Workhorse Group Inc (WKHS) 2021 Q3 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to the Workhorse Group's Third Quarter 2021 Investor Conference Call.

(Operator Instructions)

As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Finance, Tony Furey. Sir, you may begin.

Thank you, operator. Good morning, and welcome to all of you joining us today's third quarter 2021 results call. My name is Tony Furey, and I am Workhorse's Vice President of Finance. Before we begin, I'd like to note that we have posted our Q3 2021 results as well as an accompanying presentation via press release in the Investor Relations section of our website. We will be tracking with the poster presentation during the call, so please follow along either from the link in the press release or through our website directly. And with that, let's get started.

Slide 2, please. As you can see on the slide, you will be hearing from 3 members of the management team during the call. Joining me today is Greg Ackerson, our Interim CFO; and Rich Dauch, our CEO.

Moving to Slide 3. We have a straightforward agenda today. Following my remarks, I will hand the mic over to Greg, who will cover Workhorse's Q3 2021 results. Once Greg is finished, he will pass the baton to Rich, who will take your questions after a formal comment and presentation after they are wrapped up.

Moving to Slide 4. Moving to some housekeeping items and our disclaimer on Slide 4, some of the comments that will be made today are forward-looking and, therefore, are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement in our regulatory filings and in today's press release.

With these details out of the way, I will turn the call over to Greg Ackerson. Greg?

Thanks, Tony. Before I begin, I would like to say, while this is my second opportunity to take the reins as Workhorse's CFO, this is my first earnings call. It is an honor to be given the opportunity and a very exciting time for me professionally. With that, let's get to the quarterly results by turning to Slide 5.

Sales, net of returns and allowances decreased by $1.2 million, resulting in negative $0.6 million of net sales for the quarter. The driver of this decrease was the sales allowance recorded during the period, which is related to our C-1000 recall in September.

Moving to cost of sales. In Q3 2021, we saw an increase to $11.5 million from $2.8 million in the third quarter of 2020, which was driven by several factors. On the slide, you can see them in order of descending impact. The largest impact was the inventory write-down for the quarter. Additionally, our C-1000 costs were higher year-over-year due to higher volumes, consulting, plant and other expenses in addition to higher warranty costs for the quarter.

Looking at our SG&A expenses, we saw a $4.6 million increase year-over-year due to increases in our severance, technical staffing and stock-based compensation expenses. We also saw higher consulting and insurance costs compared to the previous year's quarter.

Moving on to Slide 6. On our R&D line, we saw an increase of $1.2 million due to increases in our technical staff as well as consulting and costs associated with our prototype programs. Below the operating loss, we saw some large swings in results for a number of reasons. On the interest line, we saw income of $18.6 million compared to interest expense of $74.3 million in the prior period. The largest driver was the decrease in expenses related to the fair value adjustments and losses on the conversions of our convertible notes. We also had a decrease in losses recognized on the redemption of our Series B preferred stock from the prior period. In the category of other losses, Workhorse realized a loss on the sale of our Lordstown investment of $77.1 million compared to 0 in the prior year. Overall, we had a net loss of $81.1 million for the third quarter of 2021 compared to $84.1 million in the third quarter of 2020.

Let me shift gears now and talk about what we have been doing to impact what I think is the most critical financial aspect of our business, that being the management of our cash resources. Let's now take a look at the details, which are included on Slide 7.

As of September 30, we had $230.4 million in cash and cash equivalents on our balance sheet. At our current projected burn rate, we have enough cash to fund our ongoing operations for quite some time before we believe we will need additional funding. However, we must remain diligent in our management of our cash resources, and that is exactly what we are doing.

Let me tell you what we have accomplished in managing our cash resources during the quarter. First, we slowed inbound material shipments and freight costs. We have also reduced third-party consulting fees by replacing higher-cost external resources with in-house talent. We withdrew from the costly USPS lawsuit, which reduces legal and related lobbying costs, and we have rightsized our plant staff by approximately 25% without losing key talent.

Additionally, we recently converted $172.5 million of debt into equity, resulting in a future reduction of $1.7 million per quarter in cash interest payments. What all this means is that exiting Q3, we have reduced cash outflows by more than 30% sequentially. That is a significant improvement in a relatively short period of time. And that completes my financial summary.

I will now turn the call over to Rich Dauch for his prepared remarks. Rich?

Thanks, Greg, and thank you for taking on the interim CFO role and responsibilities. You're doing a great job.

Good morning, everyone, and thank you for your interest in our company. It has been a busy and eventful first 100 days for me and our team here at Workhorse. We are taking the sometimes painful but necessary early steps to reshape our company and become a more focused and capable industry leader in the EV space.

