Ladies and gentlemen, greetings, and welcome to Workhorse Group's Second Quarter 2022 Investor Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.
Thank you, Brock. Good morning, and welcome to all of you joining us on today's Second Quarter 2022 Results Call. Before we begin, I'd like to note that we've posted our results for the second quarter ending June 30th, 2022 via press release. You can also find this release as well as an accompanying presentation in the investor relations section of our website. We've also filed our second quarter Form 10-Q this morning. We'll be tracking with the posted presentation during the call today, so please follow along either from the link in the press release or through our website directly. With that, let's get started. As you can see on slide two, joining me on today's call are Rick Dauch, our CEO, and Bob Ginnan, our CFO. We have a straightforward agenda found on slide three.
Following my opening remarks, I'll hand it over to Rick, who'll give you an update on the progress we've made on our strategic and financial priorities for the second quarter of this year. Bob will then walk us through our financial results for the quarter and cover our 2022 guidance. We'll take your questions. Moving to some other important items, please note that in today's press release, we provide a note to specify what we mean when we use the term orders, which refers to a customer's contractual commitment to purchase, as well as defining what we mean by a slot reservation, which means a commitment to make a portion of our production capacity available, and which is secured by a customer deposit. Our disclaimer can be found on slide four.
As you know, some of the comments that we've made today are forward-looking and therefore are subject to certain provisions as well as risks and uncertainties. You can find the full disclaimer statement in our Form 10-Q and other periodic filings on file with the SEC, as well as in today's press release. I'll now turn the call over to Rick Dauch. Rick?
Thanks, Stan, and good morning, everyone. Thanks for taking the time to join us today. My one-year anniversary as Workhorse's CEO was just one week ago on August 2nd, and what an interesting and challenging 372 days it has been. On slide five, we have identified some of our major accomplishments as the new leadership team here at Workhorse. Over the past year, we have addressed several issues while developing a three-year business plan to transition from a technology startup company into a full-fledged OEM, providing best-in-class commercial EVs. An organization's collective success starts with recruiting, hiring, and retaining experienced professional and capable staff. I identified the need to reshape the leadership team here at Workhorse shortly after I arrived. There is not one part of the organization which has not been strengthened over the past year.
From reshaping my direct reports to the corporate staff, to building an operations team from scratch, to adding the necessary experience, talent, and depth to our engineering and technical staffs, we have completely rebuilt the organization and more importantly, the capability and skill sets of the Workhorse team. I will not belabor the point further, but will simply say this cohesive leadership group is now full of accountable, driven, and capable individuals who are fully aligned on our critical business initiatives. As a team, we are just getting started on our journey together. We also undertook a number of critical actions in a timely fashion to strengthen the company in the near term, such as grounding and recalling the C-1000s, eliminating all of our debt, and dropping the USPS lawsuit. While painful, these were absolutely the harder right decisions to make for our company.
When I got to Workhorse, we were a one-trick pony from a product perspective. The only vehicle we could offer customers was the unprofitable C-1000, and we needed to ground, redesign, and repair all of those. After taking a few weeks to assess the C-1000, the marketplace and our competitors, we quickly pivoted and developed and are now fully executing on a new three-year product portfolio roadmap and will be one of the only players in the last mile EV medium truck space with a full lineup of Class three through Class six commercial products in production in 2024. We have upgraded Workhorse's facility infrastructure, opening and fully staffing the design and technology center in Wixom, Michigan, in less than six months, as well as moving to a new headquarters, prototype, and advanced engineering center here in Sharonville, Ohio, just three months ago.
Our manufacturing complex in Union City, Indiana, has been expanded, basically doubling the available production floor space. The plant has been completely revitalized and is ready for production now. We have slimmed down our warehouse locations from three to one and co-located it on the Workhorse Ranch up in Union City. Our aerospace business plan has been revised, product plans developed, the team expanded, and we also relocated them into a new site in Q2 as well. We are now targeting multiple market segments for revenue opportunities and developing unique drones and systems for each. We're very excited about the revenue and profitability potential of our aerospace business.
All of these initiatives are easy to talk about or show on a PowerPoint slide, but trust me, they are extremely complicated, Super Bowl-type challenging to actually execute in less than one year with a team of individuals who for the most part, had never worked together in their career. I could not be prouder of the Workhorse team at all levels of the organization, which speaks to my earlier point about bringing together talented, selfless leaders and aligning the organization around core values and a common vision. Finally, we are gaining commercial momentum thanks to all the developments I just referenced. We have been awarded multiple federal and state government grants for aerospace. We have signed our first contract manufacturing agreement and have been able to secure a significant purchase order for our commercial vehicles.
Demos of our last mile delivery vans will be ready in Q4 for the W750 and in Q1, first quarter of 2023 for the W56, both with industry-leading benchmark payload capacities. I will stop there and move to the specifics of our second quarter activities. Make no mistake, Workhorse is a fundamentally different company today than it was a year ago. We have a full medium duty EV portfolio, both four-wheeled and four-bladed. We have rejuvenated our facilities and infrastructure. We have no debt, and most importantly, we have a more capable, talented, and competitive staff and workforce compared to what we all knew one year ago. I expect us to continue forward and hit our stride as a team in the year to come. Moving to slide six.
