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spk09: Ladies and gentlemen, greetings and welcome to the Workhorse Group's first quarter 2023 investor call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.
spk00: Thank you, Daryl. Good morning and welcome to all of you joining us on today's first quarter 2023 results call. Before we begin, I'd like to note that we've posted our results for the first quarter ending March 31st, 2023 by press release. You can also find this release as well as an accompanying presentation in the investor relations section of our website. We've also filed our first quarter form 10Q this morning. We will be tracking to the posted presentation during today's call, so please follow along either from the link of the press release or through the website directly. And with that, let's get started. Joining me on today's call are Rick Douck, our CEO, and Bob Ganan, our CFO. The agenda for today's call can be found on slide three. Following my brief opening remarks, I'll hand the call over to Rick. We'll then give you an update of the progress we've made on our strategic and operational priorities during the quarter. Bob will then walk us through our financial results for the quarter and cover our 2023 guidance. We'll then take your questions. Our disclaimer can be found on slide four. Some of the comments that will be made today are forward-looking and therefore are subject to certain provisions as well as risks and uncertainties. You can find the full disclaimer statement in our Form 10-Q and other periodic filings on file with the SEC, as well as in today's press release. With that, I'll now turn the call over to Rick Dauk. Rick?
spk01: Rick Dauk Thanks, Stan. Good morning, everyone. Thank you all for taking the time to join us today. Before I jump into the details of our Q1 performance, I want to spend a moment or two discussing the primary market segment that Workhorse serves, the North American class 4-6 commercial electric vehicle business, true work trucks. These are challenging times for nearly every company competing in this segment, both startups and well-established OEMs. The generational technology transition from ICE to EV-powered commercial vehicles is a true paradigm shift, and it's not an easy one. The ICE to EV transition will occur over decades and will require significant investment in electric charging infrastructure, power generation, vehicle and component engineering, R&D, supplier tooling, factory conversion, or new factory construction. Not all of those trying to establish themselves in the commercial EV space will make it. There will be casualties along the way and likely a consolidation of competitors in the segment at both the OEM and supplier levels. Make no mistake, Workhorse is one of the pioneers in the commercial EV industry, specifically in the step-van segment. We are not a SPAC-funded startup company. We are not doing EV retrofits of internal combustion engine vehicles. We are a company with a rich and long heritage in the EV step-van space. While the industry transition challenges sound ominous, here at Workhorse, we have an executable plan to merge as winners. First and foremost, we have assembled the right team. We brought in experienced, capable leaders and operators from the automotive, commercial truck, and military service who are armed with a can-do, get-it-done spirit and mentality. The manufacturing complex at Union City has been upgraded and expanded. It is ready to roll, and it's now in production. We have the foundational plant, warehouse, and battery storage facilities capable of producing up to 10,000 vehicles a year by 2025-2026. Very few of our startup competitors can make that claim or actually show you an operating production facility. Ask them if you can go visit their plant. Our new product roadmap is fully defined. We have a family of industry-leading EV-powered Class 406 commercial vehicles being launched over the next three years, with three new products alone in 2023. We have strategically selected proven, financially stable supply chain partners, we can count on to supply our critical component needs. So we have or we will soon have the family of products necessary to compete in the emerging EV Class 4 to Class 6 market. The W56 family of vehicles we are launching in Q3 this year are completely new vehicles from the ground up, internally designed, tested, tooled, and launched in less than two years with less than 50 engineers and technicians. I'm really proud of them. We are moving quickly to establish a commercial dealer network and secure the necessary manufacturer licenses to serve commercial fleets from coast to coast as they make their own transition to EV-powered trucks. These dealers are excited by the W56 family of products. We are well-positioned to capture the wave of market momentum emerging for commercial EV vehicles. On all fronts, we are pushing the boundaries and overcoming real challenges as we create a successful commercial EV OEM. I'd like to tell our team here at Workhorse that they are true pioneers and that we are on the precipice of success. Moving to slide six, the generational shift to EV-powered vehicles is now underway and it continues to pick up speed, ramping up specifically in 2024. The easiest way to illustrate this is a quick review of the two-pronged regulatory efforts underway in California. The state's advanced clean truck rule forecast focuses on commercial vehicle OEMs and mandates the percentage of zero-emission vehicles that those companies must build and sell in the state by the OEMs. The corollary to the clean truck mandate is the California Advanced Clean Fleet Rule. This new regulatory mandate targets commercial fleet owners aiming for a fully zero-emission fleet throughout the state by 2045. It won't surprise you that California's municipal governments, both with both small and large fleets were common guests in our booth at the ACT show last week in Anaheim. They have a clear mandate, and they have the funding available to move to EV-powered vehicles starting in 2024. And we will have the types of vehicles they need across the Class IV to VI segments. These two new CARB-generated rules essentially reset the state's supply and demand minimums for commercial EV requirements over the next two decades. And where CARB leads, other states follow. On slide seven, you can see the graphical version of this regulation, which kicks in on January 1st, 2024, at 9% in Class IV to VIII vehicles. As you can see, the requirement ramps to 50% by 2030, with a 75% requirement for OEM sales percentage of zero emission by 2035. This is exactly the segment where our products are targeted. On slide eight, you can see the other states that are following the California mandates. It includes 13 more states and the District of Columbia, with five of those states adopting the regulations in the ensuing three years. This is the definition of a target-rich environment for an EV industry pioneer. Turning now to highlights from the quarter on slide nine. Over the past 21 months, we have rebuilt Workhorses Foundation, following our stabilize, fix, and grow turnaround framework. We completed building out our experience engineering, operations, administrative, and leadership teams, transformed our Union City facility into a world-class manufacturing complex, and made tangible progress in our new product portfolio roadmaps. In 2023, we remained laser-focused on execution, specifically the production and delivery of world-class trucks and drones. We made important progress on all fronts in the first quarter. First, we advanced our commercial vehicle programs, We ramped up production of the W4CC vehicles. We completed the initial builds of the W, the pilot builds of the W750 step van. We successfully unveiled the W56 vehicle at multiple industry events, which was well received by prospective customers. While behind after Q1, we feel we are on track for our full year W4CC and W750 delivery targets and look forward to beginning production of the W56 in the third quarter. We also assembled and shipped 18 