Earnings Call Transcript - WKHS Q3 2023

Operator, Operator

Ladies and gentlemen, greetings and welcome to Workhorse Group Third quarter 2023 Investor Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.

Stan March, Vice President of Corporate Development and Communications

Thank you, Sherry. Good morning and welcome to all of you joining us on today's third quarter 2023 results call. Before we begin, I'd like to note that we have posted our results for the third quarter, ended September 30th, 2023, via press release and have also filed our latest 10-Q and a separate 8-K. You can find this release, as well as the accompanying presentation and the SEC filings in the Investor Relations section of our website. We will be tracking with the posted presentation during the call, so please follow along either through the link in the press release or through the website directly. Joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. The agenda for today can be found on Slide 3. Following my opening remarks, I'll hand it over to Rick, who will give you an update on the success that we've made on our strategic and operational priorities during the third quarter. Bob will then walk us through our financial results for the quarter and our revised 2023 full-year guidance. Rick will then wrap up before we open the call for questions. Our disclaimer can be found on Slide 5 – excuse me, Slide 4. Some of the comments that we made today are forward-looking and are therefore subject to certain provisions as well as to risks and uncertainties. You can find the full disclaimer statement in our periodic filings with the SEC, as well as in today's press release. I'll now turn the call over to Rick Dauch. Rick?

