Q4 2021 Workhorse Group Inc Earnings Call
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.
Thank you Darryl good morning, and welcome to all of you joining us on todays fourth quarter and full year 2021 results call.
Before we begin I'd like to note that we posted our results for the fourth quarter and full year ended December 31st 2021 by our press release as well as an accompanying presentation in the Investor Relations Investor Relations section of our website.
Also released our Form 10-K this morning.
Tracking with the posted presentation during the call. So please follow along either through the website directly or via download on your P C and with that let's get started.
Turning to slide two joining me on today's call. It's Rick now, our CEO and Bob <unk>, our new CFO , who joined US in January .
Moving to slide three we have a straightforward agenda today. Following my opening remarks, I'll hand, it over to Rick will 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 it'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 and our 2021 Form 10-K other filings that we make with the SEC.
As well as in today's press release.
These details out of the way I'd like to turn the call over to Rick <unk>, Rick Thanks, Dan 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.
<unk> taken significant action and made difficult decisions to strengthen both the team and this was 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 our last quarters earnings call, we laid out clear priorities for the fourth quarter.
I'm pleased to say, we accomplished the majority of these objectives.
Little bit more work to do on our 2023 and 'twenty 'twenty four business plans.
It becomes 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, before we stabilize and strengthen our financial position and five we finalized our 2022 budget.
Most importantly, we have developed a revised and executable strategic product portfolio Road map for our future electric powered delivery van and truck offerings, which includes developing two new truck chassis platforms that will lay out in today's presentation.
Moving onto 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 six PS 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 and 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 achieve success.
Yeah of course, 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 a C 1000, 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 heart, you'll 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 profitably grow the business.
Along the way, we should benefit from strong industry fundamentals and tail winds driving the transition from ICD E. C E D powered vehicles in our sector.
We are confident that relentless and focused execution across each step more 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.
And you'll see on slide eight as Ive said earlier, we have now largely completed our overhaul of workhorses executive leadership team with several key appointments in Q4 and early 2022.
This included adding Bob John as CFO I'll brings more than 25 years of senior finance a C suite leadership experience to workhorse. He most recently served as both the CEO and CFO for privately held family RV group, a fifth largest RV dealer in the country.
Kerry <unk> join Us CH Arrow, and Brad Hartzell joined as VP of manufacturing services in February .
Both are accomplished auto industry veterans.
In addition, and Drake joined as the VP of Government Affairs in January after serving as the department of Defense leader for energy Resiliency policy and experience as a professional Senate energy policy staff member.
You have already seen the positive impact of these new executives joining the workforce team, including Bob's deep involvement in our 2022 budget planning and the 2021 10-K 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.
We have built an experience capable leadership team with the breadth of expertise across finances electric vehicles automotive commercial truck and related industry used 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 moved aggressively to staff the new facility in the last 90 days, we have hard experience 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're in the process of transferring acquiring and installing full vehicle and component testing equipment of wisdom, the target would 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 insurance Little Ohio.
This will help us move to 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 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 facilities 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're now calling the workhorse ranch and test drive our new generation of electric vans and trucks.
Moving to slide 10, with our organization strengthen in our operational complex revival underway for the past few months, we 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 three through class six segments.
It's 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 C. One thousands repaired and back on the road.
We have decided to limit the overall production of the C 1000 model and I will explain our decision in a moment.
We are focusing our engineering teams efforts on developing two new truck chassis platforms in 2022 and 2024, while also partnering with Green power has announced that a joint release this morning.
He will discuss in further detail shortly on a third vehicle to bridge the product gap between our decision to limit the C 1000 production.
Moving to slide 11.
Let me provide you more details on our future plans for the C 1000.
Over the past four months, we have completed F N B S S testing <unk>.
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 C 1000.
We identified several necessary corrective actions required to provide a safe reliable vehicles to our customers.
These actions include a dressing both vehicle design and supplier quality issues.