Tropos vehicles as part of our three-year contract with that company and are continuing to ramp up shipments of these unique vehicles in the coming months. We also made significant strides in our aerospace business and saw continued strong interest in both our Horsefly and Falcon drones. We performed a large number of flight demonstrations with prospective government and commercial customers during the first quarter. We are ready to ramp production in the factory and have the parts on hand to build initial orders. The Air Force's North Spark Defense Laboratory, based at Grand Forks Air Force Base in North Dakota, is working to finalize its purchase of one of our Falcon drones and our suite of supporting systems. Qualifying to sell to the United States Air Force is no small thing. We continue to execute our stables and installs package delivery routes from FedEx's ground, and we expect to electrify our fleet by the end of the second quarter. We are also continuing to look at the best options for expansions into a second stables install site in either an incentive-based state and or possibly at a federal government-owned location. Additionally, we completed facility improvements at our drone engineering technical design and production facility in Mason, Ohio, and we are on track to install the end-of-the-line dynamometer, assembly, and paint lines at Union City ahead of the W56 launch in Q3. Turning to slide 10. I want to provide some additional details on the important progress we're making on our commercial vehicle product roadmaps. Starting with our class four offerings, the W4CC and the W750. After receiving the green power chassis units at the end of December 2022, Workhorse worked hard to modify and upgrade these base units to fully meet Workhorse quality standards in Q1. These upgrades took longer than expected to work through as we experienced delivery issues on a few key components, tied primarily to the tooling and production ramp-up of a handful of parts, specifically related to light bezels, cab heaters, back panel covers, and liners. As a result of these specific parts issues, we were only able to deliver 10 trucks during the first quarter. However, we expeditionally resolved these issues, and the company is currently shipping an additional 40 W4CC trucks to fulfill a fully executed purchase order. With the chassis delivery and W4CC supplier issues now behind us, we remain on track to meet our full year 2023 W4CC delivery targets for the year. As mentioned earlier, the initial W750 pilot builds are complete. We are working through a handful of design and supplier tooling changes on this vehicle, but initial production remains on track to start in the second quarter. Turning to slide 11, the W56. which is the first new workhorse fully designed and purpose-built chassis platform, it remains on track to start production in Q3 23. Importantly, this quarter we successfully unveiled the new step van vehicle at the NTA Work Truck Show in Indianapolis and had a fully subscribed ride and drive chat session at the ACT Expo in Anaheim, California last week, both of which garnered significant positive feedback from prospective customers. As I have mentioned in the past, the W56 is a foundational, lifeblood product for Workhorse. Moving on to the WNEXT vehicle. This is our longer-term project. We plan to combine our previous Class III and Class IV vehicle experience to develop a next-generation vehicle with an accessible low-floor frame, improved ride and handling, efficient lightweight systems, and advanced safety technology. We will focus on prototype design, test and build in 23 and 24, and we expect to begin production of the WNEXT in 2025. Moving to slide 12. As we announced during the first quarter, Workhorse is developing a certified dealer network to meet end customer needs across the U.S. As you can see on the slide, we have already identified and begun or have completed the onboarding of dealers in the light blue shaded states. This process includes prospective dealers visiting the Union City plant meeting with and being trained by our field service and warranty teams. Feedback from these dealer day events has been universally positive. As part of the dealer agreement process, the dealers sign up for initial stocking orders on W4CC and W750s. We plan to onboard 8 to 10 new dealers in 2023, many with multiple locations across 22 states. Several states require us to have manufacturing licenses in order to sell vehicles, and each state's application process is different, and some are quite cumbersome. A few of our officers, including me, have had to go and get fingerprinted and have background checks completed in multiple states in order to secure these licenses. As of today, we now have 13 of the 22 manufacturing licenses required to sell vehicles in our targeted states. On slide 13, a few words about our Stables and Stalls initiative launched last year. This fleet electrification initiative provides services and charging infrastructure to support small fleet operators with EV-powered fleets. We recently renewed our contract to deliver last-mile packages for FedEx Ground in Ohio and have continued to execute our package delivery routes throughout the first quarter. We expect to electrify the 11 and Ohio fleet by the end of Q2-23 and are currently exploring opportunities to establish one to two additional sites in an incentive-based state and or federally-owned locations. The Stables Installed Initiative is expected to provide us with valuable insights into the owner-operator business model and how we can provide a meaningful advantage to further boost the transition to EV platforms, especially for smaller fleets. Moving on to our aerospace business on slide 14, which had a very busy start to the year. We advanced the development and testing of our drones to target two compelling growing markets, package delivery and agricultural and infrastructure data acquisition and data use. We conducted demonstrations of simultaneous package deliveries by multiple horsefly aircraft to two prospective last-mile delivery clients and a potential industry partner. In addition, we successfully completed demonstrations of both the horsefly and the Falcon drones for the U.S. military, multiple branches. As a reminder, our horsefly platform is an all-electric, multipurpose, uncrewed aerial system designed to tackle a variety of commercial applications. It uses a winch delivery system to provide safe, reliable, and precise last-mile delivery in various conditions and carry up to 10 pounds for 10 miles with a 45-minute flight time. Our other drone is our Humanitarian Aid and Logistics Operations, or HALO, aircraft, which we internally call the Falcon. It has the same airframe, propulsion system, and set of navigational capabilities as the horsefly, but has a lower gross weight so it can carry more payload across a longer distance. This drone is designed to be used in austere, difficult training conditions. We are about to secure our first purchase order for the Falcon from the U.S. government and are close to landing additional new orders for this tough-duty drone. Our team has another large demo with the U.S. government agencies next week, and we hope to build on our success with the U.S. Air Force. We completed scanning land in Arkansas and Mississippi with the U.S. Department of Agriculture's government's second grant in support of underserved farmers and ranchers. We are actively exploring additional opportunities for collaboration with both the federal and state government agencies. The initial feedback we are receiving from USDA is very encouraging. In their words, the data we are providing is game-changing in terms of detail and timeless versus the current data collection methods employed across not only farmland, but other larger federally owned areas across the country. Overall, we are pleased with our progress in Arrow and look forward to announcing additional appeals or government grants in the coming months. With that, I'll now turn the call over to Bob to discuss our financial results for the quarter.
