Workhorse Group Inc (WKHS) 2023 Q2 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to Workhorse Group's Second Quarter 2023 Investor Call. As a reminder, this conference call is being recorded. It's 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, Kevin. Good morning, and welcome to all of you joining us on today's second quarter 2023 Results Call. Before we begin, I'd like to note that we've posted our results for the second quarter ended June 30, 2023, via press release. You can also find this release as well as the accompanying presentation in the Investor Relations section of our website. We'll be tracking with that presentation during the 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 Ginnan, our CFO.

The agenda for today can be found on Slide 3. Following my opening remarks, I'll hand the call over to Rick, who will give you an update on the progress we've made in our strategic and operational priorities during the second quarter. Bob will then walk us through our financial results for the quarter and cover our revised 2023 guidance. Rick will then wrap up before we take your questions. Our disclaimer can be found on Slide 4 some of the comments that we've made today are forward-looking and, therefore, are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement in our periodic filings with the SEC as well as in today's press release and in the presentation. And with that, I'll now turn the call over to Rick Dauch. Rick?

Thanks, Stan, and good morning, everyone. Thank you for taking the time to join us this morning. We're going to use this opportunity to provide an update on the progress we've made in executing our strategic and operational priorities during the second quarter and the steps we are taking to position Workhorse for long-term profitable growth. Turning to Slide 5. Our team is moving full speed ahead and is intently focused on execution, execution and execution. We have taken decisive actions to build a strong foundation over the past 2 years here at Workhorse. I am confident we've established an organization, the product road maps and business systems that position Workhorse for profitable growth and value creation for our shareholders and customers.

During the second quarter, we increased production and delivery of our W 4CC vehicles, launched production of the W750 and delivered our first W750-step-ban to an end customer. Our W5 6 program continued vehicle durability and system testing ahead of the start of regular production in Q3. We also received our first orders for the W 56, which we plan to deliver to customers in Q4. The 56 also was on full display for the first time outside of trade events at a CalStar sponsored event in Washington, D.C. and at select dealer shows on the West Coast, where it received excellent reviews.

We made solid progress expanding our dealer network, announcing new certified partnerships during the quarter with Burr, EVC Samena and Western Truck Exchange. Each of these deals was targeted and selected for their specific regional location, reputations with customers and ability to sell custom bodies on cab chassis units. In addition, we shipped 53 Troost vehicles as part of our 3-year contract with the company that were assembled in our world-class manufacturing facilities in Union City, Indiana. And we expect volumes to grow in the second half of the year as Trophos continues to build a strong order book.

On the other side of our business, we achieved a crucial milestone in our aerospace business by securing our first commercial drone purchase orders. This followed several successful demonstrations of our Horsefly, including simultaneous package delivery by multiple drones at the same time. We conducted several Horsefly and Hale demonstration flights for the U.S. government departments. We built on our success with the USDA and were awarded a new 900,000 field scanning grant in support of farmers in Mississippi. Our Staples and Sal initiative continues to serve us well, and we are well on our way to electrifying our FedEx ground fleet with 5 Class 4 EV units now deployed in Levitan, Ohio.

We have expanded our delivery route assignments and are now picking up and delivering more volume than we were 1 year ago. We are continuing to apply our lessons learned from operating these routes daily to our future product development and marketing plans. Finally, we have been making the necessary facility and system improvements ahead of future production. These include the installation of final assembly and paint processing equipment in unicity in time for the W 56 launch in Q3. Our share of the Ohio prototype shop is now in full operation, and the team there has done yeoman's work on early W750 and W-56 program build units. Having completed our production line installation, we are now ready for drone assembly in our Mason, Ohio facility. Finally, we successfully completed Phase 1 implementation of our new ERP system without issues, and when we went live in early July. Again, the foundations for a high-tech manufacturing company are now in place after 2 years of hard work and the capital investments in production and test equipment, hardware and software systems.

Moving to Slide 6. I want to provide some additional details on the important progress we're making on our commercial vehicle product road maps. We are launching 3 new vehicles in less than 12 months, easier said than done. We received firm orders for 62 vehicles across the portfolio and delivered 42 Class IV vehicles, W4CCandW750s to customers during the second quarter. Starting with the W4CC. We have stabilized production, both at UnionCity and across our supply base, including Green Power. We have also secured body build slots for Q3 and Q4 to provide complete ready-to-use vehicles to our customers. We are now able to build and ship more than 300 W4 CC units in 2023.

Moving on to the WMP step band. We have started production at Union City. I will say candidly that it was a tough and challenging launch for our team, and we took away several lessons learned, which I will touch on shortly. The key point is that we now have 5W750 vehicles in the field, one with a customer and another 4 at stable installs and another 5 going through final prep ahead of shipments to customers in Q3. We also had the opportunity to showcase the versatility of the W750 during a full day infield demo with the city of Los Angeles. We have received supportive responses from our test drivers and are actively quoting several small fleet opportunities. We now have the capacity to build and ship about 50 W750 units in 2023.

