Q3 2021 Workhorse Group Inc Earnings Call
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Okay.
Ladies and gentlemen, greetings and welcome to the Workhorse group's third quarter 2021 Investor Conference call at.
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's now my pleasure to introduce your host Workhorse group's vice President of Finance Tony for you Alright, Sir you may begin.
Thank you operator good morning.
And welcome to all of you joining us today.
Today's third quarter 2021 results call. My name is Tony Furey, and I am Workhorses, Vice President of finance.
Before we begin I'd like to note 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.
Will it be tracking with the poster 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'll be hearing from three members of the management team during the call. Joining me today is Greg Akerson, our interim CFO and Rick <unk> our CEO.
Moving to slide three.
We have a straightforward agenda today following my remarks, I will hand, the mic over to Greg will cover Workhorses Q3 2021 results.
Once Craig is finished he will pass the baton to Rick who will take your questions. After our formal comments 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.
And our regulatory filings and in today's press release.
These details out of the way I will turn the call over to Greg Akerson.
Greg.
Thanks, Tony before I begin I would like to say well. This is my second opportunity to take the reins as workhorses CFO. This is my first earnings call.
It is an honor to be given the opportunity in 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 <unk> 6 million of net sales for the quarter the.
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 and <unk>.
Q3, 2021 we saw an increased to 11 5 million from $2 8 million in the third quarter of 2020, which was driven by several factors on.
On the slide you can see them in order of descending impact.
<unk> 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 of which are included on slide seven.
As of September 30th we had $234 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 a costly USPS lawsuit, which reduces legal and related lobbying costs and we have right sized our planned staff by approximately 25% without losing key talent.
Additionally, we recently converted $172 5 million of debt into equity, resulting.
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 for his prepared remarks, Rick Thanks, Greg and thank you for taking on the interim CFO role and responsibilities Youre doing a great job.
Good morning, everyone and thank you for your interest in our company.
A busy and eventful first 100 days for me and our team here at Workhorse, where.
We're taking that 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 my initial earnings call back in August after a week in my new role I said I will 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 in 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 stabilizing grow process model I previously and successfully use as the CEO to manage lead and build winning profitable companies find.
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 to workhorse has been extensive and far reaching as reflected by the activities 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 or key suppliers.
One of our industry's largest tradeshows 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 townhouse with our staff and workforce at all three facilities.
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 build of 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 powered vehicles.
Last Friday, the new $1 two trillion infrastructure Bill was passed into law with $10 billion of investments identified for the EV sector, primarily for EV charging infrastructure stations in.
In summary, we have been very deliberate and thorough and 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 say, we are fortunate to have this convergence of favorable macro 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.
Keep the enthusiasm and drive that comes with being an exciting technology startup company, while we transition into becoming a best in class manufacturer of EV vehicles.
As you heard from Greg we have near term financial flexibility based on our improved balance sheet and reduce monthly cash consumption rate.
I was very pleased to find that we have technology leadership positions in several product areas, including the class four to five EV delivery vehicles and powertrain systems. Our Uavs are historical W. 'twenty, two and P model steel rail chassis systems, and our Metro <unk> 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 differentiator for us in the industry.
We are competing in a fragmented industry.
Industry and possess foundational elements that differentiate differentiate us from others in the industry.
We have a capable plant.
<unk> extensive prototype in real world driving experience a qualified workforce and talented engineers.
Some of our key competitors in this space are now just are just now building plants hiring people and making prototypes here at workhorse, we are a real company and not a Powerpoint E B company.
On the other side of the ledger other negatives, we had an experienced leadership team and we moved very quickly to address this key issue.
We previously had poor communications 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 currency 1000 vehicles on is not robust nor is it profitable.
Our supply chain. Despite the dedicated work of our purchasing staff is not yet tier one qualified.
The company had a lack of systems and process discipline, which to be fair as 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.
We will not come as a surprise that E. Commerce has been growing faster than the U S. U S retail sales market for the last decade.
<unk> E Commerce sales continue to grow at that 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 CV truck market and the UAV forecast you see nothing but positive momentum with double digit cages and both segments. These trends support and underpin the workhorse business model.
Slide 12 tells it related but equally important story as you know state implementation of electric vehicle standards vary across the country.
Led by California in those states that are following the California Air Resources Board plans.
On the left shows in Blue the leaders by state and the move to EV vehicles.