spk03: Thanks, Rick. Let's turn to slide 15 to discuss our first quarter financial results. Our first quarter results demonstrate the team's focus on operational execution and financial discipline. As Rick stated, we are ramping up the production and delivery of vehicles and expect that to continue throughout the rest of the year. We expect this will generate significant revenue growth in 2023. At the same time, we are managing our cash burn well, and enhancing our back office systems to make us an even more efficient organization. Turning now to results, sales net returns and allowances for the first quarter of 2023 were 1.7 million compared to 14,000 in the same period last year. The increase in net sales is primarily due to sales volume of the W4CC. As Rick explained earlier, getting suppliers tooled up and launched on key components required to upgrade the W4CC product took longer than expected, It impacted our throughput and sales in Q1. We expect to make up those units across the balance of 2023. Cost of sales increased to $5.3 million from $3.9 million in the same period last year, primarily due to the $900,000 increase in costs related to direct materials and a $1.1 million increase in employee compensation and related expenses to support vehicle sales during the period. The increase in cost of sales was partially offset by a $400,000 decrease in inventory reserve expenses and a $200,000 decrease in other related overhead costs. Selling general and administrative expenses increased to $14.7 million from $11.9 million in the same period last year. The increase in SG&A expenses was primarily driven by a $3.1 million increase in employee compensation and related expenses primarily due to increased headcount and non-cash stock-based compensation expense. Research and development expenses increased to $7.2 million compared to $4 million in the same period last year. The increase in R&D expense was primarily driven by a $1.7 million increase in prototype expense related to the continued development of the company's expanded product roadmap, including the Horsefly, Falcon, W56, and W750 vehicle programs. An increase of $700,000 in employee compensation related expenses as the company increased headcount, and a $300,000 increase in consulting expenses. Net interest income was $600,000 compared to a negative $2.2 million in the same period last year. Net interest income in the current period is driven by interest earned on the cash in our money market investment account. Net interest expense in the prior period was primarily related to fair value adjustments, contractual interest expense, and a loss in the conversion of the company's former convertible notes due 2024. The entire outstanding aggregate principal of these notes were exchanged for the shares of the company's common stock during 2021 and 2022. Turning to slide 16 to discuss our balance sheet, we are continuing to operate debt-free, and as of March 31, 2023, we had approximately $79.1 million in cash and cash equivalents. In addition, we have our at-the-market program in place, and during the first quarter, we issued 14.4 million shares under the ATM for net proceeds of $18.6 million. You might have noticed that we recently filed a $150 million shelf registration statement with the SEC. I just want to point out this was a normal renewal of the former shelf's three-year term was expiring. The former shelf had approximately $143 million remaining on it. We believe our existing capital resources and capital availability will be sufficient to support our current and projected funding requirements through 2023. If the opportunity arises and market conditions are appropriate, we will raise additional financing in 2023, including through a continuance of our at-the-market offerings. Turning to slide 17, we are reaffirming our guidance as we expect to ramp up production and delivery throughout the rest of the year. We are now shipping W4CC vehicles to customers, and production is ramping up to five units per day by the end of Q2 as component suppliers stabilize their own production. The start of W750 production is on track to begin later this quarter, and the W56 is on schedule to launch in Q3. We continue to expect revenue to be in the range of $75 million to $125 million for calendar year 2023, Assuming current supply chain lead times remain unchanged. Securing the state manufacturing license and onboarding our new dealers is critical to our success over the next two quarters. At the same time, we are managing our cash burn well and enhancing our systems internally to make us an even more efficient organization. We are confident the actions we are taking now will allow us to deliver on our goals and generate value for our shareholders. I'll now turn back to Rick to wrap up the call.
