Workhorse Group Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, greetings, and welcome to Workhorse Group's Second Quarter 2022 Investor Call. As a reminder, this conference call 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.

Thank you, Brock. Good morning, and welcome to all of you joining us on today's second quarter 2022 results call. Before we begin, I'd like to note that we've posted our results for the second quarter ending June 30, 2022, via 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 second quarter Form 10-Q this morning. We will be tracking with the posted presentation during the call today, so please follow along either from the link in the press release or through our website directly. And with that, let's get started. As you can see on Slide 2, joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. We have a straightforward agenda found on Slide 3. Following my opening remarks, I'll hand it over to Rick, who will give you an update on the progress we've made on our strategic and financial priorities for the second quarter of this year. Bob will then walk us through our financial results for the quarter and cover our 2022 guidance. Then we'll take your questions. Moving to some other important items. Please note that in today's press release, we provided a note to specify what we mean when we use the term orders, which refers to a customer's contractual commitment to purchase, as well as defining what we mean by a slot reservation, which means a commitment to make a portion of our production capacity available and which is secured by a customer deposit. Our disclaimer can be found on Slide 4. As you know, some of the comments that we've 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. I'll now turn the call over to Rick Dauch. Rick?

Thanks, Stan, and good morning, everyone. Thanks for taking the time to join us today. My one-year anniversary as Workhorse's CEO was just one week ago on August 2. And what an interesting and challenging 370 days it has been. On Slide 5, we have identified some of our major accomplishments as the new leadership team here at Workhorse. Over the past year, we have addressed several issues while developing a three-year business plan to transition from a technology start-up company into a full-fledged OEM, providing best-in-class commercial EVs. An organization's collective success starts with recruiting, hiring, and retaining experienced professionals and capable staff. I identified the need to reshape the leadership team here at Workhorse shortly after I arrived. There is not one part of the organization that has not been strengthened over the past year. From reshaping my direct reports in the corporate staff to building an operations team from scratch, to adding the necessary experience, talent, and depth to our engineering and technical staffs, we have completely rebuilt the organization and more importantly, the capability and skill sets of the Workhorse team. I will not belabor the point further, but will simply say this cohesive leadership group is now full of accountable, driven, and capable individuals who are fully aligned on our critical business initiatives. And as a team, we are just getting started on our journey together. We also undertook a number of critical actions in a timely fashion to strengthen the company in the near term such as grounding and recalling the C1000s, eliminating all of our debt, and dropping the USPS lawsuit. While painful, these were absolutely the harder, right decisions to make for our company. When I got to Workhorse, we were a one-trick pony from a production portfolio perspective. The only vehicle we could offer customers was the unprofitable C1000, and we needed to ground, redesign, and repair all of those. After taking a few weeks to assess the C1000, the marketplace, and our competitors, we quickly pivoted and developed and are now fully executing on a new three-year product portfolio roadmap, and we'll be one of the only players in the last-mile EV medium truck space with a full line of Class 3 through Class 6 commercial products in production in 2024. We have upgraded Workhorse's facility infrastructure, opening and fully staffing the design and technology center in Wixom, Michigan, in less than six months as well as moving to a new headquarters, Prototype & Advanced Engineering Center here in Sharonville, Ohio just three months ago. Our manufacturing complex in Union City, Indiana has been expanded, basically doubling the available production floor space. The plant has been completely revitalized and is ready for production now. We have slimmed down our warehouse locations from three to one and co-located it on the Workhorse Ranch up in Union City. Our Aerospace business plan has been revised, product plans developed. The team expanded, and we also relocated them into a new site in Q2 as well. We are now targeting multiple market segments for revenue opportunities and developing unique drones and systems for each. We're very excited about the revenue and profitability potential of our Aerospace business. All of these initiatives are easy to talk about or show on a PowerPoint slide, but trust me, they are extremely complicated, Super Bowl-type challenging to actually execute in less than one year with a team of individuals who, for the most part, had never worked together in their career. I could not be prouder of the Workhorse team at all levels of the organization, which speaks to my earlier point about bringing together talented, selfless leaders and aligning the organization around core values and a common vision. Finally, we are gaining commercial momentum thanks to all the developments I just referenced. We have been awarded multiple federal and state government grants for aerospace. We have signed our first contract manufacturing agreement and have been able to secure a significant purchase order for our commercial vehicles. Demos of our last-mile delivery vans will be ready in Q4 for the W750 and first quarter of 2023 for the W56, both with industry-leading benchmark payload capacities. I will stop there and move to the specifics of our second quarter activities. But make no mistake, Workhorse is a fundamentally different company today than it was a year ago. We have a full medium-duty EV portfolio, both four-wheels and four blades. We have rejuvenated our facilities and infrastructure. We have no debt. And most importantly, we have a more capable, talented, and competitive staff and workforce compared to what we all knew one year ago. I expect us to continue forward and hit our stride as a team in the year to come. Moving to Slide 6. During the second quarter, we continued to make progress executing our product roadmaps and building a solid foundation based on our stabilized fixed and grow business model. As I mentioned earlier, the foundation of our company is our people. At every level of the organization, they are critical to driving our success. During the quarter, we hired additional highly experienced, next-level functional engineering and operational staff for critical positions throughout the organization. The talent that we are tracking is top-notch and it reflects the strength of what we are building here at Workhorse. We have hired a new VP of Commercial Vehicle Sales and Marketing, who will join us next month. She is an experienced and well-respected sales leader with both OEM truck and Tier 1 supplier sales experience in the commercial vehicle and transportation industries and deep knowledge of EV technology. In engineering, we have now filled five of our subject matter expert positions and have been continuing to build their teams. In commercial vehicles, we have added body engineering; Kenneth Knettle, Electrical Systems; Jason McConnell, Controls and Telematics; and Dave Reed, body and chassis. These engineers collectively bring 134 years of automotive experience on board, and we're glad to have them. In Aerospace, our new Chief Engineer, Jared Patton, brings a broad experience in systems engineering, development, and testing from both the Air Force and specialized defense contractor roles to drive our UAV product development programs forward. In operations, we now have experienced in-house leaders in place across all of the critical operating functions: manufacturing at the corporate staff and plant level and quality systems and across multifunctions in the supply chain. These groups likewise bring a wealth of essential automotive experience, especially in lean operating principles as we move to start production here in Q3. We have also added important skills in our back office and administrative functional groups, including an experienced internal auditor, a top-notch paralegal as well as important new IT and finance staff capabilities. I will say that we are about 95% complete in filling out our leadership team. Looking to the back half of the year, we will focus on rounding out our commercial, aftermarket and service teams. With our product plans on track and the Workhorse Ranch ready to produce vehicles, we can now confidently field our commercial team and allow them to go