While large and 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 forecast or 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 of new product investments by the Oems coupled.
Coupled with major investments in the EDF infrastructure across the country.
These factors will converge to enable this 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 convince 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 Ive seen nothing internally or externally.
Amidst me otherwise.
When you drill down to our markets what does this mean for the medium truck market.
Slide 13 shows you the current analyst projections on the mix shift from internal combustion engines to electric vehicles for commercial vehicles in the coming years.
We also include the incentive benefits for per vehicle tied to each of these truck weight classes for additional insight as you can see liftoff seems to occur at about 2023 and the growth continued keeps ongoing. This is now to 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.
My experiences I have developed a straightforward process driven approach towards leading affirmed from a challenged situations to stability and profitability.
No. This is rocket science, but it requires hard work tough decisions selfless leadership and most importantly by end 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 sixties understanding the people products processes partners profitability and politics are critical to future success here at workhorse.
<unk> 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 environment that has no politics and is focused on ethical people and actions team players in southwest leaders.
Over the next three years I fully expect us to reach the top of the pyramid.
Again, this will not happen overnight and requires a 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 profitably grow the business.
I am confident we can do this with strong industry fundamentals and <unk>, we have in our sector. We know all the hard work and required many important decisions along the way speaking for the whole company 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 managed team was in October at a two and a half day off site to establish our mission and values as a company.
As I tell you from my previous CEO experiences, establishing a clear vision for the company and certainly starting 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 of our company in the midst of a transition.
Why.
We don't know where youre going anywhere it will take you there.
If you do not have agreed upon values then you will do not stand for anything in particular.
The result of our session with 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 everyday transparency teamwork.
<unk> excellence and integrity.
Our board of Directors has approved our vision statement and our company values.
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 the breadth of experience NOLA.
Electric vehicle automotive and related industries.
His name is 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 Marc will join our company next week as our Vice President of corporate development and communications.
Someone who has a couple of decades of experience in business development, M&A Communications marketing and Investor Relations Dave.
<unk> murky Vice President product development over 40 years of P&L and vehicle design experience focus on low volume specialty vehicles very similar to what the kind of volume and vehicles, we're going to build here at workhorse.
Ryan <unk> 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, both both those regions.
Chris <unk>, our vice President commercial development, who joins us from the trucking industry, where he was in the forefront of the shift to alternative fuel and electric powered vehicles in that segment.
Jim Peters, Vice President purchasing supply chain, who I worked with at American axle, and who has a supply chain expert.
Slide lets now move to slide 17.
As we disclosed in September we made a filing with nitsa that additional testing and modifications are required to bring our C 1000 vehicle into compliance with federal motor vehicle safety standards.
They were only 41 vehicles in the field when we grounded the fleet.
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 tests underway in the fourth quarter on several different C 1000 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 decision will be required as to whether we make the <unk> a limited or a full production type vehicle.
We are also looking at multiple class three through class seven 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 <unk> <unk> <unk> thousand.
<unk> thousand 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 are approved by the government to pursue commercial FAA part 21 Dot 17 certification in 2022 and 2023.
Potential customers tell us our current range and payload capabilities capabilities, our market, leading we will continue to work on enhancing both.
We are a single source supplier partner and develop a drone deliver packages from vehicles with a leading the last mile delivery customer from our conversation with this to 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 will 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 in campus on slide 19.
First we have a great workforce lots of manufacturing and assembly experience.
We have an existing 2012 square foot factory started on a 47 acre campus.
<unk> 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 not yet 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.
If somebody 90 day review have also been able to scale and scope the company's capex requirements for the next three years from 'twenty to 'twenty four.
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 million 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 this number one more 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 systems somewhere between $5 million to $10 million over the next three years.
The workhorse team is executing on our revised plans to be fully prepared to meet the emerging EV market needs in 'twenty, three and 'twenty four.
As we have shown in slide 21, the federal fleet consists of more than 750000 vehicles across multiple departments and agencies. This is the largest fleet in the country.
<unk> federal funding exists to support the transition to <unk> 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 contract.
When they are suing their customer.
We're seeing a customer provided award to us.
Supplier, if they've been sooner.
Please turn to slide 22.
I have not spent the past 90 days simply Familiarizing myself with the company. We have also made a series a series of decisions.
To address the challenges we face which include.
Suddenly the 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.
Our customer order backlog through direct face to face conversation with our customers.
