Workhorse Group Inc. (WKHS) Q3 2021 Results - Earning Call
Workhorse Group Inc. (NASDAQ:WKHS) Q3 2021 Results Conference Call November 9, 2021 10:00 AM ET
Company Participants
Rick Dauch – Chief Executive Officer
Greg Ackerson – Interim Chief Accounting Officer
Tony Furey – Vice President of Finance
Conference Call Participants
Colin Rusch – Oppenheimer
Greg Lewis – BTIG
Jeff Osborne – Cowen
Craig Irwin – ROTH Capital Partners
Chris Souther – B. Riley
Mike Shlisky – D.A. Davidson
Operator
Ladies and gentlemen, greetings and welcome to the Workhorse Group's Third Quarter 2021 and investor conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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.
Tony Furey
Thank you, Operator. Good morning and welcome to all of you joining us today. Today's third quarter 2021 results call. My name is Tony Furey and I'm 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, and in the investor relations section of our website.
We will be tracking with the posted 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 Rick Dauch, our CEO.
Moving to Slide 3, you have a straightforward agenda today. Following my remarks, I will hand the mike over to Greg, who'll cover workhorses Q3 2021 results. Once Craig has finished, he will pass the baton to Rick, who will take your questions after a formal comments 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. These details out of the way, I will turn the call over to Greg Ackerson. Greg?
Greg Ackerson
Thanks, Tony. Before I begin, I would like to say while this is my 2nd opportunity to take the reigns as Workhorse's CFO, this is my first earnings call. It is an honor to be given the opportunity in 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 a sales allowance recorded during the period which is related to our C1000 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 C1000 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 onto 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 on 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 30th, 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 a costly USPS lawsuit, which reduces legal and related lobbying costs. And we have right-sized 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. That completes my financial summary. I will now turn the call over to Rick Dauch for his prepared remarks. Rick?
Rick Dauch
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'd 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 are 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 stabilizing grow process model I previously and successfully use 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 one 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 reviews with our engineering, and purchasing teams.
On the regulatory side, we know that both state, and federal mission 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 power 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 side. We're fortunate to have this conversions 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 a dedication and capability of the Workhorse team. We need to keep the enthusiasm and drive it comes with being an exciting technology start-up Company while we transition into becoming a 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 reduce 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 power train systems, our UAVs, our historical W22 and P 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, and -- industry, and possess foundational elements that differentiates us from others in the industry. We have a capable plant, extensive prototype, and real world driving experience, a qualified workforce, and talented engineers.
Some of our key competitors in the space are now just -- 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 experienced leadership team and we move 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 currency 1,000 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 to 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.
Will not come as a surprise at e-commerce has been growing faster than the U.S. retail sales market for the last decade. E-commerce sales continue to grow at 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 of delivery is more important than 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 CB truck market, and the UAV forecast. You see nothing but positive momentum with double-digit cages 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 standards vary across the country, led by California and those states that are calling 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 populations, this group forms the early adopting tip of what will be a decade long transition to EV.
The chart on the right shows the forecast or projections for the ICE to BEV powertrain transitions here in North America for all auto, vans, and trucks. As you can see, the transition to 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 EVF 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 we are in the very early innings of a generational industry disrupting change in powertrain, and infrastructure technologies.
These dynamics are impressive, and convince 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 that convinced me otherwise. If you drill down into our markets, what does this mean for the medium truck market?
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 include the incentive benefits for per vehicle tied to each of these truck weight classes for additional insight, you can see, liftoff seems to occur and about 2023 and the growth can see it keep ongoing. This is not a doubt, a target rich industry to be a part of.
Let's now turn to Slide 14. 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 for leading a firm from a challenge situation to stability and profitability.
No, this isn't 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 P's. 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.
The level set, we are currently in the lowest slice of the pyramid. From here we will start our journey together. We are emphasizing 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 requires the focus on the customers and serve them with industry-leading technology, make decisions about what is core and what's 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 a strong industry fundamentals and tailwinds we have in our sector.
We know it'll 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 managed team was on October, at a 2.5 day offsite to establish our mission and values as a Company.
As it 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 don't know where you're going, anywhere will take you there.
And if you don't note -- if you do 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 zero emission Commercial Vehicles. 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. My presentation today, I hope you will see we are serious about the values we've established, and we will use them to drive my communications internally, and externally with all stakeholders.