Turning to Slide 8. My update covers a wide range of topics. During my initial earnings call back in August after a week in my new role, I said I would be undertaking a 90-day orientation process here at Workhorse. Today, I will share with you what I have learned thus far as well as what we have accomplished in the third quarter to strengthen our company. I will also review the powerful macro trends that are driving our business model and which were important considerations when I decided to come off the bench and take over the CEO role here at Workhorse. I also want to share the stabilize and grow process model I have previously and successfully used as a CEO to manage, lead and build winning, profitable companies. Finally, I will share with you what I believe are our most important opportunities and issues as all companies have them in addition to our near-term priorities in the fourth quarter.

My 90-day orientation at Workhorse has been extensive and far-reaching as reflected by the activities that have been completed on Slide 9. I won't go through them all in a comprehensive fashion, but I will say I have met with our major customers, our key suppliers, attended of our industry's largest trade shows, met with many of you in the financial community as well as many other industry players, met internally with department leaders and held 3 separate town halls with our staff and workforce at all 3 facilities. I also conducted in-depth one-on-one interviews with 27 of the key leaders here at Workhorse and held 3 days of intense product design and build material views with our engineering and purchasing teams.

On the regulatory side, we know that both state and federal emission standards will only get more restrictive going forward and that the federal government is prepared to invest heavily in the infrastructure required to assist in the transition to electric powered vehicles. Last Friday, the new $1.2 trillion infrastructure bill was passed into law with $10 billion of investments identified for the EV sector, primarily for EV charging and infrastructure stations.

In summary, we have been very deliberate and thorough in engaging across all stakeholders within the industry at all levels and across all functions across the company. We are now well informed and prepared to make critical decisions to reshape our future business plans here at Workhorse.

In the spirit of transparency, which I will speak about more later in my comments today, on Slide 10, you will see my key 90-day findings. Let me start with the positives.

As mentioned earlier, we have strong macro market dynamics propelling our business forward. There are not many industries with this type of macro backdrop in the country today. We are fortunate to have this convergence of favorable macroeconomic trends and regulatory factors driving our future growth. We have rock solid, capable people at the working level. At every facility I was impressed with the dedication and capability of the Workhorse team. We need to keep the enthusiasm and drive that comes with being an exciting technology start-up company while we transition into becoming the best-in-class manufacturer of EV vehicles.

As you heard from Greg, we have near-term financial flexibility based on our improved balance sheet and reduced monthly cash consumption rate. I was very pleased to find that we have technology leadership positions in several product areas, including the Class 4 to 5 EV delivery vehicles and powertrain systems, our UAVs, our historical W22 and T model steel rail chassis systems and our Metron telematics systems.

Based on my conversation with all of our leading customers, we can confirm we have solid purchase orders and strong loyal customer support. Our Union City manufacturing campus' capabilities and potential are also positive differentiators for us in the EV industry. We are competing in a fragmented industry and possess foundational elements that differentiate us from others in the industry. We have a capable plan, extensive prototype and real-world driving experience, a qualified workforce and talented engineers. Some of our key competitors in this space are just now building plants, hiring people and making prototypes. Here at Workhorse, we are a real company and not a PowerPoint EV company.

On the other side of the ledger are the negatives. We had an inexperienced leadership team, and we moved very quickly to address this key issue. We previously had poor communication and coordination across the company, both internally and externally, and we've eliminated that. Our cash burn rate was greater than $12 million to $16 million per month when I arrived at Workhorse. Our current C1,000 vehicle design is not robust nor is it profitable. Our supply chain, despite the dedicated work of our purchasing staff is not yet Tier 1 qualified. The company had a lack of systems and process discipline, which should be fair as typical in a start-up company.

Let's now move to the macro backdrop for the Workhorse business model, which we've highlighted on Slide 11. It will not come as a surprise that e-commerce has been growing faster than the U.S. retail sales market for the last decade. E-commerce sales continue to grow at a 15% annual growth rate. Coupled with the consumer experience during the COVID-19 pandemic, the orange hockey stick in 2022 shown on the chart on the left tells you that the last-mile delivery is more important then ever, and we believe that this shift in consumer buying habits is here to stay.

Now let's take a look at the projected growth rates for both the Class 4 to 7 CV truck market and the UAV forecast. You see nothing but positive momentum with double-digit CAGRs in both segments. These trends support and underpin the Workhorse business model.

Slide 12 tells a related but equally important story. As you know, state implementation of electric vehicle centers vary across the country. Led by California and those states that are following the California Air Resources Board plans, the chart on the left shows in blue the leaders by state in the move to EV vehicles. While large in population, this group forms the early adopting tip of what will be a decade-long transition to EV. The chart on the right shows the forecasted projections for the ICE to EV powertrain transitions here in North America for all auto vans and trucks. As you can see, the transition in electric vehicles is just underway with less than 4% of all vehicles being fully electric. This transition to EV will pick up speed mid-decade as a result of over $200 billion in new product investments by the OEMs, coupled with major investments in the EV infrastructure across the country. These factors will converge to enable the shift to electric vehicles. It will take more than a decade to reach a 50-50 split between ICE and EV powertrain systems. So w are in the very early innings of a generational industry disrupting change in powertrain and infrastructure technologies. These dynamics are impressive and convinced me that this market was one I wanted to participate in with the right company. As a result, I came off the bench to join Workhorse, and I've seen nothing internally or externally to convince me otherwise.

