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spk05: Ladies and gentlemen, greetings and welcome to the Workhorse Group's third quarter 2021 investor conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Finance, Tony Fiore. Sir, you may begin.
spk04: Thank you, Operator. Good morning and welcome to all of you joining us today for today's third quarter 2021 results call. My name is Tony Fiore and I am Workhorse's Vice President of Finance. Before we begin, I'd like to note that we have posted our Q3 2021 results as well as an accompanying presentation via press release and in the investor relations section of our website. We will be tracking with the posted presentation during the call, so please follow along either from the link in the press release or through our website directly. And with that, let's get started. Slide two, please. As you can see on the slide, you will be hearing from three members of the management team during the call. Joining me today is Greg Ackerson, our interim CFO, and Rick Douck, our CEO. Moving to slide three. We have a straightforward agenda today. Following my remarks, I will hand the mic over to Greg. We'll cover WorkHorse's Q3 2021 results. Once Greg is finished, he will pass the baton to Rick, who will take your questions after a formal comment and presentation after they are wrapped up. Moving to slide four. Moving to some housekeeping items and our disclaimer on slide four, some of the comments that will be made today are forward-looking and therefore are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement in our regulatory filings and in today's press release. With these details out of the way, I will turn the call over to Greg Akerson.
spk01: Greg? Thanks, Tony. Before I begin, I would like to say, while this is my second opportunity to take the reins as WorkHorse's CFO, this is my first earnings call. It is an honor to be given the opportunity and a very exciting time for me professionally. With that, let's get to the quarterly results by turning to slide five. Sales, net of returns and allowances decreased by 1.2 million, resulting in negative 0.6 million of net sales for the quarter. The driver of this decrease was the sales allowance recorded during the period, which is related to our C-1000 recall in September. Moving to cost of sales, In Q3 2021, we saw an increase to $11.5 million from $2.8 million in the third quarter of 2020, which was driven by several factors. On the slide, you can see them in order of descending impact. The largest impact was the inventory write-down for the quarter. Additionally, our C-1000 costs were higher year over year due to higher volumes, consulting, plant, and other expenses, in addition to higher warranty costs for the quarter. Looking at our SG&A expenses, we saw a $4.6 million increase year over year due to increases in our severance, technical staffing, and stock-based compensation expenses. We also saw higher consulting and insurance costs compared to the previous year's quarter. Moving on to slide six, on our R&D line, we saw an increase of $1.2 million due to increases in our technical staff, as well as consulting and costs associated with our prototype programs. Below the operating loss, we saw some large swings in results for a number of reasons. On the interest line, we saw income of $18.6 million compared to interest expense of $74.3 million in the prior period. The largest driver was the decrease in expenses related to the fair value adjustments and losses on the conversions of our convertible notes. We also had a decrease in losses recognized on the redemption of our Series B preferred stock from the prior period. In the category of other losses, Workhorse realized a loss on the sale of our Lordstown investment of $77.1 million compared to zero in the prior year. Overall, we had a net loss of $81.1 million for the third quarter of 2021 compared to $84.1 million in the third quarter of 2020. Let me shift gears now and talk about what we have been doing to impact what I think is the most critical financial aspect of our business, that being the management of our cash resources. Let's now take a look at the details which are included on slide seven. As of September 30th, we had $230.4 million in cash and cash equivalents on our balance sheet. At our current projected burn rate, we have enough cash to fund our ongoing operations for quite some time before we believe we will need additional funding. However, we must remain diligent in our management of our cash resources, and that is exactly what we are doing. Let me tell you what we have accomplished in managing our cash resources during the quarter. First, we slowed inbound material shipments and freight costs. We have also reduced third party consulting fees by replacing higher cost external resources with in-house talent. We withdrew from the costly USPS lawsuit which reduces legal and related lobbying costs, and we have right-sized our plant staff by approximately 25% without losing key talent. Additionally, we recently converted 172.5 million of debt into equity, resulting in a future reduction of 1.7 million per quarter in cash interest payments. What all this means is that exiting Q3, we have reduced cash outflows by more than 30% sequentially. That is a significant improvement in a relatively short period of time. That completes my financial summary. I will now turn the call over to Rick Dauk for his prepared remarks.