The W56, which is the first new workhorse fully designed and purpose-built chassis platform remains on track to start production in September of this year. Importantly, we have already sold our first 2 vehicles to our dealer network even before we've begun initial production. We expect to have production quality demo units delivered to major fleets at early Q4. As I mentioned earlier, we are also showcased our W 56 vehicle, the only Class 5 or 6 vehicle permitted to attend at the driving future in electric vehicle event on June 7 in Washington, D.C. This EV showcase and the interactive event allowed the members of Congress to learn more about the market readiness and advanced technology now ready and available to accelerate the transition to commercial EVs.

I want to touch on the launch experiences we have worked through the last couple of quarters. Since their reminders of why creating a new vehicle OEM is easy on PowerPoint slide, but executing the real world is simply hard, grinding, tough work. We have some incredibly talented team of experienced automotive professionals across several functions. As the team may have worked to ensure that engineering change management discipline and documentation is complete and accurate. They are put in countless hours to ensure multiple software programs, both ours and our suppliers are compatible and fail safe, absolutely critical in electric vehicles. The final bill of materials must be frozen as early as possible and supplier selection and sourcing must be completed on time to ensure part readiness for both pilot and full production builds.

Our team gets these tasks. If the engineers get behind or do not properly document design changes, it throws the supply chain and manufacturing teams for a loop. We have also experienced this as well. These ingredients are really put to the test when the first production vehicle moves down the line. We learned and we grew a lot as a team and successfully got the W750 in production while launching a new ERP system, but it was a tough challenging learning process. The good news is that we have developed muscle memory through the W70 loss process, and we'll be better positioned when we start W56 production next month. Not to belabor the point, but designing, testing, sourcing parts and then assembly and launching of a new vehicle is incredibly hard work for the engineering, supply chain and manufacturing teams. And it takes automotive industry experience, which we have in depth here at Workhorse to get a new vehicle launch on time and on budget.

I'm extremely grateful and proud of our team's hard work and dedication over the past 18 months and bringing that one, but 3 vehicles to market. A final thought on this subject. I personally went to the durability test track in South Bend Indiana to ride in both our W 750 and W56-sepbans while on the test. I will tell you that this is a tough and I mean really tough bone rattling, balance challenging vehicle tests. When a truck successfully completes this rigor, it is ready for service in the field for 15 to 20 years. Both our W 750 and W 56 received high praise from the third-party test vehicle drivers as best-in-class amongst the other EV vehicles going through the test cycle up in Northern Indiana.

Turning to Slide 7. As we have mentioned in the past, Workhorse is developing a certified dealer network to meet end customer needs across the United States, targeting those areas where CARB standards will take effect in 2024 to 2030. I have spoken about our need to get manufacturing license secured in several states, and we are now licensed in and/or authorized to ship to 23 states and the most important recent addition being California. We also expanded our certified dealer network, as I mentioned earlier, by adding bird truck and trailer sales, our first distribution service partner in the state of New York and the initial workhorse dealership in the Northeast. EDC Samina truck is our first certified EV dealer and body builder in Georgia. And just last week, we announced our expanded California presence, adding Western Truck Exchange as a certified Workhorse dealer.

Adding Western Truck allows us to grow our dealer network through a trusted operator in the critical Southern California end market, which has some of the most favorable government incentives in the country. The map on the slide shows what we are planning to move forward with our plan to onboard 6 to 8 new dealers in 2023. Most crucial is our expansion on the I-5 Cordero West, I-95 along the Eastern Seaboard as well as the Southeast and Southwest regions of the United States. Finally, we have strong customer interest in the W56 and look forward to getting production level quality trucks in their hands for field demonstrations and trials in Q3 and Q4. Several large last mile delivery component companies in the packaged goods, banking, industrial supply and food service industries are requesting field W 56 demonstrations. Our intent is to perform those demos and then secure firm POs for Q4 '23 and 24% to 26% by year-end.

Moving on to Slide 8. We continue to execute on our stables by Workhorse package delivery routes for FedEx Ground. Based on our field performance, we have expanded our route assignments by about 20%. We now have 5 Class IV EV units in the delivery fleet 4W750s and a W-4CC-box truck. This represents about half of our operating fleet. We are on track to add W 56 vehicles to the fleet in the fourth quarter. With these additional EVs and service, we will gain valuable insight for our white paper on small fleet EV transition. We are also continuing to review options for a second stables operations location in an incentive supported state. In summary, we are gaining tremendous real-world experience to better serve independent contractor fleets as they make the transition to EVs.

On Slide 9, our Aerospace team has been very active since the beginning of the year. As a result of the technical progress, operational capabilities and the quality of our products, we have been able to earn our first commercial drone purchase orders for our industry-leading horsey product. These purchase orders validated the nearly 5 years of developmental work and investments we have made in this product and a testament to the technical prowess of our Aerospace team. We have completed multiple flights in support of our initial USDA grants in Arkansas and Mississippi to support underserved farmers and ranchers in those areas.

Due to the success of these efforts, we have received a new $900,000 grant in Mississippi with scanning operations commencing in the third quarter of this year. Our humanitarian aid and logistics operations or Halo aircraft, which was developed in 142 days performed multiple demonstrations of U.S. military and other U.S. government entities. We have also successfully field tested the halo internationally and are working hard to secure our initial orders for the Halo aircraft this year. We are very excited about the advances we made in our Aerospace business and believe we're well positioned to capture many of the opportunities in front of us in the market and create shareholder value with this business unit. With that, I'll now turn the call over to Bob to discuss our financial results.

