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spk11: Ladies and gentlemen, greetings and welcome to Workhorse Group's fourth quarter and full year 2021 investor conference call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.
spk00: Thank you, Daryl. Good morning and welcome to all of you joining us on today's fourth quarter and full year 2021 results call. Before we begin, I'd like to note that we've posted our results for the fourth quarter and full year end of December 31st, 2021 via press release, as well as an accompanying presentation in the investor relations section of our website. We've also released our form 10-K this morning. We'll be tracking with the posted presentation during the call, so please follow along either through the website directly or via download on your PC. And with that, let's get started. Turning to slide two, Joining me on today's call is Rick Dauk, our CEO, and Bob Janan, our new CFO who joined us in January. Moving to slide three, we have a straightforward agenda today. Following my open remarks, I'll hand it over to Rick. We'll give you an update on our strategic priorities, including our new product portfolio roadmap. Bob will then walk us through the financial results for the quarter and the full year. And once Bob's finished with our outlook for the year ahead, Rick will provide a wrap up and then we'll take your questions. Moving on to some housekeeping items. On our disclaimer, you'll find on slide four, some of the comments that will be made today are forward-looking and therefore are subject to certain provisions as well as risks and uncertainties. You can find the full disclaimer statement in our 2021 Form 10-K, other filings that we make with the SEC as well as in today's press release. And with these details out of the way, I'd like to turn the call over to Rick Dauk. Rick?
spk02: Thanks, Stan. I'm thrilled to welcome both you and Bob to your first earnings call here at Workhorse, and welcome to the team. Good morning, everyone. We appreciate you taking the time to join us today, and for your patience as we work to get our hands around the company and develop a viable business plan for Workhorse. Turning to slide five, it's now been seven months since I joined the company. During that time, we have completed a deep dive review of every aspect of the business, taking significant action and made difficult decisions to strengthen both the team and business foundations of the company. I am confident we are on the right path and believe strongly in our ability to pioneer the transition to zero emission commercial vehicles. Let's jump right into how we executed on our priorities in Q4 and then review our future plans for the company. Turning to slide six, on last quarter's earnings call, we laid out clear priorities for the fourth quarter. I'm pleased to say we accomplished the majority of these objectives. There's a little bit more work to do on our 2023 and 2024 business plans. We accomplished a lot. One, we built out our executive leadership team. Two, we significantly enhanced our engineering and technical expertise. Three, we opened a new technical center in Wixom, Michigan. Four, we stabilized and strengthened our financial position. And five, we finalized our 2022 budget. Most importantly, we have developed a revised and executable strategic product portfolio roadmap for our future electric-powered delivery van and truck offerings, which includes developing two new truck chassis platforms that we'll lay out in today's presentation. Moving on to slide seven. Each of the priorities we executed on in Q4 are a deliberate part of our three-year business plan to stabilize, profitably grow, and create shareholder value here at Workhorse. We made progress on several initiatives across our six P's, people, products, processes, partners, politics, and profits. Getting the right people on the team establishes the foundation for our future success. We are largely complete in filling critical open leadership positions with highly capable and proven industry veterans. We continue to believe that long-term value creation comes by following a series of successive and deliberate steps taken to build a business. You cannot skip any step in the process or avoid the hard work required to move across each level to achieve success. Here at Workhorse, we are taking the necessary steps to transition the company from our historical roots as a prototype technology startup into a full-blown commercial vehicle OEM. After a costly misstep with the C1000, our journey is underway, and over the next three years, I expect we can and we will accomplish all of our key business objectives. Our journey will not be easy, nor for the faint of heart. It will require us to stay focused on our customers and serve them with industry-leading technology, make decisions about what is core and what is not core long-term, to develop and implement common lean systems, and then properly grow the business. Along the way, we should benefit from strong industry fundamentals and tailwinds driving the transition from ICE to EV-powered vehicles in our sector. We are confident that relentless and focused execution across each step will help Workhorse emerge successful and create long-term value for our shareholders and other stakeholders. Not every startup will survive the shakeout that will occur in the nascent commercial EV vehicle sector. Those who execute successfully will emerge as the winners. As you'll see on slide eight, As I've said earlier, we have now largely completed our overhaul of Workhorse's executive leadership team with several key appointments in Q4 and early 2022. This included adding Bob Janan as CFO. Bob brings more than 25 years of senior finance and C-suite leadership experience to Workhorse. He most recently served as both the CEO and CFO for Privately Held Family RV Group, the fifth largest RV dealer in the country. Kerry Roraff joined as CHRO, and Brad Hartzell joined as VP of Manufacturing Services in February. Both are accomplished auto industry veterans. In addition, Ben Drake joined as the VP of Government Affairs in January after serving as the Department of Defense Leader for Energy Resiliency Policy and experienced as a professional Senate Energy Policy staff member. We have already seen the positive impact of these new executives joining the Workhorse team. including Bob's deep involvement in our 2022 budget planning and the 2021 10K processes. We have a few remaining open positions that we want to fill during the first half of the year, including finding an experienced CIO and adding sales leadership capabilities from the transportation industry. I feel we have built an experienced, capable leadership team with a breadth of expertise across finances, electric vehicles, automotive, commercial truck, and related industries to be successful here at Workhorse. Turning to slide nine, we recently opened our new technical center in Wixom, Michigan, to expand and enhance our design, engineering, and testing capabilities. We've moved aggressively to staff the new facility. In the last 90 days, we have hired experienced automotive industry veterans with more than 270 years of cumulative design experience and expertise in chassis, suspension, drivetrain, energy storage, and supply chain management. We are in the process of transferring Acquiring and installing full vehicle and component testing equipment at Wixom with a target to be fully operational there in Q3 of this year. During April 2022, we plan to consolidate and relocate our headquarters together with our advanced technology team here in Sharonville, Ohio. This will help us improve efficiency and teamwork between product engineering, purchasing, manufacturing engineering, quality and production planning. During our last call in November, I mentioned our plan to create a world-class manufacturing complex in Union City, Indiana. This transformation is well underway, and our plant staff is working hard to be ready for the start of production in Q3 of this year, and I know they will be. We have acquired or leased additional facilities on the Union City campus to help us streamline our supply chain value stream to include having an environmentally controlled facility to safely manage battery storage. We are planning to host an analyst event in Union City in the fourth quarter, so