensuring our drones undergo the required certification process. The testing conducted in Virginia has not only showcased our ability to execute but has also provided us with valuable evidence of our performance, especially through the over 300 flights we've completed in the past few years. This proof of performance distinguishes us in the market and enhances our ability to provide quick drone delivery solutions, thanks to our unique truck-launched technology. Before I move on to the next question, does this address your inquiry about drone acceleration and its rapid development?

Yes. That was perfect. That's perfect.

Okay. Good. I might ask Steve to jump in here too. But we are of course working on the different business plans and options that we have, as we continue to work to monetize the drone delivery. From the very beginning of that drone development strategy, it was always tied to trucks for us right? We see it as adding value and demonstrating our differentiators in supporting our ability to help us in the end sell more trucks and reach scale more quickly. Back to the acceleration question, yes, we believe that the commercial business's interest in now drone technology will further support our sales on the truck side, but individually as drone technology by itself. Steve, do you want to jump in and...

We are not going to discuss the impacts of the drone from 2020 and 2021. Based on what Duane said, we believe there is a strong business case for both standalone drones and drones attached to trucks, which will enhance our ability to sell more trucks to commercial and governmental customers. We hope to become more involved in this area in the future. Goldman Sachs has previously stated that this market is worth $100 billion, based on a study conducted several years ago, and we are currently operating within just a small portion of that market. Additionally, there are not many competitors that have the capabilities we possess, especially when it comes to certification processes. I hope this clarifies your question.

Thank you for the information. My follow-up is about the delivery guidance, which remains unchanged at 300 to 400 units. How should we consider the low-end versus the high-end of that range? Given the ongoing challenges related to COVID-19 in Q2, is there a ramp-up we should anticipate over the next three to four months that may determine whether we end up at the low-end or the high-end? Is that a reasonable way to approach this?

I agree, Greg. It's important to view it this way. We will be producing trucks in the second quarter and delivering them, but on a smaller scale as we begin ramping up. You can expect the third quarter to be better, with the fourth quarter being our best yet. However, this is contingent on how the supply chain reacts to COVID. So far, most of our vendors seem to have managed the situation well, though we've experienced some delays in testing due to facility closures. This shouldn't impede our second quarter deliveries. Additionally, we also need to secure funding to support this effort. We're actively seeking a credit revolver, which we believe will be a great help in scaling up our facilities. We're in discussions with potential partners and hope to finalize something in the second quarter.

Okay perfect. Thank you all for the time.

Thank you, Greg.

Our next question comes from Craig Irwin with ROTH Capital Partners. Please state your question.

Good morning and thanks for taking my questions. I hope everybody is well at Workhorse and your families of course.

Thank you.

Thanks Craig.

Can you maybe share a little color with us? I was impressed that you maintained your guide of 300 to 400 units this. Other EV truck companies are saying that customers don't have the right number of people in the office. The processes on the customer side are a little bit sticky and moving more slowly and are using that to kind of moderate expectations this year. You guys are very straightforward, 300 to 400 was your original guidance, you're reiterating. Obviously, you're hearing something from your customers that gives you confidence. Can you maybe share with us what you're looking at? And if there is potentially any factors that could drive this higher or lower that we might be looking at before the end of the year?

Thanks, Craig. It's a good question. From our perspective, it's not primarily a customer issue. First, we have a backlog with UPS and DHL. Secondly, we have already discussed our collaboration with Ryder to establish a production schedule and sales channel. We are not encountering any negative feedback from customers; in fact, they are quite enthusiastic about our trucks and are asking how soon they can receive them. That leads us to the production target of 300 to 400 trucks, which we need to manufacture and deliver.

And to your point, this is Duane. You began with the concept of many people working from home. As mentioned earlier in our script, we have been recognized as an essential business, which has allowed some of our production staff to work from the office. This has enabled us to make the best of a challenging situation. Currently, about half of our staff is working from home while the other half is here in the office. We are focused on the positive aspects and are looking at how we can continue to move forward. Thus, we can reaffirm our guidance and meet our commitments.

That's excellent. That's really good to hear. Changing subjects a little bit. Like many people on the call, we're kind of looking at Lordstown Motor Corp. as potential upside to the company, right? It's a call option that could be worth a lot of money on a successful execution over there. In the quarter you had, what, $800,000, $900,000 benefit on the P&L from the anti-dilution provision with them issuing you shares. That's a good thing, because it kind of points to them raising capital. Can you maybe share with us anything that you're able to on the capital raise over at Lordstown? And at what point would we expect the 1% payment on their debt and equity raise to potentially come to Workhorse?

Steve here. Since LMC is a private company, we can’t discuss that in detail. I recommend reaching out to the people at LMC directly. Regarding the 1% payment, that will depend on when they proceed with the capital raise or the sale of the trucks and any potential cash from those activities. You'll need to direct those questions to them, as we are only a 10% owner.

Understood, understood. So then the next series of catalysts for you guys are likely to come from, not just the initiation of production but the orders that result from people being able to see vehicles as competitors successfully executing and knowing that it's costing them a lot less money on a levelized basis. Can you maybe share with us what you're doing, or what you have been doing to sort of fertilize the ground for these orders that are likely to come from other potential customers out there that might not have made commitments yet? Are there several conversations in discussion? What level of maturity would you say these conversations have? And would you expect potential additional orders from new customers before the end of the year?

Yes. This is Rob Willison. We're starting with a 1000 cube vehicle currently in production. We have orders for both the 1000 and the 650, with the latter set to begin production later this year. The 650 uses all the same components and offers a modular solution. We've received inquiries from several large fleets for refrigerated versions, and we're initiating that effort now. While we may not see results until later this year, there have been requests for single zone and dual zone refrigerated and frozen trucks. This approach is enhancing our strong platform and expanding our appeal to various fleets and last-mile deliveries.