spk01: Thanks, Bob. I want to briefly discuss some of our key second quarter priorities, which are outlined on slide 18. Above all else, we are focused on advancing our new product roadmaps and keeping them on time and on budget. Specifically, we are continuing to ramp up production and delivery of our W4CC in the second quarter and expect to deliver significantly more vehicles than in the Q1. We are on track to begin production of the W750 vehicles in Q2. The W56 program remains on track as well, and we will continue to showcase the new step van vehicle to prospective customers ahead of starting production in Q3. These trucks are now in the critical vehicle durability, component, and system testing phase, which we expect to complete in June and July timeframe. When the testing is complete, we will put safe, reliable demo trucks in the hands of our large last-mile delivery fleets, and work to secure future purchase orders for Q4, 23, and 24 and beyond. We're also continuing to electrify our fleet under our stables and stalls program, first with the W750 in the second quarter, and then with the W56 vans in the third quarter. During the second quarter, we intend to earn more customer orders, grow our sales, and further build out our CB dealer network. We are making steady progress building out our CB dealer network with plans to onboard eight to 10 new dealer groups in 2023. I'll be on the road myself the next two, three weeks, meeting with targeted dealers and fleets around the country, and we have our third dealer day set up at Union City later this month on May 31st. On the aerospace front, we are excited to be on the cusp of having our initial purchase order from the US Air Force, and we'll continue completing flight testing and demonstrations with prospective customers. We expect to earn additional significant work with the USDA also in the Q2. Finally, we will continue executing our common assistance plans in the second quarter, including transitioning to a new ERP system, which will help drive operational efficiencies as we ramp up production of our products. We expect to complete the ERP transition in Q3 this year. Before we turn the call over to Q&A, I want to reemphasize a few important takeaways from our call today. First, with few exceptions, most notably transitioning to the new ERP system and establishing a nationwide dealer network, we have completed rebuilding the foundations of our company. We have an incredibly talented team of functional experts and business leaders with extensive automotive, commercial vehicle, and aviation industry experience. Great team here at Workhorse. Second, we have state of the art manufacturing engineering facilities and equipment in which to execute our new product roadmaps for both our commercial vehicles and aerospace drones. We are focused on execution, execution, and execution. We are finishing the design and testing phase, ramping up production for our vehicles, trucks, and drones. and delivering safe, reliable, and efficient vehicles to customers. Most importantly, we expect to generate profitable contribution margins on every vehicle we produce and ship going forward. We remain confident in the market opportunities ahead of us in our industry to deliver value to our customers, shareholders, and other stakeholders. The transition to EV-powered commercial vehicles is significantly progressing, and there is strong market demand and government support for EV, UAVs, and infrastructure to make them work. And finally, we have the necessary access to cash and capital resources to execute on our go-forward plans. We will continue to monitor our financial position, investments, and future capital needs to support our business strategy. The workforce team is highly experienced. We know that we still have significant work ahead of us, and we are ready to meet head-on the challenges we will encounter on our EEV journey. We are encouraged by the progress we are making. The solid foundation is now in place. and the positive feedback we are receiving from our current and prospective partners. We're confident in our portfolio of EV products. After almost two years of hard work, Workhorse is ready to run and establish itself as a winner in the transition to commercial electric vehicles, both on the ground and in the air. That concludes our prepared remarks. Thank you all again for your time this morning. We're now ready to open the call for your questions. Daryl, please provide the appropriate instructions.
spk09: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Colin Rush with Oppenheimer. Please proceed with your questions.
spk05: Thanks so much, guys. And congrats on getting the trucks out. Can you talk a little bit about how much rework you had to do on those vehicles before you got them out and how the operating software is performing now that you've got them on the road?
spk01: Yeah, a couple things. I think when we initially started the process with Green Power, we were talking about putting 14 or 15 parts on the trucks. I think we're now up to 75 and 90 parts on the truck. There were a couple parts that required us to go out and tool up some suppliers. I think we told you in the last earnings call that we put out a few trucks in December. We got some initial feedback both from the dealer customers and the upfitters that are putting the backs or custom bodies that they wanted a different back panel. That was our biggest challenge in the first quarter. We had to go out, tool up a supplier in North Carolina, design the part, tool it up, get the prototypes, and then we had to change the liners. That was the big issue for us in the first quarter. We got that done towards the end of the quarter, and that's now in production. It's a little longer than we thought, for sure, but based on that, I guess I would say, while that's disappointing to us in the first quarter, it does show how fast our team was able to turn on a dime and go find a solution in less than 75 days. Not six months, 75 days from the time we were identified the issue in early January to the time we had parts going on trucks in the middle of March. So I want to thank our CTO and our engineering team and our supply chain team. They did cartwheels to get that done in the first quarter. Operating system, so far so good. We've done a lot of testing of the truck up at Union City. We don't see any issues.
spk05: Okay, perfect. And then with the drone, I'm just trying to get a sense of how close you guys are to material revenue for the company. How should we be thinking about that revenue opportunity for you guys, particularly on the agriculture side?
spk03: So on the agricultural side, I think we were progressing pretty quickly there and have some good programs in place, and I think we'll continue to see that grow. So I feel like that's on track. On the drone side, obviously, it's a tough market, and bringing it to market has been longer than we had hoped, but I think we have the technological breakthroughs, and now it's about building that market network and distribution so that we can start selling those here in the latter half of the year.
spk01: Yeah, I'll add some color, too. I think the commercial part, the last mile delivery of packages, is we've got to get through with the FAA, and we've got to make sure that UPS and FedEx and others really want to use these drones. We've bounced back and forth from taking them off the trucks to doing it from ground stations and warehouses. We have some more demos we're going to do here in the quarter, second quarter. I think a good decision we made over 18 months ago was can we go after the use of the LiDAR systems and camera systems. We're finding a traction with the USDA, which also owns the Forest Department, or Forest Natural Resources, So there's opportunity. There's a lot of land that needs to be scanned. The way they're doing things right now is with horses and four-wheelers, right? And we can scan literally hundreds of acres in just a few hours. And then DOD, we've taken the Falcon out to multiple branches, and we think there's an opportunity there, too. So I think we're going to grow faster on the government side than we are on the commercial side, and hopefully we'll get that ramped up faster. Okay. Perfect. Thanks, guys.
spk09: Thanks, Collin. Thanks, Collin. Thank you. Our next questions come from the line of Jeff Osborne with TD Cowen. Please proceed with your questions.
spk06: Hey, good morning. A couple questions on my side. Rick, I think one of the themes of both the Work Truck Show and the Act Show was the challenges with trucking being integrated with charging and the time to get the charging infrastructure in place. What level of confidence do you have in terms of the ability to work with the dealers with potential customers to sort of push that along and avoid an air pocket between expected delivery of the trucks and when that infrastructure is in place?