out and sell our products. Turning to Slide 7. Let me update you on our major product platforms. With the suspension redesign complete and due care FMVSS testing underway, we expect returning repaired C1000s to customers in September. Over the past nine months, we have redesigned over 26% of the parts on the C1000, and we feel we now have a safe, reliable, and capable vehicle to sell to our customers. This took us a bit longer than we expected. After completion of the final testing next week, we will move to repair and sell the remaining 161 currently manufactured vehicles sitting at Union City. We then plan to manufacture 50 to 74 additional C1000s by year-end from inventory on hand. And of course, we will provide service, repair, and parts support as we retire the model at the end of the year. Turning to the W750 and W4 CC vehicles, which, you will recall, serves a bridge for the gap between the C1000 product and the future production of W56 and W34 platforms. We have been showcasing these vehicles across the U.S., and customer feedback has been strong. Our product's ability to carry 5,000 pounds of cargo is a clear differentiator in the market. We are the only truck, I think, at the ACT show that actually was fully loaded. The program is on track. Test shipments of the base vehicles have been received at our plant recently, and we will start regular production of the W4 CC in Q3 and the W750 in Q4 of 2022. We already have 17 vehicles at Union City today and multiple shipments ordered and on their way for Q3 and Q4 production. Turning to the W56, which we introduced two quarters ago as the first new Workhorse fully designed and purpose-built chassis platform. The W56 will serve the Class 5 and 6 delivery step van and truck market segments. We continue to execute our plan for the W56 and are on track to begin production for the vehicles in Q3 of 2023. As a reminder, W56 has the shortest path to full BEV platform production, leveraging existing Workhorse designs, and over 9 million plus miles of service time on the road with the E-GEN vehicle. And will have various wheelbase options with a common part spin. We have chosen proven Tier 1 suppliers, the majority located here in North America for this vehicle, and have sourcing decisions and contract commitments already in place for about 75% of the platform build materials. An early mule was assembled in Wixom last month. We expect to have production intent vehicles ready for testing in Q4, customer demo vehicles in Q1 of '23 and be in a position to complete testing in the second quarter and start full production on time in Q3. It's a strict production cadence following automotive practices. I have mentioned that we continue to make major improvements in Workhorse's facilities. Our true gem in the company is the transformed Union City plant, which is fast becoming a world-class manufacturing complex right here in America's Heartland. You can see from the overhead pictures on Slide 8 that we have or will soon be completing major improvements to every piece of our footprint there. And just so you can see it all for yourselves, we will be hosting our promised Analyst Day at the plant on December 7, 2022. And so please save the date. In addition to seeing the revitalized facility in the manufacturing mode, we will also have product ride and drives, drone operations, and a chance to meet the extended Workhorse team. We plan to share further details at a later day. On Slide 9, we have a few images for you to help visualize what has been accomplished to date. We truly are customer-ready, and those customers that have visited have been very impressed. I met with staff members that have returned after being away from the plant for several years that cannot believe that this is the same facility. From the outside to the inside with new lighting and paint, we have methodically transformed the Union City facility to a world-class operation. The remaining open items include installing an end-of-line dynamometer in early Q1 '23, further upgrading our security and IT systems and putting our leak test and paint capabilities in place next spring and summer. With the revitalized plant facilities, process improvements and high-caliber of operating staff we added to our team, we have business opportunities appearing that Workhorse did not have in the past. I'd mentioned in the last couple of quarterly calls that we had a number of contract manufacturing opportunities we are evaluating, and we can announce our first major CM award today. On Slide 10, you can see a couple of images of products that we'll be rolling out of Union City in the fourth quarter this year. We have signed a contract manufacturing and assembly agreement with TROPOS Technologies. Beginning in Q4, we will be assembling their sub-Class 1 vehicles for distribution in the U.S. market. Together with TROPOS, we are targeting a volume capability of about 2,000 units per year once we get through the ramp-up phase and have the ability to increase that as market demand dictates. This is not the only contract manufacturing opportunity we are pursuing as we are seeing firms outside of the Class 3-6 space asking for us to evaluate our own capabilities to support their manufacturing needs. Stay tuned. While other EV companies talk about their needs to build plants, in less than one year, we have upgraded and doubled our manufacturing floor space and will be in production mode in August this year. Moving to Slide 11. I want to share a few more pictures of our facility improvements. We moved the company's Aerospace business into a new facility in Mason, Ohio in Q2. This much larger space is about 75,000 square feet, and it's about a 15-minute drive from our new headquarters in Sharonville, Ohio. It gives us the administrative, engineering, warehousing, and manufacturing space we need since we plan to start prototype drone production in Q3 2022. In fact, we are in prototype drone production. We have not talked much about the Aerospace business in our recent calls given the need for us to focus on our commercial vehicle business and associated product road maps. But I feel very comfortable where we are on the commercial vehicle side, and I'm spending more personal time at the Aerospace business. But I want to give you a bit of insight to why we find the UAS business so compelling and exciting. Moving to Slide 12, we present some market data for the most recent Teal study on UAS trends in the coming years. The top left plot shows the total estimated civil UAS production growth forecast. However, if you dig a little deeper into the key segments of the overall UAS growth, you will see that the delivery forecast looks a lot like the proverbial hockey stick in that the construction and agricultural uses of drones are also set to increase substantially at CAGR projections that I have never experienced in my business career before. It's truly exciting. We are optimistic about the overall UAS markets, including both the package delivery as well as the mapping and sensor-based segment as our interaction with current and potential customers support what the Teal study is saying about the market dynamics—that significant growth is coming and coming sooner than most realize. To meet this market trend, we have added several key leaders that have been seasoned by relevant military or airline industry experience. We have doubled the number of certified drone pilots and significantly expanded both our hardware and software engineering staffs. As we continue to invest in our drone operations, we have achieved several important product milestones shown on Slide 13. It has also been a very important year for our development efforts. As a result, we have begun manufacturing UAS mules in the plant to validate our processes, the orange birds you see in the picture. We are just beginning the process of laying out higher volume manufacturing and supply chain processes. Our new aero site provides us with lots of room to grow over the next few years. Potential aerospace customers continue to affirm that we have market-leading payload and range capabilities. We believe that our robust and patent-protected winch delivery system capable of delivering, and if need be, retracting 10-pound packages is unique in the industry. We are continuing to fly almost daily for development and testing purposes. We have made vast improvements in our drones' autonomous operational capabilities and have multiple customer demonstrations and tests planned in Q3 and in the fourth quarter of this year. We continue to fly under Part 107 certification. We've also been flying in support of the U.S. Department of Agriculture to provide monitoring, data procurement, and analytics as part of its demonstration projects and were awarded multiple grants to do so. We are currently flying in Ohio, North Dakota, and Mississippi to support multiple government programs. We're excited about our drone operations and are exploring additional projects with federal and state governments as well as large retailers and contractors. With that, I'll now turn the call over to Bob to discuss our financial results.

