Workhorse Group Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Mar 2018

[Operator:]

Ladies and gentlemen, greetings and welcome to the Workhorse Group's Fourth Quarter and Full-Year 2017 Investor Conference Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Workhorse President and Chief Operating Officer, Mr. Duane Hughes. Thank you. Mr. Hughes, you may begin. Duane Hughes Thank you, Diana, and good afternoon, everyone. We appreciate you all for taking the time to join us for our call this afternoon. After the market close, we issued a press release and filed our Form 10-K with our results for the fourth quarter and full-year ended December 31, 2017. Copies of both documents are available in the Investor Relations Section of our Web site. In a few moments, our CFO, Paul Gaitan will provide a brief update on our financials. And then, Paul will return the call over to Steve Burns, our CEO, who will provide an update on our business, touch on some of our operational highlights from the year, as well as discuss some of our recent progress. But before we begin, I want to call your attention to our Safe Harbor provision for forward-looking statements that is posted on our Web site and is part of our year-end 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 2017 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, Paul Gaitan. Paul?

[Paul Gaitan:]

Thank you, Duane. Sales for the fourth quarter of 2017 increased 81% to $5.5 million from $3 million in the same period in 2016. The increase in sales was due primarily to an accelerated rate of fleet conversion to Workhorse vehicles by UPS and the company's increased production capacity. During the quarter, we shipped 121 unit. The net loss in the fourth quarter was $12.5 million , compared with a net loss of $7 million in the fourth quarter of 2016, due primarily to higher volume growth in negative margin sales. Sales for the full-year 2017 increased 69% to $10.8 million from $6.4 million in the same period in the prior year. The increase in sales was due primarily to an accelerated rate of fleet conversion to Workhorse vehicles by UPS and the company's increased production capacity. Total shipments for the year are 231 units. The net loss for the full-year was $42.2 million, compared with a net loss in 2016 of $19.6 million, and was significantly influenced again by the higher volume growth and negative margin sales. Now I will turn it over to Steve.

[Stephen Burns:]

