Workhorse Group Inc (WKHS) 2020 Q4 法說會逐字稿

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

Thank you, operator, and good morning, everyone. We appreciate you taking the time to join us for our call. Before the market opened, we issued a press release with all our results for the fourth quarter and for the year ended December 31, 2020, a copy of which is in the Investor Relations' section of our website. We also released our Form 10-K this morning. I'm going to turn the call over to our CFO, Steve Schrader, in a few moments, and Steve will walk us through our financial results for the quarter and for the full year. After that, our CEO, Duane Hughes, will give you an update on our business and provide an outlook for the year ahead. But before we begin, I want to call your attention to our safe harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our 2020 Form 10-K and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

And with that, I would like to turn the call over to our CFO, Steve Schrader. Steve?

Thanks, Rob, and thank you to all who are joining us for today's call. This morning, we issued a press release, which discusses the results of our operations for the quarter. Additionally, as Rob just mentioned, our Form 10-K was also filed today. I recommend going through both materials to get more color on some of the information being discussed today.

Now to our financial results for the fourth quarter and full year ended December 31, 2020. Sales for the fourth quarter of 2020 recorded at $652,000 compared with $3,000 in the fourth quarter of 2019. For the full year, sales were $1.4 million compared to $377,000 in 2019. The Increase in sales for both the quarter and the year was due to our higher volume of trucks produced and delivered. Cost of goods sold increased to $7 million from $2.1 million in the fourth quarter 2019.

For the full year, cost of goods sold was $13.1 million compared to $5.8 million in 2019. The increase is primarily due to a higher volume of trucks produced as well as increased production, payroll and warranty expenses. Selling, general and administrative expenses increased to $4.7 million from $3.6 million in the same period last year. Increase is attributable to higher incentive stock compensation and consulting costs. For the full year, SG&A expenses were $20.2 million compared to $10.2 million in 2019. Increase in SG&A expenses was attributable to higher consulting costs and employee compensation. Research and development expenses were $4 million, which was consistent from $4 million in the same period last year. For the full year, R&D expenses were $9.2 million compared to $8.2 million in 2019. The increase in R&D expenses for the full year was due to contract labor increases and prototype development expenses. Other income increased to $322.2 million from $15.8 million in the fourth quarter of 2019.

For the year, other income increased to $323.1 million from $15.8 million in 2019. The increase is primarily related to an increase in the fair value of our investment in Lordstown Motors, which was valued at $330 million on December 31, 2020. Interest expense net decreased to $4.9 million in the fourth quarter compared to $5.6 million from the same period last year.

.The decrease in interest expense was -- are primarily related to the decrease in the fair value of the company's convertible notes. For the full year, interest expense net was $190.5 million compared to $29.1 million in 2019. The increase is primarily related to a noncash change in fair value of the company's convertible notes as a result of the increase in stock price throughout the course of 2020. Net income in Q4 2020 was $280.5 million compared with a net income of $655,000 in the fourth quarter of 2019. For the full year, we had net income of $69.8 million compared to a net loss of $37.2 million in 2019.

While our increased production efforts will likely cause our go-forward quarter results to fluctuate, we look to build a long-term economically environmental sustainable organization.

As of today's call, we have approximately $215 million in cash on our balance sheet.

Over the course of 12 months, Workhorse's finance team has executed various agreements to strengthen our balance sheet. Through several capital raises, we have been able to improve our liquidity. This capital infusion represents a greater total amount and our combined fundraising efforts since inception, which speaks to the progress we made over the years, translating to market acceptance and also provides us with the stability and resources to execute on our long-term production goals.

While we will continue to focus on building trucks to meet our backlog of orders, we will also evaluate the most efficient and responsible fundraising opportunities to support this mission. This year, we increased our Investor Relations effort by conducting over 200 one-on-one meetings and taking part in 6 investor conferences, that totaled more than 800 attendees from institutional funds. This is the first time we've concentrated our Investor Relations beyond equity deal roadshows.

That concludes my financial overview. I'll now turn the call over to Duane to discuss operations and outlook. Duane?

Thanks, Steve, and good morning to everyone on the call. We appreciate you taking the time to join us today. To start, I'd like to take a minute to directly address something that's been top of mind for us as well as many of you listening today. I'm speaking, of course, about the United States Postal Service next-generation delivery vehicle or USPS NGDV program. As many of you are well aware, last Tuesday, the postal service issued a press release announcing that it had made an award under the NGDV contract to a competing finalist. This is not the result we had anticipated or hoped for. And we appreciate the interest of the many stakeholders who reached out to better understand the decision-making process as well as any potential next steps.

What I am able to share with you today is that we have requested pursuant to the publicly provided bid rules -- bid process rules, additional information from the U.S. Postal Service and have scheduled a face-to-face meeting with postal service on March 3. We understand that many people want answers and information in a timely manner. And we will continue to work with the postal service according to the terms of our engagement as we move forward.

To be clear, we intend to explore all avenues that are available to us. We appreciate your patience in the meantime as we allow this process to work through its proper course.

Now I'd like to get into updates from our operations, beginning with a brief look back this past year. The past 12 months have been a remarkable period for our company and for the world at large. Let me highlight a few items we have been keenly focused on in 2020. We raised $270 million in capital, transforming our balance sheet and giving us the capital to build the trucks in our backlog. We made significant improvements and additions to our leadership team, our Board of Directors and our overall headcount to support production. We achieved sought after and required certifications with both federal and state regulators, ensuring that our vehicles can be sold in the U.S. and now Canada.