Rick Dauch, CEO

Thanks, Stan. Good morning, everyone. I appreciate your time and continued support of Workhorse. Today, we will discuss our achievements and results for the third quarter, as well as the steps we are taking to ensure Workhorse's success in both the near and long term. The third quarter represents a mixed situation. On one hand, we have made significant progress on our product roadmap that positions us for substantial profitable growth in 2024 and beyond in areas we can influence. Conversely, our results this quarter and our outlook for the remainder of 2023 were notably affected by our inability to obtain HVIP vouchers in the third quarter. I'm glad to share that we have recently resolved this voucher issue with assistance from the CARB leadership team just last week. I am proud of our team's commitment and efforts here at Workhorse. In just over two years since I took over the company, we have kickstarted full vehicle assembly for three new product lines: the W4C cab chassis, the W750, and the W56 step vans. Those familiar with the automotive industry understand how challenging and expensive it is to design, test, and launch new products, which typically requires at least three to five years. However, the Workhorse team accomplished this in less than 22 months. Additionally, we have introduced two sellable drones to the market and are engaging with more potential customers in the aerospace sector. Workhorse is now ready to enter our growth phase, which showcases the outstanding talent and dedication of our team. Focusing on our key accomplishments this quarter, our most notable update in commercial vehicles was the commencement of production following the completion of FMVSS, durability, and validation testing for the W56, our third vehicle line this year and a vital part of our operations. Manufacturing is significantly more complex than creating a prototype or trade show vehicle. We cannot stress enough how much effort production entails when compared to design. At Workhorse, we have now initiated comprehensive manufacturing of the W56 in just 22 months. We also ramped up our production rate to four W750 step vans weekly and shipped several configured demonstration vehicles of W4CC to potential clients. We continue to expand our dealer network and commercial presence by signing up two new certified dealers, which include stocking orders to be fulfilled over the next year. During Q3, we earned IRS approval as a qualified manufacturer for the Commercial Clean Vehicle Credit, allowing Workhorse customers to access up to $40,000 in federal tax credits per vehicle for purchases of all Workhorse vehicles from 2023 onward. We strengthened our talent pool and sales team with expertise in commercial fleet and government sales, custom body building, and upfitting, while also enhancing our regional resources in California. Our corporate support and IT systems are now functional across all departments following the completion of our Phase 1 ERP project, which is essential as we transition from engineering and testing to production and sales. Our lean manufacturing practices at the plant have been reinforced, and we are collaborating with our extensive supply chain. The bottom line is that we have assembled the necessary people, products, processes, support systems, and business partners to evolve into a viable commercial EV OEM. At Stables, we are continuing to develop the EV fleet and expand our delivery responsibilities. The peak season begins later this week on November 18th, and we are prepared to meet the anticipated demand with a reliable and effective EV fleet, which our drivers find to be significantly more dependable and cost-efficient than the ice fleet we acquired in 2022. The Aero business is still generating revenue and has sold units to both UPS Flight Forward and Valqari. Additionally, we received two more USDA grants this quarter, which correlates to a revenue impact similar to selling over 60 drones, providing a meaningful boost to our aerospace segment. We finalized the administration of the class action lawsuit and received shareholder approval to increase share authorization by 200 million shares. In Union City, we successfully installed and initiated an in-house paint system, marking the last major short-term capital investment needed for the facility until the latter half of 2024. However, the team at Tropos faced considerable operational and financial challenges during Q3 despite the strong demand for their vehicles. Consequently, we are collaborating with their management, creditors, and partners to map a successful recapitalization strategy for the company, which we expect to achieve during Q4. Regarding HVIP, our ability to deliver W4CCs and W750s in 2023 was heavily hindered by the unavailability of HVIP vouchers in California, particularly during Q3 and a significant part of Q4. As at previously stated, I’m pleased to announce that we have successfully tackled this problem. As of November 8th, CARB implemented a groundbreaking program for intermediate vehicle manufacturers that includes Workhorse. This means we now have our own voucher pool, a significant facilitator for commercial EV sales. After months of collaboration with them and the problem-solving efforts of the CARB Air Resources Board team, we overcame a major regulatory hurdle that Workhorse was facing in California, the leading EV market in the United States. This achievement is reflected in our recent addition of a new certified dealer in California, who was awaiting the CARB voucher decision. This dealer has committed to stocking orders and is working to secure a considerable fleet order using our family of Workhorse vehicles. Turning to our Class 4 vehicle programs for the W4CC and W750, we've observed several encouraging market trends. We received our first repeat orders from dealers in New York and California, indicating rising market demand for these vehicles. Important opportunities have emerged as we shipped multiple demonstration vehicles to prospective customers, including box and reefer trucks in both states. We successfully completed demonstration tests with city government agencies in California and conducted two 30-day delivery trials for a major office supply company on the East Coast. All three demos yielded positive results, and we await customer decisions regarding future orders. W4CC trucks with box bodies are under further demonstration testing with a previous Workhorse customer that intends to transition entirely to EV vehicles by 2025 to 2026. We are now able to produce one W750 per day, totaling four per week, in our plant. Alongside the demos previously mentioned and those being utilized at Stables, we are pursuing several other demo and fleet opportunities with large last-mile parcel customers in Q4 of this year and early Q1 of next year. I want to emphasize that all our vehicles within our commercial vehicle product roadmap are profitable at the contribution margin level, a significant departure from legacy Workhorse vehicles. As we continue to increase production and truck sales, we anticipate doing so profitably. Focusing on our production of both the W56 strip chassis and step van, we successfully completed all FMVSS durability and validation testing, as well as supplier part PPAP certification. We expect to finalize HVIP certification through CARB for the W56 in Q4 2023. Over 250,000 miles were covered on the Navistar test track, which is an arduous test. We have completed PPAP for all individual parts for this vehicle, ensuring we can deliver automotive OEM-level quality products to our customers, which sets us apart from other startups. We can provide either a strip chassis or a full step van vehicle, and we can paint them on-site. By the end of Q4, we aim to manufacture up to two step vans daily and ramp up to five to eight units per day in the first quarter of 2024. Our lead times for complete step van vehicles stand at around 120 days, compared to the nine to 12 months required from other sources. This positions Workhorse as a competitive leader in the step van market. As 17 US states transition to adopt the new CARB Clean Fleet mandates, Workhorse is well situated to capture market share in the step van section. We have initial production demonstration units currently operational in California with various partners and have received excellent feedback regarding their performance in real-world tests over last-mile routes of up to 125 miles. We can put that truck together with custom outfitting packages in as little as six weeks from concept discussion to delivery, a feat that we believe no other customer can match. Overall, there is considerable customer interest in the W56, and we are confident in our ability to secure firm purchase orders in Q4 and beyond. The W56 will serve as a major driver for our growth and success, enabling us to benefit from the transition to commercial EVs. As a reminder, we can produce up to 5,000 W56 units annually at our Union City, Indiana plant with one shift, potentially generating over $1 billion in revenue. We continue our successful deliveries of last-mile packages for FedEx Ground and are gradually growing route assignments in our Stables operations. We electrified about 70% of our fleet based in Lebanon, Ohio, and are reviewing additional options to partner with operators in states offering incentives. We are also exploring varied methods to increase the number of trucks on the road. We plan to incorporate two W56 vehicles into our Ohio-based fleet in Q4 of 2023 and are in the preliminary data analysis phase regarding our transition white paper from ICE to EV. This initiative is providing us with significant real-world experience and credibility as we aim to better support independent contractor fleet operators during their shift to EVs. Our aerospace division achieved remarkable landmarks in the third quarter. We commenced drone assembly in our facility in Mason, Ohio, and sold three additional drone aircraft to clients. Workhorse has also made progress toward obtaining FAA certificate approval for the HorseFly. We initiated the FAA approval process for the HorseFly in compliance with UPS Flight Forward's FAA Part 135 drone airline certificate. Our Aero division is closely collaborating with UPS Flight Forward and the FAA, aiming to have everything needed for HorseFly approved for FAA Part 135 operations by the end of 2023. This demonstrates UPS Flight Forward's acknowledgment of our drones as safe, reliable, and capable. Furthermore, we received two additional USDA grants during Q3, totaling approximately $1.1 million in added funding. We are also looking into additional applications for both the HorseFly and Falcon drones with USDA leadership. In our earnings announcement today, the company has initiated a review of strategic alternatives for the Aero business. We take pride in our progress within our Aero division. We have established and started operating our manufacturing facilities, and our market-leading, dependable drones are attracting interest from both commercial clients and government agencies, both in the US and internationally. With this foundation established, we believe that starting a strategic review now is wise to ensure we maximize value for Workhorse shareholders while positioning our Aero business to seize and fund future growth opportunities. Looking ahead, we will consider a wide range of options for the Aero business, including a potential sale, strategic partnerships, or progressing with our existing strategic plans for Aero within Workhorse. We are still in the early stages of this review process and will provide updates when we have new information. Now, I will turn the call over to Bob to discuss our financial results for the quarter.