During the second quarter, we continued to make progress executing our product roadmaps and building a solid foundation based on our stabilized fix and grow business model. As I mentioned earlier, the foundation of our company is our people. At every level of the organization, they are critical to driving our success. During the quarter, we hired additional highly experienced next level functional engineering and operational staff for critical positions throughout the organization. The talent that we are tracking is top-notch, and it reflects the strength of what we are building here at Workhorse. We have hired a new VP of commercial vehicle sales and marketing who will join us next month. She is an experienced and well-respected sales leader with both OEM truck and tier one supplier sales experience in the commercial vehicle and transportation industries and deep knowledge of EV technology.
In engineering, we have now filled five of our subject matter expert positions and have been continuing to build their teams. In commercial vehicles, we have Adrian Rory, body engineering, Ken Nettle, electrical systems, Jason McConnell, controls and telematics, and Dave Reed, body and chassis. These engineers collectively bring 134 years of automotive experience on board, and we're glad to have them. In aerospace, our new Chief Engineer, Jared Patton, brings a broad experience in systems engineering, development, and testing from both the Air Force and specialized defense contractor worlds to drive our UAV product development programs forward. In operations, we now have experienced in-house leaders in place across all of the critical operating functions, manufacturing at the corporate staff and plant level, in quality systems, and across multi-functions in the supply chain.
These groups likewise bring a wealth of essential automotive experience, especially in lean operating principles, as we move to start production here in Q3. We have also added important skills in our back-office and administrative functional groups, including an experienced internal auditor, a top-notch paralegal, as well as important new IT and finance staff capabilities. I will say that we are about 95% complete in filling out our leadership team. Looking to the back half of the year, we will focus on rounding out our commercial, aftermarket, and service teams. With our product plans on track and the Workhorse ranch ready to produce vehicles, we can now confidently field our commercial team and allow them to go out and sell our products. Turning to slide seven, let me update you on our major product platforms.
With the suspension redesign complete and due care FMVSS testing underway, we expect to be returning repaired C-1000 to customers in September. Over the past nine months, we have redesigned over 26% of the parts on the C-1000, and we feel we now have a safe, reliable, and capable vehicle to sell to our customers. This took us a bit longer than we expected. After completion of the final testing next week, we will move to repair and sell the remaining 161 currently manufactured vehicles sitting at Union City. We then plan to manufacture 50-74 additional C-1000 by year-end from used inventory on hand. Of course, we will provide service and repair part support as we retire the model at the end of the year.
Turning to the W750 and W4CC vehicles, which you will recall serves a bridge for the gap between the C-1000 product and the future production of the W56 and W34 platforms. We have been showcasing these vehicles across the U.S., and customer feedback has been strong. Our product's ability to carry 5,000 lbs of cargo is a clear differentiator in the market. We are the only truck, I think, at the ACT show that actually was fully loaded. The program is on track. Test shipments of the base vehicles have been received at our plant recently, and we will start regular production of the W4CC in Q3 and the W750 in Q4 of 2022. We already have 17 vehicles at Union City today and multiple shipments ordered and on their way for Q3 and Q4 production.
Turning to the W56, which we introduced two quarters ago at the first, as the first new Workhorse fully designed and purpose-built chassis platform. The W56 will serve the Class five and six delivery step van and truck market segments. We continue to execute our plan for the W56 and are on track to begin production for the vehicles in Q3 of 2023. As a reminder, W56 has the shortest path to full BEV platform production, leveraging existing Workhorse designs and our over 9 million-plus miles of service time on the road with the E-GEN vehicle. We'll have various wheelbase options with a common parts bin.
We have chosen proven tier one suppliers, the majority located here in North America for this vehicle, and have sourcing decisions and contract commitments already in place for about 75% of the platform bill of materials. An early mule was assembled in Wixom last month. We expect to have production intent vehicles ready for testing in Q4, customer demo vehicles in Q1 of 2023, and be in a position to complete testing in the second quarter and start full production on time into Q3. It's a strict production cadence following automotive practices. I have mentioned that we continue to make major improvements in Workhorse's facilities. Our true gem in the company is the transformed Union City plant, which is fast becoming a world-class manufacturing complex right here in America's Heartland.
You can see from the overhead pictures on slide eight that we have or will soon be completing major improvements to every piece of our footprint there. Just so you can see it all for yourselves, we will be hosting our Promise Analyst Day at the plant on December seventh, 2022, so please save the date. In addition to seeing the revitalized facility in the manufacturing mode, we will also have product ride and drives, drone operations, and the chance to meet the extended Workhorse team. We plan to share further details at a later date. On slide nine, we have a few images for you to help visualize what has been accomplished to date. We truly are customer-ready, and those customers that have visited have been very impressed. I've met with staff members that have returned after being away from the plant for several years.
They cannot believe that this is the same facility. From the outside to the inside, with new lighting and paint, we have methodically transformed the Union City facility to a world-class operation. The remaining open items include installing an end-of-line dynamometer in early Q1 2023, further upgrading our security and IT systems, and putting our leak test and paint capabilities in place next spring and summer. With the revitalized plant facilities, process improvements, and high caliber operating staff we added to our team, we have business opportunities appearing that Workhorse did not have in the past. I've mentioned in the last couple of quarterly calls that we had a number of contract manufacturing opportunities we were evaluating, and we can announce our first major CM award today.