When you drill down to our markets, what does this mean for the medium truck markets? Slide 13 shows you the current analyst projections on the mix shift from internal combustion engines to electric vehicles for commercial vehicles in the coming years. We also included the incentive benefits for per vehicle tied to each of these truck weight classes for additional insight. As you can see, lift-off seems to occur in about 2023 and the growth keeps on going. This is without a doubt a target rich industry to be a part of.

Let's now turn to Slide 14. I've had the good fortune to serve as a CEO for a number of companies during my business career. Through my experiences, I have developed a straightforward, process-driven approach towards leading the firm from a challenged situation to stability and profitability. None of this is rocket science, but it requires hard work, tough decisions, selfless leadership and most importantly, buy-in throughout the organization across all stakeholders and, of course, flawless and relentless operational execution every day. You saw in the 90-day orientation slide, the orange circle with the 6 Ps, understanding the people, products, processes, partners, profitability and politics are critical to future success here at Workhorse. They serve as the foundation for what we want to achieve here at Workhorse and are shown at the base of our pyramid.

You can see at the top of the pyramid, the value creation that comes from the progressive improvement and steps taken by the company based on a series of deliberate actions. But you cannot skip the hard work required to move from the bottom of the pyramid across the levels to achieve success. To level set, we are currently in the lowest slice of the pyramid. From here, we will start our journey together. We are emphasizing an environment that has no politics and is focused on ethical people and actions, team players and selfless leaders. Over the next 3 years, I fully expect us to reach the top of the pyramid. Again, this will not happen overnight and will require us to focus on the customers and serve them with industry leading technology, make decisions about what is core and what is not core here at Workhorse, to develop and implement common lean systems and then properly grow the business. I am confident we can do this with the strong industry fundamentals and tailwinds we have in our sector. We know it will be hard work and require many important decisions along the way. Speaking for the whole company, we're ready to start on our journey. So let's go to work.

Turning to Slide 15. One of our first collective actions undertaken as a management team was in October at a 2.5-day off-site to establish our mission and values as a company. I have to tell you from my previous CEO experiences, establishing a clear vision for the company and certainly setting core values by which we will act and make decisions going forward are absolutely essential steps in establishing the proper culture for success and the touch points we need, especially for our company in the midst of a transition.

Why? Well, if you not know where you're going, anywhere will take you there. And if you not know -- if you not have agreed upon values, then you will do not stand for anything in particular. The result of our session was a straightforward vision for Workhorse, to pioneer the transition to 0 emission commercial vehicles. And our values are quite simple, and we will hold each other accountable to live up to them and emulate them every day: transparency, teamwork, accountability, excellence and integrity. Our Board of Directors has approved our vision statement and our company values. In my presentation today, I hope you will see we are serious about the values we have established, and we will use them to drive my communications internally and externally with all stakeholders.

On to Slide 16. As I mentioned in the prior slide, we have moved quickly to assemble an experienced, capable leadership team with the breadth of experience, obvious in the electric vehicle, automotive and related industries. These names include Josh Anderson, our Chief Technology Officer, who comes with 20-plus years in the EV industry and possesses 11 patents around EV powertrain systems and software. Jim Harrington, Our Chief Admin Officer and General Counsel, who worked with me at Delphi Technologies and served as General Counsel at Tenneco for over 9 years. Stan March will join our company next week as our Vice President of Corporate Development and Communications. He is someone who has a couple of decades experience in business development, M&A, communications, marketing and Investor Relations. Dave Bjerke, Vice President of Product Development of over 40 years of P&L and vehicle design experience focused on low volume specialty vehicles, very similar to what the kind of volume and vehicles we're going to build here at Workhorse. Ryan Gaul, President of Commercial Vehicles, a 20-year veteran of the global auto industry with multiple years deployed across Europe and in China, building plants and building up businesses in both those regions. Chris Nordh, our Vice President of Commercial Development, who joins us from the trucking industry, where he was in the forefront of the shift to alternative fuel and electric powered vehicles in that segment. And Jim Peters, Vice President, Purchasing and Supply Chain, who I worked with at American Axle and who is a supply chain expert.

Slide -- let's now on Slide 17. As we disclosed in September, we made a filing with NHTSA that additional testing and modifications are required to bring our C-1000 vehicle into compliance with federal motor vehicle safety standards. There were only 41 vehicles in the field when we grounded the fleet. I want to emphasize that there were no recorded accidents or safety history associated with these or any other of our vehicles. We have slowed production to just 2 vehicles a week and have extensive testing underway in the fourth quarter on several different C-1000 vehicle systems, including brake testing, analytical load analysis, durability testing, and finally, reviewing the data field on our electric powertrain systems.

