Workhorse Group Inc. Q4 FY2021 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 today's fourth quarter and full year 2021 results call. Before we begin, I'd like to note that we've posted our results for the fourth quarter and full year ended December 31st, 2021 via press release, as well as an accompanying presentation in the Investor Relations section of our website. We've also released our Form 10-K this morning. We'll be tracking with the posted presentation during the call, so please follow along either through the website directly or via download on your PC. And with that, let's get started. Turning to Slide 2. Joining me on today's call is Rick Dauch, our CEO; and Bob Ginnan, our new CFO, who joined us in January. Moving to Slide 3. We have a straightforward agenda today. Following my opening remarks, I'll hand it over to Rick, who 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 Bob has 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 4, 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 could find the full disclaimer statement in our 2021 Form 10-K, other filings that we make with the SEC, as well as in today's press release. And with these details out of the way, I'd like to turn the call over to Rick Dauch. Rick?

Thanks, Stan. I'm thrilled to welcome both you and Bob to your first earnings call here at Workhorse, and welcome to the team. Good morning, everyone. We appreciate you taking the time to join us today and for your patience, as we work to get our hands around the Company and develop a viable business plan for Workhorse. Turning to Slide 5. It's now been 7 months since I joined the Company. During that time, we have completed a deep dive review of every aspect of the business, taking significant actions and making difficult decisions to strengthen both the team and business foundations of the Company. I am confident we are on the right path and believe strongly in our ability to pioneer the transition to zero-emission commercial vehicles. Let's jump right into how we executed on our priorities in Q4 and then review our future plans for the Company. Turning to Slide 6. On last quarter's earnings call, we laid out clear priorities for the fourth quarter. I'm pleased to say we accomplished the majority of these objectives with a little bit more work to do on our 2023 and 2024 business plans. We accomplished a lot. One, we built out our executive leadership team; two, we significantly enhanced our engineering and technical expertise; three, we opened a new technical center in Wixom, Michigan; four, we stabilized and strengthened our financial position; and five, we finalized our 2022 budget. Most importantly, we have developed a revised and executable strategic product portfolio roadmap for our future electric power delivery van and truck offerings, which includes developing two new truck chassis platforms that we will lay out in today's presentation. Moving on to Slide 7. Each of the priorities we executed on in Q4 are a deliberate part of our 3-year business plan to stabilize, profitably grow and create shareholder value here at Workhorse. We made progress on several initiatives across our 6 P's: people, products, processes, partners, politics, and profits. Given the right people on the team establishes the foundation for our future success. We are largely complete in filling critical open leadership positions with highly capable and proven industry veterans. We continue to believe that long-term value creation comes by following a series of successive and deliberate steps taken to build a business. You cannot skip any step in the process or avoid the hard work required to move across each level to achieve success. Here at Workhorse, we are taking the necessary steps to transition the Company from our historical roots as a prototype technology start-up into a full-blown commercial vehicle OEM. After our costly misstep with the C1000, our journey is underway, and over the next 3 years, I expect we can and we will accomplish all of our key business objectives. Our journey will not be easy nor for the faint of heart. It will require us to stay focused on our customers and serve them with industry-leading technology, make decisions about what is core and what is not core long-term, and develop and implement common lean systems, then properly grow the business. Along the way, we should benefit from strong industry fundamentals and tailwinds driving the transition from ICE to EV powered vehicles in our sector. We are confident that relentless and focused execution across each step will help Workhorse emerge successful and create long-term value for our shareholders and other stakeholders. Not every start-up will survive the shakeout that will occur in the nascent commercial EV vehicle sector. Those who execute successfully will emerge as the winners. As you'll see on Slide 8, as I've said earlier, we have now largely completed our overhaul of Workhorse's executive leadership team with several key appointments in Q4 and early 2022. This included adding Bob Ginnan as CFO. Bob brings more than 25 years of senior finance and C-suite leadership experience at Workhorse. He most recently served as both the CEO and CFO for a privately held family RV Group, the fifth largest RV dealer in the country. Kerry Roraff joined as CHRO, and Brad Hartzell joined as VP of Manufacturing Services in February, both are accomplished auto industry veterans. In addition, Ben Drake joined as VP of Government Affairs in January after serving as the Department of Defense leader for energy resiliency policy and experienced as a professional Senate energy policy staff member. We have already seen the positive impact of these new executives joining the Workhorse team, including Bob's deep involvement in our 2022 budget planning and the 2021 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. I feel we have built an experienced, capable leadership team with the breadth of expertise across finance, electric vehicles, automotive, commercial truck, and related industries to be successful here at Workhorse. Turning to Slide 9. We recently opened our new technical center in Wixom, Michigan, to expand and enhance our design, engineering, and testing capabilities. We've moved aggressively to staff the new facility. In the last 90 days, we have hired experienced automotive industry veterans with more than 270 years of cumulative design experience and expertise in chassis, suspension, drivetrain, energy storage, and supply chain management. We are in the process of transferring, acquiring, and installing full vehicle and component testing equipment in Wixom, targeting to be fully operational there in Q3 of this year. During April 2022, we plan to consolidate and relocate our headquarters together with our advanced technology team here in Sharonville, Ohio. This will help us improve efficiency and teamwork between product engineering, purchasing, manufacturing, engineering, quality, and production planning. During our last call in November, I mentioned our plan to create a world-class manufacturing complex in Union City, Indiana. This transformation is well underway, and our plant staff is working hard to be ready for the start of production in Q3 of this year, and I know they will be. We have acquired or leased additional facilities on the Union City campus to help us streamline our supply chain value stream, including having an environmentally controlled facility to safely manage battery