Edited Transcript of WKHS earnings conference call or presentation 6-Aug-19 2:00pm GMT

Total operating expenses in Q2 2019 decreased 34% to $3.2 million from $4.9 million in the same period last year. The decrease in total operating expenses was due to the lower SG&A and R&D previously mentioned.

As a result of the company’s stock price increase during the quarter from $0.62 to $2.94, Workhorse recognized $31.1 million in noncash interest expense associated with the debt-related warrant liability. The net loss in the second quarter was $36.9 million compared with a net loss of $6.9 million in the second quarter of 2018. To be clear, excluding the noncash warrant liability interest expense, the Q2 loss would have been $5.8 million, which is $1.1 million less than in Q2 2018.

As of June 30, 2019, the company had cash, cash equivalents and short-term investments of $23.5 million compared to $1.5 million as of December 31, 2018.

Now before turning the call over to Duane, I’d like to provide an update to our financing activities. In June, the company announced that it closed a private offering with a group of institutional investors resulting in gross proceeds to the company of $25 million. Under the terms of the agreements, the investors acquired shares of Series B preferred stock and warrants to purchase common stock. The Series B preferred stock is not convertible, but the holders are entitled to quarterly dividends payable in shares of common stock. The closing with respect to $15 million occurred on May 31, 2019, and the balance of $10 million closed on June 5, 2019. The proceeds will be used for general working capital and research and development, allowing the company to focus on finalizing the R&D associated with our next-generation commercial delivery vehicle known as the N-GEN, followed by production of our existing contracted backlog.

Separately, on April 23, 2019, Workhorse also terminated its at-the-market offering sales agreement with Cowen and Company, which had been in place since June 2017.

Finally, as we’ve mentioned on previous calls, in September of 2018, we began actively pursuing a sale of SureFly, our electric vertical takeoff and landing business. Duane will expand on this later in the call.

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. Duane?

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Duane Hughes, Workhorse Group Inc. – CEO & Director [4]

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Thanks, Paul, and well done. Welcome to everyone joining us this morning. We are eager to update you on our activities through the second quarter. We’ve been well focused on our engineering and development efforts to bring the N-GEN to market as expected, and we have been busy working on our strategic opportunities, including our Duke Energy alliance, monetizing the SureFly asset and, of course, as everyone on the call is likely anticipating, we will update you on our discussions as they relate to GM’s Lordstown facility.

Before I begin with the updates on the business, I’d like to address the elephant in the room and provide some context around what has been pretty widely reported in the press. Yes, I’m talking about Lordstown. We know that many of you have questions, but please understand we are currently not in a position to provide any material updates to this process beyond what has already been publicly provided through the General Motors press release as well as what is in the public domain from the extensive media coverage. But I’ll start at the beginning.

Earlier this year, Workhorse, as well as its founder and former CEO, Steve Burns, began initial discussions with General Motors on a proposed purchase transaction of GM’s unallocated Lordstown manufacturing plant in Lordstown, Ohio. Following a thorough review process and evaluation of other credible offers, GM announced publicly on May 8, they have entered discussions with Workhorse and a newly formed entity to acquire the Lordstown Complex. Under the proposed terms of the agreement, the discussions call for a separate private company formed for the purpose of purchasing the Lordstown plant. The new company, as released by the Detroit news this weekend, is called Lordstown Motors Corporation or LMC. Workhorse intends to enter into a license agreement with LMC for specific Workhorse IP and technology. In addition, we will own a minority interest in Lordstown Motors.

LMC’s stated goal is to pursue the creation and production of a new battery electric pickup truck based on the Workhorse W-15. We at Workhorse are very excited about this relationship as it further enables Workhorse to monetize our technology. What’s more, we are excited about having an affiliated company with automotive volume capabilities, which could be beneficial in the event Workhorse wins substantially larger contracts in the future.

Under this structure, both Workhorse and LMC benefits by blending Workhorse’s technology with Lordstown’s unparalleled manufacturing expertise. We especially appreciate GM’s acknowledgment that as part of their reasoning, they found Workhorse and our technology to be better positioned than most EV start-ups with hundreds of battery electrics trucks and millions of miles on the road, satisfied customers and a substantial order backlog.