Thanks, Paul. The 10-K filing released today as well as the press release that just went out after the market close gives a good bit of detail on our business. So in this call, I just like to give a brief commentary on each of our five product lines, and then open it up to questions. The specific goal of all our products is to provide tools that enable a new way of working for our customers. First, I’d like to talk about our N-GEN electric cargo van. N-GEN stands for next generation. And we believe that we've taken all of our learnings from working with the best-of-breed delivery companies. Companies like UPS, FedEx, Post Office, and Alpha Baking Company. These learnings and our development and testing of the Post Office vehicles coupled with the millions of road miles we have on the 316 medium duty electric vehicles that we currently have on the road, have enabled us to build this truly transformable vehicle -- last mile delivery vehicle. The N-GEN is a breakthrough electric vehicle capable of up to 60 miles per gallon equivalent. We've been able to engineer it and believe we can sell it in sufficient quantities that we can now offer to our customers for the same price that they would pay for an equivalent diesel vehicle. As UPS announced earlier this month with respect to their initial purchase of these N-GENs, we believe that this cost parity threshold is a "game changer". We expect to produce and assemble the N-GEN in our Union City Indiana assembly facility and we've been working this quarter to retool our factory such that they can assemble production ready N-GENs. We believe our sales funnel is coming together nicely as is our ability to assemble and deliver these vehicles at a gross positive margin. We're preparing to start the assembly process early in the second half of this year. We're also planning to place the first cargo sized N-GEN into actual delivery service, the first week of April in the Bay Area of California. By cargo size I am referring to Sprinter, Ford Transit class vehicles. Our first N-GEN is scheduled to begin delivering packages via an independent delivery service to customers throughout the Bay Area. We believe this first N-GEN headed to California represents the first U.S OEM electric cargo van actually delivering last mile packages in the U.S. We plan to have a ceremony in San Francisco at the end of this month to Kristen [ph] this first N-GEN vehicle prior to it going into service. We will put out a press release in the next week or so with a specific date and location of that event. The N-GEN will give us the ability to increase sales by selling into a much larger market than the traditional medium duty step van market. In 2016 alone more than 265 of these types of vehicles or vans were sold to commercial fleets making it the largest growing segment in the U.S commercial truck market. This market is at least tenfold the market of our legacy step van market. Next I'd like to talk about our W-15 pickup truck. The W-15 electric pickup truck is our entry into the number one fleet vehicle market in the country. We currently have nearly $300 million worth of preorder with letters of intent from fleets. As stated previously, we expect initial production of the W-15 electric pickup truck to start later this year. Last week at the NTEA Truck Show in Indianapolis, our W-15 pickup truck won the 2018 Innovation Award for a vehicle. Our goal with W-15 is to build a pickup truck that can match or beat a conventional pickup truck performance, yet get the equivalent of 75 miles per gallon. This vehicle is built on the same chassis platform as the N-GEN van, and thus provides us with the type of economic leverages they’ve enabled a small company like us to bring a new entry into the largest vehicle segment in the U.S. Next I’d like to talk about the SureFly. The SureFly vertical takeoff and landing aircraft is a vehicle that we believe represents a new way of working for our customers, and in turn helping them accomplish their goals. This could be a farmer, an emergency responder, a delivery service, an air taxi or even military operations. We have received Special Airworthiness Certificate from the FAA allowing us to test the -- test and fly the SureFly with a pilot on board. We have been testing as such and expect to present a video in short order to give some exciting insight to the level of success that we have achieved to date. We believe that our first manned hover test flight will be the first such flight of an electric VTOL aircraft in the United States that has the approval of the FAA. Further, we are targeting late 2019 for Full Type Certification from the FAA and that should facilitate our first mover advantage in this exciting new field of hybrid electric flight. If even watching the electric VTOL space you probably notice significant investment in companies around the globe. Late last year we also announced our intention to spinoff our SureFly operations into a separate publicly traded company to be called SureFly, Inc. centered around at $33 million pre-money valuation. Simply put, we believe this spinoff is the best -- it is in the best interest of our shareholders. With SureFly as its own entity that would make it the first pure play public entity in the vertical takeoff and landing space. Next our HorseFly drone. Our HorseFly delivery drone is a custom-designed purpose built drone that is fully integrated with our electric trucks. We have just recently received our patent for the HorseFly truck launched drone package delivery system from the United States Patent and Trademark Office. The HorseFly delivery drone electric trucks system is designed to work with in the FAA rule 107 that permits the user commercial drones in U.S airspace under certain conditions. Today we've conducted two demonstration deliveries with large multinational corporations, including UPS. UPS conducted a successful real-world test with us in February of '17 and it received worldwide news coverage. The knowledge that we have gained in building electric delivery trucks for last mile delivery has led us to believe that a drone/truck delivery system can have significant cost savings in the growing last mile delivery market. We continue to work closely with the FAA as we strive to bring the system to the point of daily drone deliveries across America, especially rural America. Lastly, I'd like to touch on our Post Office prototype vehicles. With regard to that potential $6 billion 180,000 fleet replacement program, at this time we are still under specific ground rules that limit our ability to discuss the program in any detail. I'd just like to reiterate that we successfully deliver our vehicles on time for testing and that we remain very encouraged by the progress our vehicles are making during the extensive testing process. With that, I'd like to open it up to questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Osborne from Cowen & Co. Please proceed with your question.

[Jeffrey Osborne:]

Hey, good afternoon, Steve and everybody. Hope everybody is doing well. Steve, I was hoping you could touch on the gross margin trajectory throughout the year, in particular, in the second half with the shift in production. Can you just talk about what you've been able to achieve in terms of the cost redesigns and what gives you confidence about the price parity and margin profitability?

[Stephen Burns:]

Yes. Thanks for asking, Cowen (sic) [Jeff].

[Paul Gaitan:]

Jeff.