you'll be able to see firsthand what we are now calling the Workhorse Ranch and test drive our new generation of electric vans and trucks. Moving to slide 10, with our organization strengthened and our operational complex revival underway, for the past few months we've turned our attention to our most significant deliverable in Q4. Our team has developed a revised strategic product portfolio roadmap to deliver a family of electric commercial vehicles across a Class III through Class VI segments. This is not some PowerPoint exercise. It's a realistic and achievable plan to deliver the types of vehicles that our customers and the markets we serve are asking for in the last mile delivery segment as we make the shift to electrification, what I call the customer and market-driven technology and products. Our new product portfolio roadmap includes getting existing C1000s repaired and back on the road. We have decided to limit the overall production of the C1000 model, and I will explain our decision in a moment. We are focusing our engineering team's efforts on developing two new truck chassis platforms in 2022 and 2024, while also partnering with Green Power, as announced in a joint release this morning that I will discuss in further detail shortly, on a third vehicle to bridge the product gap between our decision to limit the C1000 production. Moving to slide 11. Let me provide you more details on our future plans for the C1000. Over the past four months, we have completed FMVSS testing, identifying several corrective actions required to complete full vehicle certification. During this process, we also took the opportunity to fully test the e-powertrain reliability and the structural durability and payload capacity of the C1000. We identified several necessary corrective actions required to provide a safe, reliable vehicle to our customers. These actions include addressing both vehicle design and supplier quality issues. We need to replace the front suspension and enhance the rear suspension on the C1000. Our supplier partners need to address part quality issues on e-powertrain subsystems. As a result, we will need to repair all previously produced C1000s. After completing these repairs, we will only build an additional 50 to 75 C-1000s by the year end using existing on-hand inventory. We do have firm purchase orders for all C-1000 vehicles that we will repair and build in 2022. Long term, we have determined that the combination of a limited payload capacity and unsustainable bill of materials costs make the C-1000 economically unviable, and as a result, we will not move forward with full volume production. This is a significant and costly setback for us here at Workhorse. We will take the painful lessons learned from our C1000 experience, combine them with extensive and positive field data from our 300-plus eGen vehicles still in service in the field, and apply them to our next generation of vehicles. We will, of course, continue to provide service and parts to customers for both eGen and C1000 vehicles on the road today. Turning to slide 12, let me introduce the W56. which will be the first all-new workhorse chassis platform to hit the market in Q3 of 2023. The W56 will serve the Class 5 and Class 6 delivery step van and truck market segments. It builds on workhorses' decades of experience building chassis systems for these classes of vehicles. The W56 is our shortest path to a homegrown design, tested, and economically viable BEV platform. It will come in three wheelbase sizes and addresses a TAM we estimate to be approximately $1.7 billion per year. We are building upon existing and proven workhorse chassis and e-powertrain system designs, and we will use readily available parts sourced from well-established commercial vehicle Tier 1 suppliers. Our expanded engineering and design teams have been hard at work over the past two and a half months on the W563's design, And we will soon finalize design intent with supplier partners, allowing for critical drivetrain, energy storage, chassis, and suspension sourcing decisions by the end of Q2. This will ensure we have prototype vehicles ready for testing in Q4 this year and be in a position to start full production on time in Q3 of 2023. Designing, testing, and producing the W56 is priority number one here at Workhorse. And I am personally leading cross-functional program use on a monthly basis on this program. We will keep you apprised of our progress on this critical program every quarter going forward. Next up will be the W34, which is a new Class III and IV chassis that builds on the key technologies first introduced on the E-Gen and C1000 vehicle designs. The W34 will feature the accessible low-floor platform, efficient lightweight systems, and our proven e-powertrain systems. We estimate the addressable TAM for this segment of the commercial vehicle industry to be about $10.4 billion per year. Production is expected to start in 2024, which means we will be coming to market just as new mileage and emission standards take effect for commercial trucks in several regions of the country. Lastly, turning to slide 13, is the W750, which will serve to bridge the gap between the C1000 product and future production of the W56 and W34 platforms. Workhorse has signed a strategic supplier agreement with Green Power Motor Company that demonstrates the value we provide as a strategic partner. Under the agreement, we will take delivery of up to 1,500 chassis from Green Power, complete the manufacturing process at Union City, and deliver both cab chassis and finished step vans to customers in the United States and Canada beginning in the third quarter of 2022 and throughout 2023. The W750 is a Class IV vehicle that is both FMDSS and CMDSS certified, has up to 150 miles of all-electric range, a payload capacity of 5,000 pounds, as well as standard 60-kilowatt DC fast charging and optional 60-kilowatt wireless charging capabilities. We look forward to collaborating with Green Power and delivering the first trucks and vans from our Union City plant later this year. We have shared our revised product portfolio plans in person with our two largest customers who came to Union City to test drive the 750 and review our C1000 test results. Based on their feedback, we are confident we can sell all of our C1000s by year end. Our customers are currently assessing how to proceed in transitioning previous vehicle orders into new purchase orders for the W750 and the future W56 and W34 vehicles. We owe them working demo vehicles before they can make their final order decisions. Turning to slide 14, we also continue to invest in our drone system technologies and achieve several important milestones during the quarter. First, we have continued to invest in the aerospace business by expanding both our technical capabilities and our team skills. We have quadrupled our software engineering team, tripled the number of certified pilots, and added experienced FAA veterans to the team. and we transferred supply chain teams to the aerospace team. The application we submitted last year to the Federal Aviation Administration received approval to pursue type certification for the horse flight delivery drone in 2022 and 23. We believe we have also reached the final development phase for our vehicle launch drones with industry-leading payload, range, and safety delivery capabilities. I'm extremely encouraged by the progress the team's made in the two quarters plus I've been here. Lastly, we are awarded multiple contracts and grants with the U.S. Department of Agriculture to provide sensor monitoring, data procurement, and analytics as part of a demonstration in the areas of agriculture, waterway, and land management. This expands the overall addressable market for our base drone technology. We're exploring additional projects with both federal and state governments and potential medical service customers. I look forward to updating everyone on our progress as we continue to develop our aerospace capabilities across multiple in-market segments. Based upon direct feedback from both commercial and government customers, I am convinced that we are on the cutting edge with our drone system technology with regards to both small package delivery and aerial mapping. With that business update completed, I'll now turn the call over to Bob to discuss our financial results.
