Ayro Q3 2023 Earnings Call Transcript

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November 20, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to ARO Incorporated Third Quarter 2023 Financial Results and Corporate Update Conference Call. At this time, all participants are in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes.

Operator

A webcast replay of the call will be available approximately 1 hour after the end of the call through February 21, 2023. I would now like to turn the call over to Joey Delahoussay of CORE IR, the Company's Investor Relations firm. Please go ahead, sir.

Speaker 1

Thank you, Jason. Good morning, and thank you for participating in today's conference call. Joining me from ARO's leadership Team are Tom Wittenslager, Chief Executive Officer and Dave Hollingsworth, Chief Financial Officer. During this call, management will be making forward looking statements, including statements that address ARO's expectations for future performance or operational results. Forward looking statements involve risks and other factors that may cause actual results to differ materially from these statements.

Speaker 1

For more information about these risks, please refer to the risk factors described in ARO's most recently filed annual report on Form 10 ks and subsequent periodic reports filed with the SEC and ARO's press release that accompanies this call, particularly the cautionary statements in it. Today's conference call includes adjusted EBITDA, a non GAAP financial measure that Arrow believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non GAAP financial measure to net loss, its most directly comparable GAAP financial measure, Please see the reconciliation table located in ARO's earnings press release, which is available on its website at www.arow.com under the Investors tab. The content of this call contains time sensitive information that is accurate only as of today, for November 21, 2023.

Speaker 1

Except as required by law, Arrow disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to CEO, Tom Wittenslager.

Speaker 2

Thanks, Joey, and good morning to everyone on the call. The 3rd quarter's milestones have marked the beginning of manufacturing and sales of the initial AeroVantage units. At the time of our last earnings call in August, we were waiting on final testing and homologation results. Well, I'm happy to say that we successfully completed All elements of testing involving product safety and emissions since then have received all requisite certifications that allowed us to transition into low rate initial production or LRIP of the AeroVanish with full confidence in the Q3. We've already placed the first handful of units from LRIP with potential customers, distributors, upfitters and potential strategic partners And we'll continue to do so for the remainder of 2023 with additional units produced in the LRIP.

Speaker 2

The purpose of these strategic placements is to leverage the initial Vantage units produced with potential customers that have what we deem to be the highest potential for purchased orders in early 2024 and beyond. We firmly believe that the best way to see and appreciate The Vantage over competing low speed electric vehicles is to have access to 1 or more Vantage units and to immerse it in a working environment for sufficient length We believe the Vantage drives and handles in a manner unlike competing vehicles With technological and ergonomic advantages that has unparalleled payload flexibility in the class, Prospective partners, customers and regional business executives that participated in our Test Drive event held here in October At our Round Rock headquarters, we're able to get a sense of the Vanish's unique advantages and our team is following up on those interactions. It is important to realize that the Vanish units being produced in LRIP fall under what's called prototype pricing. This means that select machinery and equipment currently being used to produce Savantas components are different than what will be used once we enter full scale production. Generally speaking, tooling and methods used in prototype production are less expensive than those used in full production As the purpose is not necessarily to produce units in a cost effective manner, it is to produce a minimal quantity of the finished units with minimal upfront equipment or tooling costs.

Speaker 2

This also means that the components being used in our LRIP phase generally costs more than what's expected for full production. This 2 stage approach for manufacturing is quite typical in the automotive industry. In order to defer the cost to tool up dies and molds and so forth in preparation for full production. In our case, the transition from prototype equipment components and cost structures to full production equipment components and cost structure is expected to happen near the end of 2023 and into the Q1 of 2024. This means that the underlying cost of goods Sold for each managed unit should decline substantially from the current prototype cost structure to a more appropriate and more profitable cost structure as production ramps.

Speaker 2

Gains from the use of production tooling, along with volume leverage and manufacturing learning curve improvements should allow us to produce more profitable vehicles in each subsequent quarter as we progress with production. Under this general roadmap and assuming no major disruptions in our supply chain, we believe we can reach breakeven during the second half of twenty twenty four. In addition to completing homologation and entering LRIP, We also reached another major corporate milestone in the Q3 with the recognition of first revenue from the EuroVantage. Cruising Kitchens, one of our food and hospitality upfitters, officially took delivery of a few of the very first Spanish units towards the end of the Q3. As I've discussed for quite some time, the ability to install hot and or cold boxes as a payload option opens up a very large market in the hospitality industry.