When you speak to the size of the vehicle, what was traditionally called the Class five step van-type world, right? These are still step vans in some ways, right, with the opportunity to expand beyond the traditional fleets who use them, not just because of the electrification, but because of our ability to size them properly for the duty cycle at hand. So something as small as 200 cube all the way up to 1200 cube, these vehicles are able to be sized properly, but not just size to accommodate other needs from other types of last-mile delivery companies, as Rob said, whether it's in that retail space of perhaps food delivery and so on.

So one more is currently fleets are using pro-masters and other vehicles with the 280 300-ish cubic feet. And what they're finding is it's not enough space to go out on an all day trip or they need more space to accommodate the goods. And so our 650 in particular at almost the same weight as a 280, 350 cubic foot metal truck, because it's all composite it is as economical to operate that gives the fleet operator more cubic feet to deliver goods.

Great. Thank you for that. So one of the questions that has come up many times with investors in the last couple of weeks is your supply chain. People are constructive and you guys being able to operate through this pandemic and the issues at that range, but the supply chain is also very important for you to be able to execute on your backlog for this year and then the nice ramp that we're looking at for next year. Can you maybe talk to us a little bit about the conversations you're having with your suppliers? Is there anything that's going to impede the C650 or C1000 actually getting out nice volumes over the next number of months and quarters? And then specifically the post office, I know it's got a different flavor to the supply chain given that you're talking a very different vehicle. But what do you feel the ability of that supply chain is to flex and allow you to deliver many thousands of vehicles over the next number of quarters?

Craig, regarding the supply chain, we were fortunate that most of our vendors are based in the United States. Although we experienced an initial four to six-week delay with some international components, our focus on U.S. suppliers significantly helped us. That said, as Duane mentioned, we cannot predict the future impact of the virus or any state orders. However, we feel confident about our vendors and their ability to handle the challenges. Concerning the post office, we can't provide more information beyond what Duane has already shared due to the NDA we've signed with them.

We enhance our supply chain by repurposing components across all the platforms I previously mentioned. For example, a pro-master van can be utilized for deliveries of various sizes, ranging from 200 to 1200 cubic feet. By repurposing components as effectively as possible, we can significantly reduce the need for separate supply chains for these different platforms. We feel confident that as long as our suppliers manage to remain resilient, which they appear to be doing, we are making the right decisions to ensure our success and future profitability.

Excellent. And then just to check one detail, the RFP for the post office is due next Friday now. Is that correct?

We're unable to discuss anything about the post office related to any RFP response, but you can find the date of the RFP online.

Okay. Understood. They did say publicly it was May 15. So I hope that everybody at the post office as well and this doesn't get pushed due to COVID. Thanks again for taking my questions. Congratulations on the strong progress.

Thanks Craig. Stay healthy.

Thank you. Our next question comes from Jeff Osborne with Cowen & Company. Please state your question.

A couple of questions on my end if I could. Steve, I was wondering if you can give us an update on the discussions if anything has changed over the last month. If my memory is right you were seeking $40 million or so for a credit revolver. Just in light of corona, I wasn't sure if banks willingness to lend or interest rates relative to the prior call have meaningfully changed?

No, really there's no change. We are finding parties that are interested, and we're in discussions with them now. So we'll go forward on that.

Do you think you'll have details on that by the next earnings call, or how much do you need it to execute on the 300 to 400?

I believe we currently have enough funds to get through the second quarter. However, I hope to establish some sort of financial facility by the end of that quarter.

Got it. And then speaking of money there's been some pressure on publicly traded companies to return the PPP funding. And looking at the Q it looks like you still have that. Is that the case?

Yes we still have it.

Got it. There was a discussion about having the capability of producing two trucks a day. Can you update us on Union City? Do you have the staff to do that? You mentioned you would start in April after the supplier delay. Can you share any insights regarding April's runway and the training and effectiveness of that staff in the early stages?

Yes, that's a great question, Jeff, and I appreciate you asking it. This is Duane. Our staff is fully equipped to meet the goal of two units per day, which we're pleased about. The PPP played a crucial role in this, as it allowed us to retain 100% of our employees and avoid layoffs. We're confident in our current staff levels, although we do anticipate growth in staffing as we ramp up volumes for training purposes. The training process is ongoing and active; we have several of our suppliers collaborating with our Union City staff in real-time. We even shared a video recently showcasing some basic elements of the production process. To answer your question, we are comfortable with our staffing levels to achieve two units a day, and we are working on the training process with the aim of improving those numbers even quicker than initially planned.

That's great to hear you're able to keep them with the loan. That's definitely good to hear. The last question I had is on the last call there was a lot of discussion of various different tests and forgive me if I'm mixing these up. But I think the seatbelt test you had received and you're waiting on the FMVSS testing if my memory is right. Is that something that's happened in the last month, or given corona are the testing authorities closed down?

And that's correct. We actually had everything ready and our testing facility closed down. They're reopening and getting things back in shape, but the test will be done on the 21st of this month.

Got it. Excellent. That all I had.

Well we appreciate, Jeff. Stay healthy.

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 call back over to Mr. Hughes for his closing remarks.

Thank you, operator and thanks everyone for joining us on our call today. We really appreciate your participation and the opportunity to provide our updates and guidance. I do really want to thank our employees, partners and other investors, especially through this time. We appreciate your continued interest in Workhorse and we look forward to updating you on future calls.

Thank you for joining us today for Workhorse Group's first quarter 2020 earnings conference call. You may now disconnect.