spk01: Thanks, Rick. Before I begin, thank you and Stan for welcoming my first earnings call. I'm excited to work with the amazing team you've assembled and pleased to be here. With that, let's turn to slide 15 regarding financial results for the quarter. Our financial results for the fourth quarter of full year reflect the C-1000 recall as well as the important investments we are making across our business and our people, facilities, and technology. We've taken steps to strengthen our financial position and our focus on operating efficiently. Let me provide some color on our results. Sales net of returns and allowances for the fourth quarter of 2021 are recorded at a negative 2 million compared to 0.7 million in the fourth quarter of 2020. The decrease in sales was primarily due to a decrease in volume and an increase in vehicle returns and allowances in connection with the recall of the C1000 vehicles. Cost of sales increased to 100 million from 7 million in the same period last year as we took several non-cash charges including a $63.6 million increase in the inventory reserve, $23.9 million increase in the prepaid purchases reserve, and a $6.8 million impairment to adjust the carrying amount of tooling and other assets related to the C-1000. So a total of $94 million in impairment-related non-cash charges. SG&A expenses increased to $15.7 million from $4.7 million in the same period last year. The increase in SG&A expense was primarily driven by a $4.1 million increase in selling costs, a $3.2 million increase in legal and professional fees, and a $2.7 million increase in employee and labor-related expenses from increased headcount and the appointments of our new and larger executive leadership team. R&D expenses decreased to $2.1 million compared to $4 million in the same period last year. The decrease in R&D expense was primarily related to reduction in consulting fees, slightly offset by an increase in employee and labor-related expenses from an increase in headcount. The decrease is also attributable to reductions in consulting and prototype component costs related to the C-1000. Net interest expense was $35.7 million compared to $4.9 million in the same period last year. The increase in interest expense was primarily related to losses on exchange of the company's convertible notes to common stock. Other loss was nil compared to $322.2 million other income in the same period last year. The other income in the prior period was primarily attributable to the favorable changes in fair value of the investment in Lordstown Motor Corporation, which was sold entirely in Q3 of 2021. Net loss was $156.1 million compared to net income of $280.5 million in the same period last year. Loss from operations for the fourth quarter was $120.4 million compared to $15 million in the same period last year. Moving to our full-year results on slide 16, sales net returns and allowances recorded a negative $0.9 million compared to $1.4 million in 2020. The decrease in sales was primarily due to an increase in sales returns and allowances in connection with the recall of C1000 vehicles announced in the third quarter. Cost of sales for the full year 2021 increased $119.4 million to $132.5 million from $13.1 million in 2020. The increase was primarily due to several non-cash charges, including a $75 million increase in inventory reserve, $23.9 million increase in prepaid purchase reserve, and a $6.8 million impairment charge to adjust the carrying amount of tooling and other assets related to the C-Series electric delivery truck. Year-over-year increase just described were primarily driven by the company's decision to produce the C1000 platform at low volume in transition to a new all-electric delivery truck platform in the near future. This decision was based on the results of extensive testing performed on the C1000 vehicles, which concluded in early 2022. Selling general administrative expenses for the full year 2021 increased to $40.2 million from $20.2 million in 2020. The increase was primarily due to an increase of $7.9 million in employee and labor-related expenses from increased headcount and the appointments of the company's new executive leadership team during the year. Additionally, there was an increase of $6.1 million in professional services related to litigation, settlements, marketing programs, investor-related services, and general consulting fees, also a $3.1 million increase in selling-related fees. Research and development expenses for the full year 2021 increased to $11.6 million from $9.1 million in 2020. The increase was primarily due to an increase in employee and labor-related expenses due to headcount to support current and expanding product roadmap and continuing development of the horsefly UAV. Other loss changed unfavorably during 2021 as the company recognized a loss of $225.4 million, primarily attributable to unfavorable changes in fair value in the sale of the investments in LMC. During the year ended December 31, 2020, the company recognized income of $323.1 million, also primarily attributable to favorable changes in fair value in the investment in LMC. Net interest expense for the full year 2021 decreased to $12.6 million compared to $190.5 million in 2020. The decrease was primarily due to a reduction of $153.4 million related to fair value adjustments and losses on the conversion of the company's convertible notes. Additionally, there was a decrease of $12.2 million related to market-to-market adjustments and losses on exercise of warrants issued to lenders, $7.7 million decrease in costs related to the issuance of convertible notes, a $4.7 million decrease in losses recognized on the redemption of Series B preferred stock. When the years ended December 31st, 2021 and 2020, we had no federal tax expense primarily due to the losses on operations. Net loss was 401.3 million or a loss of $3.12 per diluted, fully diluted share compared to