storage. We are planning to host an analyst event in Union City in the fourth quarter, so you'll be able to see firsthand what we are now calling Workhorse Ranch and test drive our new generation of electric vans and trucks. Moving to Slide 10. With our organization strengthened and our operational complex revival underway for the past few months, we 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 the Class 3 through Class 6 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 C1000s repaired and back on the road. We have decided to limit the overall production of the C1000 model, and I will explain our decision in a moment. We are focusing our engineering team's efforts on developing two new truck chassis platforms in 2022 and 2024 while also partnering with GreenPower, as announced in a joint release this morning that I will discuss in further detail shortly on a third vehicle to bridge the product gap between our decision to limit the C1000 production. Moving to Slide 11. Let me provide you with more details on our future plans for the C1000. Over the past 4 months, we have completed FMVSS testing, identifying several corrective actions required to complete full vehicle certification. During this process, we also took the opportunity to fully test the E-powertrain reliability and the structural durability and payload capacity of the C1000. We identified several necessary corrective actions required to provide a safe, reliable vehicle to our customers. These actions include addressing both vehicle design and supplier quality issues. We need to replace the front suspension and enhance the rear suspension on the C1000. Our supplier partners need to address part quality issues on E-powertrain subsystems. As a result, we will need to repair all previously produced C1000. After completing these repairs, we will only build an additional 50 to 75 C1000s by the year-end using existing on-hand inventory. We do have firm purchase orders for all C1000 vehicles that we will repair and build in 2022. Long term, we have determined the combination of a limited payload capacity and unsustainable bill of materials cost make the C1000 economically unviable, and as a result, we will not move forward with full volume production. This is a significant and costly setback for us here at Workhorse. We will take the painful lessons learned from our C1000 experience, combining them with extensive and positive field data from our 300-plus EGEN vehicles still in service in the field, and apply them to our next generation of vehicles. We will, of course, continue to provide service and parts to customers for both EGEN and C1000 vehicles on the road today. Turning to Slide 12. Let me introduce the W56, which will be the first all-new Workhorse chassis platform to hit the market in Q3 of 2023. The W56 will serve the Class 5 and Class 6 delivery step van and truck market segments. It builds on Workhorse's decades of experience building chassis systems for these classes of vehicles. The W56 is our shortest path to a homegrown design, tested and economically viable BEV platform. It will come in 3 wheelbase sizes and addresses a TAM we estimate to be approximately $1.7 billion per year. We are building upon existing and proven Workhorse chassis and E-powertrain system designs, and we will use readily available parts sourced from well-established commercial vehicle Tier 1 suppliers. Our expanded engineering and design teams have been hard at work over the past 2.5 months on the W56 design, and we will soon finalize design intent with supplier partners, allowing for critical drivetrain, energy storage, chassis, and suspension sourcing decisions by the end of Q2. This will ensure we have prototype vehicles ready for testing in Q4 of this year and be in a position to start full production on time in Q3 of 2023. Designing, testing, and producing the W56 is priority #1 here at Workhorse, and I am personally leading cross-functional program reviews on a monthly basis on this program. We will keep you apprised of our progress on this critical program every quarter going forward. Next up will be the W34, which is a new Class 3 and 4 chassis that builds on the key technologies first introduced on the EGEN and C1000 vehicle designs. The W34 will feature the accessible low floor platform, efficient lightweight systems, and our proven E-powertrain system. We estimate the addressable TAM for this segment of the commercial vehicle industry to be about $10.4 billion per year. Production is expected to start in 2024, which means we will be coming to market just as new mileage and emission standards take effect for commercial trucks in several regions of the country. Lastly, turning to Slide 13, is the W750, which will serve to bridge the gap between the C1000 product and future production of the W56 and W34 platforms. Workhorse has signed a strategic supplier agreement with GreenPower Motor Company that demonstrates the value we provide as a strategic partner. Under the agreement, we will take delivery of up to 1,500 chassis from GreenPower, complete the manufacturing process at Union City, and deliver both cab chassis and finished step vans to customers in the United States and Canada beginning in the third quarter of 2022 and throughout 2023. The W750 is a Class 4 vehicle that is both FMVSS and CMVSS certified, with up to 150 miles of all-electric range, a payload capacity of 5,000 pounds as well as standard 60-kilowatt DC fast charging and optional 60-kilowatt wireless charging capabilities. We look forward to collaborating with GreenPower 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 2 largest customers, who came to Union City to test drive the 750 and review our C1000 test results. Based on their feedback, we are confident we can sell all of our C1000s by year-end. Our customers are currently assessing how to proceed in transitioning previous vehicle orders into new purchase orders for the W750 and the future W56 and W34 vehicles. We owe them working demo vehicles before they can make their final order decisions. Turning to Slide 14. We also continue to invest in our drone system technologies and 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 and added experienced FAA veterans to the team, and transferred supply chain teams to the aerospace team. The application we submitted last year to the Federal Aviation Administration received approval to pursue type certification for the HorseFly delivery drone in 2022 and '23. We believe we have 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 2 quarters plus I've been here. Lastly, we have been awarded multiple contracts and grants with the U.S. Department of Agriculture to provide sensor monitoring, data procurement, and analytics as part of a demonstration in the areas of agriculture, waterway, and land management. This expands the overall addressable market for our base drone technology. We're exploring additional projects with both federal and state governments and potential medical service customers. I look forward to updating everyone on our progress as we continue to develop our aerospace capabilities across multiple end market segments. Based upon direct feedback from both commercial and government customers, I am convinced that we are on the cutting edge with our drone systems technology with regards to both small package delivery and aerial mapping. With that business update completed, I'll now turn the call over to Bob to discuss our financial results.