Production readiness, we announced major strategic partnerships designed to expand our production capabilities and sales reach by adding boots on the ground with consultants, proven advisers and full-time employees to achieve our goals. We announced several new customer agreements, allowing us to increase our backlog sevenfold over last year. We made tremendous progress with our HorseFly autonomous delivery drone and participated in test deliveries with UPS and others that will ultimately impact the way we deliver packages, medical supplies and other goods in our new more distanced world. We were approved for the rigorous FAA type certification process.

Needless to say, it's been an incredible year for us, and I'm both proud and grateful for the efforts of our employees who continue to dedicate themselves to our mission of changing last-mile delivery, even in the face of a pandemic. As noted on our last call, in November, our operations were unfortunately impacted by COVID-19 outbreak among our staff. Over the period of October 26, 2020, to January 29, 2021, we partnered with the Hamilton County Health Department to contact and trace more than 30 confirmed cases of COVID-19. As a result, we were able to safely manage our employees and contractors and get them back into the workplace. We significantly enhanced our daily cleaning and personal production habits following all recommended CDC and local health department guidelines.

In addition, we also participated in a webinar offered by the Health Department to ensure we had shored up any areas for improvement. Here again, we work daily on protocols, creating a safe environment for our employees and outside individuals. On January 28 of this year, we received a letter from the Hamilton County Health Department, informing us that due to no new positive cases for full -- for 2 full incubation cycles, they will be closing our case. I'm pleased to share that in the 6 weeks since receiving this letter, we have had only 1 new positive case of COVID-19.

As of today, while we believe we are past these issues that were presented by the virus, we are still continuing to take all appropriate measures, following state and federal guidelines, including self monitoring, taking temperatures, mask wearing, social distancing and routine hand washing, and are adding further procedures as we adapt to this ever-changing environment. These measures include increasing our professional sterilization and disinfection services as part of our daily janitorial services throughout the day.

In the face of these new hurdles, we still continue to make progress on the recruiting front as well. Our large-scale manufacturing plan requires we rapidly increase our workforce to support these efforts. In November 2020, we had roughly 90 employees. Today, we have almost doubled our employee count to 170 strong, which has been augmented by third-party services, such as Hitachi and Belcan, in addition to our internal hiring efforts.

All told, we are 200-plus people strong. Another necessary but important step in our plan to reach scaled production is on the regulatory front. In 2020, we were able to successfully navigate through the U.S. Environmental Protection Agency and the California Air Resource Board for our 2021 Series -- C Series vehicles. Our C Series vehicles like the vehicles from any commercial EV operator have to pass a number of regulatory hurdles both on a state and federal level in order to operate on U.S. and Canadian roads. These certifications, while all meaningful in their own right, represent a significant undertaking on the part of the applicant. Having completed all requirements for nationwide sales and road readiness, we believe our current standing has us firmly in an early leadership position.

In July and October, we also received multiple executive orders from the California Air Resource Board, respectively designating different C Series models as zero-emission vehicles in the state of California. Combined with our certificate of conformity from the EPA in March, our federal motor vehicle safety standard certifications in June, we were the first medium-duty battery electric vehicle OEM to receive approvals from both the EPA as well as CARB.

During the executive order testing process, our C-1000 Extended Range achieved an urban driving average of nearly 160 miles. And an urban highway blended driving range of 149 miles per charge. Obtaining an executive order was only one of the preliminary requirements in order to be considered for the hybrid and zero-emission truck and bus voucher incentive project, also known as HVIP, which we also successfully entered in late July. With our eligibility into the program confirmed, Workhorse's C Series battery electric step vans are eligible for monetary vouchers of up to $45,000 per vehicle. Workhorse is also eligible to receive 2.07 zero-emission vehicle credits for these models. ZEV credits can be sold to other original equipment manufacturers to help them meet CARB emission standards. Our eligibility for the HVIP program is expected to help dramatically reduce purchasing costs for California-based potential customers.

In October, we also received approval from the New York Truck Voucher Incentive Program to offer vouchers for our C Series battery-electric delivery vans of up to $48,328.

In support of our greater production efforts, we made meaningful progress on the sales front over the past few months, which has provided us with additional visibility into our production ramp going forward. Thanks to our efforts in expanding our sales channels through dealer networks and other distributors as well as our attractive financing plan supported by Hitachi, we were able to increase our order backlog from 1,100 units to just over 8,000 units.

In November, Pritchard companies placed a 500 unit order for our C1000 electric delivery vans while the Pride Group, headquartered in Canada, most recently placed a 6,320 unit order that includes both C1000 and C650 electric vehicles. Combined, the total value of these 2 purchases equates to over $600 million in sales. We expect the first deliveries to Pride customers by as early as July of this year. In addition, we have forged a close working relationship with Hitachi's mobility strategy team to develop and expand our dealer sales and support network.

HCA has been assisting Workhorse in strengthening a national dealer network in supporting our sales with vehicle financing options for both dealers and fleet customers, including dealer floor plans. We are also benefiting from their manufacturing expertise to further increase our channel sales capacity along with our assembly and manufacturing process.

With that update completed, I'll now get into operations in our vehicle assembly progress. Limited production of C Series vehicles continued in both the fourth quarter of 2020 and the first quarter of 2021. The units were delivered to our premier customer base, including Pritchard Automotive companies and to one of our newer customers, an international home and office retailer, which we were able to garner through our dealer network relationship with Fluid trucks.