On slide 10, you can see a couple of images of products that will be rolling out of Union City in the fourth quarter this year. We have signed a contract manufacturing and assembly agreement with Tropos Technologies. Beginning in Q4, we will be assembling their sub Class one vehicles for distribution in the U.S. market. Together with Tropos, we are targeting a volume capability of about 2,000 units per year once we get through the ramp-up phase and have the ability to increase that as market demand dictates. This is not the only contract manufacturing opportunity we are pursuing, as we are seeing firms outside of the Class three-six space asking for us to evaluate our own capabilities to support their manufacturing needs. Stay tuned.
While other EV companies talk about their needs to build plants, in less than one year, we have upgraded and doubled our manufacturing floor space and will be in production mode in August this year. Moving to slide 11, I want to share a few more pictures of our facility improvements. We moved the company's aerospace business into a new facility in Mason, Ohio in Q2. This much larger space, it's about 35,000 sq ft, and it's about a 15-minute drive from our new headquarters in Sharonville, Ohio. It gives us the administrative, engineering, warehousing, and manufacturing space we need since we plan to start prototype drone production in Q3 2022. In fact, we are in prototype drone production. We have not talked much about the aerospace business in our recent calls, given the need for us to focus on our commercial vehicle business and associated product roadmaps.
I feel very comfortable where we are on the commercial vehicle side, and I'm spending more personal time with the aerospace business. I wanna give you a bit of insight to why we find the UAS business so compelling and exciting. Moving to slide 12, we present some market data for the most recent Teal study on UAS trends in the coming years. The top left plot shows the total estimated civil UAS production growth forecast. However, if you dig a little deeper into the key segments of the overall UAS growth, you will see that the delivery forecast looks a lot like the proverbial hockey stick, and that the construction and agricultural uses of drones are also set to increase substantially at CAGR projections that I have never experienced in my business career before. It's truly exciting.
We are optimistic about the overall UAS markets, including both the package delivery as well as the mapping and sensor-based segment, as our interaction with current and potential customers support what the Teal study is saying about the market dynamics, that significant growth is coming and coming sooner than most realize. To meet this market trend, we have added several key leaders that have been seasoned by relevant military or airline industry experience. We have doubled the number of certified drone pilots and significantly expanded both our hardware and software engineering staffs. As we continue to invest in our drone operations, we have achieved several important product milestones shown on slide 13. It's also been a very important year for our development efforts. As a result, we have begun manufacturing UAS mules in the plant to validate our processes, the orange bird you see in the picture.
We are just beginning the process of laying out higher volume manufacturing and supply chain processes. Our new aero site provides us with lots of room to grow over the next few years. Potential aerospace customers continue to affirm that we have the market-leading payload and range capabilities. We believe that our robust and patent-protected winch delivery system, capable of delivering, and if need be, retracting 10-lb packages, is unique in the industry. We are continuing to fly almost daily for development and testing purposes. We have made vast improvements in our drone's autonomous operational capabilities and have multiple customer demonstrations and tests planned in Q3 and in the fourth quarter this year.
We continue to fly under Part 107 certification. We have also been flying in support of the U.S. Department of Agriculture to provide monitoring, data procurement and analytics as part of its demonstration projects, and we're awarded multiple grants to do so. We are currently flying in Ohio, North Dakota, and Mississippi to support multiple government programs. We're excited about our drone operations and are exploring additional projects with federal and state governments, as well as large retailers and contractors. With that, I'll now turn the call over to Bob to discuss our financial results.
Thanks, Rick. Let's turn to slide 14. Our results demonstrate the steady progress our team continues to make to strengthen our financial position and drive greater operational efficiencies, which will allow us to deliver enhanced value to our customers and shareholders. Sales net of returns and allowances for the second quarter of 2022 were recorded at $12,600 compared to $1.2 million in the same period last year. The decrease in net sales was primarily due to a decrease in volume of vehicle sales in connection with the previous recall of our C-1000 vehicles. Cost of sales decreased $3 million from $14.8 million in the same period last year. The decrease in cost of sales was primarily due to $6.7 million decrease in inventory write-downs and $2 million decrease in cost due to reduction in volume of vehicle sales.
Additionally, the decrease in cost of sales was due to a reduction in costs associated with the initial production of the C-Series vehicle platform. Selling, general, and administrative or SG&A expenses increased to $13 million from $7 million in the same period last year. The increase was primarily driven by an increase of $4.8 million in employee compensation and labor-related expenses from increased headcount, non-cash equity compensation, and the appointments of our new executive leadership team. R&D expenses increased to $5 million from $2.1 million in the same period last year. The increase was primarily driven by an increase of $1.3 million in employee compensation and labor-related expenses due to increased headcount. Additionally, there was a $1.1 million increase in consulting and prototype expenses related to the continued development of our HorseFly, W56, and W750 vehicle programs.
Net interest expense was $100,000 compared to $10.5 million respectively. The decrease in net interest expense is primarily due to an $8.5 million increase in fair value of our convertible notes during the three months ended June 30, 2021, as compared to no change in fair value during the three months ended June 30, 2022. Other loss was zero compared to $11.7 million in the same period last year. The loss in the prior period was primarily attributable to unfavorable changes in fair value of our prior investment in Lordstown Motors Corp, which was sold entirely in Q3 of 2021. Net loss was $21.2 million compared to a net loss of $43.6 million in the same period last year.