Perhaps most importantly, we believe Workhorse shareholders will benefit in multiple ways. The licensing of the W-15 entails minimal engineering and no production expense for Workhorse and allows us to focus on the last mile delivery segment. We expect that our shareholders will further benefit from the value gain from our equity holding in LMC, which allows us to share in the success of Lordstown Motors. Let me go off script for a moment.

When we created the W-15 a couple of years ago, it was because we have learned that purpose-built electric pickup trucks would be a valuable tool for commercial fleet operators. We were out front then and has clearly set the stage for new entries into the market.

Our early thoughts about the feasibility of an all-electric pickup truck are even more valid today. We believe that combining our IP with the historic GM Lordstown facility will provide Workhorse with the greatest benefit in monetizing its pickup truck technology. In the end, we believe this will be the proverbial win-win.

GM’s position is this relationship is by far the best opportunity they have found to keep vehicle production in Lordstown. We also believe this arrangement, combined with our Duke Energy alliance, will advance Workhorse’s leadership role in the electric vehicle community.

To the extent that we are able, we will provide updates as possible. However, given the dynamic nature of this process as well as the number of stakeholders involved, I have shared all that I can at this time. We appreciate your interest and your patience as we work towards a mutually agreeable outcome.

Now to update you on the rest of our business. In the second quarter, we continued to make considerable progress towards our long-term goal of becoming a production-focused company doing and delivering electric vehicles at scale. As Paul mentioned during his presentation, in June, we announced a $25 million financing, which was a significant milestone for our business.

In many respects, we feel that this capital provides the key piece to the puzzle to bridge Workhorse into full-scale N-GEN production. We now have the right kind of funding and capital structure to deliver on our existing backlog, which will enable us to make significant strides in our strategic vision of being a leader in the electric last mile delivery states. We look forward to commencing the manufacturing process during the fourth quarter of this year and are now concentrating on delivering vehicles to our blue chip customers. I’ll leave the more specific N-GEN updates to our COO, Dr. Rob Willison, who will come on the line in just a moment and try to finish with the rest of our updates.

Moving next to our partnership with Duke Energy. We believe this partnership was one of the largest utilities in the United States, is a first of its kind, industry-leading transaction, whereby the combined resources of both companies will provide a one-stop solution to electric vehicle fleet managers for all their needs, including depot infrastructure, energy management, charging equipment and of course, Workhorse electric vehicles. This alliance is important for many reasons, but chief among them is it will provide infrastructure that supports our ability to deploy electric vehicles at scale. The Duke infrastructure support will allow for the buildings of EVs by the thousands rather than the hundreds, which strengthens Workhorse’s opportunity to achieve profitability.

Duke is equipped to provide the behind-the-meter infrastructure including equipment, expertise, cash outlay options and management solutions at an affordable price point. Our partnership with Duke further enables our delivery fleet customers to adopt EVs at scale, utilizing Duke’s turnkey solution while maintaining their focus on their core mission. Ultimately, our alliance with Duke Energy allows Workhorse the ability to deliver the best-performing and most affordable electric trucks to benefit all of our customers and stakeholders. We continue to have frequent conversation with Duke, our customers and our key battery suppliers to further grow this relationship. We have begun a series of meetings with them to work on a plan to introduce the all-inclusive project to new and existing customers.

As part of our last mile delivery technology platform, we are excited about the latest opportunities for our HorseFly delivery drone. We recently received a letter of intent to work with a logistics and supply chain partner, where the truck-launched HorseFly delivery drone will be used in a paid fleet test. The test will be for deliveries of critical medical supplies between health facilities in the San Diego area beginning in early Q4.

Moving next to our SureFly. As Paul mentioned, we are in late-stage due diligence with a buyer for our SureFly product line. We’ve agreed to terms and expect the transaction to close by year-end. We plan to provide more information on what this means if and when a sale is consummated.

That covers the general update. Before I turn the call over to Rob to review our continued development of the N-GEN platform, I want to provide a very brief statement regarding the U.S. Postal Service’s next-generation delivery vehicle program. As many of you on this call well know, Workhorse is currently among a handful of finalists for this project. We have been made aware that there are a number of media outlets and other sources that have reported on updates to the program. And as we’ve stated many times in the past, we are not permitted to comment publicly on any updates related to the selection process or the progress being made on a final decision. I would like to reiterate that we remain confident in the strength and quality of our prototype vehicles, and we are pleased with how they performed during the testing process. At this time, we are awaiting further updates from the post office on next steps.