net income of 69.8 million or 70 cents per fully diluted share last year. Moving to slide 17, as of December 31st, 2021, the company had approximately $201.6 million in cash and cash equivalents, and approximately $27.5 million in principal debt at face value. This provides us sufficient cash for 2022. The company's CapEx plans for 2022 are between $25 and $35 million due to facility and IT systems upgrades in Indiana, Ohio, and Michigan. We also plan to establish an at-the-market ATM equity program utilizing our current shelf registration to allow us to opportunistically raise capital in the coming quarters. Slide 18 covers our 2022 guidance, which reflects our planned progressive ramp in manufacturing. Assuming supply chain visibility remains unchanged, we expect to manufacture and sell at least 250 vehicles and generate at least $25 million in revenue. Importantly, our guidance for the year is back-loaded, as we are not expecting to produce any vehicles in the first half of 2022. As I mentioned, we are moving ahead with enhanced financial position and a focus on operating our business across all functional areas more effectively and efficiently. Transitioning Workhorse from a technology startup and prototype company into a commercial vehicle OEM requires a significant investment in people, products, processes, suppliers, marketing, and business systems. That is exactly what we are doing today at Workhorse. We have the near-term financial flexibility to make these financial investments. With that, I'll now turn it back to Rick to wrap up the call.
spk02: Thanks, Bob. This is an important, exciting time for us here at Workhorse. We recognize that there's a lot of work to do, and we are committed to getting it done. As we come away from this call, there are a few key things I want to emphasize. First, we're building a new foundation and getting back on the road to growth. Second, we have a clear and executable product roadmap going forward. And finally, we are confident that we have the right team and structure in place to execute on our plans deliver new vehicles, and create long-term value to our shareholders. Thank you again for your time this morning. We look forward to updating you on our progress again, and we're now ready to open the call for your questions. Darrell, please provide the appropriate instructions.
spk11: 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. The confirmation tone will indicate your line is in the question queue. You may press star two 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.
spk06: Thanks so much, guys. So with the adjustment in the designs and, you know, the supply chain to support that, can you give us an update on where you're at in terms of full qualification of the supply chain and validation of the designs that you're planning to start ramping here in the second half?
spk02: Okay, great. So we're working parallel path really in three ways right now, right? We have the W750, which we're working with Green Power. We've had their vehicle for a few months. We've gone through all their testing, all their certification documentation. We've tested ourselves, and we feel pretty good about that. We are going to modify that vehicle to make it a delivery step van. We're in the early stages of that. We are likely to choose our partner this week or next week for the back of the box and the cab. So I think we're good Steve there. On W56, we've gone back and looked at our old chassis, the W62, the W88, the E-Gen, and a few others, and the C1000, and we've got a pretty good sense of what we're gonna do there from a chassis standpoint, and also from a battery management standpoint, and also from a drive change standpoint. The guys will be coming to me in the next two weeks. We expect to source those parts with our supplier partners by March 15th. So I think we're in good shape. Those are the long, we've laid out every component on the truck, Colin. And we know what the long lead times are in the industry right now. We've factored in some space there for any kind of supply chain disruptions if we're doing anything overseas. And we feel like we're very comfortable right now with some float in there for a third quarter launch next year. Perfect.
spk06: And then the cash balance, getting from here to there as you scale up, a couple hundred million dollars is a great place to be. But I'm curious what the fully loaded anticipated cash need is going to be to get to, you know, an operational cash flow positive scenario.
spk01: This is Bob. So obviously, you know, right now we are burning cash, and we've talked about that, and $200 million is we feel sufficient for the near term. But we will be looking longer term at raising capital as we go through the funding of the working capital and in these launches that are going to occur over the next couple of years. So we think, you know, once we get to the launches, then we can start talking about where we go from there.
spk02: One thing we didn't get done in the core was we didn't get, we got our hands around 22. First we got hands around 21 and the C1000. We put together a solid plan. We built it from the ground up at both business units up to the company. We factored in all the, the, The expenses we're going to have to design and test these trucks and source the parts. We're mapping out all the working capital needs. We have that for 22. We need to finish that job for 23 and 24, and we asked the board to give us until May to do that. So you probably hear something about second quarter, early third quarter this year.
spk06: That's incredibly helpful. Thank you. And then just the last one for me, obviously you've augmented the management team in a pretty substantial way here in the past year. I'm just curious, are there other key roles that you guys are trying to fill at this point, or do you feel like This is the team that you're going to carry forward and execute events to plan.