Rounding to see 1000 series vehicles, and putting them under more rigorous rigorous tests withdraw.
Withdrawing from the USPS lawsuit.
Reducing the monthly cash burn rate of the company by approximately 30% per month I think we can do better.
A three year draft of our product portfolio plans.
In establishing business unit road maps to profitability for the future.
Of course, many things remain to be completed as we work our way up the stabilize and grow 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.
Need to complete the C 1000 testing and make a decision on its future.
We need to finalize product development Roadmaps for both our bands chassis and Uavs.
We need to finalize the 2022 budget, we developed 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 is likely of interest to all of you on slide 23.
Recent news flow in our 8-K filings 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 8-K filing on October 19th of November one we received letters from the SEC requesting that we voluntary provide information related to training and 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 one fifth the department of Justice orally informed us that it has a related open investigation involving our company.
We have not received any subpoena for other request 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 I'd like you to have from today's call first of all we've assembled a strong capable and experienced leadership team here at workforce, who are role have rolled this leaves and are going to work with.
We strengthened our balance sheet by reducing more than 85% of our debt, while reducing our cash burn rate by approximately 30%.
We withdrawn the mid protests and associated legal actions against UBS USPS opening the door for us to have discussions with the federal government on other projects underway.
We have a rigorous vehicle testing your redesign process underway for our C 1000 vehicle led by extremely competent and experienced engineers.
Revise 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 in order cycles associated with launching EV vehicles, much tougher to do it in real lifetime and.
Do it on Powerpoint presentations.
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 on background, we are now happy to answer your questions. Operator, please provide the appropriate instructions.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Colin Rusch with Oppenheimer. Please proceed with your questions.
Thanks, so much guys.
As you're going through this product redesign and <unk>.
With your suppliers can you talk a little bit about the preparedness of the suppliers to help enable some of the technology you need to.
Two to actually take the wait out and get this product to optimize and simplify.
And the market.
Yes, it's a great question Colin So I think one thing we've discovered here when I got here is that <unk>.
Majority of our suppliers, we're not your typical tier one suppliers, we are buying parts from aftermarket sources par and truck dealerships online auction places.
So by bringing in Jim Peters, we'd have him taking charge of supply chain. We've already identified over 70 traditional tier one suppliers. We think are more than capable we're talking about big names like Borgwarner Dana mud pulse of Magna others. The typical tier ones that underpin the truck industry, we've already had a series of meetings there.
And we'll be prepared as we redesign that C 1000, or modify the C 1000 or go to a different design to make sure we have a very well qualified capable supply chain.
The one area I am confident is we have a good relationship with tableau for our batteries they seem to be very good they are proving out quite well in the test.
Great and then in terms of your manufacturing capacity, there's a variety of.
So at our developments in the industry as the technology nodes change.
So theres some outsourced manufacturing elements.
If you look at this.
$15 million to $20 million investment potentially on your current facilities.
How are you thinking about that.
The strategic asset relative to some incremental cost you might sign outside of what you have internally or is this really going to get you the need to get you to a place where you can really scale up into the whole scale of this opportunity.
Yes, I would say one of the key findings here when I got here I was pleasantly surprised when we got the Union City I wasn't happy with what it looked like from the outside we've already addressed that when you come visit to look a lot better. The roads have been paid we cleaned up the plant there's a lot of debris around the plant. That's all been sold off what was really exciting when I got inside is a damn good building and most importantly, we are really good.
Workforce that will be up there tomorrow to talk to them, we have two vehicles suddenly lines.
And we can run multiple shifts we have a dedicated chassis line that we can run so if we want us to do full vehicles. We just won the chassis. We have the flexibly do so we have multiple sub assembly feeder lines and we have the space to expand the plant if we want to in source any of the work we're doing on the outside okay.
I think there's a lot of flexibility Union cities as we button on our vehicle plans.
Button on our capacity plans and I think we can meet the growing needs in the EV market out in 'twenty three 'twenty four so we've already met with the local government leadership team. The surrounding community includes about 360000 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 path.
That workforce.
As a history dating back to the early 19th century of building classic vehicles there.
Great. Thanks, so much guys.
Thanks Colin.
Thank you our next questions come from the line of Greg Lewis with <unk>. Please proceed with your question. Yes. Thank you. Thank you and good morning, everybody.