I'd like to spend a few minutes to talk about Pritchard. Not only have they committed to purchasing 500 vehicles, but they are also playing a key role in creating efficient and cost-effective distribution channels for us. Pritchard provides Workhorse with transportation services of our finished vehicles in Union City to a Pritchard upfit center in Ottawa, Ohio, where they install value-added products such as custom shelving and racking, vehicle wraps and passive safety systems, like 360-degree camera systems. Their custom-built lowboy trailers can transport 2 Workhorse C1000 vehicles at the same time, which effectively cuts our transport cost in half. Furthermore, Pritchard is assisting with our branding and marketing efforts as reflected by our current engagement through the purpose-built national campaign that started in Tampa, Florida, at the Super Bowl and is planning to continue over the next several months through more than 20 major cities in the U.S. Our mission is to bring awareness to companies and cities about the electric vehicle revolution, how it can help reduce greenhouse gas emissions and how to create a structure that supports the city's evolution towards electrification, which is aligned with the current administration's support to the EV industry.

We could not be happier with the strategic relationship as it allows Workhorse to focus on scaling the production of our electric vehicles, while Pritchard handles the variability of individual customer needs as well as the effective distribution of such vehicles throughout North America.

During our last call, we also addressed a supply chain constraint with battery packs and the inability for the current supplier to keep up with the volume requirements. We have addressed this issue in multiple ways, which includes working with our current supplier to overcome the supply constraints earlier identified. We have also collaborated with an additional supplier to further expand our battery pack options, assuming testing validates our expectations, deliveries with the new packs are set to begin in the second quarter. We are also working to enter long-term agreements with key suppliers, enabling us to overcome the challenges presented by small volume spot buys and expediated shipments that are sometimes needed for a company just starting production. We have discussed our target of 1,800 units for the year, and we are well focused on the requirements needed to make it happen. But we are facing various supply chain challenges, both internal and external in the ramp-up to that goal. While we believe this is a feasible goal, it's a stretch. But given our backlog, we cannot sacrifice future build volume for current-year production and scaling up manufacturing, properly, has to take precedence.

As of today, we have completed the setup of the initial assembly operation and are using roughly 33% of the plant capacity or the 33% of the total line available to support it. This encompasses much more than basic assembly station set up. We have new hires in place to support the growing volume of daily vehicle production, and they have upgraded the assembly equipment on the line to make the manufacturing process even more efficient.

Next, during the fourth quarter of 2020 and the first quarter of 2021, we continue to work closely with our partners, Hitachi and Belcan. The focus of the Hitachi engagement following their operations assessment last year is to accelerate the progression of Workhorse's factory from an R&D concept to a world-class manufacturer of last mile mobility solutions. With Hitachi's 110 years of manufacturing expertise, our's over 60 years of IT leadership, we have made progress on the production front. In addition, Hitachi and Workhorse intend to partner on charging infrastructure capabilities through the Hitachi ABB Power Grids eMotion suite of solutions, benefiting Workhorse customers through holistic EV solutions and accelerating our journey of EV adoption.

Our Hitachi partnership has also already yielded considerable results through the dealer development and vehicle purchase finance contracts awarded to Workhorse through Hitachi Capital Americas fleet and dealer partners. We have taken the partnership a step further and have forged a close working relationship with Hitachi's mobility strategy team to develop and expand on our dealer sales and support network.

Next, I'd like to quickly touch on gross margin expectations. 2021 is our first year of scaled production. And as with nearly every manufacturing company, whether they are spending on R&D or installing equipment. The transition to manufacturing usually results in negative gross margins for a lengthy period, and we are no exception.

As I mentioned earlier, during our battery supplier discussion, we have a road map to lower our material cost through competitive sourcing, engineering improvements and adding automation to the assembly line, but it will take time to achieve. Therefore, it is a fair expectation to expect substantial negative gross margins for 2021.

Our engineering team has continued the development of the C Series platform as we identify enhancements and change requests from our blue-chip customer base. Our research and development activity has focused on improving the new model year C Series including enhancements needed to support production assembly efficiency, material component availability, cost reduction and customer feedback. These new revisions incorporate an aluminum skateboard chassis, which improves the options we have to expand our production capabilities and our sales growth through expanded channels that include specialty body builders and other third-party outfitters.

In addition to the headcount previously discussed, we also added 3 new members to the executive team. First, John Graber, who is -- who leads the development of the HorseFly program; second, as announced via press release last month, we also brought on Chris Nordh as our new Vice President of Commercial Development. Chris comes to us from Ryder, one of our major sales and maintenance partners where he was Senior Director of Advanced Vehicle Technology and Energy Products.

In his new role, Chris will be focused on augmenting and expanding Workhorse's sales and support infrastructure. He brings deep advanced technology vehicle experience and will be invaluable as we continue to build production of our C series, all-electric vehicles and expand our reach into new markets. And third is our new Human Resource's Director, Susan Pelley. Susan has already established herself as a valuable member of the leadership team, particularly with our emphasis on quality and quantity of new hires.

I'd now like to provide an update on our newly monitored aerospace division and HorseFly drone business. Safe, reliable and efficient operations drive everything we do in the last mile space. Reducing or eliminating fossil fuels and packaged delivery is important. But just as important is matching the total energy expended to only that which is required to do the job.

As part of our last mile solution set, 4 years ago, Workhorse started developing the HorseFly delivery system. HorseFly includes a small unmanned aerial vehicle, a ground control station, customer interfaces and a sophisticated integration system that allows our aircraft to operate indefinitely from our package delivery trucks.

Our HorseFly system is a joint venture with Moog Inc. through a jointly owned enterprise called Certis. Moog has decades of experience in autonomous operations, high reliability systems, electrification, FAA certification and safety. Our teams work closely with Moog to accelerate our progress in the last mile space.

In 2020, we delivered thousands of packages in tests and demonstrations, working with the State of Virginia and UPS, we demonstrated how drones can fly, standoff low-touch deliveries during a pandemic, getting critical material where it needs to be without endangering the people who have to deliver and use it. We also worked with a major international package delivery company, demonstrating the safety and reliability of our ground control station, our winch delivery systems and our aircraft. We demonstrated a system that autonomously flies from a delivery truck to a place of the customers choosing up to 5 miles away, delivers a meaningful payload that automatically returns to the truck for another delivery. And our system delivers time after time after time, designed for the heavy-duty cycles, logistics organizations demand.