spk01: That's a good question. The larger dealers we're meeting with have already started putting in their own charging systems at their locations. Several of these dealers run large rental fleets, and so they're looking at some of the areas where they use the W4CC or the step van specifically where they're using that. We've gone out to a couple interesting locations, one in L.A., a company. I won't mention their name right now, but they put in a large charging station area. They've got multiple EV trucks they've purchased, and they're leasing them to the little fleets in L.A. right now. And they're going to expand that program to multiple cities across the United States, including New York, Houston, Atlanta, et cetera, and Florida. So some people are out there on the cutting edge, I'll say. On the backside, last week in Indianapolis, we met with a distribution company. He has 800 trucks, and he said, basically, I need help. Can you help me chart the path to EV? I need your kind of trucks, Class 4 and Class 5, 6 step vans specifically. He's got 800 trucks, 100 above in Canada and 700 in the United States at multiple locations. He needs an education on fast charging, slow charging, how often you charge them, What's the route availability? How does the batteries handle the charging in the cold weather, hot weather? That's exactly what we're learning on stables and stalls. We can give you a lot of data now for over a year of how to run an ICE fleet with old trucks, what it costs to repair them, fuel them, staff them. And we're going to soon have that same data for the EVs when we electrify the stables and stalls. We'll be able to help those fleets that need to make the conversion. I'll also tell you that that distribution company is owned by a European company, and he was given a mandate to convert at least 50 of his 800 trucks this year to EV before the end of the year. That wasn't a choice. He's got to go do it. Now he's got to find the right OEMs, the right charging systems, and we do get a lot of questions about who are the right charging partners. We've done some work with ChargePoint. We've done some work with ABB. We've done some work with Shell, so we have some good information about that. But I do think It's going to take time, right? So the federal government's put the money behind putting in the charging infrastructure, and then the big fleets are starting to put their own money into it as well. And there's a cottage industry, Jeff, that's popping up of people who can go in and help secure the land and tie the grids in there. And there's programs specifically in California with the San Diego Power and Light, and the guys out west are doing some charging systems there. So lots of work to be done, that's for sure.
spk06: Got it. And then just two other quick ones here. The other revenue broken out of roughly $339,000, is the majority of that affiliated with the 18 Tropos vehicles that you assembled, or is there something else moving that line at them?
spk03: No, the majority of that's going to be the revenue from the stables and stalls and package delivery. A little bit of it Tropos, but most of it stables and stalls.
spk06: Got it. And then, Rick, in your concluding remarks, you made reference to positive contribution margins with every vehicle delivered going forward or produced going forward. I forget how you phrased it. Were you intending to say that in 2Q you would be gross margin positive, or that's just the objective?
spk03: That's a little bit early. Go ahead, Bob. No, I think at a truck contribution level, they are positive margins. But positive gross margin will be a factor of volume as we start to cover the fixed cost. So, no, that will not be the case in Q2.
spk01: Yeah. This company has a history of designing some pretty unique trucks and selling them for about half of what they put into them. And so we put an edict out when we got here to say we're going to design, test, and build trucks that we can make money. We're a publicly traded company. Got to have a path forward of profitability. Just designing and building and selling trucks. cool trucks at a loss puts you out of business long term.
spk06: Is there an annualized run rate that you would hit that or units delivered of the 750? I assume the 4cc wouldn't get you there, but should that be something we think about in the spring of 24?
spk03: Yeah, we really haven't put together any guidance on that, but I will say that overall, our fixed costs on the manufacturing side are relatively low. So you know, with a fair amount of volume, we should be able to get to that positive gross margin.
spk01: Yeah, I think one of the things, Jeff, we talked about in a couple calls is that we're early, still in the very early inning of this ICE to EV transition. There's still some price elasticity, which is a good thing for those of us who are out in the cutting edge, right? And so I'm sure we'll all have to ramp down costs in the future, specifically on batteries. But for now, the market demands Based on the California mandates alone of 9% of the fleets, when they buy trucks next year, 9% of the buys have to be EV. That's one out of every 10 almost, right? So I sat with one big dealer last week and said, hey, in order for me to sell these big ICE trucks, I've got to sell some EV trucks now too. That's a real bite in the regulatory laws out there in the clean fleet, advanced clean fleet.
spk06: Absolutely. That's all I have. Thank you. Appreciate it.
spk09: Great. Thank you. Our next questions come from the line of Chris Souther with B. Riley. Please proceed with your questions.
spk07: Hey, guys. Maybe just a little bit on the sales pipeline and backlog, how those are picking up at this stage. You know, you called out 500 to 600 chassis you're expecting to receive this year for some maybe just, you know, visibility of either W4 or 750 on that. And then, you know, what are we getting as kind of an early sense of the of the 56, you know, as far as kind of backlog building would be helpful for folks?
spk01: Yeah, we don't really publish right now the backlog. I think that's a fool's errand. I've seen a lot of that in the last couple years with companies quoting all kinds of backlog, yet they don't have a factory, so how the hell are they going to produce them? So we are building it from the ground up. Part of our dealer agreements is we sign up dealers, they agree to take stocking orders. So typically that's 10 per dealer. Some dealers have multiple sites. One dealer has 35 locations. Another one has 21. Not every location is an EV target area. So I'd say that as we build up our dealer network, you'll see the backlog of our W4CC and W750s grow. I'm going down to see a dealer tonight and tomorrow down in the southeast region. They have a real strong interest in the W750. I go to other locations with the sales team. They only want W4CC, so it's kind of jumping around. But We're confident that we have the balance right in terms of supply and demand. We know how many chassis we've ordered from Green Power and are being delivered. We have over 500 chassis on order right now and on their way into us. We had our 200 in the first quarter, and we think we'll be able to sell all those between now and the end of the year, early first quarter next year.