Need to replace the front suspension and enhance the rear suspension on the C 1000.
Our supplier partners need to address part quality issues on E powertrain sub systems.
As a result, we will need to repair all previously produced C. One thousands.
After completing these repairs, we will only build an additional 50 to 75 C. One thousands 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 built in 2022.
Long term, we have determined the combination of a limited payload capacity and.
[noise] unsustainable billow 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 C 1000 experience combined with extensive and positive field data from our 300, plus each N vehicles still in service in the field and apply them to our next generation of vehicles. We love of course continue to provide service and parts to customers for both E. Gen and see 1000 vehicles on the road today.
Turning to slide 12, let me introduce the W. Five six which will be the first.
All new workhorse chassis platforms to hit the market in Q3 of 2023.
W. Five six will serve the class five and class six delivery step van and truck market segments.
It builds on work horses decades of experience building chassis systems for these classes of vehicles.
The W. Five six is our shortest path to a homegrown designed tested and economically viable platform.
It will come in three wheel base sizes and.
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 one suppliers.
Our expanded engineering and design teams have been hard at work over the past two and a half months on the W. Five centuries design and will and we will soon finalize design intent with supplier partners, allowing for critical drivetrain energy storage chassis and suspension of 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 and Q3 of 2023.
Designing testing and producing the W. Five six is priority number one here at workhorse that 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 W. 34, which is a new class III and for chassis that builds on the key technologies first introduce on the E. Gen and see 1000 vehicle designs.
The W. 34 will feature the assessable 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 admission standards take effect for commercial trucks in several regions of the country.
Lastly, turning to slide 13 is the W. $7, 50, which will serve to bridge the gap between the C 1000 product and future production of the W. Five six and W. Three or four 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 1500 chassis from Green power complete the manufacturing process at Union City and deliver both cab chassis and finish step vans to customers in the United States and Canada, beginning in the third quarter of 2022 and throughout 2023.
W. E 750 is a class four vehicle that is both F. N B S S and C. M D. S. S certified.
As up to 150 miles of all electric range.
Payload capacity of 5000 pounds.
As well as standard 60 kilowatt DC fast charging an 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 you and to say a test drive the 750 and review our C 1000 test results.
Based on their feedback we are confident we can sell all of our C. One thousands by year end.
Our customers are currently assessing how to proceed and transitioning previous vehicle orders into new purchase orders for the W. 750, and the future W. Five six and W. 34 vehicles, we owe them working demo vehicles before they can make their final quarter decisions.
Turning to slide 14, we also continue to invest in our drone system technologies and achieved 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.
The experienced FAA bedrooms to the team and we transfer supply chain teams to the to the aerospace team.
The application we submitted last year to the Federal Aviation administration received approval to pursue type certification for the horse slide delivery drone in 2020 , two and 'twenty three.
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 has made in the two quarters plus I've been here.
Lastly, we were 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 agricultural 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 end market segments.
Based upon direct feedback from both commercial and government customers I am convinced that we're on the cutting edge with our drone systems technology with regards to both small package delivery.
And aerial mapping.
Without this is update completed I'll now turn the call over to Bob to discuss our financial results.
Thanks, Rick before I begin thank you and stand for welcoming in my first earnings call I'm excited to work with the amazing team, we've assembled I'm pleased to be here.
Now, let's turn to slide 15 regarding financial results for the quarter.
Our financial results for the fourth quarter and 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 our focus on operating efficiently.
Can you provide some color on our results.
Sales net of returns and allowances for the fourth quarter of 2021 are recorded net of negative $2 million compared to <unk> 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 the C 1000 vehicles.
Cost of sales increased to $100 million from $7 million in the same period last year as we took several noncash charges, including a $63 6 million increase in the inventory reserve of $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 <unk>.
1000.
So a total of $94 million in impairment related noncash charges.