In the last 12 months, our team more than doubled in size, and our accomplishments grew as the team did. We delivered 2 HorseFly units and Workhorse trucks with converted rooftops to accommodate the HorseFly for UPS. We performed our first commercial training for the crews of major package delivery company, training both flight and maintenance personnel to use our systems, and we entered the Federal Aviation Administration's pipeline for certification of our HorseFly system. Though this is a new process for the FAA and the industry, we anticipate completing certification in the next 18 months. The FAA prioritizes drone development through what is called the BEYOND Program. The state of North Dakota is a participant in BEYOND, and we have joined with North Dakota as a partner in their BEYOND Program. We expect our work in the northern plains test sites to accelerate our work in expanding how our systems can work and where they will be allowed to operate.

Verizon's CEO, Hans Vestberg, gave the virtual keynote address at January's Consumer Electronics Show, where Workhorse and HorseFly figured prominently in that address. Our package delivery trucks were shown in UPS colors. Our HorseFly delivery drone also in UPS colors delivered packages out of our patented truck-top delivery system. Workhorse aerospace exists to enable our customers to safely, reliably and autonomously fly a practical payload a meaningful distance, making the entire delivery process a more effective and efficient process. In 2021, we will build more aircraft systems than we've ever built before. Our plan calls for FAA flight testing in various climates and geographies. We'll lock the designs of our hardware, firmware and software.

In 2020, we created the conditions for providing safe, reliable aerial package delivery. In 2021, we'll start actually doing it in-service to the public. That concludes my prepared remarks. Thank you all for your time this morning. We look forward to updating you on our progress going forward, and we're now ready to open the call for your questions. Operator, please provide the appropriate instructions.

(Operator Instructions) Our first question comes from the line of Greg Lewis with BTIG.

Yes. Steve, I was hoping you could kind of dive in a little bit more around production. It sounds like Q1 is going to look a lot like Q4 or close to it. If you could kind of walk through how we should be thinking about maybe the next few months and realizing that Belcan has been there, but I believe that's wrapping up. How should we be thinking about production as we kind of move forward here over the next few months or few -- and few quarters?

Yes, Greg, thanks for the question. I think from a production standpoint, I think you're kind of right on with what you just said. From a standpoint of -- and part of it is trying to do 2 things at one time, Greg. We're trying to actually get trucks out the door right now, but also set up the systems long term, like you mentioned with our partners, Hitachi and Belcan that we can fulfill our backlog of orders going forward.

So having said that, I think the expectations should be, we're trying to get to a target of 3-a-day, sometime here in this month. And then also, we kind of will continue to keep out our 10-a-day by the end of -- sometime in June or by the end of the second quarter. So that's kind of our goal. I think from a standpoint of where we're at right now, we're -- we've already got some -- we've got some trucks out the door, and we'll get more out here in March, and -- but that's where we stand with production.

Greg, I would add to that is what Steve said is -- the real key here is making sure that as we head forward, that we have all the appropriate production systems in place as well as equipment, but primarily the systems and processes that allow us to make jumps from 3 to 10 and 10 and more going into the future. Again, as Steve said, to complete our current backlog and our growing backlog as we move forward. So when we had our slowdown, I'll say, in the fourth quarter due to COVID, we looked at what can we do beyond just sitting here waiting for employees to be able to come back to work. So we kind of picked up the pace of what we're doing with the Hitachi team in developing the systems and the processes so that we can more quickly grow our per day units than perhaps we would have, had we just been using that brute force method of getting trucks out the door.

Okay. Great. And then another question I wanted to pivot a little bit around incentives. And I believe some of your customers are kind of waiting for some of these incentive structures to kind of take hold in some of these states like California, where I believe some of your customers are looking to take some first deliveries of some of their vehicles.

Could you talk a little bit about how some of these state incentive structures are looking? And when we think about them potentially being funded so that as production starts to ramp up here over the next, call it, a couple of quarters, how we should think about where we are in the process from the states in terms of being able to actually fund some of these incentives?

Yes. A few questions here, Greg. And this is Duane. I would tell you, first and foremost, our plan going forward, particularly through our sales channels partners, not just Hitachi and Pride and Pritchard but beyond, right, is the ability to provide a price point at these trucks that they actually ROI very quickly in 3 years or less and then provide that significant total cost of ownership savings, giving us the opportunity, right, to sell more trucks without requiring voucher programs.

But to your point, in states that have voucher programs, I mentioned during the talk that California and the C1000 as much as $45,000. Where we can take advantage of that and increase the number of units we're delivering in California in this case. I'm sure there will be fleets who want to take advantage of that. To me and from what I understand is that program will be or is anticipated to be funding in the second half of this year. So we're doing -- we're making concerted efforts at using our sales channels partners to find those customers that aren't necessarily in a voucher state where we can deliver these vehicles without requiring that voucher program, which is what you're seeing in the 8,000 backlog now and what you'll see in the future as we continue to add new customers.

I should say this, right? One of the things that you've seen over the last few months is our expansion of the customer base. Rather than relying on 1 or 2 or maybe 3 of the largest logistics, last mile companies out there is we are now working through channels that allow us to reach, let's call them, some of the smaller fleets, but also the largest fleets across multiple countries.

So we're really paying attention to how this voucher money is coming about, how it's being competed for against the COVID pandemic, the things that are slowing it down and how we can address that market without requiring a voucher.

Our next question comes from the line of Colin Rusch with Oppenheimer.

