Workhorse Group Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, greetings, and welcome to Workhorse Group’s Third Quarter 2020 Investor Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse’s Chief Operating Officer, Dr. Rob Willison. Thank you. You may begin.

Thank you, Melissa, and good morning, everyone. We appreciate you taking time to join us for our call. Before the market opened, we issued a press release with our results for the third quarter that ended September 30, 2020, a copy of which is in the Investor Relations section of our website. We also released our quarterly Form 10-Q. In a few moments, I’m going to turn the call over to our CEO, Duane Hughes, who will provide an update on our business as well as an outlook for the remainder of the year and 2021. Duane will then hand the call to our CFO, Steve Schrader, who will walk us through our financial results for the quarter. After that, we will turn it over for questions. But before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2019 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business. And with that, I would like to turn the call over to our CEO, Duane Hughes. Duane.

Thanks, Rob, and good morning to everyone on the call. We appreciate you taking the time to join us today. I will begin first with an update on sales orders. Let me start with the order we announced this morning, a 500-truck order from Pritchard Auto Company. Pritchard is a 107-year-old premier automotive company that sells more than 30,000 medium-duty trucks annually across the United States. Pritchard is using Hitachi Capital America as their inventory financing arm. This is exactly what we envisioned and anticipated when we teamed up with Hitachi as our boots on the ground with their dealers and network connections. Hitachi will be assisting Workhorse in developing a national dealer network and will support our sales with vehicle financing options for both dealers and fleet customers, including dealer floor plan programs. As a well-known and respected player in the commercial leasing and finance industry, we believe Hitachi can help drive customer orders even more quickly than anticipated. We are also looking forward to benefiting from their manufacturing expertise to further increase our channel sales capacity. A bit more on our Hitachi partnership. As part of an overall production assessment completed by Hitachi, they recently conducted a dealer survey, and the results could not have been more promising for EVs and Workhorse in particular. 47 dealers in several high-EV adoption states responded to the Hitachi survey, a high 43% overall response rate, with 83% of that group indicating an interest in becoming a Workhorse dealer. These dealers already have a strong interest in placing orders. 84% of the customers are already asking about purchasing EVs. The top three reasons for their interest are social responsibility, reduced cost of ownership, and new technology. From those 47 dealers, they also indicated a collective interest in purchase orders in the range from 300 to 500 vehicles. Next, Hitachi has provided an assessment of our manufacturing, operating, and supply chain capabilities, and we are now preparing to implement their recommendations so we can benchmark our operations against best-in-class standards. Hitachi has invaluable expertise in EV technology, smart factory automation, and digital technologies that will certainly help maximize our production efforts. During the quarter, we also had purchase orders come from Fluid Systems and eTrucks LLC. While these customers individually represent smaller companies, we believe these smaller fleet operators represent a major opportunity for additional sales. Pursuing sales agreements with resellers allows Workhorse to expand our sales reach and take advantage of economies of scale that would otherwise be unavailable through individual transactions. Our expectation is that these initial purchases will continue to grow over time as we widen and deepen our distributor networks and further develop our internal sales and external sales channels with our current partners. Next, I’m covering the impact of COVID-19 on Workhorse. I suspect we are all aware that the U.S. cases of COVID-19 have hit a fourth straight daily record. We at Workhorse, unfortunately, find ourselves in a COVID-19 hotspot. Between November 4th and 5th, our local health officials reported a total of nearly 5,000 new positive coronavirus cases daily in Ohio and more than 5,000 daily in Indiana. These represent the highest number of new cases in a 24-hour period to date. Our local Ohio Health Commissioner is expected to elevate the warning system to level purple, Ohio’s highest warning system level. Ahead of this news, in the first several weeks of October, as part of our previously announced production plan, we added approximately 45 additional personnel to our production operation. The vast majority focused on vehicle assembly production. Shortly after those additions, we had our first employee test positive for COVID-19. Since the first positive test result, we have experienced a severe uptick in COVID-related absences. As of Friday, November 6th, we have more than 36% of our production-related workers test positive for the virus or at home awaiting test results. We continue to take all appropriate measures, following state and federal guidelines, including self-monitoring, taking temperatures, mask-wearing, social distancing, and routine cleaning, and we continue to add additional measures as we adapt to this ever-changing environment. Our policy at Workhorse is that when an employee is feeling ill, we request the employee be tested and stay at home until they have test results. If they test positive, then they are to remain home for at least 10 days and are no longer experiencing symptoms. With more than 36% of our production workforce absent for an extended time, we have had a major impact on our manufacturing efforts. So let me shift gears to production. In the third quarter, we produced and delivered a handful of new vehicles we had previously stated we would do. These vehicles are collecting real road miles and providing input from customers as well as being used to demonstrate performance and capability to new and existing potential customers. Next, as I mentioned earlier, Hitachi has provided an assessment of our manufacturing, operating, and supply chain capabilities. We have also introduced a global engineering, consulting, and technical services company into our operations to complement our production efforts and assist in the implementation and rollout of the Hitachi recommendation. We will also use their expertise in setting up a high-quality manufacturing environment to reach scale production more quickly. Previously, we projected 300 to 400 vehicles to be produced by the end of 2020, mostly in the fourth quarter. Although we will still manufacture and deliver vehicles in Q4, we are unable to provide a target number at this time as we have limited visibility for the following reasons: first, COVID. The number of COVID cases impacting our production is the biggest event forcing our production volume change. We are currently experiencing