Loss from operations for the second quarter was $22.1 million compared to $22.7 million in the same period last year. Turning to slide 15, I want to spend just a moment on the balance sheet. First, I want to emphasize that due to the exchange transaction earlier in Q2, we are now debt-free. This is an important milestone for Workhorse. Also, you can see the company had approximately $140.1 million in cash and cash equivalents at the end of Q2. Additionally, I want to flag that our down payments to GreenPower for the base vehicles we're receiving from them had a cash usage associated with it of $10.6 million, which shows up in the prepaids in the balance sheet. It's also worth noting that our ATM is in place.
On slide 16, we summarize the cash and debt position. I wanna add that we currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio, and Michigan to be between $15 million and $25 million in 2022. This is a downward revision due to timing and more limited robot usage requirements in our plans at Union City. Slide 17 covers our 2022 guidance, with our vehicle redesign effort for the C-1000 being more extensive than we first thought. We lost about 60 days of supply chain response time, which also had a knock-on impact on testing. This is only a timing issue. Assuming current supply chain lead times remain unchanged, we expect to manufacture between 150 and 250 vehicles and generate between $15 million and $25 million in revenue for the rest of the year.
I'll now turn the call back to Rick to wrap up.
Thanks, Bob. I want to briefly discuss our Q3 priorities on slide 18. First, we need to continue adding depth and specific skills at the next staffing levels, layers in the company, with an emphasis on the commercial and aftermarket and service teams. We need to keep executing on our product roadmaps and get production started at Union City. We need to get the Michigan and Ohio tech centers up to speed with their full testing capabilities by year-end. We plan to get our ERP planning processes kicked off with the transition to a new fully integrated system in 2023. Lastly, and most importantly, we need to get out on the road with our demo trucks, vans, cabs, chassis, and drones, and secure further customer orders.
Before we turn the call over to Q&A, I wanted to reemphasize four important points from our call today on slide 19. First, through the efforts of our team members, we have built internal engineering and test, supply chain and manufacturing capabilities, as well as modernized all of our facilities, most notably Union City, providing a rock-solid foundation for future leadership in EV technologies, products, and processes. We're building a company with a rock-solid foundation that's here to stay and win. We will continue to hire experienced, capable employees for critical positions and further strengthen our operational supply chain and technical capabilities through hands-on and in-classroom training. We expect to hire more than 150 hourly and salary associates in 2023 and 2024 to staff our production and testing sites. Second, our strategic product roadmap plan is on track and on budget.
We made important progress during the quarter with initial production to start this month at both the CV and aero sites. Third, we remain confident in the market opportunities ahead in our industry to deliver value to our customers, shareholders, and other stakeholders. The transition to EV-powered commercial vehicles, including UASs, while still early in the game, is in process, and we expect to emerge as one of the winners. Finally, we have the needed access to cash and capital resources to execute our plans. That concludes our prepared remarks. Thank you all again for your time this morning. We look forward to continuing to update you on our progress, and we're now ready to open the call for our questions. Brock, please provide the appropriate instructions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question today is from Jeff Osborne of Cowen and Company. Please proceed with your question.
Yeah, good morning. Several questions on my end. I was wondering if we could get a crash course, Rick, on how to model both the contract manufacturing piece and the aerospace piece. I think most of Wall Street's not giving you credit for those two segments, and you sort of leaned into those in the prepared remarks. It'd be helpful to just go over how the puts and takes on modeling both revenue per unit as well as potential margin structure.
Yeah. Jeff, I'm gonna defer that over to Bob, but let's say this, we're not gonna go and do any business that we don't make money. I'll start with that as the CEO. How's that? Go ahead, Bob.
Jeff , I'll start with the contract manufacturing business. As Rick mentioned, up to 2,000 vehicles per year. You know, our component will be basically the labor to do that. You know, that'll be somewhat minimal there, but we will have a positive margin that we expect, you know, in what you might see in a normal operating margin there for contract manufacturing. It should be something pretty normal and basic there. On the aero side, you know, as Rick Dauch mentioned, we're still conducting the prototype builds, so we're still finalizing costs there.
However, again, we do believe it to be a very positive margin business and, you know, will also come with follow-on parts, services, et cetera too. We expect that to do very well once we ramp up to full production and start getting the parts in that we need to build a scale.
Yeah. Jeff, I think today we have three or four individuals dedicated to production over at our aerospace business. We're buying one-off parts in the open market. As we look to model that out, we have better numbers probably for you the fourth quarter in terms of takes about 70 hours right now to build a drone. I'm not sure exactly where our target is in the future, but it'll be a lot less than 70 hours, and we wanna be able to get out and lower our bill of material costs. Even the way we do things today, it's still a very profitable business.
Got it. Just two other quick ones. On the, can you touch on your battery supply, you know, for 2022 and 2023, just given the inflation? You could walk through, you know, how much batteries you have for next year and, you know, more importantly, how the prices adjust given the inflation on nickel and lithium that we've seen in recent weeks.
You know, we're locked in on our contracts. We will have some minor modifications to those contracts. We won't really start getting into full needs until mid-year next year. Of course the sourced chassis that we're getting now come with batteries already in them, so we're locked in there as well. It's, you know, it's right now I feel like we're in pretty good shape there. Obviously, two things change every month, it seems like. Right now I think our timing works out well for us.