Can we just get a little bit more detail about some of the elements in the supply chain that are proving cumbersome for you guys? I wanted to get a sense of how much of a bottleneck that might be on a go-forward basis, besides the battery packs, obviously?

Yes. I think -- and what I said during my talking points where we were talking about the external supply chain-related issues. One is a very common what we've noted about -- that's affected all other OEMs right, being the microchip piece, right? That's impacted a couple of segments, whether it's steering racks or body control modules, things like obviously, the components that need microchips. Now we've done a good job now of finding additional sources to alleviate or overcome those shortages. But then I also talked about those internal hurdles. And those internal hurdles, I already spoke about, relate back to putting systems and processes in place in the plant to allow us to, I'll say, speed up our ability to move to larger number of units per day. And so while there's components out there. And in some cases, not much visibility in those components. Some of the ones that you know about, again, like the microchip and so on, have impacted us. But again, because of our limited volumes today, right, we can continue to get trucks out. We don't have to shut everything down. But we're looking for the ability that once we have the systems and processes in place to more quickly adjust to the ability to build trucks without dealing with -- without having to deal with supply chain-related issues.

Excellent. And then just in terms of the sales process, obviously, there's been a handful of announcements from some larger OEMs moving into the delivery van space. But can you talk a little bit about some of the sales dynamics in terms of time to actually contracting volumes, some of the discussions around pricing, now that there's just a bit more competition in the space?

Yes. I think -- that's a great question, Colin. And I would tell you, multiple things happening. You heard me talk about -- or I'm going to call it our purpose-built National Tour that starting in February with the Super Bowl is scheduled to roll through 20 different cities with our partner, Pritchard, who are taking 2 Workhorse C1000s to these cities and doing different campaigns throughout those cities. Everywhere from -- I think they're in Charlotte right now. They'll be in Minneapolis later this week. They moved to Cincinnati, DC, California and so on, right? That is one way we're able to get the message out with a demonstrable proof-of-performance concept, actually delivering product, delivering products from partners that if you go back and see a few of the videos that were out there, you'll see how that campaign is able to, I'll say, bring the Workhorse name more awareness, what we do in this last mile delivery segment.

The other piece is the differentiators of the vehicles themselves, which really help sell the vehicle to, in our case, last mile delivery fleets. And those differentiators, you've heard me talk about a bunch of times, whether it's the low floor, the performance of the vehicle itself, the mileage. But as importantly is the HorseFly delivery drone, right? The ability for us to further reduce the total cost of ownership by augmenting the electric vehicle with an electric delivery drone that allows these fleets to, a, differentiate themselves, reduce their cost. And ultimately, give them an opportunity to grow their market share because they're expanding upon the technology tools that are available to them to meet the ever demanding need that consumers want, which is product more quickly delivered to them and a more carbon-friendly and reduced cost capability.

Our next question comes from the line of Craig Irwin with Roth Capital Partners.

So President Biden's been pretty straightforward out there about his priorities, particularly in having the federal fleet convert over to electric vehicles over the next several years. Most of the federal agencies have to go through OMB when they have big capital programs or big policies that are up for regular reinstatement published -- publishing in the federal register. It seems the Postmaster General has a slightly different situation where he's not really accountable to the President the way that others are in the other federal agencies, given that post office has to file a 10-K and he answers to a Board. Can you maybe talk a little bit about the line of accountability in the post office as far as following federal rules? And the line of accountability, as far as following presidential priorities, any comments there would be really helpful.

I'm not -- I probably can't speak as deeply as others can to this. But to your point, the Postmaster General reports to a Board of Governors. And that Board of Governors today, I believe, at least 3 of which were appointed by President Trump -- or a former President Trump. And just in the recent news yesterday, I think I read that Biden had appointed 3 new people to that Board of Governors, which will fill it out to, I believe, all 9 seats. So clearly, in my opinion, due to the award and the decision being made to go basically combustion engine vehicles in the fleet at the post office, and Biden having signed his executive order to take the 645,000 fleet of government vehicles all electric. I think what we're seeing is a speed up in what President Biden is doing to put the Board of Governors together in such a way to support his plan going forward.

So again, I don't -- I'm probably getting the news just like you are, directly from the public as well as the things that we're doing to follow-up with the current situation ourselves and how we're getting educated. But you're right, the Postmaster General does not take orders from -- directly from the President. It comes from a Board of Governors. However, that Board of Governors can be affected by the President and how he seats people on that Board.

Understood. So my next question is DeJoy gave testimony in the last couple of weeks where he seemed a little confused. He said that electric vehicles don't really have a maintenance benefit over combustion engine vehicles, which seems somewhat ludicrous, in my view, most truck -- EV truck platforms are looking at somewhere between 50% and 75% reduction in maintenance costs, typically around 2/3. Where do you think DeJoy is getting his information from? And do you think he's at all accurate?

Let me -- and good question, Craig. I appreciate that. I'll give you my two cents worth, which is really coming directly from our customers. The comparison from a fuel and maintenance perspective of an EV or an Electric Workhorse truck as compared to its combustion engine counterpart is absolutely not comparable at all. The EV wins the race by miles upon miles, right? And so with that said, what I heard Mr. DeJoy say during his time in front of the Congress or in front of the subcommittee, was that if you take into account infrastructure that's required to be put in place in order to charge those vehicles at night, then it comes down to a draw. I would argue that -- also that, that's not comparable either. Yes, it adds to the cost. But it does not: one, impact the comparison of the total cost of ownership from an EV to its gas engine counterpart; the other part is, if you plan to it, if I own my own fleet, and the idea was, I was buying tens of thousands of these vehicles, but they plan to convert them down the road to electric and I would tell you that, that offsets the cost of the infrastructure already.