Bob Ginnan, CFO

Thanks, Rick. Let's turn to Slide 12 to discuss our third quarter financial results. Sales, net of returns and allowances for the third quarter of 2023 were recorded at $3 million compared to $1.5 million in the same period last year. The increase in sales was primarily a result of the reversal of the sales allowance in the current period related to the sale of W4CC vehicles in the second quarter of 2023. Cost of sales decreased to $6.6 million for the third quarter of 2023 compared to $9.5 million in the same period last year. The decrease was primarily due to a $2.9 million reduction in inventory reserves and adjustments in the same period a year ago due to the disposition of C-Series inventory. Lower sales volume in the current period reduced costs by $1 million, which was offset by a $1.2 million increase in employee compensation and related expenses as the company continued to expand its workforce in Union City, Indiana to support future vehicle production. Selling, general, and administrative expenses for the third quarter of 2023 decreased to $11.8 million compared to $34.8 million in the same period last year. This decrease was primarily driven by a $23.9 million reduction in expenses associated with the settlement of securities and shareholder derivative litigation. There was a $20 million non-cash stock settlement and about $3.9 million in legal fees. Employee compensation-related expenses, including non-cash stock-based compensation expense, decreased by $0.4 million compared to the prior period, which was offset by a $0.8 million increase in professional services and other IT-related expenses. Research and development expenses for the third quarter of 2023 decreased to $5.8 million compared to $6.1 million in the same period last year. This decrease was driven by a $0.9 million reduction in consulting expenses, partially offset by a $0.5 million increase in employee compensation-related expenses as we move to production in the W56. Net interest income in the third quarter of 2023 was $0.4 million compared to zero interest expense in the same period last year. This was driven by interest earned on cash in the company's money market investment account. Other loss for the third quarter of 2023 was $10 million compared to a $13.4 million profit in the same period last year. Other loss in the current period represents the impairment of the company's investment in Tropos resulting from economic conditions and uncertainties that have significantly affected Tropos' performance and financial position. The net loss for the third quarter of 2023 was $30.6 million compared to a net loss of $35.4 million in the same period last year. Turning to Slide 13 to discuss our balance sheet. As of September 30, 2023, we have approximately $38.9 million in cash. Our cash burn during the quarter was down quarter-over-quarter as we primarily decreased spending on inventory, and we expect this trend to continue through Q4 and into 2024. Importantly, we are taking major steps to strengthen our financial position and focus on reducing expenses to ensure we have the runway to execute our strategic plans. We are in advanced discussions with third parties to obtain additional financing to support our growth plans. We are also evaluating other options to strengthen our liquidity position. Our 10-Q as of September 30, 2023, includes going concern language as a result of our slower than anticipated sales ramp and HVIP availability. However, we have a strong cash position of $38.9 million to fulfill our obligations and continue to operate. We are taking steps to remedy the going concern, including efforts to drive revenue growth and obtain additional financing and liquidity. We will continue to evaluate the best path forward and have several options to fund the next phase of production and growth. Turning to Slide 14, we are providing an update to our 2023 guidance to reflect the HVIP voucher situation, which significantly impacted our Q3 results and full-year sales. We now expect to generate between $10 million and $15 million in revenue this year. The resolution of the HVIP voucher is positive news and provides momentum as we work through the remainder of 2023. I'll now turn the call back to Rick to wrap up.