G&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 of $3 2 million increase in legal and professional fees and a $2 7 million increase in employee and labor related expenses from increased head count.
And the appointment of our new larger executive leadership team.
R&D expenses decreased to two point 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 head count.
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.
Kris and 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 $124 million compared to $15 million in the same period last year.
Moving to our full year results on slide 16 sales net of returns and allowances recorded a negative <unk> 9 million compared to $1 4 million in 2020.
A decrease in sales was primarily due to an increase in sales returns and allowances in connection with the recalls C 1000 vehicles announced in the third quarter.
Cost of sales for the full year 2021 increased to $119 4 million to $132 5 million from $13 1 million in 2020.
The increase was primarily due to several noncash charges, including a $75 million increase in inventory reserve.
$3 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 trucks.
Year over year increase just described were primarily driven by the company's decision to produce C 1000 platform at low volume and 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 C 1000 vehicles, which concluded in early 2022.
Selling general and 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 head count.
The appointment 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 relation services in 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 head count to support current and expanding product roadmap and continuing development of the horse fly UAV.
Other loss change unfavorably during 2021 as the company recognized a loss of $225 4 million, primarily attributable to unfavorable changes in fair value of the sale of investments and L. M C.
During the year ended December 31, 2020, the company recognized income of $343 1 million.
Also primarily tripled to favorable changes in fair value of the investment policy.
Net interest expense for 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 of losses on the conversion of the company's convertible notes.
Additionally, there was a decrease of $12 2 million related to mark 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 of $4 7 million decrease in losses recognized on the redemption of series B preferred stock.
For the years ended December 31, 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 <unk> 70 per fully diluted share last year.
Moving to slide 17 as of December 31, 2021, the company had approximately $201 6 million in cash and cash equivalents and approximately 20.
$5 million in principal debt at face value.
It provides us sufficient cash for 2022, the company's Capex plans for 2022 are between 25 and $35 million due to facility in IP systems upgrades in Indiana, Ohio and Michigan.
We also plan to establish an at the market ETF or 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 plan for <unk>.
Crescive ramping 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.
Importantly, our guidance for the year is back loaded as we are not expected to produce any vehicles in the first half of 2022.
As I mentioned, we are moving ahead with enhanced financial position and our 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 a near term financial flexibility to make these financial investments and with that I'll now turn it back to Rip victory wrap up the call. Thanks, Bob.
This is an important exciting time for us here at workhorse <unk>.
We recognize that there's a lot of work to do and we are committed to getting it done but as we come away from this call. There are a few things key things I want to emphasize first we're building that 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 we have the right team and structure in place to execute.
On our plans and deliver new vehicles and create long term value to our shareholders.
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.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue you.
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 Rusch with Oppenheimer. Please proceed with your question.
Thanks, So much guys so with the adjustment in the designs and the supply chain to support that you give us update on where you're at in terms of full qualification of a supply chain.
It's not the designs that you're planning to start ramping here in the second half.
Okay, great. So we're working parallel path really in three ways right now right. We have the W 750, which we're working with Green Green power.
<unk> had their vehicle for a few months, we've gone through all of their testing all of their certification documentation that we've tested ourselves and we feel pretty good about that.
We are going to modify that vehicle to make it a delivery step than we are in the early stages of that we're likely to choose our partner this week or next week for the back of the box in the cab. So I think we're good good stayed there on W. Five six we've gone back and looked at our old chassis. The W. 62, the W. E T a the aegis.
N and a few others in the C 1000, 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 drivetrain 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 Collyn and we know what the long lead times are in the industry right now we've factored in some some space there for any kind of supply chain disruptions, where do anything overseas and we feel like we're very comfortable right now with with some float in there for a third quarter launch next year. So.
Perfect and then you know the the cash balance.
From here to there as you scale up you know a.
A couple of hundred million dollars Ah is a great place to be but I'm curious what the fully loaded.
Cash need is going to pay you to get to a you know a operational cash flow positive scenario.