Thanks, Rick. Let's turn to Slide 10 to discuss our second quarter financial results. Our second quarter results reflect the team's focus on operational execution and financial discipline. We continue to ramp up production and delivery of our vehicles and expect that to continue throughout the rest of this year, which will drive strong results. At the same time, we are taking steps to become a more efficient organization and manage our cash burn effectively. Turning now to our results. Gross sales for the second quarter of 2023 were recorded at $6.4 million, plus an allowance of $2.4 million for potential HVIP voucher impact while CARB finalizes Workhorse's HVIP eligibility. Sales net of returns and allowances for the second quarter of 2023 were $4 million compared to 0 in the same period last year. The increase in sales was primarily due to sales volume of the W4CC vehicle in the current period.

Just a couple of comments on the Green Power HVIP voucher impact. Until Car finalizes our voucher status, we are holding an allowance on the -- and 40 of the W4ECCs we sold. We anticipate a favorable outcome but are dependent on the resolution of several factors outside of our control at the moment. Cost of sales increased to $8.4 million from $3 million in the same period last year. The increase in cost of sales was primarily due to the $4.8 million increase in costs related to the vehicle sales and a $600,000 increase in employee compensation and related expenses. Selling, general and administrative expenses increased to $14 million from $13 million in the same period last year. The increase was primarily driven by a $500,000 increase in employee compensation-related expenses, including noncash stock-based compensation expense, $400,000 increase in professional services and a $500,000 increase in other operational expenses. The increase was partially offset by a $600,000 decrease in legal expenses.

Research and development expenses stayed consistent during the 3 months ended June 30, 2023, in 2022 at $5.1 million and $5 million, respectively. Net interest income was $500,000 compared to $100,000 of interest expense in the same period last year. Net interest income in the current year period was driven by interest earned on cash on the company's money market investment account. Net loss for the quarter ended June 30, 2023, was $23 million compared to a net loss of $21.2 million in the same quarter last year. Loss from operations for the second quarter was $23.5 million compared to $21.1 million in the same quarter last year. Turning to Slide 11 to discuss our balance sheet. First of all, we continue to enjoy being debt free. As of June 30, 2023, we have approximately $62.4 million in cash and cash equivalents.

While our cash burn rate was significant during the quarter, we expect it to decrease overall throughout the rest of 2023 despite increased working capital requirements and R&D activities. The bulk of the cash flow has been used for working capital, both for the Green Power chassis, but also the required materials to ensure a smooth launch with the W-56next month. As you can see, we had inventory increased by $25.8 million year-over-year. Additionally, through the first half of this year, we have spent $11.4 million on CapEx to install the necessary production and testing equipment, quality control systems and tooling at our manufacturing sites and select suppliers. To fund these cash needs, we have our at the market program in place. During the second quarter, we issued 24.3 million shares under the ATM program for net proceeds of $21.7 million, leaving up to $121.8 million available through the issuance of shares of common stock under the ATM program.

Along with advancing our product road map, we are taking steps to ensure we have the financial resources to achieve our goals. From a position of strength, we are evaluating a range of options to determine the best path forward to fund our next phase of production and growth. As part of these efforts, we are contemplating transactions involving common stock or the issuance of equity-linked securities, including convertible debt. These options will only be available to us if we have the flexibility to issue more shares of our stock. We are asking stockholders to help us build a financial bridge to continued growth and long-term stockholder value by voting for a proposal to increase the number of authorized shares of Workhorse common stock at the company's upcoming special meeting. Our plans are very straightforward to use any capital raise to fund the operations of the company, specifically working capital, operating expenses and as required capital expenditures. On July 25, we filed a definitive proxy statement, which outlines additional details regarding the proposal and special meetings.

Turning to Slide 12. We are revising our 2023 guidance, now expecting to generate between $65 million and $85 million in revenue this year. One driver of this recalibration has been the lack of availability of a bit vouchers in California for the Green Power chassis vehicles. We expect this administrative issue will be resolved quickly, but it has negatively impacted our sales to date. A second driver of the revenue guidance is the W 56 certification lag of about 45 days. When we first established our product road map plan 2 years ago, we anticipated the W 56 would launch occur in August. We are on track to launch the Chassis in August and the step van launch at the end of September. This is a gating event as getting these production quality demos into the hands of customers is a prerequisite to purchase orders.

I also as there's an EV adoption challenges across the industry that dealers and fleets are working through, mostly around infrastructure and technician training. The new CARB mandated clean fleet regulations, which take effect in California in 2024, will likely force customers to move a bit quicker towards EV powered vehicles in the near future. We see increased sales quoting opportunities, especially from government-funded into California and other states across the country. In that vein, I also want to spend a minute on how we are thinking about the importance of vehicle volumes in Union City plant for the balance of the year. As I've said before, our fixed costs of the plant are low. In addition, our contribution margin is positive for each EV we sell. What that means in practical terms is that with quarterly vehicle volumes of about 300 trucks, we expect to generate a positive gross margin for the company. Reaching this threshold is one of our key imperatives on the near-term objectives either later this year or in early 2024. One final note, our second quarter 10-Q will be filed on Monday, August 14. And with that, I'll now turn the call back to Rick.