Rick Dauch, CEO

Thanks, Bob. Let me briefly discuss our Q4 priorities, which are outlined on Slide 15. Our largest single Q4 priority is straightforward - to build and sell trucks and drones. That’s it, build and sell trucks and drones, plain and simple. Additionally, as Bob mentioned, we will focus on strengthening our financial position and reviewing options to enhance our liquidity position so we can achieve our future growth plans. Before opening the line to questions, let me mention a few final thoughts. Being true pioneers in an industry going through a generational technology change is not easy. It’s tough, hard, and sometimes thankless work. No one in America could accurately forecast how fast or how slow the transition to commercial EVs will occur. One thing I do know is that we now have the people, the products, the manufacturing processes, the qualified suppliers, and the experienced distribution partners in place to be ready when that transition does occur. Every fleet customer that has visited Union City and driven our truck has asked for a demo, and every demo we executed in the past 90 days has been successful. The foundations are in place at Workhorse for us to emerge as one of the survivors and winners in the commercial EV industry. We’re now ready to open the call for your questions. Operator please provide the appropriate instructions.

Operator, Operator

Thank you. Our first question is from Greg Lewis with BTIG. Please proceed.

Greg Lewis, Analyst

Yes. Hi. Thank you and good morning, and thanks for taking my questions. Rick, I wanted to touch a little bit more on HVIP. Clearly, congratulations on getting those final approvals. As we think about it, I guess, there were a handful of trucks sold in Q3. How much of those were related to HVIP?

Rick Dauch, CEO

You mean the lack of sales? A couple of those trucks went out to some of the new dealers we have as part of our stocking orders. We are really blocked in California. As everybody knows right now, the cost of an electric truck is much higher than an ICE truck, driven mostly by the batteries. The government has put in place significant incentives at both the state and federal levels to help move into the EV segment. Without those incentives, you aren't going to sell too many trucks. We are seeing some weariness on the part of the fleets about whether these EV trucks can handle the duty cycles and payloads they require on a day-to-day basis. Based on the demos our company has done side by side against others, we are convinced, and so are some of the customers, that our trucks can do the job. I don’t know if they can say that about some competitors.

Greg Lewis, Analyst

Got you. Thank you for that.

Rick Dauch, CEO

I'm not going to mention any of the competitors, but EV trucks that are out there, some of the initial prototypes, especially from some of the startups, are having some struggles.

Greg Lewis, Analyst

Yes, makes sense. And then, so as we think about your new dealer in California. Realizing we did not disclose the name, do you have any sense for the size of that dealer as we think about their track record?

Rick Dauch, CEO

I'll give you a little color. I won't give you the name. I'll just tell you it's in Southern California. It's a one-brand commercial truck-only dealer. That current brand he carries will not have a viable EV product until 2025 or 2026. He said to us, I'm dead in the water with regards to EVs in California, and I really want to partner with you. I can't do that if you're going to give me trucks without vouchers. So, he waited, which is smart on his part. He's signed up, and we will provide him some stocking orders yet this year. He’s also working on a deal for over 40 or 50 vehicles.

Greg Lewis, Analyst

Perfect. Super helpful. Thank you very much.

Operator, Operator

Our next question is from Chris Souther with B. Riley Securities. Please proceed.

Chris Souther, Analyst

Hey, guys. Thanks for taking my question. I was just curious about the review of the aerospace segment. Can you give us a sense of what the cash earned from that segment is today? Just wanted to frame the impact on the financials as you are looking at strategic alternatives.

Bob Ginnan, CFO

Hey, Chris, it's Bob. Currently, we're spending about $700,000 a month in Aero, down from previous levels earlier this year, but that's where we are right now.

Chris Souther, Analyst

Got it, okay. And then, on the overall CapEx trajectory, how should we think about where we are as far as readying the plant for scaling?

Bob Ginnan, CFO

I think I can split that in two. For the rest of this year, if you look at our CapEx through the first three quarters, we'll be down in the fourth quarter as we are through most of those projects. From a plant perspective, we have the capacity to scale without much CapEx. We will have the typical maintenance-type expenses going into next year, but the heavy lifting is mostly out of the way now with the finalization of our paint line.