Oh. This is this is Bob.
So obviously you know right now we are we are burning cash and we've talked about that in $200 million as we feel sufficient for the near term.
But we will be on looking longer term at raising.
Capital as we go through the funding of working capital and in these launches that are going to occur over the next couple of years.
So we think once we get to the.
Launches then we can start talking about.
Where we go from there.
So the one thing we didn't get done in the core was we didn't get we got our hands around 22 first of all it has around 'twenty, one and the C. 1000, you put together a solid plan, we build from the ground up at both business units up to the company.
Factoring in all the expenses, we're gonna have designed to test these trucks and source. The parks, we're mapping out all the working capital needs. We have that for 'twenty, two we need to finish that job. It for 'twenty, three and 'twenty four and we asked the board to give us until may to do that so you probably hear some amount of second quarter early third quarter. This year.
That's incredibly helpful. Thank you and then just a last one for me you know, obviously augmented our management team and a pretty substantial way.
You're in the past I'm just curious are there other.
Key roles that you guys are trying to tell at this point or do you feel like this is the the change things like here in Florida.
That's the plan.
Yeah, just like a good sports team you got to take a look at your existing roster sorted out see what you got we probably have a three areas we need to fill we need to get the CIO in here, who has gone through an ERP transition in the automotive space, either the OEM or tier one 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 that.
Customers as you know this is an interesting market you've got the big delivery guys like U P S. Amazon Fedex.
U S. Postal service. There's also a lot of independent fleets out there from my days at Accuride, I know that more than 80% of the fleets here in less than 30 vehicles and how do you. How do you cover them do you cover them through our regional team or to 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 pieces.
Because of all the parts, we're gonna have coming from across North America and across the world, we need to get the 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.
Perfect. Thanks, so much guys.
Great Tom Thanks.
Yeah.
Thank you. Our next question is coming from the line of Greg Lewis with <unk>. Please proceed with your questions yes. Thank.
Thank you and good morning, everybody.
I guess I wanted to think.
I think through a little bit more 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, our supply agreements with other providers beyond green power.
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 work force there is ability to hire more people in that area. There are other people in the EU.
<unk> space, a day, who are talking about building a factory in <unk>.
My experience and I've built about 10 factories around the world that takes minimally 18 to 24 months. So if they havent broken ground, we got the permits or secured the steel or the contractors or two years out. So there are some people who have reached out to us about considering can we go and do some things for them from a production standpoint, so I think with the.
The W. Seven video Green power as I said it bridges the gap.
Based on our decision to only do limited production on C 1000, and we need a minimum 18 months to get to the W. Five six this plugs in and fills a gap or a revenue standpoint.
When we hired Josh Anderson he knew most of the key players in the industry and consulting with them I met the Green power team out of the ACD show back in August a month into the job basically early September and we've had those discussions and that led to this partnership and we felt like based on our assessment that was the best chassis cab.
Cassie system that we could get our hands on as quick as we could so.
Okay, Great and then to help that's Super helpful. And then just around the Union City I.
I want to say you know in a previous version of workhorse I believe that the throughput at that facility was around 10000 units. Realizing you're you know things change you're adjusting your expanding your building out any kind of sense for what the throughput of that facility could be you know.
Our medium or longer term.
Yeah. That's a great question I remember I used to be a supplier to workhorse custom chassis I remember that the build axles for them, whereas the axle and wheels.
We haven't finalized that number we know we can get at least 10000. That's if we are what we need to look at that running the plant three shifts a day seven days a week not five days a week, one and a half shifts to let you do some rough math there a lot will depend on exactly what we build there both ourselves we'll do that.
750, there the W. Five six at W. Three four we just added an additional 67000 square foot warehouse, which could be expanded to put a second line into everybody's from contract manufacturing. So we think that in the heart of the automotive the automotive alley here basically between Michigan down in Tennessee, Ohio, We're right in a nice sweet spot and we act.