Thanks, Bob. No one said that making the transition from technology start-up to becoming a full-service OEM would be easy. And let me tell you that it's not. Here at Workhorse, we are taking 2 technology startups, our commercial vehicles business and our aerospace business through this challenging transition. It takes long hours, great teamwork, significant capital resources, time and patience to get the job done. After 2-plus years of incredibly tough duty, we are on the precipice of successfully getting Workhorse to the starting line in terms of being able to build and ship safe, reliable cable products to our customers. We are poised to capture demand as the combination of consumer and government regulations continue driving the transition from ICE to EV powered technology.

Let me briefly discuss our Q3 priorities, which are outlined on Slide 13. We remain laser-focused on advancing our product road maps according to plan. We continue to ramp up production of the W750, while simultaneously preparing for the start of production of the W5 6 strip chassis next month. This also means completing W56-step-dan durability testing as well as installing cabin body process equipment at Union City in Q3. We also plan to ramp Trophos production to 50 units a month in Q4 to meet accelerated demand for those vehicles. We must profitably grow our CV sales. This means completing the build-out of our sales organization for both CV as well as Aero. We must secure CARB and EP certification for the W56 and secure HF vouchers for all of our vehicles. Expanding our certified dealer network is also necessary. We will continue to showcase our innovative, high-quality electric vehicles through fleet demonstrations and test drives and get demo trucks in the hands of select fleet customers and dealers to secure Q4 '23 and 2024 orders.

In relation to our Aerospace business, our focus remains on securing additional purchase orders and receiving and earning additional government funding grants. We will continue to carry out flight testing and field demonstrations for industry partners and government officials in the coming quarters and expect to move into low-volume drone assembly in Q4. Finally, we will execute Phase 2 of our ERP system and begin to exercise the lean systems across our supply chain and manufacturing operations as we move into full production mode by year-end. Before we turn the call over to Q&A, I want to touch on Slide 14, which is -- which discuss the shareholder -- special shareholder meeting that Bob mentioned. Since I joined Workhorse as CEO in August of 2021, we have significantly transformed the business, executing a clear strategy to stabilize, fix and ultimately grow Workhorse into a viable commercial EV OEM.

We have strengthened the company's financial position. We have addressed balance sheet issues and resolve legacy legal issues. These actions provided us with the financial flexibility to invest in our turnaround efforts to date in our people, our products, our plants and our processes. As I mentioned, our focused efforts have put us on the precipice of success. We already emerged not only as a survivor, but as a leader in the transition to commercial EV-powered systems, both on the ground and in the air. That said, as we look ahead, we need to ensure we have the necessary financial resources and flexibility to complete our transition.

As Bob said, we are evaluating a range of options to fund our next phase of production and profitable growth. I want to be clear about what this means and why we are looking for the authority to issue additional equity. Simply put, we will use the additional equity to obtain new financing that we will use to fund our business period in the story. We have been very strategic in how we have cleaned up our balance sheet and finance our efforts to date. The financing options that we are looking at require us to issue more shares. We are looking to issue a reasonable amount of shares, and our goal in all of this is to protect our shareholders and build a bridge of long-term growth and shareholder value creation.

In order for us to successfully continue on our journey, we need our shareholders to vote for the proposal to increase the number of authorized shares of Workhorse common stock. We have launched a website, www.votewkhs.com, which provides additional information for shareholders regarding the special meeting and how to vote. In closing, being a pioneer in the commercial EV space is no easy task. It takes hard work, courage and some luck to be successful. I'm incredibly proud of the progress we are making here at Workhorse, I'm incredibly proud of our team doing all the hard work, and I have the utmost confidence in our path forward to deliver growth, profitability and stockholder value. That concludes our prepared remarks. Thank you again for your time this morning and your support. We're now ready to open the call for your questions. Kevin, please provide the appropriate instructions.

(Operator Instructions) Our first question is coming from Colin Rusch from Oppenheimer.

Can you talk a little bit about the dynamics with the customers and closing deals certainly, there's a number of elements in any given deal, including some of the local subsidies, the charging infrastructure and the vehicle availability. But can you talk a little bit about any sort of anything that's standing out as a delay here for you guys in terms of closing deals and focus taking delivery?

Sure. First and foremost, people want to get their hands on the trucks and actually operate. I'm not just looking at the PowerPoint slide. So getting the W 750 to the field is critical. We now have 3 or 4 of those out with our sales team doing product demos at dealers. W4CC, we had to go out and secure build slots put on boxes on the back of trucks. We have some of that being done right now. And W-56, while we've had a couple of prototypes out in the field, one in Washington, one in the West Coast, Washington, D.C., they weren't production quality ready, right? They still had some issues we needed to get addressed, okay? So the big fleet, the ones who really drive this segment of the market, Class 4 through 6, they basically told we're very interested in your products, get us products that are production quality off of production tooling, finished with testing, we want demos anywhere from 2 weeks to 4 weeks, and then we're prepared to place orders.