Thanks, Rick. Before I begin, thank you and Stan for welcoming me to my first earnings call. I'm excited to work with the amazing team you have assembled and pleased to be here. With that, let's turn to Slide 15 regarding financial results for the quarter. Our financial results for the fourth quarter and full year reflect the C1000 recall, as well as the important investments we are making across our business and our people, facilities, and technology. We've taken steps to strengthen our financial position and are focused on operating efficiently. Let me provide some color on our results. Sales, net of returns and allowances for the fourth quarter of 2021 were recorded at a negative $2 million compared to $0.7 million in the fourth quarter of 2020. The decrease in sales was primarily due to a decrease in volume and an increase in vehicle returns and allowances in connection with the recall of the C1000 vehicles. Cost of sales increased to $100 million from $7 million in the same period last year as we took several non-cash charges, including a $63.6 million increase in the inventory reserve, a $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 C1000. So a total of $94 million in impairment-related non-cash charges. SG&A expenses increased to $15.7 million from $4.7 million in the same period last year. The increase in SG&A expense was primarily driven by a $4.1 million increase in selling costs, a $3.2 million increase in legal and professional fees, and a $2.7 million increase in employee and labor-related expenses from increased headcount and the appointments of our new larger executive leadership team. R&D expenses decreased to $2 million compared to $4 million in the same period last year. The decrease in R&D expense was primarily related to a reduction in consulting fees, slightly offset by an increase in employee and labor-related expenses from an increase in headcount. The decrease is also attributable to reductions in consulting and prototype component costs related to the C1000. Net interest expense was $35.7 million compared to $4.9 million in the same period last year. The increase in interest expense was primarily related to losses on the exchange of the Company's convertible notes to common stock. Other losses were nil compared to $322.2 million of 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 Motors Corporation, which was sold entirely in Q3 of 2021. Net loss was $156.1 million compared to net income of $280.5 million in the same period last year. Loss from operations for the fourth quarter was $120.4 million compared to $15 million in the same period last year. Moving to our full year results on Slide 16. Sales, net of returns and allowances recorded a negative $0.9 million compared to $1.4 million in 2020. The decrease in sales was primarily due to an increase in sales returns and allowances in connection with the recall of C1000 vehicles announced in the third quarter. Cost of sales for the full year 2021 increased $119.4 million to $132.5 million from $13.1 million in 2020. The increase was primarily due to several non-cash charges, including a $75 million increase in inventory reserve, a $23.9 million increase in prepaid purchase reserve, and a $6.8 million impairment charge to adjust the carrying amount of tooling and other assets related to the C-Series electric delivery truck. The year-over-year increase just described was primarily driven by the Company's decision to produce the C1000 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 performance testing on the C1000 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 headcount and the appointments of the Company's new executive leadership team during the year. Additionally, there was an increase of $6.1 million in professional services related to litigation settlements, marketing programs, investor relations services, and general consulting fees, alongside a $3.1 million increase in selling-related fees. Research and development expenses for the full year 2021 increased to $11.6 million from $9.1 million in 2020. The increase was primarily due to an increase in employee and labor-related expenses due to headcount to support the current and expanding product roadmap and continuing development of the HorseFly UAV. Other losses changed unfavorably during 2021 as the Company recognized a loss of $225.4 million, primarily attributable to unfavorable changes in fair value and the sale of investments in LMC. During the year ended December 31st, 2020, the Company recognized income of $323.1 million, also primarily attributable to favorable changes in the fair value of the investment in LMC. Net interest expense for the full year 2021 decreased to $12.6 million compared to $190.5 million in 2020. The decrease was primarily due to a reduction of $153.4 million related to fair value adjustments and losses on the conversion of the Company's convertible notes. Additionally, there was a decrease of $12.2 million related to mark-to-market adjustments and losses on the exercise of warrants issued to lenders, a $7.7 million decrease in costs related to the issuance of convertible notes, and a $4.7 million decrease in losses recognized on the redemption of Series B preferred stock. For the years ended December 31st, 2021 and 2020, we had no federal tax expense primarily due to the losses on operations. Net loss was $401.3 million, or a loss of $3.12 per fully diluted share, compared to net income of $69.8 million or $0.70 per fully diluted share last year. Moving to Slide 17. As of December 31st, 2021, the Company had approximately $201.6 million in cash and cash equivalents and approximately $27.5 million in principal debt at face value. This provides sufficient cash for 2022. The Company's CapEx plans for 2022 are between $25 million and $35 million due to facility and IT systems upgrades in Indiana, Ohio, and Michigan. We also plan to establish an at-the-market 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 planned progressive ramp in manufacturing. Assuming supply chain visibility remains unchanged, we expect to manufacture and sell at least 250 vehicles and generate at least $25 million in revenue. Importantly, our guidance for the year is backloaded, as we are not expecting to produce any vehicles in the first half of 2022. As I mentioned, we are moving ahead with an enhanced financial position and a focus on operating our business across all functional areas more effectively and efficiently. Transitioning Workhorse from a technology start-up and prototype company into a commercial vehicle OEM requires a significant investment in people, products, processes, suppliers, marketing, and business systems. That is exactly what we are doing today at Workhorse. We have the near-term financial flexibility to make these financial investments. And with that, I'll now turn it back to Rick to wrap up the call.