<unk> 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 work the ranch.
Okay perfect. Thank you very much for the time everybody.
Thanks.
Thank you. Our next question is coming from the line of Jeff Osborne with Cowen. Please proceed with your questions.
Hey, Good morning. This is Jeff presenting on for Jeff Osborne. Thanks for taking the question just wanted to see if you might be able to provide.
Any details that surrounds the pricing.
Gross margin as you might expect for them.
I'm 55 six.
Three or four.
Yes, we have those we've mapped them out it's built into our 'twenty two budget, but we're not going to tip, our hands, who are our competitors out there right now so good question, though Jeff.
Okay I appreciate that.
I can say this will be a profitable vehicle for us.
How's that.
I mean any.
There was a with the green power arrangement that would.
Separately, the economics on the versus the five six and three or four.
No I don't think so solid vehicle, we've gone out and we benchmark all of our competitors in the space.
On what their payload is what their cubic spaces what their ranges.
Think we can be 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 them by the end of the fourth quarter. This year. So okay.
Thank you.
Yeah.
Thank you our next questions come from the line of Craig Irwin with Roth Capital Partners. Please proceed with your questions.
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 W. 750, it's probably the most important thing right now given given the revenue outlook.
Hum.
1500 units is a very specific number.
And.
You know you have so called contracts.
That would require a.
Units higher than that if if we 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.
And.
Whether or not you need to actually go out and capture customers for the W. 752 in order to take delivery of the 200 units a quarter.
It's a great question, Okay. So when I got here, we had 8032 orders basically from three customers U P. S.
Sure.
<unk> and pride, Okay. So we had customers out there we've met with those customers I think I was very clear with you. When you I talked to you P. S. When I first got here. They said until you can meet our payload requirements were not going up.
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 Union city like we talked about we've driven the vehicles, we've given the target prices that we think we can build those for the market.
Are there going back to assess the mix that they had on their original orders.
The C 1650, and see how they want to apply those orders to some C. One thousands we talked about we think we can sell all those even with the limited capacity payload capacity and they're making a decision they've asked for a few more weeks to figure out what they want to do W. Some 50. So they wanted to do wait to W. 563, four so that's our hard work we need.
Due in the next 90 days so.
So where do you stand on the on the pipeline for these products I mean, you're very specific about when you expect deliveries to begin.
And you say that there was a deposit so I assume you're getting some cash to green power to facilitate those those initial deliveries, which probably has to begin sometime around right now.
Given their supply chain.
But can.
Can you maybe frame out for us what the what the pipeline looks like I mean again 15 time again, it's is a very specific number.
Either a bunch of utility sort of lined up and ready to go or is.
Is this something where you really just hitting the ground running now.
Things like first first our priority is to take the customer orders, we have and see how many of those we can fulfill with the payload.
<unk> 5000 pounds as a class four vehicle not a class three vehicle. It's got a range up to 150 miles. It's got D. C fast its a very capable vehicle it's already in the market in a couple of places overseas, where it has been used okay. So that's one two is okay. Now that we have the vehicle we've announced that publicly today now I'm going to go out and talk to the current.
Customers, we have and other customers, who 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 bill of materials with them and show how it's built and they feel can 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 right. So I feel comfortable now.
I can pivot a little bit and be out in the road both 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.
And do you do you expect to actually take delivery of all 500 units roughly 200 units a quarter or is this really just the capacity and.
You know actual deliveries will be a function of.
Uh huh.
Our success on a cell phone.
We've secured capacity at the supplier who builds that cab chassis, we're up to 500 vehicles.
We have ability to adjust that up or down every quarter.
Based on our success in the market now that's what we're gonna do so I'm confident that we can get the vehicles.
