Workhorse Group Inc. Q1 2023 Earnings Call
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Ladies and gentlemen, greetings and welcome to the Workhorse Group's first quarter 2023 semester 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.
Welcome to all of you joining us on today's first quarter 2023 results call.
Before I begin, I'd like to note that we've posted our results for the first quarter, ending March 31, 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 in the press release or through the website directly. And with that, let's get started.
Joining me on today's call are Rick Dauch, our CEO , and Bob Gannan, our CFO .
The agenda for today's call can be found on slide 3. 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 4. 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 10Q 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 Dalk. Rick? 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 to 6 commercial electric vehicle business.
through Dwork 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, and power generation.
Vehicle and Component Engineering R&D, Supplier Tooling, Factory Conversion, or
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 band segment.
We are not a SPAC funded startup company.
We are not doing EV retrofits of internal combustion engine vehicles. We are a company of the rich and long heritage in the EV step-down 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 4 to 6 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 deals 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 EVOEM.
I'd like to tell our team here at Workforce 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 forecasts, 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 of by 2024 2045 excuse me
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 power vehicles starting in 2024.
And we will have the types of vehicles they need across the Class 4 to 6 segment.
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 4 to 8 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 for 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 pilot builds of the W750 step band.
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 with 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 wrap up shipments of these unique vehicles in the coming months.
We also make significant strides in our aerospace business and saw continued strong interests in both our horse fly 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 stalls package delivery routes for 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 stable install site in either incentive-based state and or possibly at a federal government-owned location. Additionally, we complete a facility improvements that are 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 a W56 launching Q3
Turn 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.
Type primarily tooling and production ramp up of a handful of parts.
specifically related to light bezels, cab heaters, back panel covers and liners.
As we resolve these specific parts issues, we were only able to deliver 10 trucks during the first quarter.
As a result of these specific parts issues, we were only able to deliver 10 trucks during the first quarter. However...
We expeditiously resolve 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 supply ratios now behind us, we remain on track to meet our full year 2023 W4CC delivery targets for the year.
As mentioned earlier, the initial W-70 pilot bills 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 Q323.
Importantly, this quarter we successfully unveiled the new step-van vehicle at the NTA Ford 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.
This is our longer-term project.
We plan to combine our previous Class 3 and Class 4 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 WNX 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 US. As you can see on the slide, we have already identified and begun or have completed the onboarding of dealers in a light blue shade of 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 manufacturer licenses required to sell vehicles in our targeted states. I want you to access byAy
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 11th 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 location. For more information, visit www.fema.gov
The Staples Installers Initiative is expected to rise 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, 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 US military, multiple branches.
As a reminder, our Horst Light Platform is an all-electric, multi-purpose, uncrewed aerial system designed to tackle a variety of commercial applications.
He 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 instead of navigational capabilities as the horse fly, but has a longer, a lower gross weight so it can carry more payload across a longer distance. For more information like this, visit www.ontario.ca
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 US government and are close to landing additional orders for this tough duty drone.
Our team has another large demo with the US government agencies next week, and we hope to build on our success with the US Air Force.
We completed scanning land in Arkansas and Mississippi with the U.S. Department of Agricultural 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. 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 ARL 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.
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 of 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 and impacted our throughput in sales in Q1.
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.
The 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 expenses.
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 R&D.
expenses as the company increased head count 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.
That 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 nodes due 2024. The entire outstanding aggregate principle of these nodes 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 that 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 offering.
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 even more efficient organization.
We are confident that 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.
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 roadmap.
and keep 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 fans 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 8-10 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 U.S. Air Force and will 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 systems 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 re-emphasize 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. We have a 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 the
We are encouraged by the progress we are making, the solid foundations 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.
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.
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 2. 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.
Thanks so much guys. 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?
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 trucks. There were a couple parts that required us to go out and tool up some suppliers.
I think we told you 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.
So 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 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 systems so far so good. We've done a lot of testing of the truck up at Union City. We don't see any issues.
Okay, perfect. And then with the drone, you know, just trying to get a sense of, you know, how close you guys are to like material revenue for the company. How should we be thinking about that revenue opportunity for you guys?
Perfect and then with the drone, you know, I'm just trying to get a sense of you know How close you guys are to like material revenue for the company? How should we be thinking about that that revenue opportunity for you guys? particularly on the agriculture side.
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, you know.