Got it. The last question I had is just on the revised guidance to 150-250. You mentioned supply chain, and I think you mentioned 60 days of lost production. Can you just flesh that out a bit more? Was there, you know, particular semiconductors or were the chassis slower to evolve and come in than originally planned? Or was this all due to the C-1000 redesign taking longer than expected? It was a bit unclear exactly why the guidance.
Yeah.
was revised lower.
Yeah. It's basically 100% tied to the C-1000. I think the redesign was more extensive than we thought it was gonna be. Talking about frames, full front suspensions, several issues that we caught during the FMVSS testing. We got a large list of probably 30 or 40 different things on the vehicle had to be changed, which causes lots of parts configuration changes. First you gotta get the redesigns done. You gotta validate that in on your computers. Then you gotta go do some testing of parts. Then you gotta go buy parts. And you're gonna buy some parts from people who you just told we're gonna kill the vehicle, so they're not too happy about doing that, right? It took us a while to get some of that resolved.
We had a couple of battery supply issues with our previous battery supplier. We had to get suspensions, and then we got backed up bringing those suspensions in from Asia. It's lots of excuses. As my old man would say, "Don't give me your excuses, just deliver results." We're gonna make up that production and get it done. It might just take us a little bit longer than we thought. Still the plan, redesign, fully test, repair and build and sell C-1000s. It might take us just a little bit longer than we thought, yeah. The good news is we've had-
Lastly.
We've had fruitful discussions with customers that we think we have a home for every C-1000 we're gonna build, so.
Got it. The last one, the 161 that you are repairing, how do we think about the margin profile of that, just given you've already written them down? It was unclear. Your guidance is only really based on revenue, but I wasn't sure, you know, in particular on gross margins as Union City ramps up. Selling a repaired vehicle, I haven't seen that flow through other P&Ls in the past.
Yeah, I think, you know, it's pretty much an accounting answer. As we wrote the value down to net realizable values. The way that'll flow out on the P&L is that, basically revenue will equal cost more or less, and so the margin will be zero on those. However, because the cash was spent last year, the cash flow will be pretty substantial on each one of those.
Got it. Thank you.
Mm-hmm.
Thanks, Jeff.
The next question is from Greg Lewis of BTIG. Please proceed with your question.
Yeah. Hi. Thank you. Thank you, and good morning, everybody, and thank you for taking my question. Rick, I was hoping you could talk a little bit more about contract manufacturing. You know, the opportunity with Tropos. I guess those vehicles, you know, a little bit smaller, not directly competing with, you know, what Workhorse is gonna be producing, you know, in the near and longer term, it looks like. You know, I guess in that, like are there gonna. Do you see the opportunity for additional contract manufacturing opportunities with other customers? And is this something where you've actually been able to kinda just given how you've quickly repositioned the company, or is there an opportunity for Workhorse really to develop a niche in assembly, you know, for multiple other EV producers?
Yeah, good question. Thanks. First of all, remember, I consider myself to be an operational animal, so I love being in the factories, and I like creating jobs here in America, right? There is an opportunity here. What we inherited in terms of the Union City plant, there was good bones there, all right? Most importantly, there's good people there, and they had basically been left behind in the last decade as they changed ownerships a few times, lack of investment up there. We've gone up and revitalized that. Again, the bones were good. We expanded and we leased the warehouse next door. We can convert that into factory space, and we leased a storage place to put all our batteries rather than have them in two or three different places.
We have a unique situation at Union City to create a real hub for EV production. We have the land to expand, we have the building space to do things. It's opportunity. When you look at other EV manufacturers, they talk about we need to build a factory. It's gonna take us 12 months or 18 months, or some say six months. We already have a factory. We already have a workforce. We have a plant that used to employ over 1,200 people. When we got here, it had less than 100. Today, we have about 80 down there right now. We have a hungry environment.
We've talked to the mayor, we've talked to the state level in Indiana about how we get some incentives, whether that's tax breaks or training money, to put people back to work in good jobs, so they're not driving 40 mi or 50 mi away from the farming community of Union City to go find a good paying job. I think that's a good thing to do. We talked to Tropos. I met them in August of 2021 when I first joined the company. I didn't think it had any fit for us. We continued our discussions. We met again this year at the NTEA show over in Indianapolis, and those discussions continued. Our team went out and visited where they make them today out in California, and they've got real orders, and it's a truck that we wanna exercise our muscles.
Our people have been sitting idle, basically cleaning up the facility, rehabbing the facility. It's been a long time since we turned a torque wrench or assembled things. We wanna do some of that this year, both on the C-1000, which is mostly repairs and some assembly, but also the Tropos vehicles is something we think we can build efficiently and help them out, so. On top of that, you know, we have the floor space and other people are calling us, right? We're in a good location in the heart belt, right in the region of where a lot of the suppliers are for specialty vehicles up there in the Elkhart, Indiana area, over to Ohio and down into Tennessee, Kentucky, Illinois. It's a great location for us.
Okay. Great.