spk02: Yeah, just like a good sports team, you've got to take a look at your existing roster, sort it out, see what you've got. We probably have three areas we need to fill. We need to get a CIO in here who's gone through an ERP transition in the automotive space, either the OEM or Tier 1 side. We need to build now that we have a product plan. We need to start thinking about how we're going to go to market and be facing the customers. As you know, this is an interesting market. You've got the big delivery guys like UPS, Amazon, FedEx, U.S. Postal Service. But there's also a lot of independent fleets out there. From my days at Acura, I know that more than 80% of the fleets here are less than 50 vehicles. And how do you cover them? Do you cover them through a regional team or through a national accounts team? And so we're sorting that out. So CIO... Sales leadership team, both at the top and regional. And the third piece is because of all the parts we're going to have coming from across North America and across the world, we need to get a director of logistics and supply chain inventory management here. Those are the three key priorities for us here as we go into the Q2 pretty soon.
spk06: Perfect. Thanks so much, guys.
spk02: Great, Colin. Thanks.
spk11: Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.
spk05: Yes, thank you. And good morning, everybody. Um, you know, Rick, I wanted to, you know, think, think through a little bit more on on the strategic partnership with green power. And really, I guess my first question around that is, do you think there's opportunities to do similar type structures or supply agreements with with other providers beyond green power?
spk02: Look, that's a good question. I won't tip our hand off too much, but we do have a factory up in Union City. We've expanded that factory by buying a warehouse up there and buying another facility that we can use for battery storage. We have a very capable workforce there. There's ability to hire more people in that area. There are other people in the EV space today who are talking about building a factory. In my experience, and I've built about 10 factories around the world, that takes minimally 18 to 24 months. So if they haven't broken ground or got the permits, or secured the steel, or the contractors are two years out. So there are some people who've reached out to us about considering can we go and do some things for them from a production standpoint. So I think with the W750 with green power, as I said, it bridges the gap based on our decision to only do limited production on C1000, and we needed minimally 18 months to get to the W56. This plugs in and fills that gap for a revenue standpoint. When we hired Josh Anderson, he knew most of the key EV players in the industry and consulted with them. I met the Green Power team out at the ACT show back in August, a month into the job, basically early September, and we've had those discussions, and it led to this partnership. And we felt like, based on our assessment, that was the best cab chassis system that we could get our hands on as quick as we could. Okay, great.
spk05: And then just around Union City, I want to say in a previous version of Workhorse, I believe that the throughput of that facility was around 10,000 units, realizing things change, you're adjusting, you're expanding, you're building out. Any kind of sense for what the throughput of that facility could be, medium or longer term?
spk02: Yeah, that's a great question. I remember I used to be a supplier to Workhorse Custom Chassis. I remember that I built axles for them when I was at Axle and Wheels. We haven't finalized that number. We know we can build at least 10,000. That's if we need to look at running the plant three shifts a day, seven days a week, not five days a week, one and a half shifts, two. So I'll let you do some rough math there. A lot will depend on exactly what we build there. Both ourselves, we'll do the W750 there, the W56 and W34. We just added an additional 67,000 square foot warehouse, which could be expanded to put a second line in there if we want to do some contract manufacturing. So we think that in the heart of Automotive Alley here, basically between Michigan down to Tennessee, Ohio, we're right in a nice sweet spot. And we actually already met with the mayor. We met with the state government there about getting some support, and we're talking to the federal government about some of the grant money that's available for transitioning old factories over to EV-powered systems. So we're pretty excited about the ranch.
spk05: Okay, perfect. Thank you very much for the time, everybody.
spk03: Thanks.
spk11: Thank you. Our next question has come from the line of Jeff Osborne with Cowan. Please proceed with your questions.
spk07: Good morning. This is Jeff Rosetti on for Jeff Osborne. Thanks for taking the question. Just wanted to see if you might be able to provide any details just around the pricing and gross margins you might expect for the 750, the 5, 6, and 3, 4.
spk02: Yeah, we have those. We've mapped them out. It's built into our 22 budget, but we're not going to tip our hands to our competitors out there right now. So good question, though, Jeff.
spk03: Okay, I appreciate it. I can say this. It'll be a profitable vehicle for us. How's that?
spk07: Anything with the green power arrangement that would differ the economics versus the 5.6 and 3.4?
spk02: No, I don't think so. Solid vehicle. We've gone out and we've benchmarked all of our competitors in the space. on what their payload is, what their cubic space is, what their range is. And we think we can have a very competitive product, and we can be in the market yet this year with that product, both in a cab chassis design and a full delivery van step van by the end of the fourth quarter this year. Okay?
spk07: Thank you.
spk11: Thank you. Our next questions come from the line of Craig Irwin with Roth Capital Partners. Please proceed with your questions.
spk10: Thanks. Good morning, and thanks for taking my questions. So, Rick, a lot of changes in the last six months. Congratulations on the progress there. I wanted to start off asking about the W750. It's probably the most important thing right now, given the revenue outlook. 1,500 units is a very specific number. And, you know, you have so-called contracts that would require units higher than that if we expect actual deliveries to those customers to materialize in the near term. Can you talk about whether or not this truck is for a new customer, whether or not there are committed orders already for this truck? whether or not you need to actually go out and capture customers for the W750 in order to take delivery of the 200 units a quarter?
spk02: It's a great question. Okay. So when I got here, we had 8,032 orders, basically from three customers, UPS, Pritchard, Family, and Pride. Okay. Okay. So we had customers out there. We've met with those customers. I think I was very clear with you when I talked to UPS when I first got here. They said, until you can meet our payload requirements, we're not going to fulfill those orders. You have those orders. When you have a truck that can be built and carry that payload at the right cost, we'll convert those orders into real trucks. We've met with the other two customers up at Union City like we talked about. We've driven the vehicles. We've given them the target prices that we think we can build those for in the market. They're going back to assess the mix that they had on their original orders between the C1000, the C650, and see how they want to apply those orders to some C1000s we talked about. We think we can sell all those, even with a limited payload capacity. And they're making a decision. They asked for a few more weeks to figure out whether they want to do W750s or they want to do weight to W56 or W34. So that's our hard work we need to do in the next 90 days.