new positive cases on a daily basis, and with more than 36% of our production-related staff currently out, we must protect our employees' health, which requires us to modify the assembly process and limit production support and access to our facilities from third-party sources. Second, there is the inability of our primary battery supplier to meet our volumes due to capacity issues and COVID-related slowdowns; third, a delay in planned assembly staff additions. As part of our Q4 production plan to exceed our goals, we had initiated the hiring process with intent to add as many as 200 production-related workers to cover multiple production shifts. Due to the risks associated with the virus spread, we have had to delay the hiring for now. And fourth, is our implementation of Hitachi’s production assessment. We have been advised to implement the assessment recommendation sooner rather than later, enabling us to achieve higher volume, higher quality production more quickly. With anticipated additional truck orders by year-end as well as into 2021, along with the current delay we are experiencing, it is critical to put the newly recommended production systems and processes in place now. The majority of the implementation of these systems and processes does not require production-related personnel who have been hit the hardest by COVID-19. Although we have discussed some of our current issues, we view this as only a delay in our progress. We have worked through the issues with the supplier and are introducing additional battery options into our supply chain and expect to have supplemental volume additions in the first quarter of 2021. Again, we can’t predict the COVID situation now, let alone in 2021. However, if conditions improve and the virus is not an issue for us or our suppliers going forward, then we would anticipate producing 1,800 units in 2021. We are certainly encouraged to hear this morning’s news that the Pfizer vaccine with 90% effectiveness may be available by the end of the month. I’m going to move on to certifications and Q3 results. During the quarter, we received a number of executive orders and certifications from several regulatory bodies, which have helped to expand our sales channels as well as lower financial barriers to entry. Our C-Series vehicles, like the vehicles from any commercial EV operator, have to pass a number of regulatory hurdles, both on the state and federal level to operate on U.S. roads. These certifications, while all meaningful in their own right, represent a significant undertaking on the part of the applicant. Having completed all requirements for nationwide sales and road readiness, we believe our current standing has us firmly in an early leadership position. In July and October, we received multiple executive orders from the California Air Resources Board, respectively, designating different C-Series models as zero-emission vehicles in the State of California. Combined with our certificate of conformity from the EPA in March and our Federal Motor Vehicle Safety Standard certification in June, we are now the first and only medium-duty battery electric vehicle OEM to receive approvals from both the EPA as well as CARB. Having received credentials from both regulatory bodies, Workhorse can sell C-Series electric delivery vans in every state throughout the U.S. During the executive order testing process, our C1000 extended range achieved an urban driving average of nearly 160 miles and a blended urban highway driving range of 149 miles per charge. Obtaining an executive order was also one of the preliminary requirements to be considered for the hybrid and zero-emission truck and bus voucher incentive project. We also successfully entered this project in late July, with our eligibility into the program confirmed. Workhorse’s C-Series battery electric step vans are eligible for monetary vouchers of up to $50,000 per vehicle. Workhorse is also eligible to receive 2.07 zero-emission vehicle credits for these models. ZEV credits can be sold to other OEMs to help them meet CARB emission standards. Our eligibility for the HVIP program is expected to help dramatically reduce purchasing costs for California-based potential customers. In October, we also received approval from the New York Truck Voucher Incentive Program to offer vouchers for our C-Series battery electric delivery vans of up to $48,328. As Steve will further elaborate on, with the recent financings we have completed, we now have additional capital to deploy in pursuit of product line extensions. To that end, we recently tasked a team of engineers to work on a prototype C-Series unit with refrigeration capabilities. While we are still largely in the development phase with this concept, we believe that a viable product prototype will be met with serious demand as it would address one of the more common requests we receive from prospects in the retail, food delivery, and supermarket industries. Moving on to Lordstown Motors and our strategic partnership. On October 26, Lordstown Motors' Class A shares began trading on the NASDAQ global select market under the ticker symbol RIDE. At this time, Workhorse maintains an approximate 10% ownership of RIDE, where our ownership is valued at over $310 million at the current market price. Additionally, with the $1.4 billion of preorders already secured as disclosed by LMC, Lordstown also agreed to pay a 1% royalty on the first 200,000 vehicles sold, plus a 4% commission on 6,000 Workhorse preorders that transferred to LMC as part of our IP licensing agreement. It is worth noting that LMC has agreed to prepay a portion of the license fee in an amount of almost $5 million. We are excited about Lordstown and look forward to further strengthening our ties with their team. I’m sorry, our ties with their team. Finally, I would like to share a brief update from our aerospace division, which includes our HorseFly delivery drone. The HorseFly unmanned aerial system has been designed to meet the Federal Aviation Administration’s stringent standards for commercial drone operations and includes a safe, reliable, multi-use aircraft that can deliver parcels, carry sensors and cameras, and operate autonomously with a high degree of precision. The system’s success has been validated through real-world commercial deliveries with real-world delivery customers. These payloads include approximately 80% of most commercial package sizes, shapes, and weights. Our aircraft carries a 10-pound payload up to 10 miles. During the quarter, the FAA accepted our application to enter the FAA’s type and production certification process. A type certificate signifies the airworthiness of a particular category of aircraft according to its manufacturing design. In addition to our joint venture with MOG, we have begun working with aerospace consultant, Argus, a premier firm with well-proven FAA expertise. FAA-type certification is the only path to scaling meaningful long-term commercial revenue operations in the U.S. For context, from application to approval, the certification process takes approximately 12 to 24 months. I will now turn the call over to Steve to discuss our financial results for the quarter. Steve.