[Stephen Burns:]

Jeff, sorry. Two things that will enable us to do it. We are able to engineer a lot of the cost out by using an extreme light weight which in addition to everything else reduces the size of the battery pack. And then also we’ve been able to garner volume orders such that in the end automotive is a volume game and even though we deal on relatively small volumes, we’ve been able to get the volumes up high enough from our customers such that we're able to offer it a diesel comparative pricing. And again, that threshold although these vehicles I think everybody's aware that these vehicles over time more than payback any cost premium that we might charge for them. It was still a deterrent and we really started to realize that we weren't going to really replace diesel and then eventually gasoline unless we could be on initial par with them. And then plus all the enjoyment of cost and maintenance savings in the future. So for our purposes we made a conscious decision that we're not building any trucks in 2018 at a gross margin loss. And that's a big turn for us and I think it's a big turn -- I’m sure we're the first electric truck builder to do that. So that comes from having a mature factory we've retooled it, so that it can start to build these new vehicles. We are able to do that with very little CapEx and now we're able to -- and command the volume we've hinted towards aspirationally we would like to do 2,000 vehicles this year, 10,000 next year. At 2,000, our margin is going to be pretty close to breakeven, but it will be positive and then it really starts, of course go up when we’re in the 10,000 volume. I think the ultimate is a 25% margin, is about the best we could hope for in the 10,000 type of volumes.

[Jeffrey Osborne:]

Because -- and so just as you talk about units, and then looking at the press release itself, I want to be clear. So when we move from the E-GEN to the N-GEN, it sounds like just the delivery of vehicles in the first half of the year will be kind of sluggish and then should we think about a ramp in the second half? And then, second part on that line of questioning is the 2,000 -- when you talk about that, that’s referring to orders, right? So not actually physical deliveries of vehicle for revenue itself?

[Stephen Burns:]

Yes. While we are -- we feel comfortable in those orders, but we are actually going to try to deliver that many vehicles this year. It's a little hard to forecast, you might miss it by a month or two, but we’re in that type of timeframe. And yes, it's going to be heavy in the latter part of the year. We hope to get up to about 30 vehicles a day towards the latter part of the year. And this year -- first part of the year will be some legacy vehicles, some E-GENs that were on order from last year or early this year and then a N-GENs we had forecasted that the N-GEN initial production would start this quarter and just toward the end of the quarter here and that's what we're bringing to San Francisco to start to place into service.

[Jeffrey Osborne:]

But no formal guidance, Steve as it relates to shipments here within the first half just as we have this transitional period for the company. Any thoughts on trying to nail that down? My sense of the estimates will probably be over the math.

[Stephen Burns:]

Yes, we don’t generally forecast, but I think it's fair to say that the bulk of those 2,000 will begin in second half.

[Jeffrey Osborne:]

Got it. And then the last question is just as we think about the E-GEN ramp in the -- N-GEN ramp, sorry in the second half of the year. How we think about the cash needs for either retooling in Indiana or ramping up the battery capacity that you have in Ohio?

[Stephen Burns:]

Yes, we've already put a lot into our battery plant. We’re good battery plant wise which is not a trivial statement. I think people, kind of can imagine what a battery plant takes. And so for our purposes we are -- we have the battery plant sufficient to be able to meet our current projections without any more tooling. And then on the factory side for at least the N-GENs, we believe we have the bulk. All of our CapEx is about done. Some of our vendors were still paying R&D, so that they can get their stuff done, so they can ship it to us and we assembled in factory. But we have almost no CapEx required -- in our factory, both the assembly factory in Indiana and the battery pack factory here in Cincinnati, which is very good point.

[Jeffrey Osborne:]

Yes, definitely. I appreciate it. I will turn it over to somebody else.

[Stephen Burns:]

Okay, thanks.

[Operator:]

Our next question comes from the line of Carter Driscoll from B. Riley FBR. Please proceed with your question.

[Carter Driscoll:]

Hi, guys. Just following up on Jeff's question, if they’re a type of blended unit or product mix you could talk about that would get you to that 25% gross margin you talk about, sometimes potentially in 2019?

[Stephen Burns:]

Yes, again we haven't. when we say 10,000 vehicles or when we say 2,000 this year, those are almost all N-GENs. Some pickup trucks towards the end. But basically all N-GENs, a few E-GENs brought in there. By 2019, no E-GENs at all is our goal -- is our premised. And the bulk of those 10,000 will be pickup trucks. Again, the 6,000 we have already presold and we stopped the pre-selling process months ago, so that's why that number is locked there. We -- the next set of orders we take for the pickup truck will be actual orders not preorders. So we've a minimum of 6,000 we have to build in '19. And let's say at least 2,000 N-GENs in '19, and then a little squishiness there for the other 2.000.

[Carter Driscoll:]

Okay. Is it fair to say at least in 2019, overwhelming majority would be the pickup truck.