spk07: Got it. Okay. That's real helpful. And then maybe just on drones.
spk01: You asked about –
spk07: Yeah, the 56 as well would be good. Yeah, thank you.
spk01: W56, I'd say, is early. We've had some excellent preliminary meetings in Indianapolis with some of the big companies. We had additional meetings with those exact same companies. Now, this time in California, they were able to actually ride and drive the W56. It got very strong reviews from almost everybody who drove it on Tuesday, Wednesday, and Thursday. I was surprised, or we were surprised, how much attention our W56 chassis, the strip chassis, got. I came in one morning on Thursday a little bit early to the show, and I found four people on our truck with tape measures and taking photos of our chassis. So there's an interest there. As you know, in the step van space, it currently is basically either a Freightliner custom chassis or a Ford chassis with an engine in it. and it goes to either Utila Master or Morgan Olson for the body, right? We're kind of a disruptor here. We're going to be able to come in and build a chassis and put a body on, or we can sell our EV chassis to somebody. If they want to put a Morgan Olson body, great. If they want to put a Utila Master body on it, that's great. We'll be able to play in all three areas there. So I would say it's a little early. I think they're reticent to give us orders until they get a demo on their hands. We have one customer who wants one for a minimum of two weeks, One wants it for a month, and one wants it for six months. And one of those customers is a large linen company that wants its special truck in the back, and we'll see. And I'd say we had multiple meetings in California with either linen companies or bakery companies, which are very interested in W56. And those are big target rich environments. One California linen company said they have over 1,000 trucks And they are in a mandate now to convert at least 9%. That's 90 trucks alone in one year in 2024. So I think hopefully we'll be able to give you a more clear picture as we move through the year here in the third and fourth quarter.
spk07: Okay, that's super helpful. And then on the drone side, can you talk a little bit about kind of the production path? It seems like the customers are getting pretty close to moving forward here on the government side. What are the production rates you guys would be targeting and be able to kind of hit? What are any incremental capital needs we should expect to kind of flow through?
spk01: Yeah, we've built the assembly lines in there to build somewhere between 500 to 1,000. I'm not sure we'll build that many this year. We'll see. I think the customers are being very cautious to make sure they want to get their hands on the vehicles, the drones, and actually put them to their paces. We expect to get three or four, well, I'd say two or three more POs in the quarter, early third quarter, and they'll be like maybe dozens of birds total. Once we get that, I think we get through all their internal testing, and I think you can see some bigger orders as we head out in the year, so, but.
spk03: And I would add that the capital requirements for the production lines are pretty minimal.
spk01: Our guys actually bought standard equipment and built their own substations. They've done some modifications. We have the substations built. We have the final assembly line built. We've staffed, you know, very lightly right now to make sure we can build some there. But I think we have, like, I don't know, 15 or 20 birds on the shelf right now ready to go. So we've worked through our little pilot builds and that kind of stuff.
spk07: Yeah. Thanks for all the comment. I'll hop in the queue.
spk09: Great. Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.
spk10: Yeah, hi, thank you, and good morning, good afternoon, everybody. Rick, I was hoping for a little bit more color around, you know, the fix for the cabin chassis, and really what I'm wondering is, you know, it seems like from the start you knew there'd have to be some upgrading of the chassis. You know, I guess it was more than you thought about. Is any of that stuff where we can go back to the supplier and have some of those changes fixed before you take delivery? Or is that something where we know what we're getting now on an ongoing basis and we're just going to have to do all these fixes ourselves?
spk01: Great question, Greg. So I'd say a couple things. One, we've already talked to our friends at Green Power and their supplier. to make some permanent changes. One of the changes is on the lights. We thought we could get that done by February or March. Turns out they couldn't get their suppliers tooled up until September. So we had to go out and pivot. We had tooled up a small supplier to handle 25 or 30 that we shipped back in December and that was okay. But when you're starting to build up to 80 to 100 a month, you've got to do something different. So that's one of the gaps we had to fill, and we've worked that out both engineering-wise, supply chain-wise, and financially with Green Power. The back panels, I think, was one that I think we thought we'd sell more of the step vans, et cetera. When it came in and the customer started to say, no, no, we want more cab chassis, we had to pivot to come up with that. That's something we haven't finalized yet. We've got a nice supplier that can keep up with us at the current build rates. And we'll have to make a decision whether to keep that here or we have to put that in coming in from China. So we'll see. Okay.
spk10: And then you mentioned the customer where the 40 deliveries kind of highlight that, hey, we're getting things going. Was that a total 40 delivery order or was that actually larger order?
spk01: Currently, it's a PO for 40. It's part of, if you remember last year, we talked about a reservation over 1,000 vehicles, so that's a conversion of some of those reservations into a real purchase order. We're talking to that same customer about a more steady pace of POs on a monthly basis. On their own nickel, they've gone up and tooled up and secured build slots at custom bodybuilders for different versions of specifically a dry van, a reefer, and a flatbed, and they have some large quote activities they're working on right now with some large sleets that are in the hundreds, I'll say. So if they're a successful land net, as they like to say to us, you're the only class four pure EV truck in the market today. Okay, great. If you go to the last two shows I've been to, I see a lot of introductions. of other people's chassis, but most of them come to market in 2025 or 2026. Specifically, Isuzu and a couple other people like that, right?
spk10: Yeah. No, definitely in a good spot. And then, Bob, as I think about R&D, realizing we're still doing some things in development on the drone side, the existing portfolio rolling out the next, As, you know, I don't know, any kind of way for us to think about R&D on an ongoing basis, you know, or at least for the rest of the year?