We're confident we've got the key suppliers lined up theyre going to come in and partner with US here, but both of those Q2 of the key ones are local sources and here in the U S. So that's good we're not deal to supply chain disruptions overseas on those components, we need for the vans and now it's a matter of going out and figure out first and foremost the customers who've been very patient with us how many orders that.
I want to convert the W 750, or hold off the W. Five six.
Oh, and then we Gotta go on plants and new customers.
So that's why I need to hire some sales people.
Yeah.
So last question if I may you have a pretty conservative Guy and I think most people that follow workhorse like that right.
But the in the past the company has been sort of willing to.
Sure targets or goals as far as units that they'd like to.
She sold in a certain timeline can.
Can you share with us some color on what you would hope would be achievable for for 'twenty two.
Yeah, We said today, we expect to sell over 250 vehicles to generate around $25 million of revenue that's going to be a combination of our C. One thousands and some W. 750 <unk> okay.
And you're right I am I tended to be a little conservative and I've 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 of the stock prices of some snacks et cetera.
We are down somewhere between 60, and 85% so doing something on a powerpoint and doing something in a factory, it's two different worlds.
Putting that they're a rendering of a drawing of a vehicle up there and actually doing the design the sourcing and the testing where you Pee Pap all your parks do you Homologate. Your vehicle you crashed us at winter testing summer testing dynamometer testing, that's hard work I almost had a bad edge as my Chief Counsel is looking at me don't say that.
So you know.
Just like the boys over in Eastern Europe are realizing what's on paper and one thing is as easy to draw maps on a lot of lines on a map and actually doing is different right. So <unk>.
Hard work in the automotive industry hard work in the auto industry.
And I use the quote last time from Elon Musk says prototypes are easy production is hard.
Take a look at all the C suite.
<unk> across the EV industry in the last six months C. E O C O O CFO because people didn't deliver on their commitments.
But we built a team that has a proven track record of executing hardcore engineering supply chain operations were a 1990 to put on there I need to put the sales team out in front of them Theres. Nothing itself you don't have a vehicle that doesn't pass testing right. So that's what we're doing that.
Excellent well, we look forward to watching your success. Thank you.
Great I appreciate it.
Thank you our next questions come from the line of Chris Southern with B. Riley. Please proceed with your question.
Hey, guys. Thanks for taking my question here.
Any update on where the backlog stands today from a dollar standpoint I believe there are few covenants related to the dollar value. So just wanted to see if we can get any clarity there.
You called out to the key customer you seem to have good feedback on the W. 750.
So wanted to get a sense of where we are in the process of converting orders from the C 1002.
750, and kind of the other nextgen stuff.
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.
It's a process we gotta go to the process, but we're confident that we will be able to.
Get everything in place to meet those covenants.
Okay. That's good to hear and then I'm curious with the W. 15, you talked about.
Stop gap to get to the W. 56, and Adobe 34, I'm curious you know what are the puts and takes around continuing to use someone else's chassis versus you know developing your own with the 34 in particular, which seems that probably more aligned from a class standpoint.
Yeah, Greg it's not a stopgap kind of a bridge what I say, but you can use stopgap I guess plug to plug the gap we had in revenues so you're right.
This is a steel rail chassis for a class four vehicle. It's proven it's tested it's already certified both in Canada and U S. So that gives us something that we can go to production this year rather than wait for two years.
The W. Five six.
Similar to what we built in the past in terms of a chassis standpoint. The W. Three four is the step forward, it's kind of what were the lessons learned we've learned on the C 1000, and the E Jets, that's going to take a little bit more marketing work to make sure the customers really want some of the things they talked about.
And then it's got to be some sourcing work right one of the one of the challenges on the C. One thousands we had one customer gives us backs, we try to build to those specs.
Some of those specs were realistic and some of them are unrealistic.
And you got to build a truck that you can actually make money doesn't do you any good to have a great working prototype.
If the costs are double what the customer wants right.
And if the bill of materials is double or triple the cost of the vehicle the sales price of the vehicle that that's not a good business model. So we're good we're balancing all of 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 tip.