spk02: Rick? Thanks, Greg, and thank you for taking on the interim CFO role and responsibilities. You're doing a great job. Good morning, everyone, and thank you for your interest in our company. It has been a busy and eventful first 100 days for me and our team here at Workhorse. We're taking the sometimes painful but necessary early steps to reshape our company and become a more focused and capable industry leader in the EV space. Turning to slide eight, my update covers a wide range of topics. During my initial earnings call back in August, after a week in my new role, I said I would be undertaking a 90-day orientation process here at Workhorse. Today, I will share with you what I have learned thus far, as well as what we have accomplished in the third quarter to strengthen our company. I will also review the powerful macro trends that are driving our business model, and which were important considerations when I decided to come off the bench and take over the CEO role here at Workhorse. I also want to share the stabilize and grow process model I have previously and successfully used as a CEO to manage, lead, and build winning, profitable companies. Finally, I will share with you what I believe are our most important opportunities and issues, as all companies have them, in addition to our near-term priorities in the fourth quarter. My 90-day orientation at Workhorse has been extensive and far-reaching, as reflected by the activities that have been completed on slide nine. I won't go through them all in a comprehensive fashion, but I will say I have met with our major customers, our key suppliers, attended one of our industry's largest trade shows, met with many of you in the financial community, as well as many other industry players, met internally with department leaders, and held three separate town halls with our staff and workforce at all three facilities. I also conducted in-depth one-on-one interviews with 27 of the key leaders here at Workhorse, and held three days of intense product design and building material reviews with our engineering and purchasing teams. On the regulatory side, we know that both state and federal emission standards will only get more restrictive going forward, and that the federal government is prepared to invest heavily in the infrastructure required to assist in the transition to electric power vehicles. Last Friday, the new 1.2 trillion infrastructure bill was passed into law with $10 billion of investments identified for the EV sector, primarily for EV charging and infrastructure stations. In summary, we've been very deliberate and thorough in engaging across all stakeholders within the industry at all levels and across all functions across the company. We are now well informed and prepared to make critical decisions to reshape our future business plans here at Workhorse. In the spirit of transparency, which I will speak about more later in my comments today, on slide 10 you will see my key 90-day findings. Let me start with the positives. As mentioned earlier, we have strong macro market dynamics propelling our business forward. There are not many industries with this type of macro backdrop in the country today. We are fortunate to have this convergence of favorable macroeconomic trends and regulatory factors driving our future growth. We have rock-solid, capable people at the working level. At every facility, I was impressed with the dedication and capability of the workhorse team. We need to keep the enthusiasm and drive that comes with being an exciting technology startup company while we transition into becoming the best-in-class manufacturer of EV vehicles. As you heard from Greg, we have near-term financial flexibility based on an improved balance sheet and reduced monthly cash consumption rate. I was very pleased to find that we have technology leadership positions in several product areas, including the Class IV to V EV delivery vehicles and powertrain systems, our UAVs, our historical W22 and P-model steel rail chassis systems, and our Metron telematics systems. Based on my conversation with all of our leading customers, we can confirm we have solid purchase orders and strong, loyal customer support. Our Union City Manufacturing Campus capabilities and potential are also positive differentiators for us in the EV industry. We are competing in a fragmented industry and possess foundational elements that differentiate us from others in the industry. We have a capable plant, extensive prototype and real-world driving experience, a qualified workforce and talented engineers. Some of our key competitors in this space are just now building plants, hiring people, and making prototypes. Here at Workhorse, we are a real company and not a PowerPoint EV company. On the other side of the ledger are the negatives. We had an inexperienced leadership team, and we moved very quickly to address this key issue. We previously had poor communication and coordination across the company, both internally and externally, and we've eliminated that. Our cash burn rate was greater than $12 to $16 million per month when I arrived at Workhorse. Our current C1000 vehicle design is not robust, nor is it profitable. Our supply chain, despite the dedicated work of our purchasing staff, is not yet Tier 1 qualified. The company had a lack of systems and process discipline, which to be fair is typical in a startup company. Let's now move to the macro backdrop for the workhorse business model, which we've highlighted on slide 11. It will not come as a surprise that e-commerce has been growing faster than the US retail sales market for the last decade. E-commerce sales continue to grow at a 15% annual growth rate. Coupled with the consumer experience during the COVID-19 pandemic, the orange hockey stick in 2022 shown on the chart on the left, tells you that the last mile delivery is more important than ever. And we believe that this shift in consumer buying habits is here to stay. Now let's take a look at the projected growth rates for both the class four to seven CB truck market and the UAV forecast. You see nothing but positive momentum with double digit cages in both segments. These trends support and underpin the workhorse business model. Slide 12 tells a related but equally important story. As you know, state implementation of electric vehicle standards vary across the country. Led by California and those states that are following the California Air Resources Board plans, the chart on the left shows in blue the leaders by state in the move to EV vehicles. While large in population, this group forms the early adopting tip of what will be a decade-long transition to EV. The chart on the right shows the forecasted projections for the ICE to BEV powertrain transitions here in North America for all auto vans and trucks. As you can see, the transition to electric vehicles is just underway, with less than 4% of all vehicles being fully electric. This transition to EV will pick up speed mid-decade as a result of over $200 billion in new product investments by the OEMs, coupled with major investments in the EV infrastructure across the country These factors will converge to enable the shift to electric vehicles. It will take more than a decade to reach a 50-50 split between ICE and EV powertrain systems. So we are in the very early innings of a generational industry disrupting change in powertrain and infrastructure