Thanks, Duane, and thank you to all of you joining us for today’s call. This morning, we issued a press release which discusses the results of our operations for the quarter. Additionally, as Rob mentioned at the top of the call, our Form 10-Q was also filed today. I recommend going through both materials to give more color on some of the information being discussed. Now to our financial results for the third quarter ended September 30, 2020. Sales for the third quarter of 2020 were recorded at $565,000 compared with $4,000 in the third quarter of 2019. The increase was primarily driven by an increase in the vehicles produced and delivered. Cost of goods sold increased $2.8 million from $1.4 million in the third quarter of 2019. The increase was primarily driven by increases in labor and materials relating to costs for the C-Series production. Selling and general and administrative expenses increased to $6 million from $2.6 million in the same period last year. The increase is attributable to an increase in consulting expenses, higher employee-related costs, and incentive stock expenses. Research and development expenses were $1.6 million, which was in line with our spending in the third quarter of 2019. Interest expense net was $74.3 million, which was an increase of $68.4 million compared to interest expense net of $5.9 million from the same period last year. The significant increase in interest expense was almost exclusively due to the fair value of the convertible note and loss on its conversion to stock and the loss on the redemption of Series B preferred stock. Both of these GAAP adjustments are noncash and were dependent on the underlying stock components of the financial instruments. In addition to cleaning up the balance sheet, these transactions also helped reduce the higher cost of capital from previous financings. Net loss was $84.1 million compared with a net loss of $11.5 million in the third quarter of 2019. The increased net loss was due to the increase in interest expense net just noted. With these considerations, we believe operating income would be a better indication of operating and cash performance. Operating income during the period was a loss of $9.8 million compared to a loss of $5.6 million in the third quarter of 2019. As of September 30, 2020, we had cash, cash equivalents, and short-term investments of $80.2 million compared to $23.9 million as of December 31, 2019. Subsequent to the year-end, we entered into and closed a convertible note financing with a group of institutional lenders for gross proceeds of approximately $200 million. This is convertible into common stock by the holders at $35.29 per share, as adjusted prior to closing. It matures in four years with an interest rate of 4% per year, which rate may be reduced to 2.75% if the company meets certain conditions. Interest is payable in quarterly installments and can be paid at the company’s option, either in cash or, subject to certain conditions, shares of common stock. In conjunction with these efforts, we entered into a separate agreement with the holder of our prior 4.5% convertible notes to exchange a full $70 million outstanding principal amount of those existing notes for shares of the company’s common stock. Currently, we have a cash balance of over $260 million. With this cash in place, we can more quickly advance our production efforts by increasing our supply chain component volumes, the hiring of more manufacturing employees, and automating certain subassembly processes. Furthermore, we can also accelerate our production timeline for new high-demand customer products, including a refrigeration truck for grocery applications, as well as a purpose-built Class 2 delivery van, allowing us to address one of the fastest-growing vehicle markets in the U.S. Finally, we also plan on focusing additional resources toward an expansion of our drone operations. We appreciate our financial partners' faith in us and their support and further solidifying our leadership and reach in the last-mile delivery segment. With that overview completed, I will now turn the call back to Duane for concluding remarks. Duane.