So that's number one, getting real products through testing and through production. Two, the big companies, I will say, have a pretty solid plan of what they're going to do over the next 5 to 15 years. to electrify their fleets. That includes putting the electrical substations in and connecting to the grid and getting the charging systems and then a very clear cadence of moving their fleets from ICE to EV, whether it's UPS or FedEx or DHL, we've been in discussions with all those guys. They have a clear plan, and I think that will become our biggest customers going forward, right? The smaller fleets are moving with a little bit of wariness, I'll say. They're not convinced about EV. They have range anxiety issues. They have battery liability issues, warranty issues, et cetera. They don't like the cost. They've got to work their way through the voucher systems, whether that's in California, New York and New Jersey.

So those are a little harder to convince and that's part of why we do stable is now that we run our own small fleet, we can go out and show that document to them by early next year that shows here. We took 10 trucks, Raggedy old crappy trucks, 100,000 to 450,000 miles that are always down or in repair. We talked to one of the large fleets. They have over 15% of their trucks down on any given day. That should be a target-rich environment for us. Where we're seeing stronger interest and it gets -- it's building almost, I'll say, every month is in government-funded acquisitions of government fleets, whether that's at the state level, the county level, the city level, police departments, the school systems. The money is flowing from the federal government down to the states to these entities and they have been tasked to start with electrifying their fleet, both at the federal and state level. And we've added to our sales team, an experienced government salesperson with over 18 years selling the governments, both here in North America and across the world, and we think that's going to help us as well. Does that help, Colin?

Yes, it's incredibly helpful. I appreciate all the detail. And then just looking at the testing process with the vehicles. Can you talk a little bit about where you've been surprised to the upside in terms of the performance of the vehicles and where there are some elements that may need some incremental tinkering?

Well, first couple of weeks W 56 testing, we had a few brackets break. And so I get a weekly report, sometimes a daily report of we've had a failure. So I decided after one of our programs use up of the test myself. I've been a lot of test tracks in my career. I've never been on a test track like that. I'm telling you, maybe I'm getting older, but I can barely walk to the next day because I had a brace myself, the track is so rough. It's about a 4.5-mile long loop over cobblestones, dirt roads, gravel roads, concrete, broken concrete, Belgium, rumble strips up and down, it was a hell of a test. Now I understood why we had some brackets break. We had a bracket break on one of our thermal management container systems. We had a bracket bank on our rear door. Here's what I'd tell you.

Our powertrain is performing marvelously. -- all right? We're getting the range, we think. We may even exceed some of the range targets. I get the final report next week. Our chassis system has done very well. We had to go from no load at first to partial now we're running the truck at its final stage is at 10,000 pounds fully loaded. Obviously, you learn a few things along the way once you put more load on the truck. -- not been surprising to me. In fact, I'm very happy, as I said in my comments, I saw 4 or 5 of our competitors' trucks up there. Two of them were down had been down for 2 weeks. One could retain its charging systems. So I won't comment on who they were or what they were, but I know they are. And our trucks have performed very well and we're probably 65% of the way through our testing right now. About 30 days behind schedule, first couple of weeks a little tough and then we had one intent we had to take care of. But we're on track to finish that testing as we head into September.

Next question today is coming from Chris Souther from B. Riley Securities.

Maybe just a little more color on the HVIP certification path and anticipated timing of resolution there. Can you give us a sense what kind of the holdup was there? And any sense to the mix of sales that were anticipated in California this year under that program.

Yes. Good question, Chris. Our W4CC and our W 750 are built off the green power chassis that we buy from overseas. That's called the EV Star. And the EV Star is on the carb executive orders, our W4CC and W750 are not. So we need to get our vouchers through green power, and there's some technical legal issues around the dealerships in California and we got that resolved, right? Right now, we're working with both CARB and Green Power to resolve an issue out there with the assets -- those 2 entities.

And we're kind of caught in the middle -- we think it's an administrative issue, and we are working hard to get that resolved. We hope to get that resolved here in August, if not early September. It's critical to our success. It costs us probably a few dozen orders and shipments in the second quarter. So we need to get that done. Obviously, the fleet mandate kicks in, in January, and we're starting to see RFQs across up Northern and Southern California, everywhere in California for electric vehicles. We got to get this done. And we're working 2 paths. One, we get our vouchers as we are supposed to from green power or we get our own allotment on executive order from CARB. Bob, anything else and we could cover on that. So...

No, that covers it.

Okay. That's helpful. And then maybe just overall on the customer side, can you walk through like where the visibility to stand on the full year guidance? And then maybe just additional color around it sounds like large fleets are moving faster than smaller fleets, which makes sense. But you called out kind of government kind of owned fleet is an area that you're particularly excited about. Just any sense as to kind of what you think the mix is there between public and private fleet for this year?

I'll go and start on the outlook in general, Chris, it's really kind of predicated on 2 things. One is on the W 4Cs getting build slots and making sure that those can be upfit and delivered to end customers is the driver there. And we see some opportunities and progress on that. And then, of course, the big one is the launch of the W56 and being able to get those step bands out first in demos to the bigger fleets and then to end customers. And those are the drivers of what we see in the fourth quarter for the sales side. In terms of the breakdown in fleets, we've started our focus with dealers first now moving to fleets and then just now adding in a government focus as we've seen those opportunities. So right now, I think it's probably for the rest of this year, more weighted to the dealer side, but hopefully, we'll start to make some movements on the fleet and the government side here quickly because those concern vehicles very fast.