technologies. These dynamics are impressive and convinced me that this market was one I wanted to participate in with the right company. As a result, I came off the bench to join Workhorse, and I've seen nothing internally or externally to convince me otherwise. When you drill down into our markets, what does this mean for the medium truck market? Slide 13 shows you the current and analyst projections on the makeshift from internal combustion engines to electric vehicles for commercial vehicles in the coming years. We also included the incentive benefits for per vehicle tied to each of these truck weight classes for additional insights. As you can see, liftoff seems to occur in about 2023 and the growth keeps on going. This is without a doubt, a target rich industry to be a part of. Let's now turn to slide 14. I've had the good fortune to serve as a CEO for a number of companies during my business career. Through my experiences, I have developed a straightforward process driven approach towards leading a firm from a challenge situation to stability and profitability. None of this is rocket science, but it requires hard work, tough decisions, selfless leadership, and most importantly, buy-in throughout the organization across all stakeholders, and of course, flawless and relentless operational execution every day. You saw in the 90-day orientation slide the orange circle with the six Ps. Understanding the people, products, processes, partners, profitability, and politics are critical to future success here at Workhorse. They serve as the foundation for what we want to achieve here at Workhorse and are shown at the base of our pyramid. You can see at the top of the pyramid the value creation that comes from the progressive improvement and steps taken by the company based on a series of deliberate actions. But you cannot skip the hard work required to move from the bottom of the pyramid across the levels to achieve success. The level set, we are currently in the lowest slice of the pyramid. From here, we will start our journey together. We are emphasizing an environment that has no politics and is focused on ethical people and actions, team players, and selfless leaders. Over the next three years, I fully expect us to reach the top of the pyramid. Again, this will not happen overnight and will require us to focus on the customers and serve them with industry-leading technology, make decisions about what is core and what is not core here at Workhorse, to develop and implement common lean systems, and then properly grow the business. I am confident we can do this with the strong industry fundamentals and tailwinds we have in our sector. We know it will be hard work and require many important decisions along the way. Speaking for the whole company, we're ready to start on our journey, so let's go to work. Turning to slide 15, one of our first collective actions undertaken as a management team was in October at a two and a half day off site to establish our mission and values as a company. I have to tell you from my previous CEO experiences, establishing a clear vision for the company, and certainly setting core values by which we will act and make decisions going forward are absolutely essential steps in establishing the proper culture for success and the touch points we need, especially for a company in the midst of a transition. Why? Well, if you don't know where you're going, anywhere will take you there. And if you do not have agreed upon values, then you will do not stand for anything in particular. The result of our session was a straightforward vision for Workhorse to pioneer the transition to zero emission commercial vehicles. And our values are quite simple, and we will hold each other accountable to live up to them and emulate them every day. Transparency, teamwork, accountability, excellence, and integrity. Our board of directors has approved our vision statement and our company values. In my presentation today, I hope you will see we are serious about the values we have established, and we will use them to drive my communications internally and externally with all stakeholders. On to slide 16. As I mentioned in the prior slide, we have moved quickly to assemble an experienced, capable leadership team with a breadth of experience, no abuse in the electric vehicle, automotive, and related industries. These names include Josh Anderson, our new Chief Technology Officer, who comes with over 20 plus years in the EV industry and possesses 11 patents around EV powertrain systems and software. Jim Harrington, our Chief Administrative Officer and General Counsel, who worked with me at Delphi Technologies and served as General Counsel at Tenneco for over nine years. Stan Marks will join our company next week as our Vice President of Corporate Development and Communications, and is someone who has a couple decades experience in business development, M&A, communications, marketing, and investor relations. Dave Berkey, Vice President of Product Development, over 40 years of P&L and vehicle design experience focused on low-volume specialty vehicles, very similar to what the kind of volume and vehicles we're going to build here at Workhorse. Ryan Gall, President of Commercial Vehicles, a 20-year veteran of the global auto industry with multiple years deployed across Europe and in China, building plants and building up businesses in both those regions. Chris Nord, our Vice President of Commercial Development, who joins us from the trucking industry, where he was at the forefront of the shift to alternative fuel and electric-powered vehicles in that segment. And Jim Bieders, Vice President Purchasing and Supply Chain, who I worked with at American Axle and who is a supply chain expert. Let's now move to slide 17. As we disclosed in September, We made a policy with NHTSA that additional testing and modifications are required to bring our C1000 vehicle into compliance with federal motor vehicle safety standards. There were only 41 vehicles in the field when we grounded the fleet. I want to emphasize that there were no recorded accidents or safety incident history associated with these or any other of our vehicles. We have slowed production to just two vehicles a week and have extensive testing underway in the fourth quarter on several different C1000 vehicle systems. including brake testing, analytical load analysis, durability testing, and finally reviewing the data field on our electric powertrain systems. During the first quarter of 2022, decisions will be required as to whether we make the C1000 a limited or a full production type vehicle. We are also looking at multiple Class III through Class VII chassis options as part of this in-depth product portfolio review. As we do this, we will be finalizing a three-year product portfolio roadmap that we plan to execute between 2022 and 2024. We will take the lessons learned from both field data and testing results associated with that C1000 fleet and incorporate the relevant improvements into our product portfolio review and decisions. Another important portion of our business is our aerospace or drone division, which is highlighted on slide 18. We are one of the original equipment manufacturers approved by the government to pursue commercial FAA Part 21.17 certification in 2022 and 2023. Potential customers tell us our current range and payload capabilities are market leading. We will