Thanks again, Steve. In conclusion, I will provide a brief comment as we always do with respect to our ongoing participation in the U.S. Postal Service’s next-generation delivery vehicle program. As many of you are well aware, under our NDA, Workhorse is only able to provide information which is already in the public domain. As has been the case throughout this process, any further information or announcements will be issued by the U.S. Postal Service. We appreciate the continued interest we receive, and we will provide updates to the market as we are able. At this time, we do not have any updates to share. That concludes my prepared remarks. Thank you for your time this morning. We look forward to updating you on our progress moving forward, and we are now ready to open the calls for your questions. Operator, please provide the appropriate instructions.

Our first question comes from Colin Rusch with Oppenheimer. Please go ahead with your question.

Can you talk about the qualification process and the maturity of that process for this additional battery supplier? I want to get a sense of how much work is left to do at this point?

I’m sorry, Colin, this is Duane. I want to clarify the question. The qualification process in terms of bringing in an additional battery manufacturer?

With battery suppliers. I mean, it sounds like you are pointing to a supplier having trouble actually delivering the packs that you were looking for, for the balance of the year, along with COVID as the reason for some of the slower ramps. So I want to understand how far along you are with this other supplier if that is early stages or if there is - you are pretty much done at this point, just waiting for that to spool out.

Yes. Here is how I would answer that question. One is our current supplier is doing well at finding additional methods to meet our capacity needs, first and foremost. We have seen good success in terms of how their packs are performing in our vehicles, both through the certification testing processes as well as with real-life customers here. We are really pleased with their performance of their pack. Now with that said, like with any other supplier, we don’t want to be single sourced. So we had started some time ago with a series of other potential battery pack suppliers, of which I think there are at least three or four. I will hand this over to Rob to give more clarity here. So we didn’t just experience this problem and then just started on that. This has been a work in progress. So I believe that, from my perspective, we are well into it, and we will have solutions in the first quarter of 2021. But Rob, if you want to add more detail.