And with that, I’ll now turn the call over to Rob to provide updates on our N-GEN platform and other operational items.

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Robert Harry Willison, Workhorse Group Inc. – COO [5]

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Thanks, Duane. In my remarks today, I plan to address updates on our N-GEN platform. With respect to development of our N-GEN electric step van, that process remains on track, and we are still on schedule to begin delivery to our customers in the fourth quarter of this year.

As I mentioned on the previous call, we have been testing drive train specific as well as other development mules, all of which are based on our N-GEN 1,000 cubic foot model, which is the model we plan to roll out first during initial production.

These production-intent mules will allow for the refinement of fit and finish, noise vibration and harshness, assembly techniques and final driver ergonomics. As an update, the first of these test mules was taken to the Transportation Research Center, or TRC, in the East Liberty, Ohio, where we completed thermal testing and acceleration, regeneration runs for our propulsion system. The tests were conducted in a variety of use conditions, and while further data analysis is underway, we are pleased with the current results.

We are also running a second testbed mule that has a number of final production-intent parts already installed. These components are running on a vehicle with a full payload that is operating in the field around the Detroit area. We have additional mules beginning to take shape. Initial parts are being fabricated for buildup. These will be used for regulatory testing, hot and cold chamber test breaking calibration as well as curb strikes and other durability testing at TRC. Our final mule is based on our 650-cubic-foot N-GEN and will begin fabrication in the coming weeks.

As you may be aware from our press release as well as our comments from the last call, we have been working with the Prefix Corporation, our long-term partner, to develop the N-GEN platform. We previously worked with Prefix on the USPS, NGDV and the W-15 concept vehicle. Our N-GEN delivery vans will be built on a low floor chassis developed by Workhorse, while Prefix is responsible for developing, building and supplying an advanced cab and body. This configuration will have many advantages over current vehicles and we expect will lead the industry in the latest technology for last mile delivery.

A final note related to production. We are in the process of pursuing ISO 9001 certification. Attaining an ISO certificate is a process for top management to control and improve our ability to meet a wide range of requirements related to all areas of the business. The ISO 9001 standard is the world’s most recognized quality management system certification.

In summary, the overall N-GEN development program is on track. I will now turn it back over to Duane.

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Duane Hughes, Workhorse Group Inc. – CEO & Director [6]

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Thanks, Rob. Good update. Of course, we will provide more definitive time lines and delivery schedules as the process continues to take final shape throughout the next few months.

In summary, I’d like to emphasize our progress over the last 6 months. First, our company is in the healthiest cash position in our history. Second, we are quickly monetizing assets, such as the SureFly and the W-15 pickup truck. Third, and perhaps most important, we are focusing on what we do best, last mile delivery by moving into production with our N-GEN platform. And finally, we continue to strengthen our position as it relates to the U.S. Postal Service NGDV program. We look forward to updating you on our progress in all these areas as we further our mission of changing the way the world works.

We’re now ready to open the call for your questions. Operator, please provide the appropriate instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today is coming from the line of Jeff Osborne with Cowen.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [2]

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A couple of questions on my end. On the N-GEN side, Duane, I was wondering if you could give us an update on the backlog. Obviously, production is limited here, but I think the last update, you had around 1,100 units or so. And you talked about needing $60 million of funding, I believe, and you’ve obviously got $25 million of that and now the Duke relationship. But a 2-part question. One, is where does the backlog stand as production starts exiting this year? And then what working capital or additional capital is needed, if any, now that Duke’s involved?

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Duane Hughes, Workhorse Group Inc. – CEO & Director [3]

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Great. Very good questions, Jeff, and we appreciate you being on the line to ask them. I’ll hit my side, and if Rob wants to add anything, he can. But in general, the backlog is still just over 1,100 currently but is in the — as you would expect, we are beginning to grow that sales funnel by expanding that customer base, if you will, in the sales discussion. That represents roughly $70 million worth of orders in the queue, of which we will again begin delivering in Q4.

But I’ll speak to the financial side, we have our revolver with Marathon that allows us, and then Paul can jump in here too if he needs to, which really allows us to draw down based on purchase orders literally up to the amount of the purchase order. We can then acquire our parts, build the trucks, deliver them, and then we can always replenish that revolver and continue to borrow from it. So we — from a facility perspective, that facility will provide us with what we need to deliver on our current backlog as well as beyond.