[Stephen Burns:]

Yes.

[Carter Driscoll:]

And then how does …?

[Stephen Burns:]

And I have to -- Carter unless we were in the Post Office of course.

[Carter Driscoll:]

Well, that was my next question would be. I don’t know, the Post Office, how does that obviously high class problem if you were to win that contract. But this step, let's say it comes in 4Q this year, you win it and even if it’s not sole source, let's say it heavily dominated by you guys. Then, what would be the next steps? I mean, obviously you would need at some level of external capital, but how does this change the plans at either Cincinnati or in Indiana? How quickly could you that to do, so what is the type of timeframe to satisfy the 180,000 unit order? Or just starting at a sense longer term, how this could be disruptive and a positive way full-year CapEx and cash needs in particular?

[Stephen Burns:]

Well, again, just to put in perspective, if the Post Office award goes electric, right. It's a game changer for us and really the whole industry, right. But if the largest fleet in the world goes electric, that’s such a significant thing. To get this far to be one of the five you have to show capacity to build. The 180,000 they would like over 4 to 5 years, right. So that kind of gives you a timeframe of -- and again, I think they’ve stated that’s -- I’m under this heavy gag orders. So I’m really cautious to say anything there. But it -- the main thing I think for your purpose is and -- that we’ve built the N-GEN and the pickup truck were both born of the Post Office. So we have to the conscious design, to build a vehicle from scratch. Complete white paper design. A blank sheet of paper design. To justify the cost to do that, on a context that we’ve with -- that we might not win. We said what we got to leverage that across other vehicles. And that’s how the N-GEN and pick of both born. So the good news is so since we’re building the N-GEN and pickup truck, and it's essentially the same as the Post Office. If we get the Post Office, it's now radical change, it's the same beast. However, I would say, we will bring more automation in. What we kind of do is we automate to the level of the orders that we can see in front of us. If we were Tesla, and we have the 400,000 orders in front of us like they do for the model three. Maybe we would tool up way in advance pool automation like DR, right. But we tool up for 10,000 next year. If we start to get overwhelmed that way -- our factory by the way can produce 60,000 vehicles a year. And we’ve seen that, we could run another third shift and exceeded but we think we have plenty of land and we will just add on the factory if we have that good of a -- that’s a nice problem to have. But the god news is it isn't like it's because they’re all built, and they’re all cousins [ph], it's very straightforward for us. And then we have a partner in that. The body partners VT had me, so it's a little -- we are building the bodies for the N-GEN and the pickup truck. For the Post Office, we have a partner there. So that take a little bit of the owners office as far as execution.

[Carter Driscoll:]

So that take a little bit of the owners offers, as far as execution.

[Carter Driscoll:]

Yes. Okay. That’s very helpful. Maybe is there any way you could have talked about maybe a blended ASP, as you ramp anywhere from the 2,000 to $10,000 units. I realize that the -- product mix shift there, but we’re trying to get a sense of where you think it goes from maybe say second half of this year to second half of 2019?

[Paul Gaitan:]

Right. Well, again, the Post Office was -- is pretty specific in there, price range, if they like to see. So we designed everything for that price range. Now at a 180,000 vehicles, it's easier to hit that price range. But I think everybody can imagine, it's pretty conservative and the Post Office doesn’t want to pay an arm and a leg for vehicles. So we targeted for that price and as such those savings have kind of push through to the N-GEN and pickup truck. Well, we’ve announced is that the pickup trucks towards selling price is 52.5, Of course, if you buy a lot of them, you get a discount like any fleet buying and volume. The N-GEN is in the comparable range of that. It's a little less the N-GEN isn't required to do all the things at modern day. Pickup truck is required to do. And the N-GEN comes in difference sizes, think of a four trans that you can buy and multiple sizes, how roof, different wage and different cubic capacities in the back. So it varies a lot more -- the first pickup truck gas one bed configuration, one cab configuration and one trim configuration, right. And we sold this, all 6,000 of them on that one, just because that is a lot more expensive for us to change than a cargo van. A cargo van, just a simpler beast. Much more utilitarian than a pickup truck, so -- but I think if you averaged our vehicles at $50,000, you probably be in the ballpark.