Thanks, Rick. Let's turn to Slide 14. Our results demonstrate the steady progress our team continues to make to strengthen our financial position and drive greater operating efficiencies, which will allow us to deliver enhanced value to our customers and shareholders. Sales, net of returns and allowances, for the second quarter of 2022 were recorded at $12,600 compared to $1.2 million in the same period last year. The decrease in net sales was primarily due to a decrease in volume of vehicle sales in connection with the previous recall of our C1000 vehicles. Cost of sales decreased $3 million from $14.8 million in the same period last year. The decrease in cost of sales was primarily due to a $6.7 million decrease in inventory write-downs and a $2 million decrease in costs due to a reduction in volume of vehicle sales. Additionally, the decrease in cost of sales was due to a reduction in costs associated with the initial production of the C Series vehicle platform. Selling, general and administrative, or SG&A, expenses increased to $13 million from $7 million in the same period last year. The increase was primarily driven by an increase of $4.8 million in employee compensation and labor-related expenses from increased headcount, noncash equity compensation, and the appointments of our new executive leadership team. R&D expenses increased to $5 million from $2.1 million in the same period last year. The increase was primarily driven by an increase of $1.3 million in employee compensation and labor-related expenses due to increased headcount. Additionally, there was a $1.1 million increase in consulting and prototype expenses related to the continued development of our Horsefly, W56, and W750 vehicle programs. Net interest expense was $100,000 compared to $10.5 million, respectively. The decrease in net interest expense is primarily due to an $8.5 million increase in the fair value of our convertible notes during the three months ended June 30, 2021, as compared to no change in fair value during the three months ended June 30, 2022. Other loss was $0 compared to $11.7 million in the same period last year. The loss in the prior period was primarily attributable to unfavorable changes in the fair value of our prior investment in Lordstown Motors Corp., which was sold entirely in Q3 of 2021. Net loss was $21.2 million compared to a net loss of $43.6 million in the same period last year. Loss from operations for the second quarter was $22.1 million compared to $22.7 million in the same period last year. Turning to Slide 15. I want to spend just a moment on the balance sheet. First, I want to emphasize that due to the exchange transaction early in Q2, we are now debt-free. This is an important milestone for Workhorse. Also, you can see the company had approximately $140.1 million in cash and cash equivalents at the end of Q2. Additionally, I want to flag that our down payments to GreenPower for the base vehicles we're receiving through them had a cash usage associated with it of $10.6 million, which shows up in the prepaid in the balance sheet. It's also worth noting that our ATM is in place. On Slide 16, we summarize the cash and debt position. I want to add that we currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio, and Michigan to be between $15 million and $25 million in 2022. This is a downward revision due to timing and more limited robot usage requirements in our plants at Union City. Slide 17 covers our 2022 guidance with our vehicle redesign effort for the C1000 being more extensive than we first thought. We lost about 60 days of supply chain response time, which also had a knock-off impact on testing. This is only a timing issue. Assuming current supply chain lead times remain unchanged, we expect to manufacture between 150 and 250 vehicles and generate between $15 million and $25 million in revenue for the rest of the year. I'll now turn the call back to Rick to wrap up.