Funny thing, yeah, one funny thing over dinner, when we were out talking about Tropos, they were talking about, "Well, you guys are kind of in the middle of the country." We're like, "Well, actually, you can get trucks here pretty quickly. You can come down the St. Lawrence Seaway. You can come up through the southern ports. You can come up the Mississippi River." And so we had to give them a geography class, you know? John and his team are California-based guys. Not everything has to come through the ports in California and Washington, Oregon, so.
No. Lately it's almost better if it's you're not.
Absolutely.
You did call, I guess, on the drone opportunity. You know, I guess for a lot of people that have been following it, you know, historically this was gonna be something that was gonna really be, you know, something focused on last mile delivery. You know, I think you called out some government work, and as well as you have this, you know, slide 12 where you have the different segments. I mean, I guess just looking at that, it seems like the near term opportunity would be outside the conventional, I don't know, the conventional wheelhouse for how we thought the HorseFly was gonna be used.
Is there any way to kind of throw rough, I don't know, TAMs around what the drone opportunity could be, you know, over the next five years, but, you know, even before maybe even outside of, say, last mile delivery? Or is it still too early?
It's a little bit early, but I'll tell you, in less than a year, I'm more excited than I was when I first got here, okay? One of the first things I did, I think the first 10 days, we had a review of the aerospace business and site. When you pull in and you can't find a parking spot because there's not enough room because we're growing, we could do some training outside, but limited training outside of flights. Now we're in a different facility. We have plenty of parking, we have plenty of room to grow. One of the first questions I asked John Graber was, "What else could our drone do if we carry a 10-lb package 10 mi or 12 mi?" We came up with some of the ideas about the aerial reconnaissance and the mapping.
This led to a grant from the USDA, which has led to multiple grants from the USDA, which has led to opportunities at states to do some transport of parts, like on the oil fields up in North Dakota, to around the Ohio 33 corridor here to move parts. We've talked about moving medical supplies between hospitals and blood banks. It's almost endless. We've had to actually step back and say, "Hey, let's focus. Yes, our bird can carry 10 lbs. It can go 10 mi or 12 mi, basically a round trip. What else can we do?" It's very interesting, as I say. It's probably too early to tell you the TAMs, but I would tell you that we think it's pretty robust. We wouldn't have moved into a 75,000 sq ft space, probably triple what we needed from the old space.
If we can put our supplies in there and we can manufacture in volumes, you know, I think we've said before, you know, 10s, 20s this year, hundreds next year. We're talking thousands of drones by 2024. All right. At pretty good pricing. The pricing there, it's a new market. There's not a lot of players. There's two opportunities we're talking very actively about delivery and last mile delivery. One off the truck and one not off the truck. There's other opportunities to deliver packages around the world.
Okay, great. Thank you very much for your time.
Yeah. Greg, we'll try to give you some more details over the next two quarters on the opportunity in the drone business, but it's real.
The next question is from Colin Rusch of Oppenheimer. Please proceed with your question.
Thanks so much, guys. You know, as you start to ramp here, you know, can you talk about some of the key manufacturing challenges? We've seen certainly any number of folks struggle with some of that initial ramp, but I'm curious what you guys are seeing given kind of your long history around strong execution in those regards.
Yeah, it's a good question, Colin. Obviously, there's supply chain challenges, whether that's ports that are backed up or the cost of freight coming over from there, but we got that built into our models. We've looked at bringing some of the trucks from Asia, different ports versus coming into Southern California. That's number one, more logistics. The first trucks we build, the W750 and W4CC. W4CC is pretty much a simple truck to assemble and rebadge and assemble. We can get those out there. There's strong demand out there right now. There's not any other Class four truck that I know right now that can carry 5,000 lbs. If there is, let me know, and we'll go find out and benchmark it for sure. The W750 is a little more complex.
There we have a tight timing to finish the design and source all the parts to go ahead and put the van backing so it can become a delivery van, so all right. One of the things we're doing is, as you know, I'm a big practitioner of Toyota Production System. We've gone through extensive training with the same consultants I've used at several companies to teach our guys the fundamentals of lean, value stream mapping, PFEP or plan for every part, operator balance charts, machine balance charts, material flow, working capital management. We're getting that buttoned down pretty good. I'm starting to hear the language when I go there, runners, repeaters, and strangers, not just at the truck business, but also the aerospace business.
Not just the manufacturing people, but the supply chain, the finance people are talking the same language as well. Teaching people lean, exercising our muscles, and working through supply chain logistics. I'm not worried about torque tools. I'm not worried about getting a dynamometer installed. All those things are pretty standard equipment, and we have a workforce. It's not a bunch of young kids up at Union City. We have some experienced manufacturing people in their thirties, forties, and fifties who built complex chassis for General Motors and for Navistar in the past. I'm confident they know what to do.
Excellent. You know, you alluded to this a little bit, with the competitive environment. You know, there's been a lot of money raised with a number of platforms, and there's a limited number of folks that are actually producing vehicles at this point. You know, as you look out at the landscape with the redesign on the platforms and, you know, in talking with customers, what can you say about the competitive positioning that you're seeing for Workhorse and how your trajectory is looking relative to some of your peers?
Yeah, good question. I'd tell you, it's a wild west in the EV space, especially on commercial vehicles. Yeah. There'll be some casualties. We've talked about that before. Even from the first time at ACT show, I sat down at lunch and said, "Some of these companies are fake, and some of these companies are real. Which are the ones who are our biggest competitors?" We've narrowed it down who we think are gonna emerge as the real competitors in our space. We're not worried about people doing big trash trucks or stuff like that. We're worried about who's gonna try to compete with us in the class three, four, five, six delivery, last mile delivery. There, we think we're well-positioned.