During the first quarter of 2022, decisions will be required as to whether we make the C-1000 a limited or a full production type vehicle. We are also looking at multiple Class 3 through Class 7 chassis options as part of this in-depth product portfolio review. As we do this, we will be finalizing a 3-year product portfolio road map that we plan to execute between 2022 and 2024. We will take the lessons learned from both field data and testing results associated with the C-1000 fleet and incorporate the relevant improvements into our product portfolio review and decisions.

Another important portion of our business is our Aerospace or drone division, which is highlighted on Slide 18. We are one of the original equipment manufacturers approved by the government to pursue commercial FAA Part 21.17 certification in 2022 and 2023. Potential customers tell us our current range and payload capabilities are market-leading. We will continue to work on enhancing both. We are a single-source supplier partner in the development of drone delivered packages from vehicles with a leading last-mile delivery customer. And from our conversation with this -- with other potential customers, we are encouraged by our system positioning in this business segment.

We're exploring additional projects with both the federal and state governments as well as large retailers. We've already entered into demonstration contracts with multiple customers. We'll keep you informed on important developments in this business segment as we believe we have both the range and cargo capacity to be a leader in the emerging drone and delivery industry.

I now want to spend just a moment talking about our Union City facility and campus on Slide 19. First, we have a great workforce with lots of manufacturing and assembly experience. We have an existing 212,000 square foot factory sitting on a 47-acre campus. The site has a 30-year legacy of commercial vehicle chassis production. We recently established a wonderful customer experience center and we're planning to add a test track to the facility to further enhance its value in 2022. I believe this facility is truly a diamond in the rough and can be a significant differentiator for us in the industry given the dedicated and experienced staff we have there and the fact that many competitors do not yet have dedicated manufacturing assets under their control. With limited incremental investments we can and will create a world-class manufacturing center in Union City.

Let's turn to Slide 20. It's on my 90-day review, I've also been able to scale and scope the company's CapEx requirements for the next 3 years from '22 to '24. Major investments are needed in 3 key areas. First, we need to fund research and development as well as test facilities and equipment, which we estimate will be between $8 million to $10 million. We plan to invest in our Union City manufacturing facility to bring it up to the state-of-the-art plant and estimate that will cost somewhere between $15 million to $20 million to do this. I want to underline this number one more time -- I want to outline this number one more time since you will find very few, if any, competitors in the EV space able to get so much improvement for the incremental investment dollar as we will see from Union City. Finally, we need to invest in our corporate IT system somewhere between $5 million to $10 million over the next 3 years. The Workhorse team is executing on our revised plans to be fully prepared to meet the emerging EV market needs in '23 and '24.

As we have shown on Slide 21, the federal fleet consists of more than 750,000 vehicles across multiple departments and agencies. This is the largest fleet in the country. Significant federal funding exists to support the transition to EV technologies, both for vehicles and for infrastructure. And across my 3 decades of industry experience and business experience, I've never seen a customer win an award or a contract when they are suing their customer. And never seen a customer provide award supplier if they've been suing them.

Please turn to Slide 22. I I've not spent the past 90 days simply familiarizing myself with the company. We have also made a series of decisions to address the challenge that we face, which include: assembling a new executive management team, and I would say we are about approximately 80% complete with that today, strengthen the balance sheet by converting more than 85% of our debt to equity, confirming our customer order backlog through direct face-to-face conversations with our customers, grounding the C-1000 series vehicles and put them under more rigorous tests, withdrawing from the USPS lawsuit, reducing the monthly cash burn rate of the company by approximately 30% per month, and I think we can do better, developing our 3-year draft of our product portfolio plans and establishing business unit road maps to profitability for the future.

Of course, many things remain to be completed as we work our way up the stabilize and grow pyramid. So we've established the following priorities for Q4. We need to hire an experienced CFO and other selected executives. We need to strengthen our organizational technical and commercial capabilities. We need to complete the C-1000 testing and make a decision on its future. We need to finalize product development road maps for both our vans, chassis and UAVs. We need to finalize the 2022 budget. We need to develop detailed '22 to '24 business plans at the business unit level. Stay tuned for further progress in these areas in the coming quarters.

Let me touch on a subject that is likely of interest to all of you on Slide 23. Recent news flow in our 8-K filings have mentioned investigations by 2 government bodies, the SEC and the DOJ. So here's the latest information we have and that is all I can share on this subject. As we noted in yesterday's 8-K filing on October 19 and November 1, we received letters from the SEC requesting that we voluntarily provide information related to trading in our securities leading up to the announcement of the award of the U.S. Postal Service contract and on recognition of revenue related to purchase of vehicles by certain customers. On November 5, the Department of Justice orally informed us that it has a related open investigation involving our company. We have not received any subpoena or other requests for documents from the DOJ with respect to this investigation. We are fully cooperating with both the SEC and the DOJ investigations. At this point, we cannot predict the eventual scope, duration or outcome of these matters. As I'm sure you can appreciate, we are limited in what we can say while these investigations are ongoing and will not be commenting further on these matters. We are here to discuss our third quarter results and ask that you please keep your questions focused on our results and plans going forward.