Thanks, Bob. I want to briefly discuss our Q3 priorities. First, we need to continue building our staffing levels with a focus on enhancing our commercial, aftermarket, and service teams. We must keep executing on our product roadmaps and initiate production in Union City. Additionally, we aim to have the Michigan and Ohio tech centers fully operational with their testing capabilities by the end of the year. We plan to launch our ERP planning processes with a transition to a new fully integrated system in 2023. Lastly, and most importantly, we need to take our demo trucks, vans, cabs, chassis, and drones on the road to secure more customer orders. Before we move to Q&A, I want to highlight four key points from our call today. First, our team has built strong internal engineering, testing, supply chain, and manufacturing capabilities while modernizing our facilities, particularly in Union City, which sets a solid foundation for leadership in EV technologies. We're establishing a company with a robust foundation that is poised for success. We will continue to recruit experienced, skilled employees for critical roles and enhance our operational, supply chain, and technical capabilities through practical and classroom training. We expect to hire over 100 to 150 hourly and salaried associates in '23 and '24 for our production and testing sites. Second, our strategic product roadmap is progressing well and is on budget, with significant advancements made during the quarter, including initial production starting this month at both the CV and Aero sites. Third, we are confident in the market opportunities in our industry to deliver value to our customers, shareholders, and stakeholders. The transition to EV-powered commercial vehicles, including UASs, is underway, and we anticipate becoming leaders in this space. Finally, we have the necessary access to cash and capital resources to implement our plans. That concludes our prepared remarks. Thank you again for your time this morning. We look forward to updating you on our progress, and we are now ready to open the call for questions. Please provide the necessary instructions.

Our first question today is from Jeff Osborne of Cowen & Company.

Several questions from my end. I was wondering if we could get a crash course, Rick, on how to model both the contract manufacturing piece and the aerospace piece. I think most of Wall Street is not giving you credit for those 2 segments, and you sort of leaned into those in the prepared remarks. So it would be helpful to just go over how the puts and takes on modeling both revenue per unit as well as potential margin structure?