As far as the precious equity that we raised in the $25 million round, that’s really for current operating expenses and so on that we expect to get us through at least the end of the year. Again, if Paul wants to elaborate, he can.

And finally, the Duke alliance, which we could spend a lot of time on that I’d like to talk about because it’s so important to our profitability path, really enables us to, I’ll say, lessen our BOM cost to our company, right, by Work — I’m sorry, by Duke actually acquiring the components or the batteries themselves. They will continue to own the pack. We’ll build the truck, put that battery pack in it. We’ll keep the revenue from the sales price of the truck but will reduce our BOM cost by the amount of the battery cost upfront. Does that makes sense, Jeff?

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [4]

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It does. No, that’s very helpful. And just to confirm, the bulk of the backlog is the 1,000 cubic feet, not the 650 that you’re just starting production of the mule?

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Duane Hughes, Workhorse Group Inc. – CEO & Director [5]

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Yes. The bulk currently is, but I do expect in short order that the 650 will outpace the 1,000 cube vehicle because the number of different customers who use that particular platform certainly is a larger base than what uses the 1,000 cube.

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Robert Harry Willison, Workhorse Group Inc. – COO [6]

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And Jeff, I might add that one of the most powerful aspects of this design and approach that we’re taking with the engine is it spawns a family of products at 650 cube, 1,000 cube, a 1,200 cube and a flatbed and other variations. So with a single design, it can be morphed into various models for different customers and markets.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [7]

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Got it. That’s helpful. And then the last one of the question, I know you’re limited on what you can say about Lordstown, but can you just elaborate on what the relationship would be hypothetically on the postal service vehicle as it relates to the W-15? Would the post office vehicle be made at that location and you would receive a similar yet-to-be determined license? I just want to make sure I understand what the mechanics are with those programs and as it relates to LMC Motors and your relationship with them?

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Duane Hughes, Workhorse Group Inc. – CEO & Director [8]

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Yes, great question, and I appreciate it. I would answer like this. From the beginning, we viewed what we’ll call as access to the Lordstown facility as a potential competitive advantage to further enable us to win the postal service contract, primarily just because of its size and so on, its ability to push through vehicles out of that plant. Not to mention, they’ve got 50-plus years of experience on how to build vehicles in that facility. So we see that as a differentiator and a strength to it, right?

But beyond that, I would say that the opportunity exists. We plan to take advantage of that opportunity, but there’s work still to be done to get there. With that said, I believe that it would be viewed as a positive event. And most importantly, I would say this. Because the W-15 that we built a couple of years ago was really — was born from our design and development of our 6 prototype meals — I’m sorry, 6 prototype postal service vehicles. We believe that when the new W-15 comes to market in Lordstown, because they can build the W-15, which is predicated on the same parts, the same underlying type of infrastructure, it would easily allow for the post office vehicles to also be built in Lordstown. So of course, we’ll pay attention to what the U.S. Postal Service wants and what the best outcome will be for Workhorse in terms of profitability. But we do view the Lordstown plant as a potential game changer in that contract.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [9]

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Got it. That’s helpful, Duane. But just to clarify, the N-GEN will continue to be — you have a chassis made in Indiana and then you’ll align yourself depending on the variant with different body partners? Or would that also be transitioned hypothetically to the Lordstown facility as well?

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Duane Hughes, Workhorse Group Inc. – CEO & Director [10]

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We anticipate building the entire vehicle at the Union City facility for the N-GEN platform, the 650 to 1,000 and 1,200 in flatbed that Rob’s talking about. We believe we can fill that facility up with those variants of the N-GEN platform. We also would, of course, say that the N-GEN platform is — there’s a 200 cube version, if you will, that would be also the post office.

So we have options with where to build them. We’re looking for what makes the most sense from a profitability and a quality perspective and also what differentiates us in ways to win a contract of substantial size.

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Operator [11]

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(Operator Instructions) Thank you. At this time, this will conclude 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.

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Duane Hughes, Workhorse Group Inc. – CEO & Director [12]

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Thank you for joining us on our call today. I especially want to thank our employees, our partners, 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?

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Operator [13]

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Thank you for joining us today for Workhorse Group’s Second Quarter 2019 Earnings Conference Call. You may now disconnect at this time.