Typical class five six truck class for a truck sell somewhere between 60 to $80000. It was ice powered.
It burns through fuel and the ice vehicles it doesn't.
60 to 80000, you got the batteries on there you've got electric axles on there you've got Inverters on there you've got some different give US 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 until the differences, but the batteries stay cost a hell of a lot more than of ice.
System of engines and transmissions, the access cost double or triple what a normal actual boss.
So those are the kind of things we've been working on very quality for last four or five months right. So we've been purposely quiet nose to the grindstone doing the grunt work not as boring as drinking Dishwater here you know so but.
Okay. No. That's helpful. And then just last one for me maybe.
Maybe you gave kind of capex target for this year anything you could provide on R&D, which kind of ticked down last quarter.
Now, where we're kind of opex should trend throughout the year I think would be helpful.
Yeah. This is a heavy capex year for us as we get the plant up to speed. It doesn't make sense of the design and build world class products at a factory that's been not invested in for couple of decades. So we're making the right investments there to make sure that plants are showcase with the right tools and safety features to protect our workforce.
Is heavy this year I think our Capex spending goes down next year, depending on what other products. We bring forward. Some comes available to us I don't have a real good number for you right now in R&D I would say this one 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'd mentioned 270 years of experience in the custom chassis and designs, we're hiring up at Wixom, we 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.
Self sufficient OEM here at workhorse, both from a design test and manufacturing quality.
As needed for special testing purposes, when the reasonably pick wix inside is a lot of testing.
Centers up in the greater Metro Detroit area, we can put our vehicles on a full chassis dyno has a partial part chassis dinos so.
Understood. Thanks for the color.
Great. Thanks, Chris.
Thank you. Our next question is coming from the line of Mike <unk> with D. A Davidson. Please proceed with your questions.
Hey, Good morning, guys I wanted maybe first touch Bob I missed I misinterpret something did you say you had a $4 $1 million increase in selling costs.
The prior year and I guess, that's true does that.
Is that a is that correct.
That is correct that that was primarily a.
Long standing the 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.
Yeah, I was going to ask you kind of what were you selling during the quarter.
So, but maybe excluding that was it more in line with the prior year or the prior quarter or can you give us some color as to what it is.
The more normalized run rate might be going forward.
Yeah that was that was the predominant.
Total of that amount and so it was pretty normal outside of that.
Okay Alright.
And then I also wanted to ask a little bit about.
How the Green power agreement came to be I mean, there are several other class for.
Providers out there I'd be curious you know how you developed.
This trip was that company as opposed to a few others that might be in the market today with their own paths for UBS.
And then also I was quite site parties like yourself yeah, great. Great question. So I was quite fortunate from a timing standpoint that joined the company in early August and then the ACD show was out of long Beach about a month later.
So in about three day period my team here was able to introduce me to almost all of our competitors, whether that's C electric bolanger.
Hi, everybody out there I 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, where.
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 vehicles vehicle powertrain systems with 12 patents.
He then sat down with my team and I, we went through and identified all the different potential partners. We could use once we kind of start early on knowing that the C 1000, we need to get back in the tests 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 the president came into here in Ohio and gave US a presentation on their product portfolio, we went and looked at their vehicles than 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 loaded fully loaded driving around myself included.
<unk> greater Ohio looking through all the documentation so we've done our diligence within a good partner, we think we forged an agreement that's.
Beneficial for both companies they get the sales we had to do some down payments they get that we get the cab chassis and we can be in the market here in 'twenty, two and not get to the market in 'twenty three okay. That's.
That's kind of it so.
Got it got it.
For one last question here on the aerospace side.
Hum.
As I look back in last year or two of talking about this business. It's always been it's a patented products.
Pick off.
The vehicle market.
Livery and come back to base and help them drive it would be more efficient.
On this call you talked a little bit more about using egg no not being.