Speaker 2

We believe we will receive more orders targeted for the hospitality industry to go along with the orders targeting the campus, arena and last mile environments. Whether it be with our standard flatbed configuration that is The base option of the Vantage, a traditional encapsulated pickup bed or a powered or unpowered box configuration, As typically seen in the hospitality industry, The Vantage addresses a very, very wide range of applications across many industries. In addition to offering traditional purchase options of the Vantage units, we're also receiving inquiries about lease options. Notably, These inquiries are coming from corporations that may want a fleet of Vanish units on their campuses for a myriad of uses. Thus, we're trying to accommodate such potential customers with acceptable lease structures for all parties.

Speaker 2

At Arrow, flexibility doesn't just Apply to our payload ability as we are more than happy to help corporate clients find ways to buy a fleet We expect to have more to say about corporate interest down the road. On the intellectual property We continue to be awarded design and utility patents, including 4 that were awarded in the last 90 days. Our team's innovation and creative foresight continues to be amplified through these patent awards, and we believe our growing IP portfolio will ultimately Create a sustainable advantage over our peers in the LSEV space as well as adding enterprise value to Arrow's core business. With respect to our product roadmap, we expect to resume development of our next vehicle offering, the people mover we call the valet and the sleek personal transport vehicle or golf cart if you want to call it, called the Vapor in 2024. Turning to the financial results for the Q3 of 2024.

Speaker 2

As I mentioned previously, We recognized our first revenue from our new common core chassis platform, the Vantage. Furthermore, all revenue moving forward will be from the Vanish, its modular payloads and any subsequent vehicle designs based on that new platform as the company's club car current inventory has been depleted. The cash burn in the 3rd quarter was With the prior couple of quarters and given the financing in August, our cash balance at the end of the Q3 was $47,900,000 We consider the current cash balance to be more than sufficient for us to reach breakeven, which is anticipated in the second half of 2024. This concludes my opening remarks. Now, I'd like to turn the call over to Dave Hollingsworth, who will review our financial results in more detail.

Speaker 3

Thank you, Tom, and good morning, everyone. Here is a summary of our Q3 2023 financial results. Revenue for the quarter ended September 30, 2023 was $88,395 a decrease of 76% year over year. The sales recorded in the Q3 of 2023 represent the initial sales of the completed Vanish units. The total operating expense for the Q3 of 2023 were approximately $6,200,000 as compared to approximately $5,800,000 In the Q3 of 2022, the year over year increase in total operating expense was due primarily to our transition from a largely Engineering effort in 2022 to full time manufacturing here in 2023, as well as expenses related to the August private placement.

Speaker 3

Adjusted EBITDA, a non GAAP measure for the Q3 of 2023 was a loss of approximately 5,200,000 versus a loss of approximately $4,800,000 in the Q3 of 2022. Net loss attributable to the common Stockholders for the quarter ending September 30, 2023 was approximately $14,200,000 including approximately $8,500,000 in non cash expense related to our August private placement versus a net loss of approximately 5.7 in the year ago quarter. Cash and cash equivalents, marketable securities and restricted cash as of September 30, 2023 was approximately $47,900,000 versus $48,900,000 at the end of 2022.

Speaker 2

Total debt

Speaker 3

was 0 as of September 30, 2023 as it was at December 31, 2022. As of September 7W30, 2023, the company had 4,890,137 common shares outstanding. That concludes my prepared remarks. I'd like to turn the call back over to Tom for any remaining comments.

Speaker 2

Hey, thank you, Dave. We look forward to completing LRIP and beginning the transition to full production, which we expect to occur by the end of 2023. We further expect to begin announcing first orders into a plurality of application verticals within the next 4 weeks. Now, I'd like to turn the call over to the operator so that we can begin the question and answer session. Operator?

Operator

Thank One moment please for the first question. The first question comes from Brian Lanier from Zacks Small Cap Research. Please go ahead.

Speaker 4

Hey, good morning guys. Tom, I was wondering if you could just provide a little bit more color around the test drive events. Were there any particular concentrations of customers, of verticals that were represented and Any particular interest that where the Vantage sort of stood out to those customers?

Speaker 2

Hey, good morning, Brian. And our Test Drive event, everyone we do is always very, very interesting because Customers come to understand that there's just a massive difference And product quality, component quality, vehicle performance, vehicle payload, all those things. So The people who are here at our last Test Drive event, which was several weeks back, We're largely fell into the distributor category, fell into the large corporate Category who want to have vehicles for their corporate campuses, replacement vehicles for their corporate campuses. And then just a number of folks who had general interest to see Sort of the directionality of what we're doing from a technical, from a product point of view. In terms of a large corporate Folks, most of their interests were having a vehicle that was could handle real payloads.