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. Yeah, I'll add some color too. I think the commercial part, the last mile delivery of packages is we gotta get through with the FAA and we gotta make sure that UPS and FedEx and others really wanna use these drones. We bounce back and forth from taking them off the trucks to doing it from ground stations and warehouses. We have some more demos we're gonna 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 our traction with the USDA, which also owns the Forest Department, or natural resources. So there's opportunity that there's a lot of land that needs to be scanned. The way they're doing things right now is with horses and...
wheelers, right? 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.
Hopefully we'll get that ramped up faster. Okay, perfect. Thanks guys.
get that ramped up faster. Okay, perfect. Thanks guys. Thanks Colin.
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 to 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. 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 LA, 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 LA right now. And they're going to expand that program to multiple cities across the United States, including New York, Houston, Atlanta, etc., and Florida. So, some people were 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 7 in the United States at multiple locations.
He needs an education on, you know, fast charging, slow charging, how often you charge them, what's the route availability, how 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. But it costs to repair them, fuel them, staff them.
And we're gonna soon have that same data for the EVs when we electrify the stables installed. So 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. And 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 gonna 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 SDG, 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. Got it. And then there's 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? N
Now the majority of that's going to be the revenue from the stables and stalls package delivery. A little bit of it tropos but most of it stables and stalls.
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? Absolutely not, this is part of the point, this is thephy again in a foreshadowed way.
That's a little bit early, go ahead Bob. Yeah, no I think at a truck contribution level they are positive, but positive gross margin will be a factor of volume as we start to cover the fixed cost. So that, no, that will not be the case in Q2.
Yeah, this company has a history of designing some pretty unique trucks.
and selling them for about half of what they put into them. 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, gotta have a path forward of profitability. Just designing, building, selling cool trucks puts you out of business long term.
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 to think about in the spring of 2024? We really haven't put together any guidance on that, but I will say that overall, the
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.
I think one thing, Jeff, we talked about in a couple of calls is that we're early, still in the very early innings of this ICE to EV transition. There's still some pricey 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 demand is going to be a little bit higher.
Based on the California mandates alone of 9% of the fleets Have to do when they buy trucks next year 9% of the buys that be it had to be EV That's one out of every ten almost right so sat with one big deal last week and said hey In order for me to sell these big ice trucks. I got to sell some EV trucks now to that. That's real bite
in the regulatory laws out there in the clean fleet, advanced clean fleet. Absolutely, that's all I have. Thank you. Appreciate it.
laws out there in the clean fleet, advanced clean fleet. So absolutely that's all I have. Thank you. Appreciate it. Right.
Thank you. Our next question has come from the line of Chris Souther with B Riley. Please proceed with your questions. Hey guys, maybe just a little bit on the sales pipeline and backlog. How does everything up at this stage, you know, you called out five to 600 chassis you're expecting to receive this year for
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 of years with companies quoting all kinds of backlog, yet they don't have a factory. So how the hell are we going to produce them?
So we are building it from the ground up. Part of our dealer agreements, as 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, tomorrow, down in the southeast region. They have a real strong interest in 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. So, got it. Okay, that's real helpful.
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 this show and I found four people on it.
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 Olsen body, great. If they want to put a utility 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.
bakery companies which are very interested in W56. And those are big target rich environments.
One California living company said they have over a thousand 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 give you a more clear picture as we move through the year here in the third and fourth quarter.
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 the rates that you guys are targeting?
you know, any incremental capital needs we should expect to kind of flow through. 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.
for the drones and actually put them to their paces. Uh, we expect to get three or four, well, I'd say two or three more PO's in the quarter, early third quarter, and that'll, that'll be like maybe dozens of birds total. Uh, once we get that, I think we get through all their internal testing, I think you can see some bigger orders as we head out in the year, so. And I, and I would add that the capital requirements for the production lines are pretty minimal.
Our guys actually guys bought standard equipment built their own substations
They've done some modifications. We have the substations built, we have the final assembly line built. We've staffed 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.
Thanks for all the color. I'll hop into the queue.
Thanks for all the color. I'll hop into the queue. Great.
Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions. Yeah, hi, thank you and good morning, good afternoon everybody. Rick, I was hoping for a little bit more color around the fix for the cabin chassis and really what I'm wondering is...
Yeah, it seems like from the start you knew there'd have to be some some upgrading of the chassis You know, I guess that was it was more than you thought about Is any of that stuff where we can go back to the supplier and have those 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.