On slide 16, as I mentioned in the prior slide, we have moved quickly to assemble an experienced, capable leadership team with a breadth of experience, [Indiscernible] in the electric vehicle, automotive, and related industries. These names include Josh Anderson, our new check -- Chief Technology Officer, who comes with over 20 plus years in the EV industry, and possesses 11 patents around EV powertrain systems, and software.
Jim Harrington, our Chief Administrative Officer, and General Counsel, who worked with me at Delphi Technologies, and served as General Counsel at Tenneco for over nine years. Stan March will join our Company next week as our Vice President of Corporate Development and Communications, and as someone who has a couple of decades experience in business development, M&A, communications, marketing, and Investor Relations.
Dave murky (ph), Vice President of Product Development, over 40 years of P&L, and vehicle design experience focus on low volume specially 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 both those regions. Chris Nord, our Vice President of Commercial Development, who joined us from the trucking industry where he was at the forefront of the shift to alternative fuel and electric powered vehicles in that segment.
And Jim Peters, Vice President purchasing supply chain who I worked with at American Axle, and who is a supply chain expert. Let's now move to Slide 17. As we just closed in September, we made a filing with that additional testing and modifications are required to bring our C1000 vehicle into compliance with federal motor vehicle safety standards. They are only 41 vehicles in the field when we grounded the fleet.
I want to emphasize that there were no recorded accidents or safety Institute history associated with these or any other of our vehicles. We have slowed production to just two vehicles a week and have extensive testing underway in the fourth quarter on several different C1000 vehicle systems, including break testing, analytical load analysis, durability testing, and finally, reviewing the data field on our electric powertrain systems.
The first quarter of 2022, decisions will be required as to whether we make the C1000 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 three-year product portfolio roadmap that we plan to execute between 2022 and 2024.
We will take the lessons learned from both, field data and testing results associated with C1000 fleet and incorporate the relevant improvements into our product portfolio, review, and decisions. And other important portion of our business is our aerospace, our 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 enhancing both.
We are a single-source supplier partner and to develop a drone deliver packages from vehicles with a leading last-mile delivery customer. From our conversation 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 delivery industry. I now want to spend just a moment talking about our Union City facility in campus on slide 19. First, we have a great workforce with lots of manufacturing and assembly experience.
We have an existing 2012 square foot factory sitting on a 47 acre campus. The site has a 30-year legacy of Commercial Vehicles 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 wrap 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. In semi 90-day review I've also been able to scale or scope the Company's CapEx requirements for the next three years from '22 to '24. Major investments are needed in three key areas. First, we need to fund research and development, as well as test facilities and equipment which we estimate will be between $8 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 our cost somewhere between $15 to $20 million to do this. I want to underline that this number one more time. I want to underline 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 systems somewhere between $5 to $10 million over the next 3 years. The Workhorse team is executing our revised plans to be fully prepared to meet the emerging EV market needs in 23 and 24. As we have shown in 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 funds exists to support the transition to EV technologies, both for vehicles, and for infrastructure. Across my 3 decades of industry experience in business choice, I've never seen a customer winning an award or a contract when they are suing their customer -- I've never seen a customer provide award to a supplier if they've been suing them. Please turn to slide 22.
I have not spent the past 90 day to simply familiarize myself with the Company, we have also made a series of decisions to address the challenge we face, which include some of your new executive management team, and I would say we're 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 to direct face-to-face conversation with our customers, grounding the C1000 series vehicles and put them under more rigorous tests, the drawing 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 a 3-year draft of our product portfolio plans, and establishing business unit roadmaps the profitability for the future.
Of course, many things remain to be completed as we work our way up to 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 C1000 testing and make a decision on his future; We need to finalize product development roadmaps 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 subject as likely of interest to all of you on slide 23. Recent news flows in our 8-K filings have mentioned investigations by two government bodies, the SEC and the DOJ. Here's the latest information we have and that has all I can share on the subject.
As we noted in yesterday's 8-K filing on October 19th in November, we received letters from the SEC request that we voluntary provide information related to trading in our securities leading up to the announcement, the award of the US Postal Service contract and on recognition of revenue related to purchase of vehicles by certain customers.
On November 1st -- 5th, 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 request 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 we'll 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 I like you to have from today's call. First of all, we've assembled a strong, capable, and experienced leadership team and a workforce, 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've withdrawn the bid protests and associated legal actions against USPS, opening 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 C1000 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 lifetime than do it on PowerPoint presentations. 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, and background, we're now happy to answer your questions. Operator, please provide the appropriate instructions.