So I don't believe it was -- I'm going to say, well thought-out answer. It was more of a how do I respond to this? And I don't -- and I also recognize -- I don't know if they were talking about a 10-year total cost of ownership, a 15-year or 20-year. But what we know is the length of time, and I think this was public is that we were designing a vehicle to last more than 20 years. So the total cost of ownership at 20 years is where the comparison would need to be made.

Excellent. No, that's good to hear. Good luck on your challenge of this curious award that was made by the post office. So I also wanted to ask a little bit about the new customer opportunity. So you've had some pretty nice traction out there with different names. I would assume that now that some of the vehicles have been on the road for -- the C1000 vehicles, I should say, have been on the road for several months. There's potential for others to interact with those original operators to learn from them and really see the economics validated. Can you maybe frame out for us how the front end of your pipeline, the funnel of potential customer interactions is looking, what do you feel about the potential tempo of orders for the C1000 over the course of the next several quarters.

Yes. I appreciate that. I think what we're seeing already in terms of the pipeline -- in terms of the sales pipeline is movement ahead of where we are today. I can't speak -- I haven't said anything publicly about this. I want to be a little guarded here. But for example, I keep talking about this 20-city purpose-built national tour that we're doing with our partner, Pritchard, right, where they're taking 2 vehicles to these cities and doing real-life deliverables and performance and having ride alongs and the things that go along with, again, demonstrating proof of performance. That's a big deal. But again, with our Hitachi relationship who has dealers across the country. And if you take just the 5 states alone, where they did a 100-dealer survey in terms of EVs and what they were looking for, Workhorse scored, if I'm not talking out of turn, like highest on the chart in terms of most proof of performance, right, the most number of vehicles that are currently out on the road in this space. And the most number of electric delivery vehicles that were out prior to the C Series as well. So we have a deep bench, if you will, of data that allows us to further demonstrate that proof of performance added to through our differentiators that I just spoke about with, I think, Colin before.

I think what we're going to see is that continued increase in these orders as we make production match our ability to keep up with those orders. So we're very excited about the pipeline that we're seeing, how it's being able to be built upon and primarily through those sales channels that I keep talking about.

And if I can add to that, Craig, is -- I would say, too, is, I think we've said this to you and others before, our goal is to make money on selling the truck. So there's a lot of after-sale opportunities with infrastructure and financing and service. And I think that's why you see the top-quality companies out there that understand that there's money to be made there. And they see that we have a product out there that customers like and are ahead of the field by a couple of years. And that's why we aligned our -- that's why Hitachi and Ryder and Pritchard and Pride and Duke are all kind of aligning theirselves with us. So I think we'll certainly anticipate more orders this year.

Okay. Excellent, excellent. Last question is actually a question I've had from a couple of clients. So let me just frame it out, right? So everybody has been pretty much shocked by the Oshkosh award. And I'm guessing your customers are, too. Can you comment maybe whether or not this is impacting your customer relationships? Or what are your customers saying about this award to the post office? Does this really impact you guys from a competitiveness standpoint on the C1000 core offering going forward?

What I would tell you, Craig, is -- and I appreciate that question because what we're hearing from our customers is a lot of the frustration that you're hearing from the public as well as the democratic senators, and that boils down to much more -- even more support for Workhorse, right? We've got our customers coming back saying, keep your head high, you've got the best product out there, right? We're with you all the way, right? And this -- and in some cases, it's -- we're even -- now we're even more motivated to make the point that the EV strategy and the Workhorse EV strategy, in particular, is the way to go. And that's not just from one customer. That's for multiple customers along the way.

If anything, I always felt like 2 things: One is, and I've always said this, with or without the post office, we have a business here, and we have to focus on being able to build that business. If the post office comes, yes, that's a game changer and all that; on the opposite side, what I didn't realize was how many of our customers are standing behind us and screaming from the rooftops, how well we're doing and so on. So if anything, I would tell you that it's been a very positive, overwhelmingly positive response from our customers in support of Workhorse in the vehicles and our future technology roadmap going forward that they're standing behind.

Okay. And then last question is really just the confirmation. Do we know for a fact, in black and white, somewhere maybe that there was no other EV or hybrid submitted in the entire RFP, RFQ process for this procurement at the post office and then for a fact that the addition was last minute from Oshkosh.

Look, all I can speak to is that, because we are still technically under NDA with the post offices, we do know through reporting like trucks.com, the Freightways all the other media, and the attention they got is, yes, there was -- the Oshkosh Morgan Olson hybrid, right? And then there was the Oshkosh Combustion Engine Ford Transit, and then there was our vehicle. So we are not aware of any other vehicle that went through -- that were of the finalists that went through the durability testing process, but I cannot speak to what RFPs were delivered. I'm not aware of any other RFPs being delivered to the post office, nor am I aware of what the competitors RFPs said that they would deliver. But I can tell you that our RFP stuck to our stripes and what we sit through durability testing, sure we may enhance it a little from those learnings and/or from the newer technology that's even available to us today. But we stuck to our stripes, we gave them an RFP that was based upon the 6 prototype vehicles that we delivered to them back in January -- I'm sorry, back in '16, '17 time frame.

Good luck with your meetings this week. I'm sure our representatives are going to work hard to do the right thing here.

I appreciate that, Craig.

Our next question comes from the line of Mike Shlisky with Colliers Securities.

Duane, I want to follow-up quickly on the postal service contract. I mean, Oshkosh has made an investment in an EV battery supplier. Oshkosh is working with Ford, which is going to be introducing the Ford E-Transit in the next couple of months. I guess, if the USPS does ask for this whole thing to go EV or mostly EV in the future, do you think Oshkosh can deliver an EV, if they were asked to do so?