Speaker 2

Obviously, they really like the fact that it performs well, it drives well. It drives well empty, it drives well loaded. It has good acceleration, excellent breaking, all of those kind of things. And for new corporate campuses, those kind of things are nice. The other nice thing for new corporate campuses, obviously, they like the way the vehicle presents itself, the styling and The panache the vehicle has, which is very different from a converted golf cart.

Speaker 2

So, we saw Interest in all of those dimensions, Brian. And interestingly enough, we're also We expect to see our first orders from a bunch of those large corporate entities Before the year is out, at least that is the interest they expressed to us during the Ride and Drive event.

Speaker 4

Great. And could you flush out a little bit more? I understand Putting the product into distributors' hands, I think that's a good strategy going forward. But you could Talk a little bit more about sales and marketing as we go into 2024 and what the plan looks like. Sure.

Speaker 2

Well, look, we've said before that we kind of have a 4 pronged approach to the marketplace. So First of all, we have one of our 4 channels to market as dealers And there are dealers who have a need for a utility LSEV that can carry real payload and that Has real quality, so they're not rolling the fleet every 2 or 3 years. So the dealer channel is 1 of 4 important channels. The next one is the upfitter channel. So that's folks who take our platform And turn it into a food truck, turn it into a tool truck, turn it into a campus truck, Turn it into an inside distribution truck.

Speaker 2

So these are folks who do conversions on And again, what they seek is, they seek electrification for the purpose of having a vehicle that It emits nothing for purposes of having a vehicle that is very, very torque y. Torquey is important for heavy, heavy loads. And of course, having a vehicle that's quiet. So that's prong number 2. Prong number 3 is the direct to consumer Channel, so that represents sales on our website, direct to consumer shipment From a dealer location, in our case, that would be from the state of Florida, because the state of Florida allows direct sales to consumers.

Speaker 2

And that's Channel 3. Channel 4 is kind of You would call it the governmental large fleet usage Channel. And that's where again, because these vehicles are very quiet and very powerful and strong, They're kind of ideal in a great many government applications, whether we talk about military bases Before we talk about airports or we talk about overseas installations or domestic installations. So those are our 4 channels. We have very, very high quality channel partners in all of them.

Speaker 2

And The question you asked about is because we don't want to build too many units on LRIP because we'd like to Get our production process dialed in so we can go to production tools and bring the cost of goods on each vehicle down to boost profitability. We want to take those first LRIP units, which are more expensive than production units and place them In a way that gives us the most leverage going into 2024 for production sales once we ramp to full production. Hope that makes sense to you, Brian.

Speaker 4

It's Deshaz. Thank you very much. I guess, and this is sort of the nature of the business, as You're just in LRIP right now with the Vanish, but unfortunately, I have to ask, Is the roadmap still the valet then the vapor or have you any thoughts on that? And What does the timeline look for when we'll first see one of those products in 2024?

Speaker 2

So the roadmap is exactly that order. It's the valet. So it's the people mover version of the vanish And then the Vale will be later in 2024, which is excuse me, the Vapor will be later in 2024, which is, of course, our You can consider our personal transport vehicle or PTV or you could even call it our high quality Golf cart, although it most assuredly is not a golf cart. So long story short, The valet will be next for the simple reason that the valet is nothing more than a frame modification To The Vanish. So we take The Vanish, we insert what you would think of as a U frame section, you could call it, Brian, A footwell section and on both sides of that footwell section, we mount seats.

Speaker 2

So it's a very, very modest adaptation of The Vantage, which makes it easy Well, makes it relatively EDC and relatively low cost to launch as our next platform. It's also interesting to note that we've seen tremendous interest in having a premium people mover From people that run premium properties, people that shuttle VIPs around, people that corporate campuses with corporate executives. So The valet is next and the valet will debut at the PGA show the 3rd week of January in Orlando. So you will see there not only The Vantage, but you will see the valet there in the flesh. And of course, we will show design imagery of what the vapor will be later in the year.

Speaker 4

Okay, great. If I could just follow-up with one question for Dave. The conversion price on the preferred shares and the warrants, is that $2 now?

Speaker 3

It is. It was ratchet down to $2

Speaker 5

All right.