Yes. So all the EV suppliers, we always keep our ear to the ground for emerging technologies, who is coming online. And there are quite a few battery suppliers that are transitioning or indeed to product. So for us, we look for someone that can meet production and the quality that meets our standards. We have designed our vehicle, as we have said before, to be modular so we can accept different packs. And so we work with these suppliers to make sure that we are getting that optimum battery at a price point, weight, and longevity that translates to the warranty. So as Duane had said, we always have a backup supplier. We have had very good luck with our primary, and it is certainly not a performance issue. But we are looking because of our volume and increased orders for secondary suppliers.

Great. And then as you look to move into new applications, can you give us a sense of the cycle time on going through those designs and qualification of those designs for production? Should we be thinking about that as kind of an 18-month process? Or do you think you could be shorter than that or longer than that?

Yes. So like our batteries, our designs themselves are very modular. So the 650, the 1000, the 1200, the refrigerated versions all use the same primary parts and that filling out of the portfolio, we are doing in a very systematic way. We look for the customers, the potential customers in the market. As was mentioned, refrigeration is really that next step, and we have worked on that. We will have a prototype coming out. But it is in the six to eight month timeframe to get initial production.

But when we talk about the Class 2 Colin, that is a little longer timeline, that is the 12 to 18-month scenario because that is - I don’t want to call it a fresh-up design because you know other projects that we have worked on that tend to lend themselves toward that Class 2 platform. In 2018, we did put a Class 2 unit in California and did five months’ worth of actual real-life deliveries as a test environment for that. Now that we know that there is a market out there for that vehicle, what those particular customers want in a vehicle, we see the ability for us to - after we get to our initial delivery platforms on this and production numbers on the C-Series introducing that Class 2 unit as well.

Okay. Thanks so much, guys.

Thank you.

Thank you. Our next question comes from the line of Greg Lewis with BTIG. Please proceed with your question.

Yes, thank you, and good morning everybody. Just as I think about the updated 2021 production guidance of 1,800 vehicles, as we think about the pace or the cadence of increases, is there any kind of way we should be thinking about it, whether you want to kind of parcel that out versus first half and second half or maybe year-end December 2021 kind of run rate? Any kind of way we should be thinking about that as kind of - as you guys grant production?

Greg, this is Steve. Yes, I think the way to think about it is maybe a couple of milestones. So I think you could look at it as getting to 100 trucks per month by no little later than the first quarter of 2021 and then getting to 200 trucks a month by no later than the second quarter of 2021. I think that will kind of give you a frame of reference for how it ramps up.

Okay. And then just congratulations on the 500-unit order. And you mentioned also, I guess, what was it eTrucks and Fluid Systems, any kind of update you can give us on where backlog is standing around now?

Yes. I think we have a backlog now of about 1,700 vehicles. So that is good. And like we have mentioned before, Hitachi is out there as our foot soldiers as a writer. We believe that we will have more orders, hopefully, by the end of the year, but soon.

And then just knowing that you have the Telematics Systems and now the Ryder trucks have been delivered, I guess, that was in early July, I believe. Any kind of feedback, updates? Have you seen more? What has kind of been the overall feedback? And has there been more truck orders from Ryder?

From a Telematics perspective and understanding proof of performance, I would tell you that what we are experiencing today is, I think you remember this, Greg, in the initial trucks that we delivered between 2015 and 2017, we averaged about 32 miles per gallon equivalent in those vehicles. And of course, we redesigned the vehicle lightweight and all of the things that we talk about. The vehicles that are out with the customers today are getting, I will say, right at or north of 40 miles per gallon equivalent, which just translates to a much stronger ROI as well as total cost of ownership savings. Now I’m going to segue here and say this, the Telematics System that we are using today on our trucks, which is all in-house written, also offers an opportunity for us to commercialize that and actually use that as a recurring revenue stream rather than providing it as a proof of performance added value scenario to the current trucks. So just as a segue into there, I wanted to say that. But to your point, the vehicles that are out there are performing well. We have gotten good feedback. Interestingly enough, one of the first pieces of feedback we got was Ryder is a couple of those vehicles, they are actually using through their well, I think it is called their co-op business, where they lease them to fleets for short-term service needs. Where I’m going with that is they actually have a couple of customers outside of the parcel delivery business who lease them for, I will say, unique projects, which is really opening up further opportunities to expand upon who might use these types of vehicles. As you know, typically, parcel delivery, grocery delivery, laundry delivery, office supplies, those are a lot of the kind of the fleets that use these vehicles, and we have been seeing an expansion beyond that through that rental model. So we are pretty excited about the different paths we have to go.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question.