continue to work on enhancing both. We are a single source supplier partner in the development of drone delivered packages from vehicles with a leading last mile delivery customer From our conversation with other potential customers, we are encouraged by our system positioning in this business segment. We are exploring additional projects with both the federal and state governments, as well as large retailers. We have already entered into demonstration contracts with multiple customers. We'll keep you informed on important developments in this business segment, as we believe we have both the range and cargo capacity to be a leader in the emerging drone delivery industry. I now want to spend just a moment talking about our Union City facility and campus on slide 19. First, we have a great workforce with lots of manufacturing and assembly experience. We have an existing 2,012 square foot factory sitting on a 47 acre campus. This site has a 30 year legacy of commercial vehicle chassis production. We recently established a wonderful customer experience center and we're planning to add a test track to the facility to further enhance its value in 2022. I believe this facility is truly a diamond in the rough and can be a significant differentiator for us in the industry given the dedicated and experienced staff we have there and the fact that many competitors do not yet have dedicated manufacturing assets under their control. With limited incremental investments, we can and will create a world-class manufacturing center in Union City. Let's turn to slide 20. Based on my 90-day review, I've also been able to scale and scope the company's CapEx requirements for the next three years from 22 to 24. Major investments are needed in three key areas. First, we need to fund research and development, as well as test facilities and equipment, which we estimate will be between $8 to $10 million. We plan to invest in our Union City manufacturing facility to bring it up to the state-of-the-art plant and estimate that will cost somewhere between $15 to $20 million to do this. I want to underline that this number one time I want to underline this number one more time since you will find very few, if any, competitors in the EV space able to get so much improvement for the incremental investment dollar as we will see from Union City. Finally, we need to invest in our corporate IT system somewhere between $5 to $10 million over the next three years. The Workforce team is executing on our revised plans to be fully prepared to meet the emerging EV market needs in 2023 and 2024. As we have shown in slide 21, the federal fleet consists of more than 750,000 vehicles across multiple departments and agencies. This is the largest fleet in the country. Significant federal funding exists to support the transition to EV technologies, both for vehicles and for infrastructure. And across my three decades of industry experience and business experience, I've never seen a customer win an award or a contract when they are suing their customer. I've never seen a customer provide an award to a supplier if they've been suing them. Please turn to slide 22. I've not spent the past 90 days simply familiarizing myself with the company. We have also made a series of decisions to address the challenge we face, which include assembling a new executive management team. And I would say we are about approximately 80% complete with that today. Strengthening the balance sheet by converting more than 85% of our debt to equity. confirming our customer order backlog through direct face-to-face conversation with our customers, grounding the C1000 series vehicles and putting them under more rigorous tests, withdrawing from the USPS lawsuit, reducing the monthly cash burn rate of the company by approximately 30% per month, and I think we can do better, developing a three-year draft of our product portfolio plans, and establishing business unit roadmaps to profitability for the future. Of course, many things remain to be completed as we work our way up the stabilizing road pyramid. So we've established the following priorities for Q4. We need to hire an experienced CFO and other selected executives. We need to strengthen our organizational technical and commercial capabilities. We need to complete the C1000 testing and make a decision on its future. We need to finalize product development roadmaps for both our vans, chassis, and UAVs. We need to finalize the 2022 budget We need to develop detailed 22 to 24 business plans at the business unit level. Stay tuned for further progress in these areas in the coming quarters. Let me touch on a subject that is likely of interest to all of you on slide 23. Recent news flow and our AK fines have mentioned investigations by two government bodies, the SEC and the DOJ, so here's the latest information we have, and that is all I can share on the subject. As we noted in yesterday's 8K filing, on October 19th and November 1st, we received letters from the SEC requesting that we voluntarily provide information related to trading in our securities leading up to the announcement of the award of the U.S. Postal Service contract and on recognition of revenue related to purchase of vehicles by certain customers. On November 5th, the Department of Justice orally informed us that it has a related open investigation involving our company. We have not received any subpoena or other requests for documents from the DOJ with respect to this investigation. We are fully cooperating with both the SEC and the DOJ investigations. At this point, we cannot predict the eventual scope, duration, or outcome of these matters. As I'm sure you can appreciate, we are limited in what we can say while these investigations are ongoing and will not be commenting further on these matters. We are here to discuss our third quarter results and ask that you please keep your questions focused on our results and plans going forward. So wrapping up the slide on 24, what essential takeaways would I like you to have from today's call? First of all, we've assembled a strong, capable, and experienced leadership team in our workforce who have rolled up their sleeves and are going to work. We've strengthened the balance sheet by reducing more than 85% of our debt while reducing our cash burn rate by approximately 30%. We've withdrawn the bid protests and associated legal actions against USPS, opening the door for us to have discussions with the federal government on other projects underway. We have a rigorous vehicle testing and redesign process underway for our C1000 vehicle, led by extremely competent and experienced engineers. We've revised our product portfolio roadmap, currently in development. It is also worth remembering that the transition to commercial electric vehicles will be a long road. To be successful at the end, it will require nimble and multifaceted companies to be ready when the market opens, and also whether the long design, testing, and order cycles associated with launching EV vehicles. Much tougher to do it in real lifetime than do it on PowerPoint presentations. And finally, we have already identified the capital investments necessary to position Workhorse to be first to market in the commercial electric vehicle last mile delivery space in 2023. With that overview and background, we are now happy to answer your questions. Operator, please provide the appropriate instructions.