We lost about 12 or 18 months with our misfire on the C-1000, but we've quickly pivoted, and we feel we're in a really good position with the W750. The W56 that's coming down the road. Those will be benchmark vehicles, and we can go out and win our share of the market. We don't have to win a huge percentage of the market share to be a successful, profitable company. Right? As I said in the past, some of the space has been a duopoly for a long time. A duopoly in chassis, which are restricted, and a duopoly in body upfitters, which is somewhat restricted with capacity. The market needs someone like us to come in, and not everybody's happy we're coming in. We know we're gonna come in, and we're gonna fight and win.
Great. Thanks so much, guys.
Thanks, Colin.
The next question is from Chris Souther of B. Riley. Please proceed with your question.
Hey, guys. Thanks for taking my question here. Maybe on the W56, you mentioned 75% of the bill of materials is locked in here. What are the critical components you're still looking to dial in over the rest of the year here? Could you maybe walk through vehicle, you know, how vehicle pricing is shaking out as we're getting a better clarity on the supply chain? That would be helpful.
Yeah. We're basically 85%-90% sourced on the key chassis components, so brakes, suspension, batteries. I should say powertrain as well. The last things to really to source are gonna be the cab and the body, some of the interior, and that stuff has shorter lead times, so I think we're still within our lead time targets. We have a very disciplined process we've put in place here now where we track both the timelines and the dates we have to meet so we don't get behind schedule. Two, we have budgets, right? That's something that was new here, I think, at Workhorse. You know, you just can't design a truck that works. You gotta design a truck that works, is safe, is reliable, and makes money. We're trying to put that discipline in here as like that.
I think we're in good shape. You asked the question. Would you ask about a specific part or would you say brakes, or what'd you say? I can't remember what you said.
No, I was asking because what were those critical components which you addressed, and then just the vehicle pricing, how we see that kind of shaking out as we're getting better clarity on the supply chain. You know, it sounded like, you know, previously when you talked about it, you thought there was kind of room upwards from, you know, where the C-1000 had been pricing for, you know, the entire kind of fleet, given the competitive landscape. I just wanted to get a sense, you know, on the W56, you know, if you had any sense of pricing or if it was still too early to kinda tell there.
No, you know, we know— We bought a couple of the current competitor vehicles, non-EV, and we've torn those down. We know what they cost from a frame and body standpoint. We've seen some of the pricing from some of our competitors out in the marketplace, whether that's someone like Xos or BrightDrop and others. We feel like we have a good handle on where we need to come in to be competitive and where we need to make money, and we've rolled that down to our manufacturing team from a labor standpoint, and we've laid it down to our supply chain team from a component standpoint. I think we're confident.
Bob's, his team's right in there with us in all these reviews and making sure our models are right, and then we'll see what happens. Now, one of the wild cards is the money that the governments are gonna put forward, whether that's in California, the HVIP program, or if this Inflation Reduction Act actually gets passed. You'll see there's significant incentives there to move towards EV-type vehicles, not just passenger cars and trucks, but also commercial vehicles, and we'll take that into account as well. You know, at the end of the day, you have to go and get an EV power that can allow the final customer to make money in what they do with these trucks, whether that's, you know, taco trucks or delivering bread or delivering uniforms or delivering groceries or delivering packages to our houses, right?
Electric vehicles, based on the models, especially with diesel at $5-$7 a gallon, higher than that in California right now, the TCO calculation gets pretty good. We've done some work with one of our customers on drone deliveries, and it's even better in terms of the cost of delivering a package, especially a small package, especially to a rural area or somewhere you gotta cross heavy congested traffic or riverways.
Okay. Maybe just on, you know, it sounds like the guidance movement is, you know, potentials and C-1000s being pushed into kind of early next year. I just wanted to get a sense of, you know, if that was indeed the case, versus, you know, W4, W750, you know, expectations remaining pretty similar. You know, as we're looking at, you know, kind of that order book conversion for folks who had previously been waiting for the C-1000s, you know, can you just talk a little bit about, you know, what the customer discussions are if you're either, you know, the that kind of next gen W56 versus, you know, the 750, you know, where those discussions are kinda shaking out at this point?
Great. Good question. Yes on the C-1000, is that basically these are gonna slide a little bit to the right, you know. I told the guys, "Maybe no one goes home for Christmas unless they're all repaired and built." I think they're confident. It's all about getting the parts in, okay? We lost some time. As Bob said, we lost about 60 days in some of the redesign and testing, and then it took us a while to get some of the parts, and we're just finishing up the due care testing actually this week. That's C-1000. As I said, we think we have a home for every one of those, and we've adjusted some of the pricing to cover some of the repairs as well.
W4CC and W750, the order we talked about today basically is a combination. As Stan said earlier, it's a combination of purchase orders and build slot reservations. If you take a look at the build slot reservations, it's for almost 40% of the trucks we're bringing in with GreenPower. We feel that's a good start. Now we gotta convert those reservations to firm orders, which we intend to do. The customer that we've been working with on that program is very bullish about the EV space, has a lot of knowledge in the EV space and thinks he can sell a lot of these trucks. Some of them will have the van version, and some will be just go out to the market like a Mitsubishi or an Isuzu work truck that gets a different package on the back.