[Carter Driscoll:]

Okay, perfect. Thank you. Couple of quick ones for me. One quick one for me and then one more longer term view. FedEx, maybe an update on where some of our rights are. Follow trials and I was being running around the urban area for a while now, any type of feedback you can provide in terms of what they have told you.

[Paul Gaitan:]

On the FedEx deal, the hydrogen fuel sell project.

[Carter Driscoll:]

Yes.

[Paul Gaitan:]

So we have a partner in that, it's kind of a three way deal to us and a company called Plug Power and FedEx. And then of course, the DOE is sponsoring it and watching over it all. So we are -- we are just aware that it is operating, we are watching in on our telematics, we can see it. And if we get a call, we get out to and service it. But it's essentially our same electric truck, but instead of the BMW range extender, it has a fuel cell charging the batteries. So for our purposes and where the truck OEM of record for that vehicle, it is our win number and plug power services a component manufactured to put the fuel cell in there. So we are cautiously optimistic. It looks very good.

[Carter Driscoll:]

Okay. Truck replacement opportunity, maybe on a unit basis, what do you think about -- or think maybe kind of a 10% replacement. Is that a reasonable percentage for how often the fleets are replaced?

[Stephen Burns:]

You know, I think the fleet practices are generally in the 5% to 10%, you want to refresh that much of your fleet. The Post Office, of course still in a all at once, every 25 years is unusual. But I think that’s the nature of their funding and all the other complexities of that entity. But what we’ve seen is -- fleets are a little bit like a normal person in some respects. They only replace their vehicles because there isn't a lot of innovation in this space, and a vehicle 10 years old, it does it really have any -- you and I buy a new vehicle every three, four years, because there is something that’s attracting us to it, right. Some new technology or safety or coolness factor and since the trucks haven't really changed much, and that’s the key thing. We are operating in a space with very little innovation over the years. And so we’re coming in there with extreme innovation as a new entity on the block and what we’ve seen is, if you can prove the fleet manager that let's say they normally keep their trucks 20 years, and they replace 5% to 10% per year. If you can show them that you cross the numbers, and given the fuel and maintenance savings that our vehicles are, they can't justify not taking them off at 14 years, right, or whatever it is earlier. So they’re very open to something on paper can be prove to them that it's more economical to not go the whole 20 years on that vehicle and get a new one in there, they will do it. So we are expecting some early bumps and then it will level back out to the 10% per year. But if you come with something really good that gets 5x the gas mileage, I think we are hoping to see an influx in early years to level that out a little bit and then settle down to the traditional replacement rate.

[Carter Driscoll:]

And the last one for me. In terms of, I mean, looking at like Duke Energy and some of the preorders they have, I’ve got to imagine just with the disruption that is facing all the traditionally utility models, moving mergers distributed Gen that the infrastructure is a big issue if they’re going to really swap out their fleets and move to the electric. Is there a potential business opportunity that you can help them with on the infrastructure side, whether from a planning perspective or meaning that is entirely new potential business opportunity for you? Just trying to think outside the box about other type of relationship might expand?

[Stephen Burns:]

Right. When you start to really think about putting many, many electric vehicles in a depot or in one spot, right, infrastructure starts to creep up is one of the things you got to conquer. And just like in the 50s when air conditioning became prevalent and all the residential houses had to be kind of upgraded their box to be able to do a little more to accommodate that. And of course the end game is since those houses were going to use a lot more electricity, the utility companies were happy to accommodate and we’re starting to see that here as well. It's very easy to calculate, especially with the fleet, they know how far they go every day. It’s very -- and we know how much energy we use per mile. So it's very easy to calculate how much electricity this company is going to buy from you over time. So we’ve got something that we have seen change a lot in the last few years is kind of the utility companies stepping up to help our customers with infrastructure. What we can do from a technical point of view is automatically stagger charging during the night, things like that, fast charging where appropriate. So we can do from our side, things that help easy infrastructure problem. But in the end, it is wires running under the road into a depot and into a service panel and then out to chargers. We have seen some of our customers are contemplating new -- building new depots, firing them from scratch, each stall having electric outlet. So it's you really feel a movement coming there.

[Carter Driscoll:]

I appreciate taking all my questions. Thank you, gentlemen.

[Stephen Burns:]

Sure. Thanks.