Good morning and thanks for taking my questions. So can you talk a little bit about this Pritchard agreement, whether or not there are commitments to unit deliveries at specific times in 2021? How much of that 500 do we expect to be actually shipped in 2021 or is this much more like your UPS backlog that you have, where 1,000-plus units, but there are all sorts of contingencies and commitments that need to be met before we see the full units actually delivered?

Yes, Craig, this is Steve. So no, this is a unit order. There are not the contingencies that you mentioned before. I think we anticipate they will be delivered in 2021.

Okay. Excellent. And then we have had several conversations offline about your battery supplier that you had previously announced. One that had actually prepaid for a few thousand units. I expressed significant reservations about that supplier with you and said, no, you have a supplier, it is not an issue. So if you had changed suppliers, are we changing again or what did it take in the last three months to discover that all of a sudden you have an issue with your battery supplier, where this has been common knowledge in the market?

Okay, this is Duane, Craig, I appreciate your question. I would tell you this, again, we have been working with other battery suppliers as well. While we have a primary supplier who had a little bit of a hiccup here, they are quickly reacting to that hiccup, and we don’t expect that to last long. However, a being good business people, we don’t want to be single-sourced on anything. So we have identified multiple battery suppliers and have prioritized them in terms of integrating. We have packs whether they are already being shipped or on order from other suppliers and much of the engineering effort is either already done or is being done now. I will hand that to Rob.

The other issue in beginning to sell and supply these trucks, we nominally these with four packs each. A number of our potential customers and orders now have switched to six packs. So you are looking at it from a four to six pack, and that has thrown a little bit of a wrench into the supply in that everybody wants a longer range, which we are able to accommodate. But from our supplier standpoint, it is 50% more capacity that they had to come up with quickly. So the good news is we have other potential suppliers. Our current suppliers are still online producing at the rate that they can, and we have choices among a number of qualities.

So let me just - that is a really good - yes, I was going to say that is a really good point Rob made. When we went through the certification processes and we are demonstrating vehicles that get 160 miles, on basically 105 kilowatts, we are seeing a lot of interest in switching from existing customers to say, let’s do the larger pack or the extended range vehicle as opposed to the standard range, which is 105 miles. So giving them 160-mile range versus 105 is something that they switch to, which cost another.

Great. Well, congratulations on that Pritchard order. That is a nice size order, and we look forward to seeing those trucks rolling on the road.

Thanks, Craig.

Thanks, Craig.

Thank you. Our next question comes from the line of Jeff Osborne with Cowen & Company. Please proceed with your question.

Most of them have been addressed. But I was wondering, I might have missed it. Could you articulate what the Q3 deliveries were and then maybe just touch on in October, pre the COVID spike, what deliveries were there? It was unclear with the timing of all the moving pieces between Hitachi, the battery, and COVID, what level of production you had Q4 to date?

So in the third quarter, we had seven deliveries. Five went to Pritchard, and then two were delivered to Ryder in the third quarter. From a standpoint of pre-COVID and all that sort of stuff, I think we anticipated hitting our 300 to 400 target. Both of these kind of came at the same time and things substantially.

Got it. And then just how do we think about the allocation towards UPS? It is 1,000 or so of your 1,700 in backlog. It doesn’t seem like you allocated any to them based on your comments just now. Given the concerns that investors have had in the short seller report around UPS in particular, can you just touch on, a, your relationship? And then b, why you are not delivering any units to them?