spk03: You know, I think probably the easiest way to think about it is our run rate captures our spend. And, you know, as we move to roll out on the W56, we'll reallocate that spend. I don't see... big lumpiness in R&D spend, I think it will continue on its pace.
spk10: Okay, perfect. Thank you for the time.
spk09: Great, thanks. Thank you. Our next question has come from the line of Mike Chesky with DA Davidson. Please proceed with your questions.
spk04: Good morning, and thanks for taking my question. Just a couple of follow-up questions here first. On the TROPOS, some of your earlier questions on TROPOS, Is there a sense, do you have a cadence as to when that might ramp up to a number of deliveries that kind of shows up in a material way, your numbers? Or at some point, is there a point where you can tell us when you might get to that, you know, that full 2,000 rate?
spk01: Yeah, I'd say right now, just like other companies, we've had some supply chain delivery issues there. We got our initial kits in. I think we got 56 kits in. Unfortunately, some of those kits were incomplete. or some of the parts came in with quality issues. We put a production pause in place for like five or six weeks. We asked the guys at Tropos to go to their supplier, a company called SEVIC, and get their act together. They have committed to do that. They're making an investment. And so we think we're now starting to flow the right kind of parts here. So when we get a box out, we can build a full truck. I'd answer your question. I think it's going to take us to balance the second quarter to get that supply chain under control. Probably late third quarter, fourth quarter, we should get a run right there. But they're having some good success commercially with selling the trucks. Some of the bigger name companies, especially in education systems on the West Coast specifically. So I think there's a market there for that truck, and we're prepared to build it.
spk04: Great, thanks for that. And I wanted to also ask about some more details on the dealerships you've got signed up or are talking with at the moment. You could have mentioned they want to have inventories or demo units. You said something like 10 or a modest number for each facility that will have them available for sale. Do they also, at this point, do your dealership agreements also have kind of long-term minimum take rates? I remember the old Workhorse management team had Several dealerships signed up for, you know, thousands of units and things like that. Obviously, they weren't necessarily guaranteed commitments, but they were guidelines and there were some take rates there. Is that how your new dealership agreements are kind of structured at this point?
spk01: I'd say slightly different. When I got here, I think we had 8,032 orders from three different customers, 500 from the Pritchard Group out of Iowa, 1,000 from the UPS, and 6,000 some north of the border up in Canada. When we went back to those guys and said, hey, first of all, the old C1000 can only carry 3,000 pounds that ruled out the UPS order. When we told them that the cost was a hell of a lot more than 75 or 80,000, that ruled out the Canadian guy. And I give the Pritchard family a lot of credit for sticking with us. They helped. They gave us a lot of feedback on the C1000. They helped guide us on the W4CC and W750. And so they stuck with us, and they are the ones who gave us 1,000 reservations. To come to specific dealers, all these dealers are putting their toes in the water, too, on the EV space, right? And so they're learning what it takes to become an EV. We don't want every commercial dealer. We want a handful of dealers that we can serve with trucks so we don't get an allocation-type situation. There's some that are very, I'd say, forward in the saddle, looking at their areas. They know the incentive programs in their states. Places like New Jersey, New York, where there's great incentives for Class 456, up to $100,000 a truck. Texas, you would think of that as an EV-friendly state, but they've got a lot of ports down there, and there's a lot of money coming in from the federal government to electrify the ports. There's a need down there along the Charleston, the South Carolina, Florida borders and stuff like that where the ports are as well. The demos I talked about, We have each one of our field sales team now has at least one W4CC or W750 demo they can take around the different trade shows with dealers. There's one going on next week in California. The ones I was talking about were the W56 demos. We're going to put those in the hands of five of the biggest companies in the last mile delivery space. You know they are three-letter initials in a couple places, big leasing companies, big linen companies, big bakery companies. they're the ones who will buy thousands of trucks a year, right? I've watched it before as a board member at a previous company. They buy 5,000 trucks a year. They split it among two or three players, right? So that's where the W56 will get sold, right? That will be direct to those big guys through a dealer somehow. So that's where it's got to work out right now. But hard to sell and convince them to spend upwards of $200,000 on a truck that they've never ridden on before, right? So they want to make sure it's real. And so one of the good things we have here is we have those 280 e-gens out in the field, mostly with UPS with almost 9 million miles on it. They know we stand behind our products. Those products run pretty good. They're still out there since 2017. So we can build on that with people like UPS. So when I got here, UPS said, if you can't carry 8,000 pounds, quit talking to me. And now they're talking to us.
spk04: Got it, got it. That's great color. Maybe one last one for me, and this is on stalls and stables. So, Stan, we're going to discuss you here. You know, it appears that some FAX fleets have already gone electric or are partially electrified elsewhere in the country, and I'm curious whether you've compared notes with any of them. Are they conquest businesses for you that are clearly open to having EVs in their fleet, or do you plan to at least when you're up and running with your EVs compare and contrast your results to theirs? either privately or publicly, once that's available.