spk10: So where do you stand on the pipeline for these products? I mean, you're very specific about, you know, when you expect deliveries to begin, right? And you say that there's a deposit, so I assume you're giving some cash to Green Power to facilitate those initial deliveries, which probably has to be given sometime around right now, given their supply chain. But, you know, Can you maybe frame out for us what the pipeline looks like? I mean, again, 1,500 units is a very specific number. Are there a bunch of utilities sort of lined up and ready to go, or is this something where you're really just hitting the ground running now?
spk02: Two things. First, our priority is to take the customer orders we have and see how many of those we can fulfill with the payload. You know, it carries 5,000 pounds. It's a Class IV vehicle, not a Class III vehicle. It's got a range up to 150 miles. It's got DC fast. It's a very capable vehicle. It's already in the market in a couple places overseas where it's being used, okay? So that's one. Two is, okay, now that we have the vehicle and we've announced it publicly today, now we're going to go out and talk to the current customers we have and other customers who have approached us and see if we can convert some of those in orders as well. So, again, we were able to give them a test drive of the vehicle. We were able to share all the building materials with them and show how it's built, and we showed them all the test data. So it's a matter of them making some decision right now, but we got to get out on the road. All right. So I feel comfortable now that I can pivot a little bit and be out in the road, both to talk to investors and also talk to customers where before I wasn't confident in the plans that I inherited that I could go out there and sell that.
spk10: And do you, do you expect to actually take delivery of all 1500 units, roughly 200 units a quarter, or is this really just the capacity? And, um, you know, actual deliveries will be a function of success on the sale front.
spk02: We've secured capacity at the supplier who builds that cab chassis for up to 1,500 vehicles. We have ability to adjust that up or down every quarter based on our success in the market, and that's what we're going to do. So I'm confident that we can get the vehicles We're confident we've got the key suppliers lined up that are going to come in and partner with us here. Two of the key ones are local sources here in the U.S., so that's good. We're not dealing with the supply chain disruptions overseas on those components we need for the vans. And now it's a matter of going out and figuring out, first and foremost, the customers have been very patient with us. How many orders do they want to convert to W750 or hold off to W56? Oh, and then we've got to go out and find some new customers.
spk10: That's why we need to hire some sales people. Oh, yeah. No, so last question, if I may. You're a pretty conservative guy, and I think most people that follow Workhorse like that, right? But in the past, the company has been sort of willing to share targets or goals as far as units that they'd like to see sold in a certain timeline. Can you share with us some color on what you would hope would be achievable for 22?
spk02: Yeah, we said today we expect to sell over 250 vehicles and generate around $25 million of revenue. That's going to be a combination of our C1000s and some W750s, okay? And you're right, I tend to be a little conservative, and I've surrounded myself with very conservative people who make me even more conservative, which is probably the right thing. There's been a lot of sizzle in the EV space over the last three or four years, not just from workhorse. You can go look at all the stock prices of some SPACs, et cetera. Typically, they're down somewhere between 60% and 85%. So doing something on a PowerPoint and doing something in a factory, it's two different worlds. Putting a rendering of a drawing of a vehicle up there and actually doing the design, the sourcing, and the testing where you PPAP all your parts, you homologate your vehicle, you crash test it, winter testing, summer testing, dynamometer testing, that's hard work. I almost had a bad adjective. My chief counsel is looking at me. Don't say that word. So, you know, just like the boys over in Eastern Europe are realizing what's on paper and one thing is easy to draw maps on a line, lines on a map, and actually doing it is different, right? So hard work in the automotive industry. Hard work in the auto industry. And I used a quote last time from Elon Musk that says, prototypes are easy. Production is hard. Take a look at all the C-suites. departures across the EV industry in the last six months, CEOs, COOs, CFOs, because people didn't deliver on their commitments. What we've built here is a team that has a proven track record of executing hardcore engineering supply chain operations. What I need to put on there, I need to put the sales team out in front of them. There's nothing to sell if you don't have a vehicle that doesn't pass testing, right? So that's what we're doing now.
spk10: Excellent. Well, we look forward to watching your success. Thank you.
spk03: Great. I appreciate it.
spk11: Thank you. Our next question has come from the line of Chris Souther with B. Riley. Please proceed with your questions.
spk09: Hey, guys. Thanks for taking my question here. Any update on where the backlog stands today from a dollar standpoint? I believe there are a few covenants related to the dollar value, so I just wanted to see if we could get any. Clarity there. You called out two of the key customers and seemed to have good feedback on the W750. So wanting to get a sense of where we are in the process of converting orders from the C1000 to the 750 and kind of the other next-gen stuff.
spk01: Hi, this is Bob. So the backlog, we are, as you said, in the process of converting to the C-1000 and then the 750 here. And, you know, it's a process. We've got to go through the process, but we're confident that we will be able to get everything in place to meet those covenants.
spk09: Okay, that's great to hear. And then I'm curious, with the W750, you talked about it as a stopgap to get to the W56 and the W34. I'm curious, you know, what are the puts and takes around, you know, continuing to use someone else's chassis versus, you know, developing your own with the 34 in particular, which seems to, you know, probably more aligned from a class standpoint.