[Operator:]

Our next question comes from the line of Justin Long from Stephens. Please proceed with your question.

[Justin Long:]

Good afternoon and thanks for taking my question. First question I had, I was wondering where you stand on potentially looking at the consumer market for the W-15. Is that around your planning to explore and is that something that’s contributing at all to the 10,000 unit delivery expectation for next year?

[Stephen Burns:]

Hi, Justin. This is Steve. Well, our mission is to fleets, right. But we have noticed that if you build a, let's say a rough and tumble 75 mile per gallon pickup truck that consumers are going to want it to some capacity. So our mentality is, we build and sell to fleets. But of course we can't ignore if too many customers are wanting it and we have our partner called Ryder with the national footprint of service. So that really enables us if we wanted to go consumer route.

[Paul Gaitan:]

But it's not contributing.

[Stephen Burns:]

But it isn't -- that isn't a major -- our major focus is fleets and a new way of work. And I will let Duane expand on that a little bit.

[Duane Hughes:]

I will just say to your point as we have several thousand consumers who have shown a significant amount of interest in being able to get in line to purchase pickup trucks. So what we’ve said was quietly as again to repeat what Steve said, we are commercial fleet focus, but to let them feel a little bit of the love [ph], we’ve allowed them to get into a preorder process that when and if we do go to the consumer market, they would be in a front line.

[Justin Long:]

Okay, great. That’s helpful. And then maybe following up on the $300 million of preorders for the W-15. Could you give us a sense for the number of fleets within that order book and maybe provide some color on the size of those fleets?

[Stephen Burns:]

Yes. First is the number of fleets, its roughly about 20 fleets that make that up. Primarily those fleets are utility such as Duke Energy as we mentioned before and AEP, Columbus, Ohio, Portland, electric, etcetera. They are -- they range in size. They may have as few as a 1,000 or 2,000 vehicles and as many as 5,000 or more. A number also -- some of the fleets include some smaller fleets that are aggregated through the clean fuels, cities such as clean fields Ohio and so on. So its ownership of 1,000 units and higher.

[Justin Long:]

Okay, great. And I think my last question was on UPS. You continue to make positive strides with that relationship. But I was wondering if you could provide an update on how you think that relationship could continue to evolve going forward and just kind of thinking about their appetite to buy in a potential blue sky scenario.

[Duane Hughes:]

And that was UPS, right, Justin?

[Justin Long:]

That’s correct. Correct, UPS.

[Duane Hughes:]

And this is still Duane. What I would tell you is as the press release demonstrated and talked about is they have identified we will say the 35,000 units and their total fleet that would be vehicles that are of comparable size and mission in terms of the duty cycle that the new N-GEN 1,000 cubic foot vehicle that we are collaborating with them on would replace. I can tell you that currently we do have a contract that even though the first portion of it is to deliver the first 50, we already called for the first 1,000 units of that 35,000 unit picture.

[Justin Long:]

Okay. That’s very helpful. I appreciate the time this afternoon.

[Duane Hughes:]

Thank you, Justin.

[Operator:]

Our next question comes from the line of Brian Kinstlinger from Maxim Group. Please proceed with your question.

[Brian Kinstlinger:]

Great. Thanks. Duane, could you just highlight -- what did you say there was 50 obviously, they’ve talked about what was the 1,000 you mentioned of the UPS deliveries of N-GEN?

[Duane Hughes:]

Yes. Well, basically I said -- what I said was in the press release, talk about the 35,000 to meet the criteria. But the contract just goes back to -- they made a statement in the press release, so they understand that to get the price point scale and volume as part of that, right. So the contract actually calls for up to a 1,000 units as part of that 50 unit order.

[Brian Kinstlinger:]

Got it. Okay, great. So, back to the margin question, with the weaker volumes and higher mix of E-GENs in the first half of the year, should we expect a similar loss per vehicle in the first quarter. In the second quarter we will see that loss per vehicle become more modest before we see positive gross margin in the second half of the year? Is that how we should think about it?

[Stephen Burns:]

Hi. This is Steve, Brian. No, I think what you’re going to see is whereas even E-GENs we're charging more for them. So that we can be gross positive margin. What you’re going to see is, of course, our general expenses and R&D and everything armored across a lower number of vehicles. So not gross margin positive -- not gross margin, but just general cost of doing business versus doing less vehicles, that will go up. But we are not selling even E-GENs. We are not selling this year without gross margin positive.