spk05: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Colin Rush with Oppenheimer. Please proceed with your questions.
spk08: Thanks so much, guys. You know, as you're going through this product redesign and working with these suppliers, can you talk a little bit about the preparedness of those suppliers to help enable some of the technology moves that you need to make to actually take the weight out and get this product optimized and simplified to hit the market?
spk02: That's a great question, Colin. So I think one thing we've discovered here when I got here is that majority of our suppliers were not your typical tier one suppliers. We were buying parts from aftermarket sources, car and truck dealerships, online auction places. So by bringing in Jim Peters, we have him taking charge of the supply chain. We've already identified over 70 Traditional Tier 1 suppliers we think are more than capable. We're talking about big names like BorgWarner, Dana, Metalsa, Magna, others, the typical Tier 1s that underpin the truck industry. We've already had a series of meetings there, and we'll be prepared as we redesign the C1000 or modify the C1000 or go to a different design to make sure we have a very well-qualified, capable supply chain. The one area I'm confident is that we have a good relationship with cattle for our batteries. They seem to be very good. They're proving out quite well in the tests.
spk08: Great. And then in terms of your manufacturing capacity, you know, there's a variety of, you know, kind of scenarios that are developing within the industry as the technology modes change. You know, and, you know, there's some outsourced manufacturing on elements of this. You know, if you look at this, you know, $15 to $20 million investment potentially on your current facilities, How are you thinking about that as a strategic asset relative to some incremental capacity you might find outside of what you have internally? Or is this really going to get you a place where you can really scale up into the full scale of this opportunity?
spk02: Yeah, I'd say one of the key findings here when I got here, I was pleasantly surprised when I got to Union City. I wasn't happy with what it looked like from the outside. We've already addressed that. When you come to business, it'll look a lot better. The roads have been paved. We cleaned up the plants. a lot of debris around the plant that's all been sold off what was really exciting when i got inside it's a damn good building and most importantly have a really good workforce i'll be up there tomorrow to talk to them we have two vehicle semi lines that we can run multiple shifts we have a dedicated chassis line that we can run so if we want to do full vehicles we just want to do chassis we had to flexibly do so we have multiple sub assembly feeder lines And we have the space to expand the plan if we want to insource any of the current work we're doing on the outside. So I think there's a lot of flexibility at Union Cities. And as we button on our vehicle plans, we'll button on our capacity plans. And I think we can meet the growing needs in the EV market out in 23-24. And we've already met with the local government leadership team. The surrounding community includes about 360,000 people. We're one of the best employees up there in terms of wage and benefits, and so I think we can get a very good, competent workforce. We have a history dating back to the early 19th century of building classic vehicles there.
spk08: Great. Thanks so much, guys.
spk02: Thanks, Colin.
spk05: Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.
spk00: Yes, thank you, and good morning, everybody. You know, Rick, there was a little bit of comments around the recalled vehicles. Is there any update on where we are in the process of those vehicles, you know, getting back on the road, and then, you know, we noticed, you know, you mentioned you slowed down to, you know, I guess, you know, to a count of two on vehicle production per day. Is there any way to kind of You know, it sounds like we still think there's an opportunity, you know, at least a niche opportunity for the original series C1000, you know, at least over the next few quarters. Is that kind of the right way to think about it?