spk02: Yeah, very good. It's not a stopgap, it's kind of a bridge is what I said, but you can use stopgap, I guess, right? The plug, it plugs the gap we had in revenue. So you're right. This is a steel rail chassis for a Class 4 vehicle. It's proven. It's tested. It's already certified both in Canada and U.S., so that gives us something we can go to production in this year rather than wait for two years. The W56 is similar to what we built in the past in terms of a chassis standpoint. The W34 is the step forward. It's kind of what the lessons learned we've learned on the C1000 and the E-Gens. That's going to take a little bit more time. Marketing work to make sure the customers really want some of the things they talked about. And then it's got to do some sourcing work, all right? One of the challenges on the C1000 is we had one customer give us specs. We went and tried to build to those specs. Some of those specs were realistic and some of them were unrealistic. And you've got to build a truck that you can actually make money. It doesn't do you any good to have a great working prototype if the costs are double what the customer wants, all right? And if the bill of materials is double or triple the cost of the vehicle, the sales price of the vehicle, that's not a good business model. So we're balancing all the balls there. What does the customer want and need? Not just the, both the end customers and the big fleets, but also the small guys. A typical class five, six truck, class four truck sells somewhere between 60 to $80,000. If it's ice powered, it burns through fuel and the ice vehicle doesn't, costs $60,000 to $80,000. You've got the batteries on there. You've got electric axles on there. You've got inverters on there. You've got some different components. Yes, you have wheels and tires. Yes, you have chassis. Yes, you have suspension. That's pretty straightforward. We can do a bill of materials side by side and tell the differences. But the battery stay costs a hell of a lot more than an ICE system of engines and transmissions. The axles cost double or triple what a normal axle costs. So those are the kind of things we've been working on very quality for the last four or five months, right? So we've been purposely quiet, nose to the grindstone, doing the grunt work, about as boring as drinking ditch water here, you know?
spk09: Okay. No, that's helpful. And just last one for me. Maybe you give kind of CapEx target for this year, anything you could provide on, you know, R&D, which kind of ticked down last quarter and, you know, where kind of OpEx should, Good trend throughout the year I think would be helpful.
spk02: Yeah, this is a heavy CapEx year for us as we get the plant up to speed. It doesn't make sense to design and build world-class products out of factory that's been not invested in for a couple decades. So we're making the right investments there to make sure that plant's a showcase with the right tools and safety features to protect our workforce. It's heavy this year. I think our CapEx spending goes down next year depending on what other products we bring forward or something comes available to us. I don't have a real good number for you right now in R&D. I'd say this. One high-level thought is that we are transitioning from a company that was highly, highly relying on outside, costly consultants to bring in our in-house, our own talent. I mentioned 270 years of experience in the custom chassis and designs. We're hiring up at Wixom. When I got here, we had 11 outside consultants helping with our manufacturing quality. That's now down to two. We're adding the right resources. We want to be a self-sufficient OEM here at Workhorse, both from a design test and manufacturing quality. As needed, for special testing purposes, one of the reasons we picked Wixom's site is there's a lot of testing centers up in the greater metro Detroit area. We can put our vehicles on in full chassis dynos or part chassis dynos.
spk09: Understood. Thanks for the call.
spk03: Great. Thanks, Chris.
spk11: Thank you. Our next question has come from the line of Mike Schleske with DA Davidson. Please proceed with your questions.
spk08: Hey, good morning, guys. I want to maybe first touch Bob. I might have misinterpreted something. Did you say you had a $4.1 million increase in selling costs over the prior year? I guess that's true. Is that correct?
spk01: That is correct. That was primarily a longstanding contractual settlement that we took care of to move us forward in the future and get it behind us. So, yeah, negative revenue and selling expense, that doesn't seem logical, but that's what that was for.
spk08: Yeah, I was going to ask you kind of what were you selling during the quarter if there wasn't much out on the road. So maybe excluding that, was it more in line with the prior year or the prior quarter? Can you give us a little color as to what it was? the more normalized run rate might be going forward?
spk01: Yeah, that was the predominant total of that amount, so it was pretty normal outside of that.
spk08: Okay, all right. And then, you know, I also wanted to ask a little bit about how the Green Power agreement came to be. I mean, there are several other Class 4 providers out there. I'd be curious, you know, how you developed – the relationship with that company as opposed to a few others that might be in the market today with their own Class 4 EVs? And they're also doing it themselves.
spk02: Yeah, great, great question. So I was quite fortunate from a timing standpoint to join the company in early August, and then the ACT show was out in Long Beach about a month later. So in about a three-day period, my team here was able to introduce me to almost all of our competitors, whether that's C-Electric, Bollinger, Everybody out there, right? Remember, I also came from another company where I was on the board, so I'm familiar with the industry, right? A personal friend of mine who I've worked with for 20 years gave me the resume of Josh Anderson, our chief technology officer. I interviewed him at the trade show, and we had a handshake agreement by the time we left L.A. that he would join the workhorse team. He's got 22-plus years in the commercial electric vehicle powertrain systems with 12 patents. He then sat down with my team and I, and we went through and identified all the different potential partners we could use. We kind of started early on knowing that the C1000, we need to get it back in the test, and we had some questions about it. So, hey, where can we pivot quickly if we can build our own chassis? Great. That's going to take a little longer than we thought, so who can we go get? He brought Green Power in. Their president came in here in Ohio and gave us a presentation on their product portfolio. We went and looked at their vehicles. Then we had a subsequent meeting with their CEO, and we forged a deal over the last two months, basically. That included all of my leadership team taking the vehicle, loading it, fully loading it, driving it around, myself included, around greater Ohio and looking through all the documentation. So we've done our diligence. We've been a good partner. We think we forged an agreement that's – beneficial for both companies. They get the sales. We got to do some down payments to get that. We get the cab chassis and we can be in the market here in 22 and not get to the market in 23. Okay. That's kind of it. So.