Yes. So Jeff, I'm going to defer that over to Bob. But let's say this: we're not going to go and do any business that we don't make money. I'll start with that as the CEO. How is that? So go ahead, Bob.

So Jeff, I’ll begin with the contract manufacturing business. As Rick mentioned, we're looking at up to a couple of thousand vehicles per year. Our contribution will mainly be labor, which will be somewhat minimal, but we do anticipate a positive margin similar to what we would typically see for contract manufacturing. It should be quite standard and straightforward. Regarding the Aero side, as Rick pointed out, we are still working on the prototype builds and finalizing costs. However, we believe this will also be a very profitable margin business. Additionally, it will include follow-on parts and services. We expect strong performance once we ramp up to full production and start receiving the necessary parts to achieve scale.

Yes. Jeff, currently we have three or four people focused on production in the Aerospace division. We are purchasing individual parts from the open market. As we project future numbers, we expect to provide more detailed information in the fourth quarter. It currently takes about 70 hours to assemble a drone, but our goal is to reduce that time significantly. We also aim to lower our material costs. Despite our current methods, the business remains very profitable.

Got it. And then just two other quick questions. Can you discuss your battery supply for 2022 and 2023 considering the inflation? Could you explain how many batteries you have for next year? More importantly, how do the prices adjust in light of the recent inflation on nickel and lithium?

We are committed to our contracts and will make some adjustments to them. We won't fully address our needs until around midyear next year. The sourced chassis we are currently receiving already come with batteries included, so we are secure there as well. Overall, I feel we're in a solid position at the moment. Of course, circumstances can change every month, but right now, I believe our timeline is favorable.

Got it. And the last question I had is just on the revised guidance to $150 million to $250 million. You mentioned supply chain and I think you mentioned 60 days of lost production. Can you just flesh that out a bit more? Was there particular semiconductors or were the chassis slower to evolve and come in than originally planned? Or was this all due to the C1000 redesign taking longer than expected? It was a bit unclear exactly why the guidance was revised lower.

Yes, it's entirely connected to the C1000. The redesign turned out to be more comprehensive than we anticipated, including frames, full front suspensions, and several issues we identified during the FMVSS testing. We had to change a large number of components, around 30 to 40 different items on the vehicle, leading to numerous parts configuration changes. First, we need to complete the redesigns and validate them on our computers. After that, we must test the parts and then procure them. This involves buying some parts from suppliers we previously informed about discontinuing the vehicle, which hasn't made them particularly pleased. Consequently, it took time to resolve those matters. We also faced some battery supply issues with our prior supplier, and we encountered delays in receiving suspensions from Asia. Those delays are certainly reasons for our slower progress. As my mother used to say, "Don't give me your excuses. Just deliver results." We will make up the production and finish it, although it may take a bit longer than we originally expected. Our plan remains to redesign, fully test, repair, and produce C1000s, even if it takes more time than anticipated. The good news is that we've had positive discussions with customers, and we believe we have a market for every C1000 we plan to build.

Got it. And the last one. The 161 that you are repairing, how do we think about the margin profile of that just given you've already written them down? It was unclear if your guidance is only really based on revenue. But I wasn't sure in particular on gross margins as Union City ramps up. But selling a repaired vehicle, I haven't seen that flow through other P&Ls in the past.

Yes. I think it's pretty much an accounting answer as we wrote the value down to net realizable value. So the way that will flow out on the P&L is that basically revenue will equal cost more or less. And so the margin will be zero on those. However, because the cash was spent last year, the cash flow will be pretty substantial on each one of those.

The next question is from Greg Lewis of BTIG.

Rick, could you elaborate on contract manufacturing and the opportunities with TROPOS? It seems those vehicles are smaller and not in direct competition with what Workhorse plans to produce in the near and distant future. Do you see potential for additional contract manufacturing opportunities with other customers? Given how quickly you've repositioned the company, is there a chance for Workhorse to carve out a niche in assembly for other EV manufacturers?