spk01: I would tell you that if Stan's working closely, we're in constant discussions with the team at FedEx on the West Coast, where they've had some success in putting some bright drop vehicles out there on the West Coast in some of their locations. They're anxious to get some of our vehicles in there as well, and we can compare and contrast. And they're different. We're learning on stables and stalls. Some trucks are just Class III trucks that we deliver certain routes, small packages to houses. Then we have some Class IV, V, and VI big step bands. We're delivering appliances, tires, lawnmowers. Those have to have a better, bigger payload. And it's interesting for me, being new to the segment, is that the UPS model and the FedEx model are totally different, same as DHL. Different size trucks. Some own their fleets. Some don't own their trucks. Some have their drivers work for them. They're unionized. Some are not. So there's a lot of different dynamics we're working through. What we want to be able to do is we want to be agnostic and say, if you want to order a brown truck, we'll build you a brown truck that can carry 8,000 pounds. You want to have a white truck with a purple and orange label or a green label on it that can carry only 2,000 or 3,000 pounds, we can do that as well. The common theme is They have all committed to meet the Paris Accords of being zero emissions by 2040. And so they have to convert these fleets. These fleets are huge, 100,000, 120,000. One bakery has 66,000 delivery trucks for their baked goods here in North America and in Europe. Other companies have tens of thousands of trucks as well. So there's going to be plenty of opportunities for us. As we said, we're ramping up this year our factory business. You know, eventually we'll get to a 5,000 run rate per shift, probably by 25, and then if we need to, we'll go to two shifts, and that'll be 10,000 trucks a year. That's a real company, right? 10,000 trucks, $150,000, $220,000 per truck, that's a big number, right? Great. Thanks so much. I appreciate the call. Thanks, Mike.
spk09: Thank you. Our next question has come from the line of Craig Irwin with Roth MKM.
spk08: Please proceed with your questions. Good morning, and thanks for taking my questions. So most of my questions actually have been pretty thoroughly answered, but I was hoping maybe we could dig in just a tiny bit on the expense side and the 10 vehicles you got out in the quarter. Can you maybe just give us color on one-time expenses as far as identifying those suppliers and engineering and integrating these new solutions into the vehicle and, you know, how that benefits you as you move to the 40 that you deliver, I guess, in the current quarter. And would you expect some of these early setup and startup expenses to have a material impact on margins?
spk03: I think overall, Craig, I don't expect them to have a material impact on margins. I think, you know, My previous comment on the R&D side kind of applies there, that we'll just move those into the building of the next vehicles. Don't think it's substantial. I think the biggest issue for what you're trying to get at is, as we talked last year, we've maintained our workforce at our plant. And so obviously with the smaller volume, we've got those, everyone's working on other stuff. And as we ramp up volume, they'll be reallocated to the direct production vehicles. So I think that's probably the biggest issue that's kind of getting at what you're trying to get to is when you look at the workforce, they'll become more fully productive as we ramp up volume.
spk01: Yeah, we made a conscious decision when we had to shut down production at Union City not to lay off our hourly workers, right? I've said it before, they didn't make a mistake, right? Why should they be punished? In a very tight labor market, we want to make sure we keep our skilled workers There's some expense that we have right now. Once we get production going on, that'll be better. We had to move locations. We opened up Wixom. We moved aerospace. We moved the headquarters. We had to upfit those offices. There's some expense there that's going to be behind us as well, right, I think. We're putting in all the test equipment in the prototype center and up in Wixom, so pretty good. So we have a pretty tight handle. Bob's got a tight control on the reins there, so keeps the purse nice and tight.
spk03: I think first quarter's pretty good. window into your expense structure.
spk08: Excellent. It's good to hear Bob's got that strong grip. So just to pivot a little bit, the W56, you guys disclosed eight of the 12 build programs are complete. I guess that's as of this call, not as of the end of the quarter. So if you could maybe clarify that. And then if you could maybe talk a little bit more about the remaining four build programs and what initial production would look like there. Are we starting with one a week? Are we starting with a couple of weeks?
spk01: What should we expect? Yeah, great question. Great question. Dave Berkey came to us, 40 years plus experience in the industry building unique vehicles. He laid out very quietly for us how many trucks he wanted to get built. Number one was just let's build it. It doesn't come together, right? So we had a team at Union City putting the parts together. I'm really proud of the engineers involved. supply chain, the manufacturing, and sometimes the suppliers are sitting right in the line as we build the trucks. We're not building them at prototype shops. We're doing it right in the factory, and we're learning a lot. So that means you have fit-up issues, torque, you can't get that bolt touched and that kind of stuff like that, wires crossing over. So we're now on the stage. The first four, I think, were basically just chassis to make sure we could build the chassis, right, what it's going to take to build chassis. Then we started getting into the full vehicle. We had one built in time for an NTA show. I think we now have three full vehicles out at test, one in thermal testing, one at brake testing, and one in durability testing. Those tests take anywhere from two weeks to 40 days, 40 work days. You start the truck without a load. In about a week, you put it in half load, and then basically towards the end of the testing, you put it in 100% load. So W56 can carry 10,000 pounds of payload. So we'll load that thing up with 10,000 pounds of payload. Water, basically, you know, and big totes. We've learned a lot already, you know. So we've learned a lot. There's a lot of software configurations that have to be done. So we're doing that. And then we go in right now. The next two big ones we do are actually slow walk manufacturing. So we actually build the whole chassis and turn it around to the dyno, and we go build the bodies to make sure we have all our work instructions, our process control charts done. And then the last three or four trucks will be the ones we're going to send out to the customer. That means we'll build those towards the end of June and July. They should be in the hands of the customer early July. And then we'll probably have a slow ramp. We'll start in August. We'll build chassis, get the chassis down the line, 14 stations across the dyno. Then we'll start coming back. I think we have 14 stations for the bodies as well. So we haven't defined the exactly daily build rate. It's probably like one a week for a while until we get all the bugs worked out, make sure all suppliers are there. and we'll just gradually ramp it up. But we know how many we want to build this year and sell in our budget, and we have expectations we'll be able to build all those trucks and chassis.
spk08: Excellent. Well, thank you very much for taking my questions. Congrats on the progress.
spk09: Thanks, Craig. Thank you. There are no further questions at this time. I would now like to hand the call back over to management for any closing remarks.
spk01: Well, I appreciate your questions and your interest in the workhorse, and we're going to go back, put our nose to the grindstone, and kick some ass in the second quarter and get ready to build and sell some trucks and drones. Thanks a lot, and have a great day.
spk09: Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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