spk02: Yeah, let me go through some of the data, okay? So right now, as of I think last Friday, we had 41 vehicles recalled, and there's about 124 vehicles that we've built that are on the ground up in Union City, so about 165. That may have grown to 170. already by this week. We've got to go back and do some of the testing. You know, as a new startup company, we just weren't experienced enough in some of the regulations and standards that we need to hold ourselves accountable to under FMVSS. Let me give you a few examples. First of all, we expect to have all this testing done by the end of the year. Test number 101 is around controls and displays. So there's certain switches, and need to be replaced in our vehicles to bring the markings into conformity with the FMVSS standards. Test number 104, windshield wipers and defogging systems. Our wiper blades need to be replaced, so that's not going to cost us a lot of money. Test number 108, lamps, reflective devices for safety on the vehicle and associated other equipment around the cab for operating warning needs to be taken care of. So that's just stuff that we weren't used to doing on these kind of trucks. Test 120, our tires and our wheels need to have DOT markings on them. And we bought these off the internet, and we didn't have those markings. So that's something we can replace pretty easily. We know what it's going to cost us. The bigger issues we're working on are basically three. One, let's do our brake testing and make sure we document it properly. That's underway. We expect that to be completed by the end of November. Two, let's put our EV powertrain and software systems under more rigorous testing. We'll have good data on that by the middle of December. And finally, we needed to go back and do all the load analysis and then use the basically delivery vehicle test standards you put on a dyno to shake, rattle, and roll the trucks and see how durable they are. As I've talked to the big customers at UPS, FedEx, others, they expect to have these trucks last 15 to 20 years and go 15 to 20,000 miles a year and carry up to 7,000 or 8,000 pounds of payload. I'm pretty darn sure the C1000 can't meet those kind of stringent requirements, okay? That's the bad news. The good news is when I've talked to customers, they told me they'll take every C1000 we can build in 2022 so they can start demonstrating to their teams and their customers in the field how an EV vehicle works versus an ICE vehicle works. I had dinner last night or last Thursday in Dallas. The gentleman said, hey, as soon as you can give me a safe, reliable vehicle, I'll take 12 or 15 just as demos so I can start educating my team and my customers about what's going to happen to them over the next five years in the EV space. So I bring in Josh, who's a known EV powertrain expert who has consulted with multiple of the EV SPAC companies, and bring in Dave Berkey, who ran Triad Services, which designed multiple types of vehicles including the presidential limousines, special vehicles for the military and other agencies, mobility assist vehicles. We have almost 70 years of experience that joined the company in the last 90 days who are now leading the charge. We've got some great young engineers here, average age 22 to 28 years old, a few a little older than that, who are great engineers, but had never really come out of the auto industry. So now we're getting a good combination and blending, and we're going to probably double the size of our engineering staff over the next 12 or 18 months. We also need to have better in-house testing capabilities so we can test the parts of our suppliers to make sure they can meet the requirements we have in our specifications and on our blueprints. And we're going to make a few small investments so we can actually fully test vehicles like we did when I was at American Axle on dynos, et cetera. So does that help you?
spk00: Yeah, that was super helpful. Thanks. And then I guess just one more for me. As we think about, thank you for the comments on the decision to drop the USPS lawsuit, but as we think about the potential federal government opportunity, realizing that it's still very early days, you did mention Dave, who's joining, has background in working with the military. I think traditionally people viewed Workhorse as you know, a provider of electric vehicles solely in the, you know, last mile delivery. As we think about opportunities broadly from the federal government, is there the potential now with your team in place that we could be looking beyond just, say, a small delivery truck as, you know, opportunities present themselves?
spk02: I'm not going to tip my hand too much because I know some of my competitors are listening. or some of my potential customers are listening. But one of the great things I found in this company is that we have a history of making up to Class 7 and Class 8 chassis at our Union City factory. We own all the intellectual property. We own the tooling. We know who the suppliers are. So one of the things we've done as a team is go back and ground ourselves in the transition from both Class 3 up through Class 7 commercial vehicles and where we can play, either as a full vehicle manufacturer or as a chassis provider of vehicles. There's a very, you know, the chassis market here in North America is really a duopoly right now. I won't comment on who those duopoly people are, but it's restricted right now. We hear that from multiple customers that they can't get enough chassis right now to underpin their vehicles. And so we're doing some studies there. So stay tuned for future business plans. We hope to have buttoned up here by early first quarter.
spk00: Perfect. Thank you for the time.
spk02: You're welcome. Thanks for the questions.
spk05: Thank you. Our next questions come from the line of Jeff Osborne with Cowan. Please proceed with your questions.
spk07: Good morning. Just a couple quick questions on my end. Rick, I was wondering if you can give us an update post the actions. It was helpful that you went through on the cash burn. If it was $12 to $16 million, are you closer to $8 now, or can you give us a sense of where that is?
spk02: I'm going to let Greg take that, and then I'll make a few comments probably soon.
spk01: Yeah, I would say during Q3, we got it down to 11. You know, when we talked about some of those actions we were taking, and I will say there are opportunities there. We have a pathway to get it lower. I think 8 is a very good goal for Q4.
spk02: Yeah, I'd say when I first got here, I asked the guys, you know, I went through with Greg and the team. We went through every line item of our spending back to January 1st, and a couple things jumped out at me. Labor, both salary or hourly, is not our major issue here. The issue is we are bringing a lot of raw material. We have a lot of inventory, and we actually flew some of that inventory here, but we weren't able to build the trucks. So why bring more inventory? So we've slowed that process down, and we're not flying parts from Asia in here, right? So that's key. Two, we are spending a hell of a lot of money on outside consultants, legal firms, and lobby groups to the tune of millions of dollars per month And we've driven that down significantly. First of all, it's a lot cheaper and better for us long term to have our own in-house talent versus relying on outside consultants. You know, I won't give the exact numbers, but we were probably paying five times more for a program management position than we should be paying. All right. So that's just like almost ludicrous is what I'll say. Okay. So we've got that. We had to clean up a few past due invoices to suppliers and that both our parts suppliers and some of our service providers. That's almost behind us now, and I think we can tighten the ship pretty tight here in the fourth quarter, in the first quarter, until we are ready to start thinking about what we do next year. Key to that will be is what we do with the C-1000. We basically have enough inventory on hand right now to build somewhere north 500 vehicles, plus or minus a couple hundred, without bringing any more inventory into this company. So we don't need to bring any raw materials in at least until second or third quarter next year. So that's going to be good for us from a cash burden. key factor Greg and I've got to work on is as we start our new product designs and decide what we do with the c1000 or a different design when do we start ramping up the spending on inbound materials and taking on purchase orders and probably sometime in 23 late 22 okay that's helpful just to clarify did I hear you right that you have inventory for 500 and you wouldn't need to order before middle of the year so you're implying you're going to build 500 between now and mid 22 If we can look each other in the eyes, and we can pass every single test, and we can make the modifications on the vehicles we've already built, and we can make those design changes on the next vehicles we've built, then yes, we could probably do that. But we haven't made that decision yet, okay?