Yes. This is Duane, Jeff. I appreciate the question. It is good to talk to you. No, UPS, we have got a great relationship with UPS, and the real key was part of the fourth quarter deliveries. We are identified to go to UPS and out in the San Diego area, if you will, California. So part of that is under the voucher program and so on. Of course, we notified UPS of our COVID issue and so on in advance so that they would have an understanding of what we are doing. UPS remains our premier customer because they have been with us the longest time. They collaborated with us on this C-Series design. They fully understand that using the old, I always call it, '1960s chassis structure' as an underlying factor for the old delivery vans doesn’t make sense for moving forward and designing a vehicle in the future. So we feel strong. We are happy where we are with UPS. We will be delivering new vehicles. The real key for them is us delivering a high-quality vehicle over and over again. We have already been through 345 vehicles with them in the past. We understand their business. We understand how they operate. A lot of what we learned from their business is what we designed into these vehicles. So the first vehicle we deliver them, we want to hit it out of the park, and we want to make sure it is right. So the vehicles that we have delivered to date are all about understanding their performance, do they work for the driver, and so on. We are not using UPS so much as a guinea pig anymore.

That is great to hear. And the last question I had was around the competitive dynamics in the space. So putting aside capital, which clearly, you are well capitalized now, there are other folks that have raised capital in the sector or are raising capital. Can you just talk about the timelines, Duane, of getting the California New York certifications, dealing with the Federal Motor Vehicle Safety Certification? If you had a truck in a prototype ready to go, and you had unlimited capital and you were ready to start series production, but you didn’t have any of those items, can you just talk about what your experience is in getting all of those approvals and certifications? And what that sort of timeline would look like for competitors in this sector?

Yes. I would say at least when you look at it as a whole, right, and you have got to align the testing environment, which happens in different areas of the country. Those test results are given to another group who ultimately provide it to the EPA and CARB; you are looking at at least a four to six month process, could be longer based on access to the testing facilities. Actual Dyno tests where they are running multiple thousands of miles. We went through the test actually more than once in order to - for example, when we initially did our first test on the extended range vehicle, I think we got in the neighborhood of a 152-mile range. We made a modification, a software modification, that basically turned one of the two electric motors off when it reaches its not max but its continuous speed. In other words, as long as a driver is not releasing the accelerator or stepping on the accelerator, we can turn off a motor to make the vehicle more efficient. As soon as they release or step on the accelerator, we can immediately turn that motor back on. We moved from like a 152-mile range to a 160-mile range with that change, but we had to go through that testing process a second time. But I think your question is, what does it take to get through the certification processes that are required to do the things that we have done? I would tell you, I would go back to about a six-month time frame from beginning to end.

Got it. That is helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Mike Shlisky with Colliers Securities. Please proceed with your question.

Hello, good morning guys. I have joined a few minutes late. So if what I ask you has been already answered, please feel free to refer me to the transcript. First, the Pritchard order, I guess, I’m a little confused about what Pritchard’s role in all is. Are these orders spoken for with end users? Or are they just really an inventory stock-up for Pritchard? And if they are a job to actually fund the end users from there?

Yes, that is correct. So we appreciate that question, Mike. So Pritchard, a 107-year-old dealership basically out of Iowa, sells about 30,000 medium-duty trucks a year. Of course, to-date, they have really all been combustion engine vehicles. So they have been getting, A, they are a forward-looking dealership that understands that they are going to have to adjust to the market standards. They did a great deal of research and so on into other vehicles that they could possibly floor plan and sell. Given we are in the medium-duty electric business, particularly in last-mile delivery, that extends beyond those sectors. They really viewed us as the first opportunity to reach into that marketplace. They will find their own end-user customers as they always do. I mean, they already have a group. They sell many trucks to FedEx ground contractors as well as beyond that. So that 500 number is a pretty small number in their mind in terms of number of units to sell.

Okay. I also wanted a few more details on your Q4 outlook here. I guess, first, I’m a little bit concerned about where all the vehicles you have planned to build here in Q4, are they all for FedEx as part of that contract or were there other customers? And I guess, are you a little worried about customer satisfaction and making sure that you meet their deadlines? I mean, it is the holiday season, folks wanted to have their trucks on time to get packages delivered. Were there any reactions from your customers about not having what they needed when they need it?