Thanks, Bob. This is an important and exciting time for us here at Workhorse. We recognize that there's a lot of work to do, and we are committed to getting it done. But as we come away from this call, there are a few key things I want to emphasize. First, we're building a new foundation and getting back on the road to growth. Second, we have a clear and executable product roadmap going forward. And finally, we are confident that we have the right team and structure in place to execute on our plans, deliver new vehicles, and create long-term value for our shareholders. Thank you again for your time this morning. We look forward to updating you on our progress again, and we're now ready to open the call for your questions. Darryl, please provide the appropriate instructions.

Operator Instructions. Our first question is coming from the line of Colin Rusch with Oppenheimer.

So with the adjustment in the designs and the supply chain to support that. Can you give us an update on where you're at in terms of full qualification of the supply chain and validation of the designs that you're planning to start ramping here in the second half?

We are currently pursuing three initiatives simultaneously. First, we are collaborating with GreenPower on the W750 vehicle, which we have tested, certified, and documented over the past few months. We are now planning to modify it into a delivery step van and expect to select a partner for the box and cab soon. Regarding the W56, we have reviewed our previous chassis models and have a clear plan for the chassis, battery management, and drivetrain. Our team will present their findings in the next two weeks, and we aim to source the necessary parts from our suppliers by March 15th. We have also identified all components of the truck, considering industry lead times and potential overseas supply chain disruptions, and we feel confident about our timeline for launching in the third quarter next year.

Perfect. And then the cash balance, gain from here to there, as you scale up $200 million is a great place to be. But I'm curious what the fully loaded anticipated cash need is going to be to get to an operational cash flow positive scenario?