Speaker 4

And when we talk about Gross margin breakeven per unit in 2024, just a ballpark estimation What that means in terms of capacity utilization? Would that be when you're at 70% Capacity in the plan or is it at 35%? I'm just trying to get an understanding of what level of sales we should be looking at

Speaker 3

We're forecasting about 4 vehicles per day right now With the capacity of what

Speaker 2

we believe to be 9 vehicles with

Speaker 3

a fully staffed, fully running production line. So I think that's close to the answer I can get you right now. Of course, it will take some time to ramp up to that, but that's what we're

Speaker 4

Okay, great.

Speaker 2

We're talking about factory capacity approximately.

Speaker 4

Great. Thanks.

Operator

The next question comes from David Pardy, Private Investor. Please go ahead.

Speaker 5

I had another question regarding that breakeven calculation. So you're saying 4 units a day, is that based on limitations as far as Your production or what you're seeing as far as demand in the marketplace?

Speaker 2

Well, it's the so the demand we see in the marketplace is substantially Larger than that. For us, when you go from LRIP into full production, the thing that you have to master Sure. Every time and it's different every time you do it, is ramping the supply chain to have all of those parts arriving as near Simultaneously as possible. And so when you're ramping a supply chain and while you're getting smarter and Smarter and more used to from a learning curve perspective, the building process of these units, You ease into it in a way so that you don't end up with, As Ford did a while back, you're going to end up with a ton of inventory sitting on your lot waiting for One piece come in, right? So ramping up to that is really mastering some Synchronicity in the supply chain, which just takes very, very takes an amazing amount of attention to detail And is the reason that you like to ramp in a controlled fashion rather than just jumping to a higher level?

Speaker 5

Okay. So you've got even greater demand, but you're just Being careful in making sure that all the parts are available and you have all the processes Dialed in so that you can continue to ramp up. That sounds good. Will the Vale and the Vapor have to go through the same home litigation process? Or do they kind of piggyback because off of the same platform of What's already been done?

Speaker 2

Well, my guess is that clearly the valley will be a piggyback situation. It is literally from a parts perspective, the parts on the Vale are identical To the parts on the Vanish, literally, the only modification to the valet is the insertion of A frame section and the shortening of some body work. That's it. So I believe that that will Clearly, it'd be a piggyback. On the vapor, we just have to see.

Speaker 2

Again, the vapor will also be Absolutely identical parts. So the same motors, the same controller, same wheels, same tires, same everything. But because I'm not certain what the answer to that is, I'm simply going to say, We're going to find out for the vapor, but for the Vale, I would expect it to be a piggyback.

Speaker 5

Okay. So the can I ask another question?

Speaker 2

Sure. I've got it.

Speaker 5

So this breakeven, you're just talking about the Vanish, not these other units. So that is correct?

Speaker 2

Yes. That's right.

Speaker 5

So when should we see substantial income Revenue from the Vanish, it sounds like maybe 2nd quarter?

Speaker 3

Well, currently, we don't give out any projections on revenue, but we do expect a consistent ramp throughout 2024, as we build up our And dial in that supply chain like Tom was talking about. It won't be completely linear, but we do expect to see that ramp continue

Operator

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Tom Witten Schlager for any closing remarks.

Speaker 2

Well, I would like to thank all of you for participating on today's call and for your interest in Arrow. We look forward to sharing our progress on our next quarterly conference call when we report our year end 2023 financial results likely in March of 2024. Thanks to all. Have a great day.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • ARO began low rate initial production (LRIP) of its AeroVantage units in Q3 after completing safety and emissions testing, placing initial demo vehicles with distributors and strategic partners to drive orders in early 2024.
  • The company plans to transition from prototype to full-scale production by year-end 2023 into Q1 2024, expecting lower cost of goods sold through production tooling and volume leverage and targeting gross margin breakeven in H2 2024.
  • ARO recognized its first revenue from European Vanish units in Q3 via a Spanish hospitality upfitter, underscoring strong market interest in modular payload configurations for food service, last-mile delivery, and campus use.
  • Financially, Q3 revenue was $88K (down 76% YoY) with operating expenses of $6.2M, an adjusted EBITDA loss of $5.2M, net loss of $14.2M, and a cash balance of $47.9M—debt-free and deemed sufficient to reach breakeven.
  • On the product roadmap, ARO will resume development in 2024 of the Valet people-mover—set to debut at the PGA show in January—and later the Vapor personal transport vehicle, while expanding its patent portfolio.
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Earnings Conference Call
Ayro Q3 2023
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