Yes. I think we originally started down this path. We weren't -- we were kind of novices, I'll say, about the upfitting and custom body building segment and how long that takes and how sold out some of those guys were. We purposely pivoted in the second quarter to identify those dealers who have either in-house or affiliated custom body builders in their region. And so you see us moving away from more Class 6-8 type dealerships over to these work type truck dealerships. We have the Pritchard family who've been very supportive of us since the day I got here, and I appreciate that very much. They've done Yoma's work helping us identify that and build a secure build slots. Also the only thing I'd say is there are some dealers who are a little bit gun shy, right?

There's a concern about how fast the transition to EV vehicles will actually happen in the industry. I think the clean fleet mandate that California car passed earlier this year is really going to change the game for us from a supply and demand standpoint out in California and then it moves up the I5 quarter north. And I think there's also read the industry, there's been a lot of EVs that haven't made it. And so there's a concern about viability of the EV companies, right? And are you going to be here to service your truck and warrant you're talking continued production. It's one of the reasons we're going out for the share issuance, so we can make sure we can tell the customers we have a clear path forward to financial viability. And as Bob said, we've built this company from a cost structure that doesn't take a lot of trucks across our fixed assets to get the gross positive margins, gross margin positive. So right we've got some work to do to get full positive free cash flow as we have an overhead cost structure here, but we'll address that over the next 18 months.

Your next question is coming from Jeff Osborne from TD Cowen.

Just a couple of questions on my end. I think you folks mentioned 300 units to get the gross margin positive and hoping to get there in Q1. Can you talk about what the volumes would be needed to get to cash flow breakeven?

Well, Jeff, we're kind of starting with gross margin here. We think with our cost structure and the contribution margin, that's why we're confident in this $300 million number as we move forward. Obviously, it is depending on we have multiple vehicles just depending on mix and all those things. But assuming a normal average mix, that's what we anticipate. A little bit further out to get to total. As Rick said, we have an operating expense cost structure to cover. So we really haven't gone out that far, and we're ready to talk about that just yet. But the first step has always been positive gross margin. The first half was actually a positive contribution margin. We're there. So now the next step is positive gross margin, and then we'll keep going in terms of what we talk about.

Yes. We've done some math at this Jeff. We're going to -- we'll talk to you about that later this year or next year.

Okay. Look forward to that. Just 2 other quick ones. I'm not looking for you to endorse consensus for '24, but I think Wall Street has you around $200 million or give or take, what level of sales do you anticipate from California? Is that sort of half the mix? I just would have thought with the IRA bill and having a nationwide credit the HFT program wouldn't have been as impactful as it was to the revised guidance for '23. So I'm just trying to get a sense of perspective as you look out over the next 12 to 18 months, do you anticipate California being half the mix or bigger or smaller?

I think the key there, Jeff, is the incentives are only part of the story. I think if you look at the 3 legs of this, you got incentives, you got adoption and then you got what's driving urgency. And while they exist, in fact, incentives in New York, for example, or greater, California is driving the urgency by some of the new rules that really take effect in 2024. So the urgency is much greater there. Therefore, we think that's where the preponderance of the opportunities exist. In terms of percentage, we haven't really calculated it, but it's significant.

Yes, I think that the Clean Fleet rule says that 9% of your new vehicle purchase needs to be electric, whether you're Ryder, Penske, FedEx, UPH,UPS, DHL, Cintas, PepsiCo, all those fleets in California, you're going to see a 9% penetration next year of electric vehicles and ramps up after that. So I do expect California to carry the bulk of the early EV adoption, but we're seeing some pretty aggressive programs in and around the New York City area, down in Florida with some of the state governments and across the school systems. One of the things we learned from Tropo they've had good success at some of the school systems out West, University of Arizona school system, University of California school system where the schools are adopting the electric vehicles. So we're following right behind their footprint there to bring our trucks into the market.

Got it. And just one last follow-up on Chris Souther’s question. On the HPI program, does the revised guidance essentially a mandate that you resolved that in August? Or what's the risk that if we don't see a resolution this month?

Yes, I'd say I'd say it's on the sooner we can resolve with the better. We have one customer out there one dealer who's told us based on the inquiries he has, he thinks he can sell 15 to 20 trucks a month. Right now, we only have in 10. He hasn't made the second order yet, is waiting for to get the HFT vouchers. We just signed up a Western truck. There's a lot of demand in the L.A. County area for sure. So it's pretty critical for us. I'd say that's something that will be on our radar screen, and that's something we won't wait for quarterly earnings once we get that resolved. That will be something we get out there. So...

But if you don't, then you hit the high end -- or sorry, the low end of guidance. And if you do, you could hit the high end, I'm just trying to understand the $20 million range.

I'd say there's some -- if we don't get out to there's some risk to us in the low end of the guidance. If we get it, then I think we may have a better shot at the top end of the guidance, how is that -- so it's probably the #1 on my whiteboard in my office, number one is get CARB executive order and vouchers. And we have 3 or 4 people, including a couple of people in the outside and helping us do that. So as you know, when you work through government organizations, sometimes things move a little slower than you'd like in the business world. How's that being nice.

Understand, Rick. Good luck in Sacramento.

Yes. On the way there in a few weeks here, so for sure. So...

Next question is coming from Greg Lewis from BTIG.