Rick Dauch, CEO

Yes, I'll jump in there, Chris. So W4CC and W750 assembly lines are fully tooled up. We're waiting on a couple of minor manufacturing devices to attach the panels on the top of the W56, minimal expenditure this year. We just received the AGVs and owe a final payment to them once they’re operational. We are finalizing the paint shop today, and so we are set with production capacity. The capital has been spent, plants have been reconditioned, test track is in place, and warehouses have been refurbished. Everything we have is in place to be a $1 billion-plus OEM.

Chris Souther, Analyst

That's great. And maybe just the last one, you talked about being prepared to scale the business for profitable growth in 2024. Are you at a point where you have a sense of what the break-even revenue level would look like and timing around that?

Rick Dauch, CEO

We're actually just getting into the budgeting process, so we don’t have answers there just yet. I think our positive gross margin is around 300 trucks a quarter, 100 trucks a month. We've not completed full cash flow calculations, but you can probably do some math from there. We think 300 is a key number for us to achieve positive gross margin stepping forward.

Chris Souther, Analyst

Thanks a lot. I'll hop in the queue.

Operator, Operator

Our next question is from Craig Irwin with ROTH MKM. Please proceed.

Craig Irwin, Analyst

Good morning, and thanks for taking my questions. This past year, as you were planning for a higher revenue runway, there was much work done developing customers and supporting those customers in the procurement of HVIP vouchers out of New York, New Jersey, Massachusetts. It sounds like some of the heavy lifting for growth over the next year has likely been addressed. Can you talk about how you feel about the pipeline for deliveries once production is there and these trucks are fully certified to be handed to customers that have been working to receive them?

Rick Dauch, CEO

We did all the truck, the brand-new truck within 22 months. We are still working through stabilizing suppliers and assembly processes while launching the paint plan. We think we have that under control. In terms of pipeline, we're seeing various feedback from the marketplace. Obviously, the CARB mandates for clean fleets take effect January 1, 2024, in California, and we're seeing a flurry of RFP activity mostly through government-funded organizations. This is an opportunity for us; it was essential to get these HVIP credits and vouchers in California. We have done demonstrations with fleets, where one fleet is considering buying 40 to 50 EVs and another 30 to 40 EVs, dependent on the CARB mandate remaining intact on January 1st. There’s a legal appeal against the California mandate that should be heard in the next month or two. My experience growing up in the industry for almost 50 years, I’ve seen CARB lose battles, but I’ve never seen them lose the long war. So, I think there’s a trajectory forward. We’ve communicated with some of the biggest fleet operators in California. All are trying to determine their transition pace to EVs. Similar interest is seen in New York City. We’ve been conducting reefer demos, and we have a reefer running routes right now. One customer committed to converting 100% of their fleet to EVs by 2024, 2025, and 2026, for which the W750 and W4CC can meet their needs. We are confident we will complete those demos successfully and secure their orders.

Craig Irwin, Analyst

That's very helpful. I appreciate it. A key part of the value proposition to all of these customers is the reduction in maintenance costs. Previously, the company noted approximately a 65% reduction. Your designs have surely evolved and probably gotten more efficient and reliable. Can you quantify what customers are looking at now as a potential reduction in maintenance and operating costs? How does this resonate with this customer group?

Rick Dauch, CEO

We will have better data at the end of this peak season to share on the year-end earnings call. I can share that at Stables, in a fleet of ten vehicles, we spend close to $30,000 a month on fuel. With 70% of our trucks now electric, we are not spending nearly as much. We’ve had zero repairs on our W750s for any meaningful powertrain parts. We do have minor damages like bumpers, but repair costs for EVs typically will be 60% to 70% of TCO savings. We expect to document this better. Talking to customers we’ve interacted with in California, sharing our fleet conversion experience resonates well with them. One fleet’s average truck’s age is over 15 years, and they’re eager to move from those old, failing systems to reliable electric options.

Craig Irwin, Analyst

Understood. Well, congrats on the progress and thanks again for taking my questions.

Rick Dauch, CEO

Thank you for your support. Transitioning is challenging and a bit unpredictable. As Bob mentioned, we are poised operationally. We need to go sell trucks and drones, while assessing ways to enhance our financial runway to land this ship successfully. We appreciate your attention and look forward to seeing you out on the road. Have a great day.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.