No, it is interesting that, to your point, that is a very logical approach. But in reality, most of these fleets, like the UPSs of the world, right, don’t like taking vehicles in the fourth quarter, typically even leading into Thanksgiving, but particularly after Thanksgiving because November and December and even early January are very busy months for them. So onboarding new vehicles into their delivery cycles is a somewhat difficult proposition for them. However, as the world changes and things are changing, all of these fleets, whether it is UPS, DHL, and beyond, are all willing to work with us for those deliveries. In some ways, no harm, no foul because it is not something they like to do anyway, but they are willing to do it. The more vehicles we get out, we will have a home for them, but we will also be able to make up for our delay, as we said, in 2021.

Okay. Maybe when you are going out to find new customers for your vehicles, are you finding that there are additional competitors bidding on some of these packages and that even if they are not necessarily ready today with their vehicles, are they just trying to get out there and get business the way that you are today and can you tell us a little bit about whether other folks’ offerings are price competitive with yours?

From what we know, and this is Duane again, I would tell you that there are multiple hurdles to get over in order to actually deliver to a customer. The first one is you got to have a vehicle designed and proven to be safe, reliable, and so on before you even deliver it. The second part of that is once you think you have a vehicle that is safe and durable, then you have got to put it through all of the CAFE standards, testing, and so on to get through your certification processes. Once you are through that and you are able to start delivering vehicles, that is where you really learn some things. The vehicles that we delivered between 2015 to 2017 give us a real advantage. One of the keys to success here is learning their business and knowing as much about their business virtually as much about your own because you have got to satisfy not just leadership in these companies and not just fleet managers but individual drivers and so on. They have got to feel safe, but not only feel safe, recognize what makes them safer and so on. Putting all of this together, once you put vehicles on the road and you start learning whether it is the performance of the vehicle or where the pedal exists on the floorboard, any number of things, we have a lot of advantages in understanding from the learnings that we have gained over the last five years. I would tell you once they are ready to deliver vehicles, then they have got learnings that will come to them about what generation two looks like for them based on what they just learned out of generation one.

Got it. And perhaps one last one for me. I know you have great Telematics, and so forth, but have you talked to any of the drivers or users of your most recent vehicles that have just been delivered and gotten their feel for what their view is of the truck and how it is performing to their standards?

Yes. I mean, I would say the most recent customer, and I’m going to let Rob jump in here, but all the customers in reality are getting really positive feedback. I mean everything down to the point where you are talking about a driver who is used to driving this big steel chassis with a big heavy aluminum body and aluminum shelves in it, just the noise alone that is created bumping up and down the road is they are going from stop to stop is an incredible amount of decibels of noise in our environment. Being the composite materials we are and no combustion engine and so on. We have really eliminated a lot of noise at as well beyond just the engine itself. But Rob, do you want to speak to it?

So in addition, this is the perfect task for EVs in that you have a lot of torque at 0 RPM. It is a perfect condition for electric motor. You don’t have the wear items you do on an ICE-based engine. So what we are seeing is we sell with total cost of ownership, but the secondary benefits of being in neighborhoods, easy start-stop, good visibility, low step-in height, these are all huge factors for fleets and so we get a lot of positive feedback. We have always said this is like a big golf cart, and it really is. It is surprisingly easy to drive and surprisingly relaxing to drive. So that is the feedback we get. It is almost funny because somebody takes it out for a test drive, they come back, you open the door, they have the biggest smile on their faces, and they say, I can’t believe this. It really is, as Duane said, these vehicles have been in their forms since the 1950s, this is the next evolution, and it shows with our customer feedback.

I think one of the testaments I would tell you is we delivered five of those seven vehicles, as Steve said earlier, to Pritchard in Q3, and we are already sitting on a 500-unit order today. I think that speaks volumes as to the not just the performance of the vehicle, but the overall acceptance of this new generation.

That is outstanding. Thanks so much guys, I will pass it along.

Thank you, Michael.

Thanks, Michael.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. Hughes for any final comments.

Thank you for joining us on our call today. We really appreciate you guys. I definitely want to thank our employees, our partners, and our investors for their continued support and we appreciate your continued interest in Workhorse and look forward to updating you on our next call. Thank you, operator.

Thank you. Thank you for joining us today for Workhorse Group’s Third Quarter 2020 Earnings Conference Call. You may now disconnect your lines.