Bob, I was hoping to get a little more color on -- I don't know how granular we want to be. But as we think about this year guidance and we think about the buckets, let's call it, your vehicles, tropo, staples, installs and drones. Is there any kind of way to think about the revenue contributions? Maybe if you could just think about how you're thinking about vehicles versus other or however you want to think about that. So just trying to get a better sense for where are those drivers of the revenue in the high end and the low end they're going to be.

Sure. So let's start at the kind of bottom and work up here. On the tropo side, it's been a challenge on the supply chain, getting the kits in so we can turn them around and finish them. That's not -- once we get them, we can turn around very quickly and get them out the door. We do expect it to ramp up in the third quarter versus the fourth quarter or versus the second quarter. But not to the point where it gained changing on the revenue. Remember, one of these trucks because it's -- we're assembling them is dramatically different revenue compared to one of our trucks. So we do expect continued growth there.

But in terms of modeling out, it's not huge dollars there. Next up, the list is we've broken through on our first drone sales, but really getting those to scale. While I think it will be significant progress this year, it's not a big contributor to your revenue model. Now it gets us into the trucks. And there -- if you think about the 4 -- really 4 versions we're focused on, you've got the Class III/IV cab chassis, the step ban in the Class III I step ban in the Class 5 6 and then the strip chassis on the Class 5 6 and as we start to turn the cab chassis as build slots become available and credits, et cetera, we expect that to be a significant contributor. And then, of course, the step and the W56is to be the real linchpin. So those are the 2 keys, those 2 vehicles and then the 750 and the strip chassis will be important, but not as important as the other 2.

Yes. So Greg, if I throw some color there. I think in my remarks, we talked about we can build and ship up to 300 W4 CCs yet this year, about 50 -- up to 50 of the W750, -- that's a much more complex product, a lot more part numbers, a lot more work at our manufacturing facility. W56, we'll start rolling the chassis down the line. We got a couple of pieces of equipment due in the next 2 weeks, and we'll start running chassis this month in advance next month, assuming we get through all the final testing and certification there.

So vehicles is the bread and butter for this company. Stable installs makes a little bit of money for us and profitable money Tropos. We've gone through the growing page, as Bob said, with their kit suppliers. We actually took a pause for almost 6 weeks until they got their act together. We've got the new kits in in July. They were about 90% accurate versus about 50% accurate before. We're building those every day, basically, probably ramping from 16 to 32 to 50 a month on pace. In Aero, it's both a combination of drone sales, which is -- we're still the very cost of the early of the drones for delivery but drones for scanning, which is mostly drone the service force is a big opportunity. And we do think the halo after it gets through a few more tests and a couple of tough situations, environments, I should say, we should pick up some orders that we could announce later this year.

(Operator Instructions) Our next question is coming from Mike Shlisky from D.A. Davidson.

I can start off with some other news that happened today in the EV space. One of the large gain makers in the Etrustspace announced their bankruptcy. To my knowledge, Workhorse is not using that company. I guess, first, if you could just confirm that for any of your models? And then secondly, Rick, you've been an expert or have been talking about supply chain for quite some time. Can you give us a sense as to how you plan any kind of eases in the battery supply chain. It's hard to get one certified to kind of figure it out. Do you have -- just in case your current providers can't deliver, do you have a backup plan for Workhorse whenever it is time to get production ramped up here. I would appreciate in color there. Thank you.

Yes. We don't have any exposure to Proterra from a Chapter 11 standpoint. I got that notice that I was driving on from a customer dealer event last night. And so we have no exposure there. Supply chain, we have written guarantee of our battery supplies for this year and next year from our current supplier. We're confident they're the largest battery manufacturer in the world today, I think. And we have taken a look at other sources, some in North America that are coming along in line in '24, '25, and we have other ones and our current suppliers talking about building his own factory here in North America. So we have a -- our supply chain team has a very detailed outlook of where we can get batteries for it and what price per kilowatt hour and the one we have right now is the best we can do. We think we're competitive on battery costs versus some of our peers, our competitors, and we have looking at different options out in the future. So.

That's great. I appreciate that color. I also want to get some feel for the change in guidance and some of the brief delay you've got and kind of the rollout here on W5 6. I guess it's a 2-part question. First, do we just push call it, the difference in the midpoint, call it, $5 million sold revenue into the first quarter of next year? And does that shift anything in the first quarter into the second quarter of next year? And then more broadly speaking, Rick, you've been in this space for quite some time. And can you share with us, do you think that the issue with some of the fleets is beyond just getting the charging infrastructure, but also I'm just hesitant to invest when e-commerce is in a tougher spot right now. I'm just curious as sort of the broader CapEx thoughts on what you're hearing from peas nowadays.

I'll let Bob talk about guidance, but let me -- I'll peel the onion backwards. I do think there's some here's my experience from the Heavy truck industry when I was at the back of your ride. Heavy truck experiences recession first. They start seeing the volumes go down in freight movements at least up ordering trucks, they stop ordering trailers. I do see, and I've talked to some of my friends in the industry that there's starting to be some caution on the fleet operators of how much capital they're going to outlay going forward. You saw the big notice last week, Yellow Freight went down, Chapter 11, 30,000 jobs lost, right? That will ripple across the industry. There's concerns up in Detroit about the UAW putting a very tough demands on the big 3 and how that's going to ripple across the automotive industry and the supply chain, right? Talking about taking the industry back 20 years when GM and Chrysler went bankrupt.