[Brian Kinstlinger:]

So let me make a clarification. So are you saying as the first quarter's about to close, two weeks, you will have a growth -- a narrow but positive gross margin in the first quarter you think?

[Stephen Burns:]

It's a relatively number small number of vehicles and it might not be, But for sure starting that …

[Duane Hughes:]

The vehicles that are in backlog and that we’ve the press release about so on. Other have the gross margin lost. Our focus on the sales, the markets the opportunities and what Ryder has been on making those vehicle -- these future vehicle sales. It's a backlog today and going forward, gross margin positive.

[Paul Gaitan:]

So it's relatively small number of vehicles first quarter might not be, but everything post today -- well, this is next quarter gross positive margin. So the ones -- everything we've announced, all the vehicles we’ve announced that’s $7 million order we announced the other day is gross vehicle positive.

[Brian Kinstlinger:]

And related to that $7 million order, what is the timeframe you expect to deliver? I assume it's about 140, 150 vehicles, is that over the first half of the year or is that over a longer period. How do you think about that?

[Stephen Burns:]

That is a little tricky for us only because we've to buy the parts upfront, and we’re working to secure that funding. The customer would take it tomorrow if we could deliver them, so we expect to be order and parts here soon and get start getting them in the second quarter and finishing in the third quarter.

[Brian Kinstlinger:]

Great. And then, the 2,000 vehicles you expect for '18, where else the super majority still come from one customer?

[Stephen Burns:]

No.

[Brian Kinstlinger:]

No?

[Stephen Burns:]

Not a super majority, a majority but not as biased as they’ve been.

[Brian Kinstlinger:]

Okay. And then in the past we’ve talked about Amazon and Walmart to the world being over to leverage your vehicle. Where are discussions there? I know there has been some discussion blogs and things like that. So maybe you can provide an update on what the opportunity is there and where things are going?

[Stephen Burns:]

Don’t read those blogs right. I think it's fair to say that our business to date, it’s been with kind of the incompetence that are in the delivery business. They do all sorts of things, bread, packages, everything. So, however, I think everybody is aware that last mile, I mean today for example Walmart announced 100 cities they’re going to start delivering groceries, right. And so last mile delivery is, we think extremely topical, everything, everybody expects everything to be delivered. I'd say as far as we know we the only vehicles in the United States delivering things electrically. And that's pretty strong statement. So when you hear that anybody is starting to consolidate last mile deliveries of any sort, I think it's fair to say they’re using traditional tools. And when I say traditional tools, I mean gasoline and diesel vehicles. And probably not with the drone on the top and probably not with a sophisticated telemetry system like we have with Metron. So we feel that we want to work with all folks that want to optimize last mile delivery, both economically and reduce emissions. So we're expecting to play with all folks doing that.

[Brian Kinstlinger:]

Okay. Last question, I think some of the analysis coded around is clearly there is going to be a little bit more burn at least in this first half of the year. If not little bit longer and there will be some financing needs. Can you -- you’ve talked about in the past, share us some details about where maybe the financing might come in? how you are thinking about financing going forward?

[Stephen Burns:]

Good. Good question. Of course we are in a capital-intensive business. We are very proud of what we do without the traditional hundreds of millions of dollars that it takes to be in businesses, right. And most of times that's a billions with the B. So we are going to need financing. We are striving to do -- even though one of the reasons you’re a public company is to be able to rely on public markets if you need is a backstop. But we’ve been really -- we try not to do that every time we go to the public markets. It's pretty ugly. So we are -- the reason we sponsored SureFly off, right. One of the reasons was focused. The other reason was it was not getting its true valuation underneath the Workhorse umbrella. We believe that our workforce investment in SureFly when its own NASDAQ company, will be very valuable asset to Workhorse, right? We also have other things internally to the company that if we have to, we feel like we could spend out to generate capital. We also are needed to even strategic discussions, we have not been able to find a great strategic partner yet. But with all the things we’ve been working on, we are in discussions with a couple of good ones that we hope to get strategic funding as well. And as a last resort, we go to the capital markets but that is not our plan.