This is Bob. So obviously, right now, we are burning cash, and we've talked about that. $200 million is we feel sufficient for the near term. But we will be looking longer term at raising capital as we go through the funding of working capital and 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.

Colin, I would say that one thing we didn't accomplish in the quarter was getting everything finalized for 2022. First, we focused on 2021 in the C1000. We developed a solid plan, building it up from the ground across both business units to the Company level. We took into account all the expenses needed to design and test these trucks and source the parts. We are outlining all the working capital requirements, which we have covered for 2022. We need to complete that planning for 2023 and 2024. We requested the Board to allow us until May to finish this, so you will likely hear updates around the second quarter or early third quarter this year.

That's incredibly helpful. And then just the last one for me. Obviously, you've augmented the management team in a pretty substantial way here in the past year. I'm just curious, are there other key roles that you guys are trying to fill at this point? Or do you feel like this is the team that you're going to carry forward to execute, advance the plan?

Yes. Similar to a successful sports team, it's essential to evaluate your current lineup and determine what you have. We have identified three areas we need to address. First, we need to bring in a CIO who has experience with ERP transitions in the automotive industry, either from the OEM or Tier 1 perspective. Second, with a product plan in place, we must strategize on how to enter the market and engage with customers. This market is quite dynamic, with major delivery companies like UPS, Amazon, FedEx, and the U.S. Postal Service, but also many independent fleets. From my experience at Accuride, I know that over 80% of fleets consist of fewer than 50 vehicles. We need to determine the best approach for servicing them—whether through a regional team or a national accounts team. So, we're working through that. Therefore, we need a CIO, a sales leadership team at both the top and regional levels. Lastly, because we will be receiving many parts from North America and globally, we need to hire a Director of Logistics and Supply Chain Inventory Management. These are our three primary focuses as we approach the second quarter soon.

Thank you. Our next question is coming from the line of Greg Lewis with BTIG.

Rick, I wanted to think through a little bit more on the strategic partnership with GreenPower. And really, I guess my first question around that is, do you think there's opportunities to do similar type structures or supply agreements with other providers beyond GreenPower?

That's a good question. I can't reveal too much, but we have a factory in Union City that we've expanded by purchasing a warehouse and an additional facility for battery storage. We have a skilled workforce there and the potential to hire more people in the area. Other companies in the EV sector are discussing building factories, but based on my experience from establishing about 10 factories globally, that process usually takes at least 18 to 24 months. If they haven't started construction or secured necessary permits, steel, or contractors yet, they're likely looking at a two-year timeline. We've even been approached by some who are interested in our production capabilities. The W750 from GreenPower, as mentioned, helps bridge the gap due to our decision to limit production on the C1000, and we need at least 18 months to reach the W56. This will fill that gap in our revenue. When we hired Josh Anderson, he had connections with key players in the EV industry and consulted with them. I met with the GreenPower team at the ACT show in August, shortly after starting, and those discussions led to our partnership. Based on our evaluation, we believe that the chassis system we acquired was the best option available to us in a timely manner. Does that clarify things?

I want to mention that in a previous version of Workhorse, the throughput at the Union City facility was around 10,000 units. However, things change, and we are adjusting, expanding, and building out. Do you have any idea of what the throughput of that facility could be in the medium or long term?

Yes, that's a great question. I used to supply custom chassis for Workhorse and built the axles and wheels for them. We haven't finalized the production numbers yet, but we know we can mill at least 10,000 units. This estimate depends on running the plant three shifts a day, seven days a week. A lot will depend on what we produce there, including the W750, W56, and W34. We recently added a 67,000 square foot warehouse that could be expanded for a second production line if we secure contract manufacturing. We're situated in a prime location for the automotive industry, and we've already engaged with local officials and state government for support. We're also discussing available federal grants for transitioning old factories to electric vehicle systems. We're excited about the potential work ahead.

Thank you. Our next question is coming from the line of Jeff Osborne with Cowen.

This is Jeff Rossetti on for Jeff Osborne. Just wanted to see if you might be able to provide any details just around the pricing and gross margins you might expect for the 750, the 56, and 34?

Yes. We have those. We've mapped them out. It's built into our '22 budget, but we're not going to tip our hands to our competitors out there right now. So good question, though, Jeff. I can say this, it will be a profitable vehicle for us. How is that?

Is there anything about the GreenPower arrangement that would change the economics compared to the 56 and 34?

No, I don't think so. It's a solid vehicle. We've benchmarked all of our competitors in the space regarding their payload, cubic space, and range. We believe we have a very competitive product and can enter the market this year with it, both in the cab chassis design and a full delivery van, step van by the end of the fourth quarter this year.