I can't speak to what Oshkosh's capabilities are. I would just say, as a defense contractor in a business that they do, they're good at what they do, right? But I would turn it the other way and say, but I know right now that we are, without a doubt in my mind, right, the most confident EV maker in the last mile delivery space. First of all, the last mile delivery space, as we all know, is not like putting any other vehicle out on the road. When you have a vehicle that's going to go anywhere from 18 miles a day to 300 miles a day, let's call it, and it's going to stop many, many, many hundreds of times throughout that duty cycle. That puts a lot of different demands on a vehicle, than does, perhaps, a military vehicle and/or even a fire truck and ambulance, other things. So we know that our many years of experience working with the blue-chip customers we work with, we have substantial amounts of learnings that have allowed -- that has allowed us to design last mile delivery vehicles that not just outperform anybody else we've seen to date, right? But also are built for the future, meaning our vehicles adapt to the future as the future changes. So whether it's with the idea of autonomous drive, we started autonomous by adding a drone, an autonomous delivery drone to the top, right? It's crawl, walk, run. So we feel like we are the best solution for anybody who wants to take a fleet, all electric, particularly in the last mile delivery space.

Okay. Great. And then I wanted to ask secondly about the California program that's out there, it's a pretty fixed pie. There's a fixed amount of fund that they want to put out there. There's a fixed amount that you can get. So eventually, the pie runs out and there's been some more competitors in the EV space. And it seems like adoption is kind of rolling up here and doing a lot better, but the same pie. So I'm curious, do you have any feel for how much -- what amount they might fund the HVIP program for this year and for next? And will they be increasing it with a number of our competitors that are currently in the EV market?

I don't -- this is Duane, again. Thanks again for the question. I don't have an idea of what the fund will be. I guess if you look back historically, you can probably use that as a judgment call. However, we do know that the COVID pandemic has impacted these programs because money is going for other purposes. The same as you see things like the stack up of parts that -- ports right now because it's more important that COVID pandemic things get put on those ships and brought over here than the necessary -- than necessarily components like microchips and so on. But I guess what I'm saying to that is I don't know the amount they're going to fund, but I do know they have altered the program. So rather than having 100 units dedicated to a fleet, now they're only going to have 30 units dedicated per fleet. And that's why our focus is on not requiring a voucher to make it -- make it since, pencil out, right, provide the right ROI and the substantial total cost of ownership savings. Again, however, whenever money is available, that we are able to garner on behalf of our fleet customers or they can actually garner for themselves. We will use it and take advantage of that, but we are building a business plan that does not require the voucher.

Got it. And maybe just one last one for me. Between Pride and Pritchard, the 6,820 units are still that have been ordered. Can you give us a sense as to the most recent quarter and the sell through? I mean, what's -- what amount has been actually ordered by end users of that number? And what's your time frame for getting those delivered to people?

Sure certainly we want first quarter deliveries, and we'll get first quarter deliveries. Certainly, we'll talk about the first quarter results on the second -- in May when we have our next earnings release. Pride is really -- don't want any until July. And then it's just kind of an initial order, about 20 total, 10 each of the 650 and the C1000 for like the last 6 months. They are stepping in their 6,320 order, they want 600 the following year, 2022 and 2023 each year and then the 5,000 for the last 3 years.

Pride is also looking at -- part of their staging it out is getting the infrastructure in Canada in place from their standpoint, too, and making sure that the demand is there as well. So I hope that answers your question, Mike.

Well, I would add...

Well, actually I was asking whether they were spoken for yet by end users?

I would tell you, we don't know all of the end users in the group, but they have identified specific end users, and we've actually delivered a few that we can't name those end users because they have plans in the upcoming months to make big splashes in their marketplaces and so on as to what they're doing EV wise. And I mentioned one of those in the script earlier, an international retailer, blah, blah, blah. But they do have -- they have identified their initial fleets to begin deliveries with, but it's not something we can talk about on today's call.

Our next question comes from the line of Jeff Osborne with Cowen and Company.

Most of the questions have been answered. Just a couple of housekeeping questions on my end. One, can you disclose what the deliveries were for Q4 in aggregate?

Yes, we had, I believe, 7 deliveries in Q4.

Got it. And then with everything going on at the factory operationally that you talked about, which was helpful in the detail, Steve, can you give us a sense of what the CapEx budget is for the year?

Yes. The CapEx budget is not huge. I think we probably have a budget about $6 million for the year. I think what you need to consider more, though, from a standpoint of the working capital requirements have gone up from last year quite a bit. One, we doubled the labor force; two, we're doing a lot of prepays because of our kind of low revenue situation, a lot of vendors want prepays; and three, we're building up the inventory. So I think the cash requirements are going to be a lot higher this year than they were in the past.

Got it. And then you touched on the gross margin trajectory being negative sort of in the near to intermediate term. Can you give us a sense of how many vehicles would need to be sold a quarter to be gross margin breakeven with the current staffing anticipated and the cost point that you have?

Yes. I mean -- sure, Jeff. I think it's a good question. I'm answering this from a standpoint of where we're delivering in small volumes right now. So I want you to keep that in mind. But I anticipate to get to our gross margin, maybe 300 to 400 per month, then we feel we can kind of maybe get to our gross margin targets at that point in time.

That's to the target, which is, what, 15%? But I was talking about breakeven. So if you could just confirm the breakeven.

Breakeven?

And the target.

Yes, that's how -- yes, that's right, closer to 200 per month. We're going to go through just like any other manufacturing company. We're going to go through -- we're going to struggle this year to get that gross margin even positive and don't anticipate going positive this year. So it's we're doing it like every other manufacturing company when you go from R&D or selling equipment to actually putting out the product.