Yes, a good question. First of all, remember, I consider myself to be an operational animal. So I love being in the factories, and I like creating jobs here in America, right? So there is an opportunity here. What we inherited in terms of the Union City plant, there were good bones there, all right? Most importantly, there are good people there. And they had basically been left behind in the last decade as they changed ownership a few times. Lack of investment up there. So we've gone up and revitalized that. But again, the bones were good. We expanded, and we leased the warehouse next door. We can convert that into factory space. And we leased a storage place to put all our batteries rather than have them in two or three different places. So we have a unique situation at Union City to create a real hub for EV production. We had the land to expand. We have the building space to do things. It's an opportunity. When you look at other EV manufacturers, they talk about, 'We need to build a factory. It's going to take us 12 months or 18 months.' Or some say 6 months. We already have a factory. We already have a workforce. We have a plant that used to employ over 1,200 people. When we got here, it had less than 100. Today, we have about 80 down there right now. We have a hungry environment. We've talked to the mayor. We talked to the state level in Indiana about how we get some incentives, whether that's tax breaks or training money to put people back to work in good jobs, so they're not driving 40 or 50 miles away from the farming community of Union City to go find a good paying job. And I think that's a good thing to do. We talked to TROPOS. I met them in August of 2021 when I first joined the company. I didn't think it had any fit for us. We've continued our discussions. We met again this year at the NTA show over at Indianapolis, and those discussions continued. Our team went out and visited where they make them today out in California. And they've got real orders. And it's a truck that we want to exercise our muscles. Our people have been sitting idle basically, cleaning up the facility, rehabbing the facility. It's been a long time since we turned a torque wrench or assembled things. We want to do some of that this year, both on the C1000, which is mostly repairs and some assembly, but also the TROPOS vehicles is something we think we can build efficiently and help them out. And on top of that, we have the floor space, and other people are calling us, right? And we're in a good location in the heart belt, right, in a region of where a lot of the suppliers are for specialty vehicles, up there in the Elkhart, Indiana area over to Ohio and down into Tennessee, Kentucky, Illinois. So it's a great location for us.

Okay. Great. Great. And then just...

Yes. During dinner, we discussed TROPOS and they mentioned being in the middle of the country. I pointed out that parts can be accessed quickly. You can use the St. Lawrence Seaway, travel up through the southern ports, or navigate the Mississippi River. So we ended up giving them a geography lesson. John and I are based in California, but not everything needs to come through the ports in California, Washington, or Oregon.

And lately, it's almost better if you're not.

Absolutely.

Regarding the drone opportunity, for many who have been following it, this was initially expected to focus on last-mile delivery. You mentioned some government work, and looking at Slide 12, which showcases different segments, it appears that the immediate prospects might be outside the traditional applications we anticipated for the Horsefly. Can you provide any rough estimates on what the drone opportunity might look like over the next five years, particularly beyond just last-mile delivery? Or do you believe it's still too early to make that assessment?

It's a little early to gauge the full potential, but I'm more excited now than when I first arrived. In the initial days, we conducted a review of the Aerospace business and its site. When you pull in and can't find a parking spot due to growth, it's evident we're expanding. We can train outside up to a point, but now we have a new facility with ample parking and room to grow. I asked John what other capabilities our drone could have if it can carry a 10-pound package for 10 or 12 miles. This led us to explore aerial reconnaissance and mapping, securing multiple grants from the USDA and creating opportunities for transporting parts, like in North Dakota's oilfields and along the Ohio 33 corridor. We've also discussed transporting medical supplies between hospitals and blood banks—it's almost limitless. We had to pause and focus on our capabilities: our drone can carry 10 pounds and go 10 or 12 miles round trip, but what more can we do? While it might be premature to define the total addressable markets, we believe they are substantial. We moved into a 75,000-square-foot space, nearly three times our previous size. We plan to manufacture in larger volumes: starting with 10 to 20 this year, scaling to hundreds next year, and thousands by 2024 at competitive pricing. This is a new market with few players, and we’re actively pursuing two last-mile delivery opportunities, both related and unrelated to trucks, along with other global delivery options. We will provide more details on the drone business opportunities in the coming quarters, but it's a significant venture.

The next question is from Colin Rusch of Oppenheimer.

As you start to ramp here, can you talk about some of the key manufacturing challenges we're seeing? Certainly, any number of folks struggle with some of that initial ramp. But I'm curious what you guys are seeing given kind of your long history around strong execution in those regards?

Yes, that's a great question, Colin. There are definitely supply chain challenges, like backed-up ports and freight costs. We've factored that into our plans and are exploring bringing trucks from different Asian ports instead of just Southern California. The first models we’re working on, the W750 and W4CC, are on track. The W4CC is fairly easy to assemble and we can deliver it quickly, especially since there's strong demand. Currently, I’m not aware of another Class 4 truck that can handle 5,000 pounds, but if there is, we’ll benchmark it. The W750 is slightly more complex, and we're under tight deadlines to finalize the design and source parts to convert it into a delivery van. I firmly believe in the Toyota production system and have undergone extensive training with consultants to teach our team about lean value stream mapping, planning for every part, and working capital management. We're improving our processes and I'm hearing the right terminology being used across different teams, not just in manufacturing but also in supply chain and finance. Our approach is about teaching lean practices and enhancing our capabilities while managing supply logistics. I’m not concerned about standard equipment issues; we have an experienced workforce in Union City with skilled professionals who have previously built complex chassis for companies like General Motors and Navistar. I'm confident in their abilities.