Thank you. Our next question is coming from the line of Craig Irwin with Roth Capital Partners.

So Rick, there have been many changes in the past 6 months. Congratulations on the progress made. I wanted to begin by asking about the W750. This is likely the most significant aspect right now considering the revenue outlook. The figure of 1,500 units is quite specific, and you have contracts that would indicate a need for more units if we want to see actual deliveries to those customers soon. Can you discuss whether this truck is intended for a new customer, if there are already firm orders for this truck, and whether you need to actively acquire customers for the W750 in order to meet the delivery of 200 units each quarter?

It's a great question. When I arrived, we had 8,032 orders primarily from three customers: UPS, Pritchard Family, and Pride. We have engaged with these customers, and I made it clear to UPS that we won't be fulfilling those orders until they meet our payload requirements. They hold those orders, and once they have a truck that can carry the necessary payload at the appropriate cost, we will convert those orders into actual trucks. We've also met with the other two customers in Union City, driven the vehicles, and provided target prices we believe we can achieve in the market. They are currently evaluating the mix of their original orders between the C1000 and C650 to decide how they want to allocate those orders, including some C1000s that we discussed. We believe we can sell all those trucks, even with the limited payload capacity. They have requested a few more weeks to determine if they will choose W750s or wait for the W56 and W34. This is the important work we need to complete in the next 90 days.

So where do you stand on the pipeline for these products? I mean you're very specific about when you expect deliveries to begin, right? And you mention that there's a deposit. So I take it you're providing some cash to GreenPower to help with those initial deliveries, which likely needs to be arranged around now given their supply chain. But could you frame for us what the pipeline looks like? I mean, again, 1,500 units is a very specific number. Are there utilities lined up and ready to go, or is this something where you're really just starting to get things moving now?

We have two main focuses. First, our priority is to fulfill the customer orders we currently have with our payload, which can carry 5,000 pounds. This is a Class 4 vehicle with a range of up to 150 miles and fast DC charging capabilities. It is already operating in several markets overseas. Second, now that we have publicly announced the vehicle, we need to engage with our existing customers and potential new clients to convert their interest into orders. We can offer them test drives and share detailed information about the vehicle's materials and construction along with performance data. It's now crucial for us to get on the road, as I feel more confident about moving forward and engaging with both investors and customers than I did with the previous plans I inherited.

And do you expect to actually take delivery of all 1,500 units, roughly 200 units a quarter? Or is this really just a capacity and actual deliveries will be a function of success on the sell-through?

We have secured capacity at the supplier for the cab chassis, reaching up to 1,500 vehicles. We can adjust that number every quarter based on our market performance, and that will be our approach. I am confident we can reach the vehicle target, and we have lined up key suppliers who will partner with us. Two of these suppliers are local and based in the U.S., which is advantageous as it helps us avoid supply chain issues with overseas components for the vans. Now our focus is on understanding how many orders our patient customers want to convert to the W750 or postpone on the W56, and we also need to find new customers. This is why we plan to hire additional salespeople.

So last question, if I may. You're a pretty conservative guy, and I think most people that follow Workhorse like that, right? But in the past, the Company has been sort of willing to share targets or goals as far as units that they'd like to see sold in a certain timeline. I mean, can you share with us some color on what you would hope would be achievable for '22?

Yes. Today we mentioned our expectation to sell over 250 vehicles and generate approximately $25 million in revenue. This will include a mix of our C1000 and some W750s. I tend to be on the conservative side, and I've surrounded myself with like-minded individuals, which is likely a prudent approach. The EV market has seen a lot of hype over the past three to four years, not just with Workhorse. Many SPAC stock prices have dropped between 60% and 85%. There’s a significant difference between presenting a concept and bringing a product to life. Transforming a vehicle design into reality involves extensive work, including design, sourcing, testing, and passing all necessary validations. It’s challenging. Recently, we've seen a number of executives leave their positions in the EV sector because they fell short of their promises. We have built a team with a strong history of effective engineering and supply chain management. Now, I need to focus on bringing a sales team to the forefront. Without a vehicle that meets testing requirements, there’s nothing to sell. That’s where our efforts are currently directed.

Thank you. Our next question is coming from the line of Chris Souther with B. Riley.

Any update on where the backlog stands today from a dollar standpoint? I believe there are a few covenants related to the dollar value. So I just want to see if we can get any clarity there. You called out 2 of the key customers seemed to have good feedback on the W750. So I wanted to get a sense of where we are in the process of converting orders from the C1000 to 750 and kind of the other next-gen stuff.