So I guess they want to bankrupt again, I don't know. I got to be careful what I say, I guess. But at the end of the day, it's an interesting time. I think I've talked to multiple dealers. I've talked to multiple fleets. They've had multiple EV companies come pitch them and then that EV company doesn't deliver on their promises, whether that's whoever, how many trucks are going to build, how many plants they're going to build and now they have nothing to show for , right? We're one of the few EV companies that has a world-class factory. We're one of the few EV companies in the commercial space that has products running down the production line, not at the volumes we want or not the sales.

We got to button down the end the dealer network and get the trucks in the hands of the people, then I think it will start going, okay? Everybody believes the EV world is going to turn overnight. We said from the day I got here, this is a multi-decade transition to EVs. We're building the foundations. We're going very slow, very methodical, probably slower than our investors want, slow than we want some days, but we are building a rock-solid company that's going to be here to stand the test of time. So... Do you want to talk about guidance?

Yes, I'll talk a little bit about that. So Mike, basically, when we look at this, we look at our reduction as somewhat internal, somewhat external, whether it's vouchers or the delay, the roughly 45 delay in the W56 internal. And then you've got infrastructure and adoption that we also talked about as well. But all those things combined all suggest timing versus demand. We don't look at this as a demand change. We look at this as a timing to get those things worked out and flowing through the process correctly. So to kind of simplify that down to your question, we look at far more as a push than a reduction.

As a... Ex-military guy, we know what our objective is the battle feels a little tougher than we thought. We're learning lessons as we move across into the zone there, right? So we had logistics issues, we had import issues. We had quality delivery issues. We had tooling issues. We had engineering test issues. We're working through them one at a time, fighting the battle, fighting the battle moving the ball down the field, eventually, we'll get the end zone, okay? So 0 sales last year, $6 million this year. We took a reserve because of the CARB issue, now we'll go resolve the CARB issue. We get that resolved, we get W-56, then we've got -- we have products that I can put our name on behind it, safe, reliable, capable trucks that do the job.

When I got here 2 years ago, our friends at one of the customers said, your truck you have is not anywhere close to being viable for us. It can't carry our payload and it won't last more than 2 years. That same customer has discussed with us about buying trucks that have a life of 15 to 20 years and carry 10,000 pounds. -- and we're really proud of that. I was out in our prototype center this morning, I think there's 14 or 12 vehicles up there, W4CCs, W750s, W5 6, old E-GENs being retrofitted in the couple of the old C1000 we're still taking some of the lessons learned out there. Software engineers are out there, wiring guys are out there. It's like a business of activity out there. So...

Next question is coming from Craig Irwin from ROTH MKM.

So most of the things I wanted to ask have already been addressed. But Rick, I was hoping you could give us a little bit more color administration calendar. This is obviously something that's going to play an important role as far as how the second half comes together and then the '24. How scheduled are you at the moment for demonstrations on your different vehicle platforms? Do you feel that there's an opportunity for fleets raising their hand now to come in and get the appropriate amount of time on vehicles? And do you maybe need to grow the demonstration fleet over the next couple of quarters?

Great question. We've had that debate and our biweekly program reviews. We started with like maybe 3 or 5 program vehicles. I think we're now up to 8 to 12. That comes down to part availability in terms of launching I think we're selling right now between 8 to 12. I've got -- we had a program review next week, I think, to button that down. I do think we'll have to add a few more to our build schedule, okay? We have one customer who wants 2 trucks. He wants a strip chassis with somebody else's body on that he currently uses in the field, then he wants our strip chassis with our van configured to his demands, which is different than what we build today. So we got a lot of moving pieces there. We're talking about the big guys, right? We're talking about UPS, their truck is slightly different than a FedEx truck.

FedEx fleet is very diverse between the FedEx Ground and the FedEx Express vehicles. Some are on, some are owned by contractors. DHL has a different demand. We're working with one of the large retail companies right now in order for 100, 300 trucks. They're trying to decide between a W750 for a W4CC with a different backing on the back. You have both those vehicles going to that customer for about a 2-week trial August 14. So we're basically managing customer by customer. One customer wants a 6-month trial before it pops down a bunch of investments, right?

So that's kind of where we shifted to. I'm very confident in the plan I like with the lessons we learned on the W4CC, much -- a little more difficult than we expected when we got the green power vehicles. W750 was, I'll say, some self-inflicted wounds on some late design changes. I think we dealt with almost 200 design changes from our first pilot bill to our first production build. That's a hell of a lot of engineering work, a hell of a lot of supply chain work that people really can't appreciate unless you're actually in the mix, right? And now the W56. So I'm confident by first quarter, we're running in production, and now it's our job for sales team to go block up the vouchers and go get the dealers lined up and sell some trucks. That's kind of where we are here at Workhorse.

Great. Well, congrats on the progress there.

We reach the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

I just want to say thanks again for your interest in Workhorse. For those shareholders listening, we do need your vote for the shareholder proposal. You can trust us to use those shares wisely and as effectively as possible. Our goal here is to create a company you'll be proud of and that can create shareholder value going forward over the next few years. Thanks for your interest, and we'll see you on the road somewhere. Thank you.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.