So wrapping up the slide on 24, what essential takeaways would like you to have from today's call. First of all, we've assembled a strong, capable and experienced leadership team here at Workhorse who have rolled their sleeves and are going to work. We strengthened the balance sheet by reducing more than 85% of our debt while reducing our cash burn rate by approximately 30%. We have withdrawn the mid protest and associated legal actions against USPS opening the door for us to have discussions with the federal government on other projects underway. We have a rigorous vehicle testing and redesign process underway for our C-1000 vehicle, led by extremely competent and experienced engineers. We've revised our product portfolio road map currently in development. It is also worth remembering that the transition to commercial electric vehicles will be a long road. To be successful at the end, it will require nimble and multifaceted companies to be ready when the market opens and also whether the long design, testing and order cycles associated with launching EV vehicles, much tougher to do it in real life time than do it on PowerPoint presentations. And finally, we have already identified the capital investments necessary to position Workhorse to be first to market in the commercial electric vehicle last-mile delivery space in 2023.

With that overview on background, we are now happy to answer your questions. Operator, please provide the appropriate instructions.

(Operator Instructions)

Our first questions come from the line of Colin Rusch with Oppenheimer.

As you're going through this product redesign and working with the suppliers, can you talk a little bit about the preparedness of those suppliers to help enable some of the technology moves that you need to make to actually take the weight out and get this product optimized and simplify it to hit the market?

Yes, it's a great question, Colin. So I think one thing we discovered here when I got here is that majority of our suppliers were not your typical Tier 1 suppliers. We were buying parts from aftermarket sources, car and truck dealerships, online auction places. So by bringing in Jim Peters, we have him taking charge of the supply chain. We've already identified over 70 traditional Tier 1 suppliers, we think, are more than capable. We're talking about big names like BorgWarner, Sena, Matula, Magna, others, the typical Tier 1s that underpin the truck industry. We've already had a series of meetings there. and we'll be prepared as we redesign the C-1000 or modify the C-1000 or go to a different design to make sure we have a very well-qualified, capable supply chain. The one area I'm confident is that we have a good relationship with Tavo for our batteries. They seem to be very good. They're proving out quite well in the test.

Great. And then in terms of your manufacturing capacity, there's a variety of kind of scenarios that are developing within the industry as the technology nodes change. And so there's some outsourced manufacturing elements of this. As you look at this $15 million to $20 million investment potentially on your current facilities, how are you thinking about that as a strategic asset relative to some incremental price you might find outside of what you have internally? Or is this really going to get you to the place where you can really scale up into the full scale of this opportunity?

Yes, I'd say one of the key finds here when I got here was pleasantly surprised when I got to Union City. I wasn't happy what it looked like from the outside. We've already addressed that when you come business, they look a lot better. The roads have been paved. We clean up the plant. There's a lot of debris around the plant that's all been sold off. What was really exciting when I got inside, it's a damn good building, and most of them have a really good workforce. I'll be up there tomorrow to talk to them. We have 2 vehicle assembly lines that we can run multiple shifts. We have a dedicated chassis line that we can run, so if we want us to do full vehicles, we just want to do chassis, we had to flexibly do so. We have multiple subassembly feeder lines, and we have the space to expand the plant if we want to in-source any of the current work we're doing on the outside, okay? So I think there's a lot of flexibility at Union Cities. And as we button on our vehicle plans, we'll button on our capacity plans, and I think we can meet the growing needs in the EV market out for '23, '24. So we've already met with the local government leadership team, the surrounding community includes about 360,000 people. We're one of the best employers up there in terms of wage and benefits. And so I think we can get a very good competent workforce who has a history dating back to the early 19th century of building classic vehicles there.

Our next questions come from the line of Greg Lewis with BTIG.

Rich, there was a little bit of comments around the recalled vehicles. Is there any update on where we are in the process of those vehicles getting back on the road? And we noticed -- you mentioned you slowed down to, I guess, to account it to on vehicle production per day. Is there any way to kind of -- it doesn't sound like -- it sounds like we still think there's an opportunity at least a niche opportunity for the original Series C1000 at least over the next few quarters. Is that kind of the right way to think about it?

Yes. Let me go through some of the data, okay? So right now, as of -- I think last Friday, we had 41 vehicles recalled and there's about 124 vehicles that we built that are on the ground up in Union City, so about 165. That may have grown to 170 already by this week. We've got to go back and do some of the testing. As a new start-up company, we just weren't experienced enough in some of the regulations and standards that we need to hold ourselves accountable to under FMVSS. Let me give you a few examples.