Ricky there was a little bit of comments around around the recalled vehicles is there is there any update on where we are in the process of those vehicles.
Getting back on the road and then we noticed you mentioned you slowed down too.
In August.
<unk> accounted to.
On vehicle.
Per day is there any way to kind of it doesn't sound like it sounds like we still think there is an opportunity at least a niche opportunity for the original series C 1000.
At least over the next few quarters is that kind of the right way to think about it.
Yes, let me go through some of the data Okay. So right now as of last Friday, We had 41 vehicles recall and whereas about 124 vehicles that we built that are on the ground up and you can see so about 165 net may have grown to $1 70.
Already by this week.
We've got to go back and do some of the testing.
A new startup company, we just werent experienced enough in some of the regulations and standards that we need to hold ourselves accountable to unwrap M. DSS. Let me give you a few examples first of all we expect to have all this testing done by the end of the year.
Number 101 is around controls and displays so theres certain switches and need to be replaced in our vehicles to bring the markings into conformity with the FM BSS standards.
Task number one O four windshield wipers, and deep hogging systems, our wiper blades needs to replace so that's not going to cost us a lot of money <unk>.
That's number one away lamps reflective devices for safety on the vehicle and associated other equipment around the caf for operating warning needs to be taken care of so that's the stuff that we weren't used to doing on these kind of trucks.
Test <unk> 'twenty, our tires in our wheels need to be have markings on them and we bought these off the internet and we didn't have those market. So thats something we can replace pretty easily we know what's going to cost us the bigger issues. We're working on are basically three one lets do our brake testing to make sure. We documented 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 will have good data on that by the middle of December and finally, we need to go back and do all the load analysis and then use the basically delivery vehicle test energy put on a Dino just shake rattle and roll the trucks and see how durable they are as Ive talked.
Two the big customers at UBS Fedex others.
To have these trucks last 15 to 20 years and go 15 to 20000 miles a year and carry up to seven or 8000 pounds of payload.
I'm pretty darn sure that <unk> can't meet those kind of stringent requirements. Okay.
The bad news the good news is when I talk to customers. They tell me. They will take every C. 1000, 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, our 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 but this is going to happen to them, what's going to happen to them over the next five years in the EV space.
So by bringing in Josh Who's a known EV powertrain expert.
With has consulted with multiple of the <unk> companies and bringing in de Burkey, who ran triad services, which designed multiple types of vehicles, including the presidential limousine 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.
Now leading the charge we've got some great Young engineers here average age 22 to 28 years old if you will than that who are great engineers, but it never really come out of the Ottawa experienced auto industry. So now we're getting a good combination blending and we're going to probably double the size of our engineering staff over the next 12 to 18 months, we also need to have better in.
Testing capabilities. So we can test the parts.
Of our suppliers to make sure they can meet the requirements we have in our specifications.
Our blueprint and we're going to make a few small investments. So we can actually fully test vehicles like we did when I was an American axle on dinos et cetera. So does that help you.
Yes that was super helpful. Thanks, and then I guess, just just one more for me.
Yes.
As we think about thank.
Thank you for the comments on the U S. 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 mentioned Dave.
These who's joining.
His background and working with the military.
I think traditionally people viewed workhorse as.
Provider of electric vehicles solely in the last mile delivery as we think about opportunities broadly from the federal government is there is there is there the potential now with your team in place that we could be looking beyond just say small delivery truck.
Opportunities present themselves.
I'm not going to tip, my hand, too much because I know some of my competitors are listening or selling my potential customers are listening.
But one of the great things I found this company is that we are have a history of making up to class seven and class eight chassis and our Union City factory, we own all the intellectual property.
We own the tooling, we know the suppliers are.
So one of the things we've done as a team is go back and ground ourselves in the transition for both class III up through class seven.
Commercial vehicles, and where we can play either as a full vehicle manufacturer, whereas a chassis provider of vehicles.
As a barrier.
The chassis market here in North America is really a duopoly right now I won't comment on who those duopolies people are.
Restricted right now we hear that from multiple customers that they can't get enough chassis right now to underpin their vehicles. 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.
Perfect. Thank you for the time.
Youre welcome thanks for the questions.
Thank you. Our next question is come from the line of Jeff Osborne with Cowen. Please proceed with your questions.
Hey, Good morning, just a couple quick questions on my end Rick I was wondering if you can give us an update post the actions.