spk07: Got it.
spk02: And I know that's a critical decision and a pivot point for us that we're not quite ready to make right now.
spk07: That makes complete sense. Last question, is there any risk of a negative net revenue number for Q4? Are there any returns that have come in quarter to date, or can you just give us any sense of scope as to what we should be thinking about for Q4? I assume no saleable deliveries, just given the issues that you've identified, and some of these are going to be going through mid-December, but I wasn't sure if there's actually any net negative numbers coming in.
spk01: That would not be the expectation. We've already talked to all 41 customers, and we feel we have a full accounting for who's giving us those trucks back, who wants them fixed, and who wants to get those trucks back.
spk02: Yeah, and some of those trucks we've just decided to store on-site at those locations rather than incur the penalty. These are costly trucks that move around the country. It takes special flatbed trailers. To move our truck from our plant to customers is around a $5,000 bill. So the major customers agree to keep those. We're going to pay them a storage fee, and then we'll repair those trucks on-site.
spk07: Got it. Thank you. That's all I have.
spk02: Thanks, Jeff.
spk05: Thank you. Our next questions come from the line of Craig Urban with Roth Capital Partners. Please proceed with your questions.
spk09: Good morning. Rick, can you talk a little bit about the returns of the vehicles, you know, whether or not you expect financial returns to be changed materially with the design changes you're likely to adopt? Are we still looking, you know, at probably something like 65% reduction in maintenance costs for your customers? and superior per mile economics versus gasoline or diesel.
spk02: Yeah, I'd say the numbers that I've seen so far, the TCO for electric vehicle is almost 67% better than an ICE vehicle. So there's a real move to ICE, but they've got to put the infrastructure in place to do so, right? So that's part of the key to unlocking the EV potential one things we're taking a look is you know what is the right price point for an EV powered vehicle I don't think that our price point we went out with the market is right if you especially if you factor in all the vouchers that are coming in for this space so I think that's all a moving target right now okay so I understood understood and then the second question I have is really a financial clarification and use of cash
spk09: So in your presentation today, you covered CapEx needs for a variety of different things. Can you maybe walk us through the timing of the CapEx span and approximate for us what it might look like sort of over the next 12 months?
spk02: Yeah, let me go backwards, okay? We're a startup company. We have IT systems, but we're early in our stage of growth, so it's a good time to put in the right product PLMS system to track our designs between engineering, purchasing, and manufacturing. So that's not very costly, a couple million dollars probably. We have an ERP system, but it's a couple of versions old. And so rather than try to go back and upgrade that, let's go put a better system that's more applicable to us. It's probably going to cost us $3 or $4 million. And I've asked Greg to take a look at what systems he wants from a financial consolidation every month rather than doing some of the things we do right now on Excel spreadsheets. So that's We put in a range, I think, of 5 to 10. I think it will be closer to the lower range. We'll see what happens there, OK? The factory, we have a range of $15 to $20 million. That includes if we purchase a warehouse on the site, because right now we're bringing our materials here to Cincinnati. It doesn't make any sense to bring materials to Cincinnati, unload it, and then take it up to two hours away to Union City. We're looking at some of the in-house processes we have, like water testing or leak testing. Do we want to paint inside or outside? We want to have a dyno tester at the end of the line to run the vehicles for a few miles and make sure all the systems work like we typically see in a big OEM. I'm not sure we need that in the commercial vehicle space, the little volumes we have, but we'll see. So that's why the range is there. And finally, you know, we just don't have the right park testing equipment in here. So I think it's going to be a balance. Let me come back with a If you just spread it out, you know, probably a little bit more in 22 and 23, probably, you know, maybe like 10 in 22, 15 in 23, and then less in 24, we'll be ready to go. That's for your model. But I'll let Greg put that down. We haven't finalized that yet, but that's pretty close.
spk09: Understood. Understood. Thank you. I'll hop back in the queue.
spk05: Thank you. Our next question has come from the line of Chris Souther with B. Reilly. Please proceed with your question.