This is Bob. So the backlog, we are, as you said, in the process of converting to the C1000 and then the 750 here, and it's a process. We're going to go through the process. But we're confident that we will be able to get everything in place to meet those covenants.

I'm curious about the W750, which you've mentioned as a temporary solution leading to the W56 and W34. What are the pros and cons of continuing to use an external chassis compared to developing your own, particularly with the W34, which seems to align better from a class perspective?

It's not just a temporary solution; it's more of a transition. It helps fill the revenue gap we faced. This is a steel rail chassis designed for a Class 4 vehicle. It’s reliable, tested, and certified in both Canada and the U.S., allowing us to go into production this year instead of waiting two years. The W56 is comparable to our previous chassis. The W34 represents our advancements, incorporating lessons learned from the C1000 and EGEN. However, it requires more marketing effort to ensure that customers are interested in what they've requested, and we need to manage sourcing as well. One challenge we encountered with the C1000 was receiving specifications from a customer that were both realistic and unrealistic, which complicated our build process. We need to ensure that we can produce a truck that is profitable. A great prototype is of no value if the costs are excessively high compared to what the customer is willing to pay. We are trying to balance customer needs, considering both large fleets and smaller operators. Typically, Class 4, 5, and 6 trucks range between $60,000 and $80,000. When powered by internal combustion engines, these vehicles consume a lot of fuel, but the ICE vehicles themselves don't cost that much. With electric models, we're dealing with the added costs of batteries, electric axles, and inverters, along with standard components like wheels, tires, chassis, and suspension. We can compare the costs through our bill of materials, showcasing the differences. However, batteries are significantly more expensive than traditional engine systems, and axles can cost two to three times more than expected. We've been diligently working on these issues quietly for the past four or five months, focusing on the necessary groundwork without making a lot of noise.

Could you provide a CapEx target for this year? Additionally, any details on R&D spending, which decreased last quarter, would be helpful, as well as insights on how OpEx is expected to trend throughout the year.

This year is a significant capital expenditure year for us as we ramp up the plant. It doesn't make sense to create world-class products from a factory that hasn't seen investment in decades. We are making the necessary investments to ensure the plant showcases the right tools and safety features to protect our workforce. This year’s spending is substantial, but I expect our capital expenditures to decrease next year, depending on the new products we introduce. I don't have a precise number for our research and development at this moment. Generally, we are shifting from relying heavily on costly external consultants to developing our in-house talent, which includes 270 years of experience in custom chassis and designs. We are hiring at Wixom. When I joined, we had 11 external consultants assisting with our manufacturing quality, and that number has now reduced to 2. We’re bringing in the right resources to become a self-sufficient original equipment manufacturer at Workhorse, covering design, testing, and manufacturing quality. For special testing, we chose the Wixom site because it is close to numerous testing centers in the greater Metro Detroit area, allowing us to put our vehicles on full and partial chassis dynamometers.

Thank you. Our next question is coming from the line of Mike Shlisky with D.A. Davidson.

I wanted to check with Bob for clarification. Did you say there was a $4.1 million increase in selling costs compared to the previous year? Is that correct?

That is correct. That was primarily a long-standing contractual settlement that we took care of to move us forward to the future and get it behind us. So yes, negative revenue selling expense that doesn't seem logical. But that's what that was for.

Yes. I was going to ask you kind of what were you selling during the quarter? There wasn't much out in the road. So maybe excluding that, was it more in line with the prior year or the prior quarter? Can you give us some color as to what the more normalized run rate might be going forward?

Yes. That was the predominant total of that amount. So it's pretty normal outside of that.

I also wanted to inquire about how the GreenPower agreement came about. There are several other Class 4 providers in the market. I would like to understand how you established the relationship with that company compared to others that have their own Class 4 EVs today.

Yes, that's a great question. I joined the company in early August, and shortly after, the ACT show took place in Long Beach. Within a few days, my team introduced me to many of our competitors, including SEA Electric and Bollinger. I also have prior experience in the industry because of my time on another company's Board. A personal friend of mine, who I’ve known for 20 years, introduced me to Josh Anderson, our Chief Technology Officer, whose resume I reviewed. I interviewed him at the trade show, and we essentially reached a handshake agreement by the time we left Los Angeles for him to come on board. He has over 22 years in commercial electric vehicle powertrain systems and holds 12 patents. He then collaborated with my team and me to identify possible partners. We realized early on that we needed to conduct further testing on the C1000, and we evaluated our options for possible pivots. He introduced us to GreenPower, and their President presented their product portfolio to us in Ohio. After reviewing their vehicles and meeting with their CEO, we established a partnership over the last two months. My leadership team took their vehicle, fully loaded it, and drove it around Greater Ohio, ensuring we had all necessary documentation. We believe they are a solid partner and that we've reached a mutually beneficial agreement. They will handle sales and receive some down payments, while we will get the cab chassis, allowing us to enter the market in 2022 instead of waiting until 2023. That's the summary.