You went through on the cash burn if it was $12 million to $16 million or are you closer to eight now or can you give us a sense of where that is.
I'm going to let Greg take that and then I'll make a few comments for Alastair, Yes, I would say during Q3, we got it down to 11.
When we talked about some of those actions we are taking and I will say there are opportunities. There we have a pathway to get it lower I think Adas is a very good golfer Q4.
Yeah, I'd say when I first got here.
Ask the guys went through with Greg and the team. We went through every line item of our spending back to January one and a couple of things jumped out of me labor, while salary or hourly is not a major issue here.
Issues, 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 werent able to build the trucks. So why bring more inventory. So we've slowed that process down we're not flying parts from Asia 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.
$1 million millions of dollars per month.
Driven that the down significantly first of all it's a lot cheaper and better for us long term to have our own in house talent versus rely on outside consultants.
I won't give the exact numbers, but we're probably paying five times more for a program management position that we should be paying alright. So, let's just like almost ludicrous as what I will say, okay. So we've got that we had to clean up a few past due invoices to suppliers and that both of our parts suppliers in some of our service providers, that's almost behind us now.
I think we can tighten the ship pre tight here in the fourth quarter and 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 <unk>.
We basically have enough inventory on hand, right now to build somewhere north of 500 vehicles, plus or minus a couple of hundred without bringing any more inventory into this company. So we don't need to bring any raw materials and at least until second or third quarter next year. Okay. So that's going to be good for us from a cash burn.
Key factor, Greg and I have got to work on is as we start our new product designs and decide what we do at the C 1000, or a different design when do we start ramping up the spending on inbound materials and taken on purchase orders and probably sometime in 'twenty three late 'twenty two okay.
That's helpful. Just to clarify did I hear you right that.
Inventory for 500, and you wouldn't need to order before middle of the year, So youre, implying youre going to build 500 between now and mid 'twenty two.
If we if we can look each other in the eyes. When 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 built and yes, we could probably do that but we haven't made that decision yet okay got it and I know thats a critical a critical decision to pivot point for us.
We're not quite ready to make right now.
That makes complete sense last question is 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 salable deliveries just given the issues that you've identified in some of these are going to be going through mid December.
But it wasn't sure if there is actually any net negative numbers coming in.
Now that would not be the expectation we've already talked to all 41 customers and we feel we have a full accounting for.
<unk>, who is giving us those trucks, we want some fixed and he wants to get those trucks back and some of those trucks, we just decided to store an onsite at those locations rather than per the penalties either coffee trucks and move around the country. It takes special flatbed trailers to move to move our trucks from our plant to customers is around a 5000 dollar bill so the major.
Customers agreed to keep those we're going to pay them a storage fee and then we will repair this trucks on site.
Got it. Thank you that's all I had.
Thanks, Jeff.
Thank you. Our next question is coming from the line of Craig Irwin with Roth Roth Capital Partners. Please proceed with your questions.
Hi, good morning.
Can you talk a little bit about the returns of the vehicles, whether or not you expect.
Financial returns to be changed materially with.
It.
Design changes, you're likely to adopt or are we still looking.
Probably something like 65% reduction in maintenance costs for your customers and.
I hear your per mile.
Economics versus.
Gasoline or diesel.
Yes, I would say the numbers that I've seen so far the tcl for electric vehicles, almost 67% better than an ice vehicle. So there is a real move to ice, but they've got to put the infrastructure in place to do so right. So thats part of the.
The key to unlocking the potential.
One of the things we're taking a look as 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 of the vouchers that are coming into this space. So I think thats all a moving target right now okay. So.
Understood understood and then the second question I have is really a financial clarification and use of cash.
The presentation today you covered.
Capex needs.
For a variety of different things can you maybe walk us through the timing of the of the Capex spend and approximate us for us what it might look like sort of over the next.
12 months.
Yes, let me go backwards, Okay, where 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.
Peel on that system to track our designs between engineering purchasing and manufacturing. So that's not very costly couple of million dollars probably.
We have an ERP system, but its a couple of years versions old and so rather than try to go back and upgrade that let's go put a better system thats more applicable to us is probably going to cost us $3 million to $4 million and I've asked Greg to take a look at what systems. He wants from a financial consolidation every month rather than do some of the things we do right now in an excel spreadsheet. So that we put in a range I think of five to 10 I think it will be.
Closer to the lower range, we'll see what happens there okay.