Excellent. And you alluded to this a little bit. With the competitive environment, there's been a lot of money raised with a number of platforms and there's a limited number of folks that are actually producing vehicles at this point. As you look out at the landscape with the redesign on the platforms and in talking with customers, what can you say about the competitive positioning that you're seeing for Workhorse? And how your trajectory is looking relative to some of your peers?

Yes, that's a great question. The electric vehicle market, particularly for commercial vehicles, is quite chaotic. There will be some failures among companies, which we have discussed previously. During my first attendance at the ACT show, I mentioned that there are both legitimate and less credible companies out there. We have identified those we believe will truly compete with us. Our primary focus is on who will challenge us in the Class 3 to Class 6 last-mile delivery segment, and we feel confident about our positioning there. Although we lost some time with the issues surrounding the C1000, we have quickly adjusted our strategy and are optimistic about the W750 and the upcoming W56, which we believe will set benchmarks in the industry. We don’t need to capture a large share of the market to be a successful and profitable company. Historically, this market has been dominated by a duopoly, both in chassis and body upfitters, which limits capacity. The industry needs a player like us, and while not everyone welcomes our entry, we are prepared to compete and succeed.

The next question is from Chris Souther of B. Riley.

Maybe regarding the W56. You mentioned that 75% of the build materials are secured. What are the key components you still need to finalize for the rest of the year? Also, could you explain how vehicle pricing is evolving as we gain better insight into the supply chain? That would be helpful.

Yes. We are about 85% to 90% sourced on the essential chassis components, including the brake, suspension, and powertrain, as well as the batteries. The last items to source will be the cab, the body, and some interior elements, which have shorter lead times. I believe we are still on track with our lead time targets. We have implemented a disciplined process to monitor the timelines and deadlines to avoid falling behind schedule. Additionally, we have established budgets, which is a new approach for us at Workhorse. It’s important to design a truck that not only works but is also safe, reliable, and profitable. We are focused on instilling that discipline here. I think we're in a good position. You asked about a specific part, was it brakes or something else?

No, I was just asking what the critical components were that you addressed. Also, how do you see vehicle pricing developing as we gain better clarity on the supply chain? It seems that previously you thought there was potential for upward movement in pricing for the entire fleet, considering the competitive landscape. I'm curious about the W56; do you have any insights on pricing, or is it still too early to tell?

No, we bought a couple of the current competitor vehicles, non-EV, and we've taken them apart. We understand their costs from a frame and body perspective. We've also observed some pricing from competitors in the market, like Xos or BrightDrop. We feel confident about our pricing strategy to remain competitive while ensuring profitability. We have communicated this to our manufacturing team regarding labor and to our supply chain team regarding components. We're confident in our approach, and Bob's team is actively involved in these discussions to ensure our models are accurate. It's uncertain how government funding will impact the situation, whether through California's HVIP program or the potential passing of the Inflation Reduction Act, which could offer significant incentives for EVs, not just for passenger cars and trucks but also for commercial vehicles. We will consider these factors as well. Ultimately, we need to deliver an EV solution that enables customers to profit from their operations, whether that involves taco trucks, bread delivery, uniform delivery, grocery delivery, or package delivery. Electric vehicles make financial sense, especially with diesel prices currently at $5 to $7 a gallon in California, making total cost of ownership calculations quite favorable. We've also conducted analysis with one of our customers on drone deliveries, which shows even better cost-effectiveness for delivering packages, particularly smaller ones, in rural areas or through congested traffic.

Okay. It seems the guidance has changed, possibly due to the C1000 being delayed until early next year. I would like to understand if that's accurate compared to the expectations for W4 or W750, which seem to remain fairly consistent. Additionally, regarding the order book for customers who were waiting for the C1000s, could you share some insights on the discussions taking place? I'm particularly interested in where the conversations stand regarding the next-gen W56 compared to the W750.

Great question. Regarding the C1000, we're pushing the timeline a bit. I've advised the team that no one should expect to leave for the holidays until they are ready and prepared. I believe they feel confident about it. The key factor is getting the necessary parts. We encountered some delays, as Bob mentioned, about 60 days due to redesign and testing. Additionally, it took some time to acquire the parts, but we're wrapping up the due care testing this week. For the C1000, we believe we have a market for each unit, and we've also adjusted some pricing to account for repairs. Concerning the W4CC and W750 orders we discussed today, these represent a combination of purchase orders and build slot reservations. Almost 40% of the trucks we're bringing in with GreenPower are covered by these reservations, which we see as a positive development. Our goal now is to convert those reservations into firm orders, and our customer involved in this program is optimistic about the EV market and has significant experience in this field. They believe there is strong demand for these trucks, including some van versions and others that will simply enter the market similar to Mitsubishi or Isuzu trucks with different configurations. As for the W56 and W750, our customers are eager to see the working prototypes. While they have observed a few display vehicles of the W750, they have not yet seen the real production models. We recently completed the mule chassis build for the W56, and our first program builds will take place in October and November. By Christmas, we aim to have vehicles on the road and in front of customers. We'll be engaging with some of the largest truck dealerships in North America, those that manage extensive fleets, and they are eager to evaluate what we have to offer. Currently, there's a shortage of work truck chassis in the United States. Major OEMs are prioritizing platforms for larger Class 8 trucks and SUVs that are more profitable, which is causing challenges in the industry. Our capability to design and manufacture our own chassis will set us apart from other competitors in the last-mile delivery market.