spk03: Thanks for taking my question here. Maybe just on the decision process that you're going through right now on the C1000, you know, what are kind of the puts and takes here for limited versus, like, full production with the redesign versus that next-gen product? And then, you know, it sounds like the next-gen product would potentially be available for 2023, you know, with the ramp, so you could kind of ramp with either one of those in 2023. Like, so just, you know, that decision process with the C1000, what are – What's driving that?
spk02: All right, first and foremost, C-1000, safe, reliable vehicle. If not, we're not putting it on the road, okay? We're not going to jeopardize anybody's life or anybody's family's life on the road. So you've got to have the brakes that work, got to have a powertrain that's reliable, et cetera. That's number one, okay? Every OEM should be doing that, and every OEM I've ever worked at or been associated with, that's exactly what they do. Number two is what's the payload requirement? We know we designed this truck to go after people like UPS who have a lot larger payload, 7,000, 8,000. As you drill down into the segment that actually uses these vehicles, there's a hell of a lot of trucks that don't need 7,000 or 8,000 pounds. And we think we can identify enough customers to build, whether we build 300, 500, or 1,000 type of these C1000 and put them out there in the field. One thing I don't know right now is when we really shake, rattle, and roll these trucks, the dinos are they really fully capable of living for 15 years or are they more like two or three or four year type trucks that we use as limited production on leases and that's the kind of thing we're trying to get our hands around right now okay and you're right based on all of our testing data and what we do in the field next year we're going to pivot whether we have we might have both we might have a c1000 for certain applications that's a redesigned c1000 we may have a completely different vehicle the c1000 has an aluminum and skateboard chassis it's very costly maybe it's more more cost effective for us from a business standpoint to have a steel chassis or we can have both if someone's willing to pay a little bit more money to have the lower floorboards versus the steel rail chassis we might be able to do that so those are the kind of decisions now that we've been introduced to the company and have our hands around the overall trends and data now we can make some really informed decisions between now and Christmas okay and then just you know looking at what you've talked about with capital quick plans here and then
spk03: lower cash burn rate that you're targeting, you know, looking at like six to eight quarters of kind of cash burn left here. You know, how much of a cash cushion do you need heading into that 2023 production, you think?
spk02: I'd say that's TBD. That's the work that Greg and I are doing right now, right? Now that we have our cash burn down, as Greg said, sounds like the $8 million range. I think October came in around $8 million. I think we can be a little lower in November, December. We'll see. Then we'll start laying in the capital factors. When do we really need the equipment there? We need the engineering stuff now, right? Some of the manufacturing stuff doesn't need to come in until early 23, so we can push that out a little bit. And then when do we need to start ramping up and tooling suppliers, new suppliers? That will probably be second half of 22. So I'd ask for your patience, and we'll try to bring that to you in our fourth quarter earnings call.
spk03: Okay. Thanks, guys.
spk05: Thanks. Thank you. Our next questions come from the line of Mike Schliske with DA Davidson. Please proceed with your question.
spk06: Good morning, and thanks for all the great detail in your presentation. I may have missed this, and I'm looking through the 10-Q. Can you maybe just tell us what number of vehicles you actually did ship in the quarter? I mean, there were some shipped. Can you just give us the number?
spk01: Six shipped during the quarter, Mike. Okay, great.
spk06: And my other question is about the inventory write-off you had in the quarter. Is this basically the parts that are kind of too heavy for the current vehicle or just not going to go forward with any future G1000 in the next iteration? And is there, or is this unrelated to that, is there a risk of a second write-down over the next few quarters of, you know, things you have in stock that just aren't going to be used whenever you get the next version designed?
spk01: Mike, this is – the write-down this quarter was largely due to the accounting standard that says if your costs are higher than your sales price, you have to write it down to the sales price. So it's strictly a mechanical calculation for the quarter.
spk06: So as you go through the process redesign, the C-1000, is there potential that you'll see a second write-down once you realize that some of the parts might not be going forward?
spk01: Yeah, I mean, we're going to be evaluating that as part of our plan, looking at the sales price and cost, but to the extent the costs are in excess of what we expect to sell for, you would expect to see a future write-down.
spk02: Yeah, the comment here is that this company historically has been a prototype type company, right? And we paid prototype type prices for our parts from prototype type suppliers. We're going to transition, and it's a painful transition, quite honestly, you know, to go from a prototype company to to a full production OEM, right? And so we've got to teach the team here, especially in supply chain engineering, hey, these are the target prices for the parts that have these specifications that need to work as a system, right? And so we're going to do that, okay? Go back and look at Elon Musk's quote. Prototype's easy. Production's hard. We're doing that transition from prototype company startup to full production OEM, all right? That's the challenge we face over the next two or three years.
spk06: Got it. So true, Rick. Thanks so much.
spk02: Thanks, Mike.
spk05: Thank you. At this time, that does conclude the company's question and answer session. If your question was not taken, you may contact Workhorse's investor relations team at wkhs at gatewayir.com. Thank you for joining us today for Workhorse Group's second quarter 2021 earnings conference call. You may now disconnect.
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