The factory, we have a range of $15 million to $20 million that includes if we purchase of warehouse on the site.
Because right now, we're bringing our materials here to Cincinnati doesn't make any sense to bring materials of Cincinnati unload it and take it up to two hours away to Union City. We're looking at some of the in house processes, we have like water water testing or leak testing, we want to paint inside or outside so we want to have a dyno test would be in line to run the vehicles for a few miles and make sure all the CIS.
<unk> work like we typically see in our big OEM.
Sure we need that in the commercial vehicle space at low volumes, we have but we will see so that's why the range is there and finally, 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.
If you just spread it out probably a little bit more in 'twenty, two and 'twenty three.
Maybe it's maybe like 10, and 20 to 15% to 23% and less than 24 will be ready to go.
For your model, but I'll, let Greg.
But then we haven't finalized that yet, but that's pretty close.
Understood understood. Thank you I'll hop back in the queue.
Thank you our next questions come from the line of Chris <unk> with B Riley. Please proceed with your question.
Hey, Thanks for taking my question here, maybe just on the decision process that you're going through right now on the ceiling.
What are kind of the puts and takes here for limited versus like full production with the.
The redesign versus that nexgen product.
And then it sounds like the nexgen product would potentially be available for 2023.
With the ramp so you could kind of ramp with either one of those in 2023. So just let decision processes to see 1000, what are what's driving that.
Alright, first and foremost C 1000.
Reliable vehicle, if not were not put on the road, okay, I'm not going to jeopardize Amy's life or any family life on the road. So you got to have the brakes that work kind of a powertrain this reliable et cetera.
That's number one okay that every Oems should be doing that every OEM I've ever worked at her associates, that's exactly what they do number two is whats the payload requirement right. We know we designed this chalk to go after people at UBS, we have a larger payload 7000 8000.
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 seven or 8000 pounds.
We think we can identify enough customers to build as we build 300 500 or 1000 type of D. C 1000 that put them out there in the field.
One thing I don't know right now is when we really shake rattle enroll these trucks on 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 is limited production on leases and thats. The kind of thing we're trying to get our hands around right now okay.
And Youre right based on all of our testing data and what we do on the field next year, we're going to pivot whether we have we might have both we might have a C 1000 for certain applications. That's a redesigned <unk>. We may have a completely different vehicle. The C 1000, hasnt aluminum skateboard chassis very thoughtfully, maybe its more cost.
<unk> 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 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 in data now we can make some really informed decisions between now and Christmas.
Okay, and then just looking at what you've talked about with capital.
Plans here and then.
Lower cash burn rate that you are targeting.
Looking at like six to eight quarters of kind of cash burn last year.
How much of a cash cushion do you need heading into that 2023 production.
Yes.
I'd say, that's TBD, that's the work that Greg and I are doing right now right.
If we know 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.
And 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 'twenty. Three so we can push that out a little bit and then when do we need to start ramping up in tooling supplier, new suppliers and that will probably be second half of 2022 so I would ask for your patience and we'll probably.
Bring that too.
In our fourth quarter earnings call.
Okay. Thanks, guys.
Thanks.
Thank you. Our next question is come from the line of Mike Zaremski with D. A Davidson. Please proceed with your question.
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.
This ship in the quarter I mean, there were some shifts.
Can you just give us that number fixed ship during the quarter Mike.
Okay great.
Another question is about the inventory write off you had in the quarter.
Is it basically the path there too heavy for the current vehicle or just not we're just not going to go forward with any future Q1 thousand.
Iteration is there or is this all related to that and is there a risk of a second write down over the next few quarters I think we haven't stopped there just arent going to be used.
Whenever you get the next version.
Designed.
Mike This is.
The write down this quarter was largely due to the accounting standards is 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.
So.
As you go through the process redesign.
1000 is there potential that you will see a second write down once you realize some of the parts might not be going forward.
Yes.
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 four you would expect to see a future right now.
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 the Gulf from a prototype company to a full production OEM right and so we've got to teach the team here, especially in supply chain and engineering and these are the target prices for.
For the parts that had these specifications that need to work as a system right.
So we're going to do that Okay go back and look at Elon Musk must quote prototypes easy productions heart.
We're doing that transition with prototype company startup.
Full production OEM alright, that's the challenge we face over the next two or three years.
Got it Centurylink.
Thanks, Mike.