spk08: Got it. Got it. I think I have to throw one last question in here on the aerospace side. As I look back in the last year or two of talking about this business, it's always been, it's a patented product that can take off from a vehicle and, make a delivery and come back to base and help that driver be more efficient. On this call, you're talking a little bit more about uses in ag, land mapping, potentially even in the medical world. Are any of those use cases backed by any of your intellectual property, or are they just kind of additions to what you can already do anyway? And what kind of feel for, you know, is there a very heavy environment competitively for some of those other use cases, especially in the ag and the med space?
spk02: Yeah, great. John Graber and the team and I, we went back and dusted off some old UAV market data, and we got it updated for this year. The growth in this segment is phenomenal. I've never seen in my entire career cages that are being projected by the big economic forecast by some of the banks. Primarily the UAVs have come out of the military, obviously. You read about predators and reapers and drones and stuff like that. Now they're taking some of that technology and bringing it to the commercial space. Explosion of growth on small drones for cameras and photography and that kind of stuff like that. Now we're going through the transition, how we actually apply that technology in the commercial space. We still feel like we're in lead. Our customer told us that we're the only ones they're working with for a vehicle-launched drone. They've given us specific engineering specifications. We got a sheet of almost three pages the first month I was here, and we think we're on track to have those design specifications met under testing by sometime this third quarter or fourth quarter this year. If so, then we can break that nut there and go forward. As part of our discussion, as we read all the data, hey, where else can we use our drone technology? The controls logic, the stability, it's a very robust drone. You know, I think it weighs less than 25 pounds, and we can carry a 10-pound package and deliver a 10-pound package, and we can put it on a tether down and tether it back up. Nobody else is doing that right now that we know of right now, right? So we think that's an opportunity for us to differentiate ourselves. So we've thrown a couple of. camera systems and LIDAR systems underneath the drones and gone out and done some work and got some nice grants from the government. And guess what? The feedback we have from the customer after our first test, we're very positive. They want to do some more. So we've got a second grant now. So that's good. There's a need out there. You think about, you know, national parks, large ranches, waterways, agricultural areas, you know, where farmers have to take a four by four ATV or a horse to go check things, you know, You can now do it with a drone at 100 miles an hour with radar detection type systems that can look at things on the ground.
spk03: It's a real opportunity for us.
spk08: Super. Thank you, Rick. I'll leave it there.
spk03: All right. Great. Thanks.
spk11: Thank you. Our next question has come from the line of Jamie Perez with RF Lafferty. Please proceed with your questions.
spk04: Good day, everybody. Thanks for taking my questions. Just for a clarification, you mentioned last quarter that some of the vehicles are going to have steel chassis and aluminum chassis. I see the W56 is steel. What about the W34? Is that the aluminum chassis?
spk02: W56 will definitely be a steel rail chassis. The W750 is a steel rail chassis. And the W34 is TBD. We learned some great lessons about aluminum, both good and bad, on the C1000. But if you put too much aluminum, it weighs as much as steel, right? So that's why we pushed the W34 out a little bit, even though it's a bigger addressable TAM. We want to go through and not pin down our design yet, whether we're going to use aluminum or a steel chassis. We're looking at both. So it's really about... how the chassis is built, and how do we protect the batteries along that chassis. If you go out and look at a lot of the passenger cars, you see the chassis and the batteries are all built around each other. So we've got to think about the same thing here on the truck side.
spk04: Now, with the heavier load capacity, any change? How are you going to handle the performance with the torque? Do the inverter or additional battery or motors? I'm just curious.
spk02: We've gone through assessment of five or six of the major tier ones who manage what I'll call the electric drive trainer. So you're talking people like BorgWarner, Dana, Linamar, Axel, Omnitech, a bunch of people, and we've identified we're down to two that we're negotiating with, and we'll choose one of them. We're very confident. In fact, back on some of our eGens, we have some of the original Dana Axels that were converted for ePowerTrain sitting in our warehouse right now. So we've had a lot of experience here. in this building over the last three or four years on how to do this.
spk04: And one final question. Last quarter you mentioned you had inventory, a half of 500 units, and you're not going to build any vehicles in the first half of 2020. Does that imply you have enough inventory for the second half production and maybe go out and get quite a new inventory for the 2020? Any color would be appreciated.
spk02: Yeah, C1000, that's what we said last quarter, about the 500. We've gone through and done a deeper dive. When you get into different design revisions, we don't think we have a 500, so that's part of the inventory and reserve we took this quarter. We have enough inventory. As we said today, we're going to build somewhere between 50 to 75 additional C1000s, and we think we have 98% of that inventory. It's probably a few part numbers. We have to go out and buy a few more parts. That's it. But we're very confident, so. So we are not exposed today, as we speak today, we're not exposed on the C-1000 to any of the supply chain issues that I see out there with other customers. Okay? So that's a good issue.
spk04: All right. Thanks. Thanks for that question.
spk11: Thank you. There are no further questions at this time. I'd like to turn the call back over to management for any closing comments.
spk02: No, thanks, Daryl. We appreciate your patience. We appreciate your questions. We appreciate your interest and investment in Workhorse. We're committed to get this company across the finish line. Go from a plow horse to a workhorse. All right? Thanks. Have a great day.
spk11: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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