Well, first of all, we expect to have all this testing done by the end of the year. Test #101 is around controls and displays. So there are certain switches that need to be replaced in our vehicles to bring the markings into conformity with the FMVSS standards. Test #104, windshield wipers and defogging systems, our wiper blades need to be replaced. So that's not going to cost us a lot of money. Test #108 lamps reflective devices for safety on the vehicle and associated other equipment around the cab for operating warning you it needs to be taken care of. So that's the stuff that we weren't used to doing on these kind of trucks.

Test 120, our tires and our wheels need to have DOT markings on them, and we bought these off the Internet, and we didn't have those marketing. So that's something we can replace pretty easily. We know it's going to cost us.

The bigger issues we're working on are basically 3. One, let's do our brake testing and make sure we document it properly, that's underway, and we expect that to be completed by the end of November. Two, let's put our EV powertrain and software systems under more rigorous testing, and we'll have good data on that by the middle of December. And finally, we needed to go back and do all the load analysis and then use basically delivery vehicle test standards you put on a Dyno to shake, rattle and roll the trucks and see how durable they are.

As I've talked to the big customers at UPS, FedEx, others, they expect to have these trucks last 15 to 20 years and go 15,000 to 20,000 miles a year and carry up to 7,000 or 8,000 pounds of payload. I'm pretty darn sure the C-1000 can't meet those kind of stringent requirements, okay? That's the bad news. The good news is when I talk to customers, they told me they'll take every C-1000 we can build in 2022, so they can start demonstrating to their teams and their customers in the field how an EV vehicle works versus an ICE vehicle works. I had dinner last night -- or last Thursday in Dallas, the gentleman said, "Hey, as soon as you can give me a safe, reliable vehicle. I'll take 12 or 15 just as demos, so I can start educating my team and my customers about, look this is going to happen to -- what's going to happen to them over the next 5 years in the EV space."

So by bringing in Josh, who's a known EV powertrain expert which has consulted with multiple of the EV SPAC companies and bring in Dave Bjerke, who ran Triad services, which designed multiple types of vehicles including the presidential limousines, special vehicles for the military and other agencies, mobility assist vehicles. We have almost 70 years of experience that joined the company in the last 90 days who are now leading the charge. We've got some great young engineers here, average age 22 to 28 years old, a few a little older than that who are great engineers, but have never really come out of the auto experience -- auto industry. So now we're getting a good combination of blending, and we're going to probably double the size of our engineering staff over the next 12 or 18 months.

We also need to have better in-house testing capabilities, so we can test the parts of our suppliers to make sure they can meet the requirements we have in our specifications and on our blueprints. And we're going to make a few small investments so we can actually fully test vehicles like we did when I was at American Axle on Dynos, et cetera. So does that help you?

Yes. That was super helpful. And then I guess just one more me. As we think about -- thank you for the comments on the U.S. -- the decision to drop the USPS lawsuit, but as we think about the potential federal government opportunity, realizing that it's still very early days. You did mention, Dave, who's joining has background in working with the military. I think traditionally, people viewed Workhorse as a provider of electric vehicles solely in the last-mile delivery. As we think about opportunities broadly from the federal government, is there the potential now with your team in place that we could be looking beyond just, say, a small delivery truck as opportunities present themselves?

I'm not going to tip my hand too much because I know some of my competitors are listening or some of my potential customers are listening. But one of the great things I found in this company is that we have a history of making up to Class 7 and Class 8 chassis at our Union City factory. We own all the intellectual property. We own the tooling. We know who the suppliers are. So one of the things we've done as a team is go back and ground ourselves in the transition for both Class 3 up through Class 7 commercial vehicles and where we can play, either as a full vehicle manufacturer, or as a chassis provider of vehicles. There's a very -- the chassis market here in North America is really a duopoly right now. I won't comment on who those duopoly people are, it's restricted right now. We hear that from multiple customers that they can't get enough chassis right now to underpin their vehicles. And so we're doing some studies there. So stay tuned for future business plans. We hope to have buttoned up here by early first quarter.

Our next question comes from the line Jeff Osborne

from Cowen.

Just a couple of quick questions on my end. Rich, I was wondering if you can give us an update post the actions. It was helpful that you went through on the cash burn. It was $12 million to $16 million. Are you closer to $8 million now? Or can you give us a sense of where that is?

I'm going to let Greg take that and then I'll make a few comments probably, sir.

Yes. I would say, during Q3, we got it down to 11%. When we talk about some of those actions we were taking, and I will say there are opportunities there. We have a pathway to get it lower. But I think $8 million is a very good goal for Q4.

Yes. I say when I first got here, I asked the guys, I went through with Greg and the team, we went through every line item of our spending back to January 1. And a couple of things jumped out of me. Labor, well, salary or hourly is not our major issue here. The issue is we are bringing a lot of raw material. We have a lot of inventory, and we actually flew some of that inventory here but we weren't able to build the trucks. So why bring more inventories. So we've slowed that process down. We're not flying parts from Asia here, right? So that's key.