Got it. And my last question not sure if you can touch on this, but you were helpful with Craig as it relates to the post office and some of the dynamics there. You alluded to in the script of exploring all avenues. Can you just talk about what those avenues are above and beyond the meeting in the third?

Probably can't get into too much detail. This is Duane, Jeff, appreciate the question. But we're talking to different entities and groups out there and really getting our -- let's say, we're going to get information inflow, right? So we know what available options that we have and the way to approach, not just the post office, but whomever else we have to approach, to better understand how we might go about having a constructive conversation that leads to something more positive down the road.

Our next question comes from the line of Craig Shere with Tuohy Brothers.

Do you see any linkage between additional material commercial traction and progress towards filling orders already in hand? I mean are basically customers saying, let's see what you can do with what you've got because if I give you a 5,000 unit order in the next 3 years, what good is it if you're not ramping production and proving you can get it out the door?

Craig, it's funny. I think it's just the opposite situation. I think customers are looking at and saying -- they know for the most part this year, the orders, if we get 1,800 out, they're spoken for. So they're looking at, can I get on your 2022 production schedule? Can I get in your 2023 production schedule? So if anything, I think it's a selling point. So yes, I don't think we're finding any hesitancy of orders from that standpoint because I think they like the truck, they like the price point on it. And again, like we have said, I think we anticipate more orders this year for sure.

And some of it, Craig, I would tell you is the infrastructure play, right? Infrastructure has always been like the largest barrier to entry here. So now what we're starting to see from these customers, when they're talking about 2022, 2023, is -- and can you help us understand what we need to do or who we need to be talking to. So like our partnership, not just with Hitachi, but with Duke's newly created eTransEnergy service, right? That allows us to help find ways to provide the infrastructure required for these fleets. It really gives us a more well-rounded approach in conversation with these fleets who want to go electric, but aren't quite far -- as far along as other fleets are today.

Understood. The turnkey offering should be very powerful.

Right.

Can you speak to the timing of filling UPS orders? And are there any early indications? I know we may not be able to sell it for 12 to 18 months. But any early indications of potential HorseFly orders, both in conjunction with the EV truck, but also on a stand-alone basis?

I Would answer that with -- by saying yes, there's potential on all of those fronts. As I mentioned in my remarks, we've done -- well, for example, at the Verizon keynote, right, as the CEO is giving his keynote speech, what you saw in the background was a Workhorse electric vehicle with a Workhorse electric drone, leaving the truck, doing a delivery coming back and focusing on the 5G network for Verizon, their partner, UPS, in the delivery space, right? And we, the Workhorse technology behind the scenes, bringing that to fruition, if you will, both by using 5G wireless capability with our drone as well as what we do for UPS. So yes, I would anticipate seeing more business to be had. Of course, there's relationships and there's contracts and things that have to be done. But we are working towards, making sure we can fulfill our technology with many different customers and fleets.

To that point, the drone, while a key differentiator for our truck side of the business, is the truck launch and landing capability, our drone is designed to not require a truck. It can go from a parking lot, a rooftop or virtually any setting, right, that would require deliveries to be made. In the past, we've done things from the CVSs of the world, parking lots and so on as test environments, right? We do these things. What we did in Virginia, right, in April of last year to -- as the pandemic was announced. So yes, we feel that we have a very strong business case for the drone, not only to help us sell more trucks, but to be its own stand-alone business as well.

I guess I was looking for a couple of things. One is, if I'm not mistaken, of those actually produced and delivered in the third quarter, none went to UPS. I'm trying to get a sense of when the UPS deliveries will start ramping. And I'm also trying to get a sense of your expectation. I know this is kind of in the future of, say, the percentage of your C1000s that would likely be taking the integrated HorseFly once it's fully approved. And if you've gotten any kind of body language from potential customers about the potential size of stand-alone orders.

Let me ask -- let me answer the second question first, Craig. I would say there are 3 major customers you've all heard of out there that are definitely interested in the integrated truck/drone product, okay? So we certainly anticipate that something will come out of that down the road.

UPS, it's a combination, obviously, we haven't got production now, but also is when and where UPS would love to take their vehicles first. They have a depot in California and San Diego that's already with infrastructure. They love to get the voucher program too. So ideally, I think their first trucks would ideally go to California. Now somewhat, we're already talking about the HVIP program and how -- when that will get funded. So it's somewhat dependent. I assume -- we assume, for the most part, if that is not funded or they can't get vouchers, but we have production and trucks ready to deliver them. We anticipate they would want to take them in as well.

Okay. Great. And any quick updates about your refrigerated truck R&D effort?

Yes. This is Rob Willison. We're beginning a build of a test mule. We have the Board of Advisers that are helping us coach through the configurations and innovations. It's no small task to make a refrigerated vehicle with a diesel. It's even more daunting to make it electric, but I think we have a good path forward. So we're getting a mule built on that. We'll begin to take it through some testing throughout this year. And that's on track as well. I do want to make a comment about infrastructure, though. Our vehicles, especially for fleet, can be charged on level 2. And what you've heard from other fleet manufacturers about fast charge and the cost of fast charge infrastructure, very expensive as far as the chargers as well as the amount of electricity needed because of the nature of our vehicles being lightweight and very efficient, we can charge overnight on a level 2 charger, which is much more economical than what some others have done.

So what's been said, our technology -- Workhorse is a technology company. We are, in far away, ahead of others, all the way from the drones, to the motors to the batteries, to all of our experience, and so I hope that helps you answer that question.

At this time, this concludes 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. I'd now like to turn the call back over to Mr. Hughes for his closing remarks.

Well, thank you again for joining us on our call today. I especially want to thank our employees, our partners, our investors and all of our support folks behind us. We appreciate your continued interest in Workhorse, and we look forward to updating you on our next call. Thank you, operator.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.