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 bill up to 80 to 100 a month, you got to do something different. So we had, 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, etc. When it came in and the customer started saying no, no, we want more cab chassis, we had a 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, 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? 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, 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 fleets that are in the hundreds, I'll say, right? So if they're successful land that as they like to say to us, you're the only class for pure EV.
truck in the market today. Okay, okay great. Go to the last two shows, last two shows I've been to I see a lot of introductions of other people's chassis but most of them come to come to market in 2025 or 2026. Specifically a Zuzu and a couple other people like that, right?
Yeah, no, no, definitely in a good spot. Um, and then, and then Bob, um, you know, as, as I think about R and D, um, realizing, you know, we, we, we're still doing some things in development on the drone side, you know, 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? 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. Okay, perfect. Thank you for the time. Great, thanks. Thank you. Our next question has come from the line of Mike Shiske with DA Davidson. Please proceed with your questions.
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 could tell us when you might get to that, you know, that full 2,000 rate? Inos tutti n exercise?
Yeah, I'd say right now we just like other companies, we've had some supply chain delivery issues there. We got our initial kits and 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 we get a box out, we get to build a full truck. I'd answer your question that I think it's gonna take us to balance the second quarter to get that supply chain under control. Probably late third quarter, fourth quarter, right? 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 them. Great, thanks for that. And I want 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. Do you think you said something like 10 or…
but they were guidelines and there were some takeaways there. Is that how you deal with super agreements or kind of structure at this point?
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, you 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 a thousand 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 how, 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 in an allocation type situation. parents.
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 4, 5, 6, up to $100,000 a truck. Texas, not a, you would think of that as an EB 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. So there's a need down there along the Charleston, the South Carolina, Florida borders and stuff like that where the ports are as well. So 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 gonna 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'll be direct to those big guys through a dealer somehow. So that's where it's gotta 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 wanna 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 nine million miles on it. They know we stand behind our products. You know, 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.
upwards of $200,000 on the truck that they've never ridden on before, right? So they wanna 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 nine million miles on it. They know we stand behind our products. You know, 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.
Got it, got it. That's great color. Maybe one last one for me, and this is on dolls and stables, so Stan, we just kind of have a few here. You know, it appears that some of their fluids have already gone electric or have partially electrified elsewhere in the country, and I'm curious whether you've compared notes with any of them. Are there 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?
Got it, got it. That's great color. Maybe one last one for me, and this is on dolls and stables, so Stan, we just kind of have a few here. It appears that some fanics fleets have already gone electric or have partially electrified elsewhere in the country, and I'm curious whether you've compared notes with any of them. Are there conquest instances 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?
Stan's working closely. We're 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 and some other locations. They're anxious to get some of our vehicles in there as well that we can compare and contrast.
And they're different. We're learning on stables and stalls. Some trucks are just class three trucks that we deliver, certain routes, small packages to houses. Then we have some class four, five and six big step bands. We're delivering appliances, tires, lawn mowers.
Those have to have a better, bigger payload, you know, 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 sized trucks, some own their fleets, some don't own their trucks, some own them, 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 your brown truck that can carry 8,000 pounds. If you want to have a white truck with a purple-orange label or a green label on it, it 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 Europe . You know, other companies have tens of thousands or 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. 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.
So, great. And thanks so much. I appreciate the color. Thanks Mike. Thank you. Our next question has come from the line of Craig Irwin with Roth MKM. 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 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 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? The last time I talk about a abstract thrift TillmanServTON, I'll tell you why.
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 in at our plant and and so obviously with 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. 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 and as we get production going on, that'll be better.
endurance of infrastructure. Excellent it's good to hear Bob's got that strong grip. So just to pivot a little bit the W56 you guys disclosed 8 of the 12 build programs are complete I guess that's as of this call not as of the end of the quarter shift 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 a week? 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, just come together, right? So we had a team at Union City putting the parts together. I'm really proud that the engineers, supply chain, the manufacturing, and sometimes the suppliers are sitting right on 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 to two hours.
weeks to 40 days, 40 work days. You start the truck without a load, then about a week you put it in the half load and then basically towards the end of the testing you put it in 100, you know 100% load. So W56 can carry 10,000 pounds of payload. So we'll load that thing up with 10,000 pounds of water basically, you know, 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 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, then we'll just gradually ramp it up. But we know how many we wanna build this year and sell in our budget, and we have expectations we'll be able to build all those trucks and chassis.
Excellent. Well, thank you very much for taking my questions. Congrats on the progress. Thanks, Craig. Thank you. If there are no further questions at this time, I would now like to hand the call back over to management for any closing remarks. Well, I appreciate your questions and your interest in the workhorse, and we're going to go back.