The next question is from Mike Shlisky of D.A. Davidson.

I wanted to start off with a few follow-up questions of details on the TROPOS agreement. Can you give us a sense as to the tenure, the length of that agreement? How long will that go for? And are they building their own facility? And will this year when there's ramps up? And maybe secondly, what does TROPOS' supply chain and their order book look like? Do you feel confident that they'll have 2,000 units a year starting next year?

So the agreement is for three years. I think they will continue to look for ways to enhance their production capabilities. But they really like our facility and location as a key spot for the U.S. market. In terms of their supply chain and customer book, we've been very impressed. That's why we wanted to do this deal. We think they've got not only a good supply chain but a good supply chain strategy. And they absolutely have customer book and demand.

Yes. One of the nice things about TROPOS is they're out talking to some customers that would not be our first target from a last-mile delivery, but they're institutions or organizations who are fully committed to going green. They've already ordered some of the TROPOS vehicles, and we want to come in behind with TROPOS and say, 'Hey, let me also introduce you to a Class 5 truck or a Class 5 van.' If you're going to do your whole university campus or, in some states, your whole state university system is going to go green, you got the small trucks, whether ambulances or shuttles or whatever, but you need some trucks to go service the cafeterias and the sports facilities, et cetera. And we think that's a target-rich environment. And we think that the TROPOS' team has been out ahead of us on that for probably 12 to 18 months.

Yes. Got it. Hello? Are you there?

Yes, we're here.

Sorry. I wanted to also ask quickly about your SG&A and R&D spend. There was a slight increase, and that's been happening obviously everywhere. I just want to get a little sense of the trajectory on SG&A and R&D going forward. Should we expect to see a little bit more increases in Q3, Q4 as you make those last few hires and some more investments in the C1000 and W750? And could things tamp down a little bit next year as some of those expenses roll off?

I believe our teams are becoming quite complete. However, I want to highlight that as you plan for the third and fourth quarters, we have a new Vice President of Sales joining us, and we still need to establish a full sales function. We also plan to enhance that team with additional selling expertise. Therefore, as you evaluate your projections, you should anticipate a slight increase in the third and fourth quarters before we reach full capacity and stabilization.

Yes. As Bob said, we're 95% full. Now let's tweak it a little bit and then it kind of stabilizes. Then we got to drive the volumes up across the fixed assets. So a lot of expenses to pick up and relocate one, two teams, recruiting fees to hire the talented people out there, onboarding costs, just getting basic fundamental systems in place. But we understand where we're going.

Okay. Okay. Maybe lastly, I want to touch on charging real quick. A few companies we heard from this quarter have discussed charging as a bit of a sticking point. The customers want vehicles, but they haven't put all the effort into and all the thought into how they're going to charge them once they get them. With Workhorse, you've got like a second bite of the apple here. You're kind of starting with some brand new platforms and vehicles. You had a charging strategy in the past. I was wondering if you're making any changes to how you will help customers make sure that they're ready to take these vehicles and charge them as soon as they get them? Or is your old strategy sufficient for the time being?

Mike, that's a great question. I'm still relatively new to this industry, but I continue to hear infrastructure, infrastructure, right? Obviously, the federal government is putting money forward, whether it's through the DOT Infrastructure Bill for charging systems. The Inflation Reduction Act adds some more money for investments in EV infrastructure. The Department of Energy has put forward some grants to allow companies like ours to transform old ICE-related factories over to EV. So there's lots of opportunities there. We have a partnership that we signed up with ChargePoint. We think they're the leaders here. We've been out and checked out their hardware and their software. I'll just say stay tuned. We're working on some things we'll probably talk about later in this year.

There are no further questions at this time. I'd like to turn the call back to Rick Dauch for closing comments.

Thanks, Brock. Thanks again, everybody, for calling in and your interest in Workhorse. We have a good team. We've got solid products. We've got great facilities, and we need to go put our nose to the grindstone to work and kick some ass. Have a good day. Talk to you later. Bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.