Question-and-Answer Session
Operator
Thank you. We'll now be conducting a question-and-answer session. [Operator Instruction]. One moment, please, while we poll for your questions. Our first questions come from the line of Colin Rusch with Oppenheimer. Please proceed with your questions.
Colin Rusch
Thanks so much, guys. As you're going through this product redesign, and working with your 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 to optimize, and simplify to hit the market?
Rick Dauch
That's a great question Colin. So I think one thing we like 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, power and truck dealerships online auction places. So by bringing in Jim Peters, we have him taking charge of 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, Dana, and Metalsa, Magna, and others. The typical Tier 1's that underpin the truck industry.
We've already had a series of meetings there, and we'll be prepared as we redesign the C1000 or modify the C1000 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 we have a good relationship with CATL for our batteries. They seem to be very good. They're proving out quite well on the tests.
Colin Rusch
Great. And then, in terms of your manufacturing capacity, there's a variety of new scenarios that are developing within the industry is the technology notes change, so there's some outsourced manufacturing on elements of this.
As you look at this, $15 to $20 million investment potentially on your current facilities, how do you think about that as a strategic asset relative to some incremental costs you might find outside of what you have internally, or is this really going to get you need to -- get you to a place where you can really scale up into the full-scale of this opportunity?
Rick Dauch
I'd say one of the key findings here, when I got here, I was pleasantly surprised when we got the Union City. I wasn't happy with what it looked like from the outside; they've already addressed that, when you come visit, it look a lot better. The roads have been paved, we cleaned 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 importantly, our really good workforce. I will 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 to do full vehicles or we just want to do chassis, we had the flexibly to do so.
We have multiple sub assembly feeder lines and we have the space to expand the plan if we want to in-source any of the current work we're doing on the outside. Okay? I think there's a lot of flexibility Union Cities, and as we button out our vehicle plans, we'll button out our capacity plans, and I think we can meet the growing needs in the EV market out in 23, 24. We've already met with the local government leadership team.
The surrounding community includes about 360,000 people who are one of the best employees 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.
Colin Rusch
Great, thanks so much, guys.
Rick Dauch
Thanks, Colin.
Operator
Thank you. Our next questions come from the line of Greg Lewis with BTIG, please proceed with your question.
Greg Lewis
Yes. Thank you, and good morning, everybody. Rick, 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 then we noticed you mentioned you slow down to I guess, to a count or two on vehicle production per day.
Is there any way to -- 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?
Rick Dauch
Yeah. Let me go through some of the data. Right now, as of, I think last Friday, we had 41 Vehicles recalled. Whereas about a 124 vehicles that we built 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 startup 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. First of all, we expect to have all this testing done by the end of the year. Test number 101 is around controls and displays. There are certain switches that need to be replaced in our vehicles to bring the markings into conformity with the FMVSS standards.
Test number 104, windshield wipers and defogging systems are our wiper brace need to be replaced. That's not going to cost us a lot of money. Test number 108, lamps, reflective devices for safety on the vehicle, and associated other equipment around the cap for operating warning needs to be taken care of. 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 markings. That's something we can replace pretty easily we know what it's going to cost us. The bigger issues we're working on are basically three. 1. Let's do our break testing, and make sure we documented properly. That's underway.
We expect that to be completed by the end of November, 2. Let's put our EV powertrain, and software systems under more rigorous testing. We will have good data on that by the middle of December. Finally, we need to go back, and do all the load analysis and then use the base of the delivery vehicle test energy, put on a [Indiscernible] to shake, rattle, and roll the trucks to 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 to 20,000 miles a year, and carry up to 7 or 8,000 pounds of payload. I'm pretty darn ensuring the C1000 can't meet those kind of stringent requirements. That's the bad news.
The good news is when I talk to customers, they tell me they'll take every C1000 we can built in 2022 so they can start demonstrate 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 gentlemen said, Hey, as soon as you can give me a safe, reliable vehicle, I'll take over 15 just as demos, so I can start educating my team, and my customers about -- this is going to happen to them.
What's going to happen to them over the next 5 years in the EV space. So I'm bringing in Josh, who is a known EV powertrain expert, who has consulted with multiple of the EV SPAC companies, and bringing 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 it never really come out of the auto industry. Now we're getting a good combination 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 that 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 in American Axle on Dynos, etc. Does that help you?