Two, we are spending a hell of a lot of money on outside consultants, legal firms and lobby groups to the tune of million dollars, millions of dollars per month, and we've driven that down significantly. First of all, it's a lot cheaper and better for us long term to have our own inhouse talent versus relied on outside consultants. I won't give the exact numbers, but we are probably paying 5x more for a program management position than we should be paying, right? So that's just like almost ludicrous is what I'll say, okay? So we've got that -- we had to clean up a few past due invoices to suppliers and that both our parts suppliers and some of our service providers. That's almost behind us now, and I think we can tighten the ship pretty tight here in the fourth quarter and the first quarter until we are ready to start thinking about what we do next year. Key to that will be is what we do with the C-1000. We basically have enough inventory on hand right now to build somewhere north of 500 vehicles, plus or minus a couple of hundred without bringing any more inventory into this company. So we don't need to bring any raw materials in at least until second or third quarter next year, okay? So that's going to be good for us from the cash burn.

The key factor Greg and I've got to work on is as we start our new product designs and decide what we do with the C-1000 or different design, when do we start ramping up the spending on inbound materials and taking on purchase orders and probably sometime in '23, late '22.

Okay?

That's helpful. Just to clarify, did I hear you right that you have inventory for 500 and you wouldn't need to order before middle of the year, so you're implying you're going to build 500 between now and mid-'22?

If we can look each other in the eyes and we can pass every single test, and we can make the modifications on the vehicles we've already built, and we can make those design changes on the next vehicles we've built then yes, we could probably do that, but we haven't made that decision yet. And I know that's a critical decision and a pivot point for us that we're not quite ready to make right now. So...

That makes complete sense. Last question, is there any risk of a negative net revenue number for Q4? Are there any returns that have come in quarter-to-date? Or can you just give us any sense of scope as to what we should be thinking about for Q4? I assume no saleable deliveries just given the issues that you've identified and some of these are going to be going through mid-December. But I wasn't sure if there's actually any net negative numbers coming in?

No, that would not be the expectation. We've already talked to all 41 customers, and we feel we have a full accounting for -- who's giving us those trucks back, who wants them fixed and who wants to get those trucks back.

Yes. And some of those trucks, we just decided to store in on-site at those locations rather than pure the penalties. These are costly trucks to move around the country. It takes special flatbed trailers to move our truck from our plant to customers is around a $5,000 bill. So the major customers agree to keep those. We're going to pay them a storage fee, and then we'll repair those trucks on site.

Our next questions come from the line of Craig Irwin with ROTH Capital Partners.

Rich, can you talk a little bit about the returns of the vehicles, whether or not you expect financial returns to be changed materially with the designs changes you're likely to adopt? Are we still looking at probably something like 65% reduction in maintenance costs for your customers and superior per mile economics versus gasoline or diesel?

Yes, I'd tell you the numbers that I've seen so far, the TCO for electric vehicle is almost 67% better than an ICE vehicle. So there's a real move to ICE, but they've got to put the infrastructure in place to do so, right? So that's part of the key to unlocking the EV potential. One of the things we're taking a look is what is the right price point for an EV powered vehicle. I don't think that our price point we went out with the market is right, if you -- especially if you factor in all the vouchers that are coming in for this space. So I think that's all a moving target right now, okay? So...

Understood. Understood. And then the second question I have is really a financial clarification and use of cash. So in your presentation today, you covered CapEx needs for a variety of different things. Can you maybe walk us through the timing of the CapEx spend and approximate for us what it might look like sort of over the next 12 months?

Yes, let me go backwards, okay. We're a start-up company. We have IT systems, but we're early in our stage of growth. So it's a good time to put in the right product PLMS systems that track our designs between engineering, purchasing and manufacturing. So that's not very costly, a couple of million dollars probably. We have an ERP system, but it's a couple of year versions old. And so rather than try to go back and upgrade that, let's go put a better system that's more applicable to us. It's probably going to cost us $3 million or $4 million. I've asked Greg to take a look at what systems he wants from a financial consolidation every month rather than doing some of the things we do right now in an Excel spreadsheet. So that's -- we put in a range, I think, of 5% to 10%. I think it will be closer to the lower range. We'll see what happens there, okay?

The factory, we have a range of $15 million to $20 million. That includes if we purchase a warehouse on the site because right now, we're bringing our materials here to Cincinnati doesn't make any sense to bring materials to Cincinnati and load it and then take it up to 2 hours away at the Union City. Looking at some of the in-house processes we have, like water testing or leak testing, we want to paint inside or outside, if we want to have a Dyno tester in line to run the vehicles for a few miles and make sure all the systems work like you typically see in a big OEM. I'm not sure we need that in the commercial vehicle space, the volumes we have, but we'll see. So that's why the range is there. And finally, we just don't have the right part testing equipment in here. So I think it's going to be a balance. Let me come back, but if you just spread it out probably a little bit more in '22 and '23, probably, maybe like 10 in '22, 15 in '23 and then less than '24 we'll be ready to go. That's for your model. But I'll let Greg put that down. We haven't finalized that yet, but that's pretty close.