You can go to a lot of upfitters there, so. The W56 and the W750, our customers wanna see the working prototypes. They've seen a couple of display vehicles on the W750 that's out running around right now, but they haven't seen the real production version yet. The W56, we just did our mule chassis build 10 days ago. We'll have our first program builds here in October, November. We'll be in a position by Christmas to get on the road and start seeing the customers with real vehicles. We're talking about, I won't say the names, but some of the biggest truck dealers in North America that own more than 100 trucks, some of the biggest fleets in America who buy these kind of trucks and then lease them to people. You can start figuring out who I'm talking about.
They're anxious to get their hands on the trucks and see what we do. Okay? Real secret in America right now, there's a shortfall of work, custom or work truck chassis right now. All right? The big OEMs who make those are gonna put their electric chips in the big Class eight rigs or big SUVs that make a hell of a lot more money than they do on the commercial vehicles, right? That's strained the industry a little bit right now. Our ability to design and build our own chassis will differentiate us from a couple other players in this last mile delivery space.
All right. Dauch, thanks for the color. I'll hop in the queue.
Thanks.
The next question is from Mike Shlisky of D.A. Davidson. Please proceed with your question.
Good morning, thank you. I wanted to start off with a few follow-up questions or follow-up details on the Tropos agreement. Can you give us a sense as to the tenor or the length of that agreement? How long will that go for and are they building their own facility? You know, will this year contract end when theirs ramps up? Maybe secondly, what does Tropos' supply chain and their order book look like? Do you feel confident that they'll have 2,000 units a year starting next year?
The agreement's for three years. I think they will continue to look for ways to, you know, enhance their production capabilities, but they really like our facility and location as a key spot for the U.S. market. In terms of their supply chain and customer book, we've been very impressed. That's why we wanted to do this deal. We think they've got not only a good supply chain, but a good supply chain strategy, and they absolutely have a customer book and demand. Yeah, one of the nice things about Tropos is they're out talking to some customers that would not be our first targets from a last mile delivery, but they're institutions or organizations who are fully committed to going green.
They've already ordered some of the Tropos vehicles, and we wanna come in behind them with Tropos and say, "Hey, let me also introduce you to a Class five truck or a Class five van." If you're gonna do your whole university campus or in some states, your whole state university system's gonna go green, you got the small trucks, whether ambulances or shuttles or whatever, but you need some trucks to go service the cafeterias and the sports facilities and et cetera. We think that's a target-rich environment, and we think that Tropos team has been out ahead of us on that for probably 12 or 18 months.
Yeah. Got it. Hello, are you there?
Yeah, we're here.
Oh, sorry. I wanted to also ask quickly about your SG&A and R&D spend. There was a slight increase, and that's been happening obviously everywhere. I just wanna get a little sense of the trajectory on SG&A and R&D going forward. Should we expect to see a little bit more increases in Q3, Q4, as you make those last few hires and some more investments in the C-1000 W750? And could things tamp down a little bit next year as some of those expenses roll off?
You know, I think we're getting pretty well filled out on the teams, but I will remind you as you think about modeling out third, fourth quarter that, as Rick mentioned, we have a new VP of sales starting here. We've not really had a full sales function, and we'll wanna round that team out with some expertise on the selling side. We still have that to add into this. I think, you know, if you think about your model, I think you'll still see somewhat of an increase in third and fourth quarter before we're fully loaded and leveled at that point. Yeah. As Bob said, we're 95% full. Now it's tweaking a little bit, and then it kind of stabilizes.
We gotta drive the volumes up across the fixed assets. A lot of expenses to pick up and relocate one, two teams, recruiting fees to hire the talented people out there, onboarding costs, just getting basic fundamental systems in place. We understand that where we're going.
Okay, maybe lastly, I wanted to touch on charging real quick. A few companies we heard from this quarter have discussed charging as a bit of a sticking point. You know, the customers want vehicles, but they haven't put all the effort in or all the thought into how they're gonna charge them once they get them. With Workhorse, you know, you've got like a second bite at the apple here. You're kind of starting with some brand new platforms and vehicles. You had a charging strategy in the past. I was wondering if you're making any changes to how you help customers make sure that they're ready to take these vehicles and charge them as soon as they get them, or is your old strategy sufficient for the time being?
Mike, that's a great question. I'm still relatively new to this industry, but I continue to hear infrastructure, infrastructure, right? Obviously, the federal government's putting money forward, whether it's through the DOT infrastructure bill for charging systems. The Inflation Reduction Act adds some more money for investments in EV infrastructure. The Department of Energy's put forward some grants to allow companies like ours to transform old ICE-related factories over to EV. There's lots of opportunities there. We're working on some things we'll probably talk about later this year.
Okay. Thanks for that color. I appreciate it. I'll pass it along.
All right.
There are no further questions at this time. I'd like to turn the call back to Rick Dauch for closing comments.
Thanks, Brock. Thanks again, everybody, for calling in and your interest in Workhorse. We have a good team. We've got solid products. We've got great facilities, and we need to go put our nose to the grindstone and work and kick some ass. Have a good day. Talk to you later. Bye.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.