Potentially even in the medical world.
Hum.
Any of those use cases.
By any of your intellectual property or are they just kind of additions to what you can already do anyway.
That kind of get a feel for.
Is there a very heavy heavy environment competitively for some of those other use cases.
And and med space.
Yeah, Greg the John Graber, the team and I, we went back and dusted off some old.
UAV market data and we got 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 Big economic forecast by some of the banks.
Is it primarily the Uavs have come out of the military obviously, you read about predators, and reapers and drones is off of that now they're taking some of that technology into the commercial space.
Explosion of growth on small drones for cameras and photography and that kind of stuff like that and now we're going through the transition how we actually apply that technology in the commercial space. Okay. So you still feel like we're in lead our customer told us that we're the only ones that are working with for a vehicle launch 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 the design specifications met under testing by sometime this third quarter fourth quarter. This year. If so then we can break that that are not there and go forward.
And as part of our discussion as we read all the data Lake 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 that we can carry a 10 pound package and deliberate 10 pound package.
And we can put it on a tethered down and tether back up not nobody else is doing that right now so 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 <unk>.
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 tests were very positive. They wanted to do some more so we've got a second grant now so that's good there's a need out there.
If you think about rate.
National Parks are large ranch's waterways.
AG cultural areas, you know where farmers had to take a four by four ATV or a horse to go check things. You know you can now do with the drilling at 100 miles an hour with the radar detection type type systems. They can look at things on the ground so but okay.
So a real opportunity for us.
Super Thank you Rick I'll I'll leave it there.
Alright, great. Thanks.
Thank you. Our next question is coming from the line of Jamie pressed with RF Lafferty. Please proceed with your questions.
Good day, everybody. Thanks for taking my question just for a clarification you mentioned last quarter that the summer vehicles, they're gonna have steel.
Steel chassis and aluminum chassis easy I see the W 675 sectors steel what about the a W. A 34 is that the aluminum chassis.
W. Five sexual definitely BSD rail chassis.
<unk> seven is a steel rail chassis and the W. Three forest TBD.
We learned some great lessons about aluminum both good and bad on the C 1000.
A few but if you put too much aluminum it weighs as much as steel right. So where our team is well that's why we pushed the W. Three four 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 steel chassis. We're looking at both so okay. 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.
Our passenger cars you see the chassis and the and the batteries are all built around each other so we got to think about and the same thing here on the truck side.
Now what what the heavy load capacity any change how are you going to handle the performance what to talk to a converter or additional battery on motors I'm just curious.
We've gone through assessment of five or six of the major tier ones, who manage the what I'll call the electric drivetrain or.
So you're talking to people like Borgwarner, Dana let them our axle omni tag a bunch of people and we've identified we're down to two that we're negotiating with and will choose one of them.
We're very confident in fact, you know back on or some of our <unk>. We have some of the original Dana axles that were converted for E powertrain 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 so.
Okay and one final question last quarter, you mentioned you had inventory on hand for 500.
Units and.
And you're not going to build any vehicles in the first half of 'twenty 'twenty you ever.
That mean does that imply you have enough inventory for.
The second half production and maybe go out and get to acquire new inventory 40, a 'twenty 'twenty any color would be appreciated.
Yeah see 1000, that's what we said last quarter about the 500 were gone.
<unk> 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.
Reserve, we took this quarter, we have enough inventory as we said today, we're going to build somewhere between 50 to 75 additional C. One thousands and we think we have 98% of that inventory is probably a few part numbers will go up by a few more parks that's it but we're very confident so 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.
So that's a good issue.
Alright, thanks for that question.
Thank you there are no further questions at this time I would like to turn the call back over to management for any closing comments.
No. Thanks, Darryl we appreciate your patience. We appreciate your questions. We appreciate your interest and investment in workhorse, where we're committed to get this company across the finish line go from a plow horse to a workhorse alright, thanks have a great day.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.