Greg Lewis
Yeah, that was super helpful. Thanks. Then I guess just one more from me. As we think about, you -- 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 you're realizing that it's still very early days. You did mention, Dave, who's joining has background and 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, small delivery truck as opportunities present themselves?
Rick Dauch
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 in our Union City factory. We own all the intellectual property, we own the tooling, and we know who the suppliers are.
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, but it's restricted right now. We hear that from multiple customers, that they can't get enough chassis right now to underpin their vehicles. So we're doing some studies there. Stay tuned for future business plans. We hope to have buttoned up here by early first-quarter.
Greg Lewis
Perfect. Thank you for the time.
Rick Dauch
You're welcome. Thanks for the questions.
Operator
Thank you. Our next question is coming from the line of Jeff Osborne with Cowen, please proceed with your questions.
Jeff Osborne
Hey, good morning. Just a couple of quick questions from my end. Rick, I was wondering if you can give us an update posts the actions helpful that you went through on the cash burn. If it was 12 to 16 million, are you closer to 8 now or can you give us a sense of where that is?
Rick Dauch
I'm going to let Greg take that and then I'll make a few comments probably soon.
Greg Ackerson
Yes, I would say during Q3, we got it down to 11. When we talked about some of those actions we're taking, and I'll say there are opportunities there. We have a pathway to get us lower. I think it is a very good goal for our Q4.
Rick Dauch
Yeah. I'd 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 1st. And a couple of things jumped out on me. Labor, our salary hour 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? We've slowed that process down, we're not flying parts from Asia in here, right? So that's key. 2, we were 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 in-house talent versus relying on outside consultants. I won't give the exact numbers, but we're probably paying 5 times more for a program management position than we should be paying. All right? So this is like almost ludicrous is what I will say. Okay?
So we've got that. We had to cleanup a few past due invoices to suppliers, and that both our part 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 as what we do at the C1000. We basically have enough inventory on hand right now to build somewhere north 500 vehicles plus or minus a couple of 100 without bringing any more inventory into this Company. We don't need to bring any raw materials in at least until second or third quarter next year.
That's going to be good for us from a cash burn. Key factor, Greg and I have got to work on is, as we start our new product designs and decide what we do at the C1000 or different design, when do we start wrapping up the spending on inbound materials and taking on purchase orders and probably sometime in '23, late ' 22.
Jeff Osborne
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?
Rick Dauch
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 built, then yes, we could probably do that, but we haven't made that decision yet. Okay.
Jeff Osborne
Got it.
Rick Dauch
I know that's a critical decision, a pivot point for us that we're not quite ready to make right now.
Jeff Osborne
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 according to data? 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.
Rick Dauch
Now, that would not be the expectation. We've already talked to all 41 customers and then we feel we have a full accounting for what -- who's giving us those trucks back, who wants them fixed, and who wants to get those trucks back.
Greg Ackerson
And some of those trucks, we just decided to store on-site at those locations rather than incur 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 agreed to keep those. We're going to pay them a storage fee and then we'll repair this trucks onsite.
Jeff Osborne
Got it. Thank you. That's all I had.
Greg Ackerson
Thanks, Jeff.
Operator
Thank you. Our next questions come from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your questions.
Craig Irwin
Good morning. 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 design changes you're likely to adopt, are we still looking at probably something like 65% reduction in maintenance costs to your customers, and superior per mile economics, versus gasoline or diesel?
Rick Dauch
I'd say the numbers that I've seen so far, the TCO for electric vehicles, 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 thing we're taking a look at is what is the right price point for an EV power 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 into this space. So I think that's all a moving target right now. Okay?
Craig Irwin
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 over the next 12 months?
Rick Dauch
Yeah. 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 system to track our designs between engineering, purchasing, and manufacturing. 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 cost us $3 million or $4 million. And I've asked Greg to take a look at what systems he wants from a financial consolidation every month rather than doing some of things we do right now on our Excel spreadsheet.
That's -- we put in a range, I think of 5 to 10. I think it'll be closer to the lower range, we'll see what happens there. 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. It doesn't make any sense to bring materials to Cincinnati, unload it then take it up to 2 hours away to Union City.
We're looking at some of the in house processes we have, like water testing or leak testing. We want to paint inside or outside, we want to have a Dyno tested in the line, to run the vehicles for a few miles and make sure all the systems work, like we -- you've typically seen a big OEM. I'm not sure we need that in the Commercial Vehicles space, with the low volumes we have, but we'll see.