[Brian Kinstlinger:]

If I can then follow-up one on the strategic, I’ve asked this before on a call. You got some great names, right, you’re working with Panasonic, you’re working with Ryder, you’re working with UPS, a lot of great companies, VT Hackney, that can see the value. What has been the push back that you have been unable to find a strategic partner to invest at the terms maybe that you’re looking for -- what are they pushing back against?

[Stephen Burns:]

Well, I think first it should be set. We’ve had offers from strategic partners we just --- they went to our acceptable what we thought was acceptable. So there's strategic outreach to us. We live in a world that has a lot of carnage in the first generation, right. I don’t know if everyone in this call knows, but except for us and Tesla, we are the only public electric vehicle makers standing, right. There was a lot of carnage, people went through a lot of money and that has made -- and it's traditionally a very capital expensive business. So that makes a strategic hesitant, right. And so the more risk we can reduce and by reducing risk I mean the more customers we can have, the more trucks we get on the road that you can see they can work, the further we are with the Post Office, the further we are along with SureFly certification from the FAA. As we just continue to put meat on the bone it reduces risk, And at some point, we feel that we will find a good strategic partner and we are actively seeking one. So, but it is just have to that available to us to date and I -- we really -- most people that are entrusted us were interested in the same space 5 or 10 years ago. And most of them saw that everybody and I mean everybody got completely wiped out. So we're hoping our shareholders are really -- indebted to our shareholders that invested in us, in our placements and believed in us and could look past kind of the first generation stuff. So …

[Duane Hughes:]

Hey, Brian, I do want to clarify this is Duane. Based on your capital question, we were talking about gross margin positive in 2018. What we’re talking about there's gross margin positive at the vehicle level not at the company level.

[Brian Kinstlinger:]

Okay. So when you say that -- and so we are more clear for our 2018, if you do 2000 vehicles the gross margin will not be positive, is that right? It'll be slightly negative.

[Duane Hughes:]

The gross margin for the company will still be negative, but the gross margin positive on each vehicle we are focused on selling vehicles only at that gross margin positive number.

[Brian Kinstlinger:]

Okay. What else goes in to the gross earlier That gross margin positive it will split into the gross cost? I would think everything else goes into overhead? What else goes into the gross cost that in addition to -- in the gross margin?

[Stephen Burns:]

I should probably let Paul answer the question, but he is going to say overhead, is that correct?

[Paul Gaitan:]

Yes. So obviously when we are running at pretty low volumes, I think if you look at our cost per unit in the first half versus what we did in the fourth quarter was really a significant improvement. So we will make some headway there, but -- and there was a reference earlier in the call to improvements in material costs and we’ve see that very, very aggressively at some of our key components from the UPS prior order of 125 for the order we just finished up of 200. So we're coming down really rapid cost down curve and we will continue to see that not only on the existing each one units we produce, but as we make the next step into the N-GEN unit.

[Brian Kinstlinger:]

Yes. One last question, just because that information I thought changed or maybe help people might think about it. What is your actual gross margin breakeven were all inclusive, how many vehicles do you need to be at?

[Paul Gaitan:]

You mean for company positive?

[Stephen Burns:]

Company positive gross margin. I think, yes and that …

[Paul Gaitan:]

[Indiscernible].

[Stephen Burns:]

We’ve got models [indiscernible].

[Paul Gaitan:]

Yes. I think there are really too many variables at place to hang it on one number.

[Stephen Burns:]

I mean, you’ve got Post Office in or out all that kind of stuff. It varies.

[Brian Kinstlinger:]

Of course not with the Post Office, I’m talking about with your N-GEN being the majority and then ultimately the consumer product in the W-15, are you actually gross margin positive in 2019?

[Stephen Burns:]

We haven't probably cited. We know it, but we’re just -- that’s a little -- well just a little too early to forecast that.

[Brian Kinstlinger:]

Okay. All right. Thank you.

[Stephen Burns:]

Thank you.

[Operator:]

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 [e-mail]. I’d now like to turn the call back over to Mr. Burns for his closing remarks.

[Stephen Burns:]

Just like to thank everybody for listening in, for supporting us and we are hoping to have a great 2018.

[Operator:]

Thank you for joining us today’s Workhorse's Group fourth quarter and full-year 2017 earnings conference call. You may now disconnect.