Our next questions come from the line of Chris Souther with B. Riley.

Maybe just on the decision process that you're going through right now on the C-1000. What are kind of the puts and takes here for limited versus like full production with the redesign versus that next-gen product? And then it sounds like the next-gen product would potentially be available for 2023 with the ramp. So you could kind of ramp with either one of those in 2023, like so just that decision process with the C-1000, what are -- what's driving that?

All right. First and foremost, C-1000 safe, reliable vehicle. If not, we're not put it on the road, okay? I'm not going to jeopardize anybody's life or anybody's family's life on the road. So you've got to have the brakes that work, got to have a powertrain that's reliable, et cetera. That's number one, okay? That's -- every OEM should be doing that and every OEM I've ever worked at or be associated with, that's exactly what they do.

Number 2 is what's the payload requirement, right? We know we designed this truck to go after people like UPS, who have a larger payload 7,000 to 8,000. As you drill down into the segment that actually uses these vehicles, there's a hell of a lot of trucks that don't need 7,000 or 8,000 pounds. And we think we can identify enough customers to build, whether we build 300, 500 or 1,000 type of C-1000 and put them out there in the field. One thing I don't know right now is when we really shake rattle and roll these trucks on the Dynos, Are they really fully capable of living for 15 years? Or are they more like 2- or 3- or 4-year type trucks that we use as limited production on leases? And that's the kind of thing we're trying to get our hands around right now, okay?

And you're right. Based on all of our testing data and what we do in the field next year, we're going to pivot whether we have -- we might have both. We might have a C-1000 for certain applications, that's a redesigned C-1000. We may have a completely different vehicle. The C-1000 has an aluminum Skate Ford chassis. It's very costly. Maybe it's more cost effective for us from a business standpoint to have a steel chassis or we can have both. If someone is willing to pay a little bit more money to have the lower floor boards versus the steel rail chassis, we might be able to do that. So those are the kind of decisions. Now that we've been introduced to the company and have our hands around the overall trends and data, now we can make some really informed decisions between now and Christmas.

Okay. And then just looking at what you've talked about with capital plans here and then lower cash burn rate that you're targeting, looking at like 6 to 8 quarters of kind of cash burn left here. How much of a cash cushion do you need heading into that 2023 production?

I'd say that's TBD. That's the work that Greg and I are doing right now, right? If we -- now we have our cash burn down, as Greg said, down to like the $8 million range, I think, October came in around $8 million. I think we could be a little lower in November, December, we'll see. Then we'll start laying in the capital factors, when do we really need the equipment there. We need the engineering stuff now, right? Some of the manufacturing stuff doesn't need to come in until early '23, so we can push that out a little bit. And then when do we need to start ramping up in tooling supplier, new suppliers. And that will probably be second half of '22. So I'd ask for your patience, and we'll probably bring that to you in our fourth quarter earnings call.

Our next questions come from the line of Mike Shlisky with D.A. Davidson.

Thanks for all the great detail in your presentation. I may have missed this, and I'm looking to the 10-Q. Can you maybe just tell us what number of vehicles you actually did ship in the quarter? I mean there were some shipped. Can you just give us that number?

6 shipped during the quarter, Mike.

Okay. Great. And another question is about the inventory write-off you had in the quarter. Is this basically the part that are kind of too heavy for the current vehicle or just not going to go forward with in future C-1000 in the next iteration? And is there -- or just related to that, and is there a risk of a second write-down over the next few quarters of things you have in stock that just aren't going to be used whenever you get the next version designed?

Mike, this is -- the write-down this quarter was largely due to the accounting statement that says if your costs are higher than your sales price, you have to write it down to the sales price. So it's strictly a mechanical calculation for the quarter.

And so as you go through the process design, the C-1000, is there a potential that you'll see a second write-down once you go out some of the parts and might not be going forward?

Yes. I mean we're going to be evaluating that as part of our plan, looking at the sales price and cost. But to the extent the costs are in excess of what we expect to sell for, you would expect to see a future write-down.

Yes. The comment here is that this company historically has been a prototype type company, right? And we paid prototype type prices for our parts from prototype type suppliers. We're going to transition, and it's a painful transition quite honestly, to go from a prototype company to a full production OEM, right? And so we got to teach the team here, especially in supply chain and engineering. And these are the target prices for the parts that have these specifications and need to work as a system, right? And so we're going to do that, okay? Go back and look at Elon Musk quote, "Prototype is easy, production is hard". We're doing that transition with a prototype company start-up to full production OEM, all right? That's the challenge we face over the next 2 or 3 years.

Thank you. At this time, that does conclude the company's question-and-answer session. If your question was not taken, you may contact Workhorse's Investor Relations team at wkhs@gatewayir.com. Thank you for joining us today for Workhorse Group's Second Quarter 2021 Earnings Conference Call. You may now disconnect.