For one last question regarding the aerospace sector, I've reflected on our discussions over the past year or two about this business. It has consistently been about a patented product designed to take off from a crew vehicle, deliver a payload, and return to base, enhancing driver efficiency. In this call, you're addressing additional applications in agriculture, land mapping, and possibly even in the medical field. Are any of these applications supported by your intellectual property, or are they simply extensions of existing capabilities? Additionally, can you provide insight into the competitive landscape for these other applications, particularly in agriculture and healthcare?

Yes, I, along with John Graber and the team, reviewed some previous UAV market data and updated it for this year. The growth in this segment is incredible. I've never seen such projected CAGRs in my career from major economic forecasts by several banks. The UAVs are primarily derived from military applications and are now being adapted for commercial use, including printers, reefers, and drones. There is an explosion in demand for small drones used for photography and similar applications, and we are in the process of figuring out how to apply this technology in the commercial sector. We believe we are in a strong position, as our customers have indicated that we are their only partner for a vehicle launch drone. They provided us with specific engineering requirements, amounting to almost 3 pages in the first month of my tenure, and we expect to meet these design specifications through testing by the third or fourth quarter of this year. If we succeed, we can advance further. As we analyzed the data, we also explored other potential applications for our drone technology, including the control logic and stability of our robust drones, which weigh less than 25 pounds and can carry a 10-pound payload. We can operate them on a tether, which none of our competitors are currently doing, presenting a unique opportunity for us to differentiate ourselves. We have added various camera and LiDAR systems to our drones, conducted tests, and received positive feedback from customers, leading to additional government grants for our initiatives. There is a clear demand for our drones in areas such as national parks, large ranches, and agricultural lands where farmers traditionally rely on ATVs or horses for monitoring. With our technology, these tasks can now be accomplished much more efficiently, making it a real opportunity for us.

Thank you. Our next question is coming from the line of Jaime Perez with R.F. Lafferty.

Just for clarification, you mentioned last quarter that some of the vehicles are going to have a steel body, with both steel and aluminum chassis options. I see that the W56 has a steel chassis. What about the W34, does it have an aluminum chassis?

The W56 will definitely have a steel rail chassis. The W750 is also a steel rail chassis, while the W34 is still to be determined. We gained valuable insights about aluminum from our experience with the C1000, both positive and negative. If too much aluminum is used, it can weigh as much as steel. That's why we delayed the W34, despite its larger potential market. We're not finalizing our design yet regarding whether we'll use an aluminum or steel chassis; we're evaluating both options. Ultimately, it's about how the chassis is constructed and how we can protect the batteries integrated within it. If you observe many passenger cars, you'll notice that their chassis and batteries are designed around each other, and we need to approach this similarly for our trucks.

Now with the heavier load capacity, any change, how are you going to handle the performance with the torque through inverter or additional battery or motors? I'm just curious.

We have evaluated several of the major Tier 1 suppliers involved in the electric drivetrain, such as BorgWarner, Dana, Linamar, Axle, and Omnitech. We have narrowed it down to two finalists that we are currently negotiating with and will select one. We are very confident in this process. In fact, as mentioned during our summer EGENs, we currently have some original data axles that were converted for E-powertrain stored in our warehouse. We have gained significant experience in this area over the past three to four years.

And one final question. Last quarter, you mentioned you had inventory of 250 units, and you're not going to build any vehicles in the first half of 2022. So does that imply you have enough inventory for second half production and possibly acquire new inventory for 2020? Any clarification would be appreciated.

Yes. Regarding the C1000, we mentioned last quarter that we had about 500 units. After a thorough review, we believe we do not have 500 units due to various design revisions, which is why we adjusted our inventory and reserves this quarter. We have sufficient inventory and as stated today, we plan to produce an additional 50 to 75 C1000s. We are confident that we have 98% of that inventory covered, needing only to purchase a few more parts for some part numbers. Overall, we are not currently facing any supply chain issues with the C1000 that might affect us like it does for other customers.

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. We're committed to get this Company across the finish line. Go from a plough horse to a workhorse. All right. 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. Enjoy the rest of your day.