That's why the range is there. Finally, we just don't have the right part testing equipment in here. 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, maybe it's -- maybe like 10 to 22, 15 to 23 and then less than 24 we'll be ready to go, for your model. But I'll let Greg put that down. We haven't finalized that yet, but that's pretty close.
Craig Irwin
Understood. Understood. Thank you. I'll hop back in the queue.
Operator
Thank you. Our next questions comes from the line of Chris Souther with B. Riley, please proceed with your question.
Chris Souther
Thanks for taking my questions here. Maybe just on the decision process that you're going through right now on the C1000. What are some of the puts and takes here for limited versus full production with the redesign versus that next-gen products?
And then, it sounds like connection product would potentially be available for 2023 with the ramp, so you could ramp with either one of those in 2023. So just, that decision process with the C1000. What was driving that?
Rick Dauch
Alright. First and foremost, C1000, safe, reliable vehicle. If not, we're not putting it on the road. Okay. We're not going to jeopardize anybody's life or any family's life on the road. You got to have the breaks that work, got a powertrain that's reliable, etc. That's number 1. Okay? That's every OEM should be doing that, and every OEM I've ever worked at or associated with, that's exactly what they do.
Number 2 is what's the payload requirement? We know we designed this truck to go after people like UPS, who have a larger payloads, 7,000 and 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. We think we can identify enough customers to build when we built 300 or 500 or 1000 type of these C1000, and put them out there in the field.
One thing I don't know right now is, will it shake, rattle, and roll these trucks on the Dinos (ph), are they really fully capable living for 15 years or are they more like 2 or 3 or 4 year type trucks that we use is limited production on leases. And that's the kind of thing s we're trying to get our hands around right now.
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 C1000 for certain applications, that's a redesigned C1000, and we may have a completely different vehicle. The C1000 has an aluminum skateboard chassis, so 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's willing to pay a little bit more money to have the lower floorboards versus 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.
Chris Souther
Okay. And then just looking at where you've talked about with capital plans here and then, lower cash burn rate that you're targeting. Looking out like 6 to 8 quarters of cash burn left here. How much of a cash cushion do you need heading into that 2023 production, you think?
Rick Dauch
I'd say that's TBD. That's the work that Greg and I are doing right now. Now, we have our cash burn down as Greg said, sounds like the $8 million range, I think October came in around $8 million, I think we can go a little lower 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.
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. I'd ask for your patience, and we will try to bring that to you in our fourth quarter earnings call.
Chris Souther
Okay. Thanks [Indiscernible]
Rick Dauch
Thanks.
Operator
Thank you. Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.
Mike Shlisky
Good morning. Thanks for all the great detail in your presentation. I may have missed this, and I am looking to a 10Q. Can you maybe just tell us what number of vehicles you actually did ship in the quarter? There were some shipped. Can you just give us that number?
Rick Dauch
[Indiscernible] during the quarter, Mike.
Mike Shlisky
Okay. Great. Another question is about the inventory write-off you had in the quarter. Is this basically the parts that are too heavy for the current vehicle or just not going to go forward with any future C1000 in the next iteration? And is there -- or is this unrelated to that, and is there a risk of a second write-down over the next few quarters of [Indiscernible] you having stocks that aren't going to be used whenever you get the next version designed?
Rick Dauch
Mike, this is -- the write-down this quarter was largely due to the accounting standards 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.
Mike Shlisky
As you go through the process, redesign, the C1000. Is there potential that you will see a second write-down once you realize that some of the parts might not be going forward?
Rick Dauch
Yeah. We're going to be evaluating that as part of our plan, looking at the sales price, and costs, 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.
Greg Ackerson
Yeah, the comment here is that this Company historically has been a prototype type Company, 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?
So we've got to teach the team here, especially in supply chain, and engineering. These are the target prices for the parts that had these specifications, and need to work as a system, right? And so we're going to do that.
Go back and look at Elon Musk's quote, prototype's easy, production's hard. We're, doing that transition, we're a prototype Company startup to full production OEM. All right? That's the challenge we face over the next 2 or 3 years.
Mike Shlisky
Got it for sure, Rick. Thank you.
Rick Dauch
Thanks, Mike.
Operator
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 Second Quarter 2021 Earnings Conference Call. You may now disconnect.
