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.

Stan March - Vice President of Corporate Development and Communications

Thank you, Brock. Good morning, and welcome to all of you joining us on today's second quarter 2022 results call. Before we begin, I'd like to note that we've posted our results for the second quarter ending June 30, 2022, via press release. You can also find this release as well as an accompanying presentation in the Investor Relations section of our website. We've also filed our second quarter Form 10-Q this morning. We will be tracking with the posted presentation during the call today, so please follow along either from the link in the press release or through our website directly. And with that, let's get started. As you can see on slide 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 will give you an update on the progress we've made on our strategic and financial priorities for the second quarter of this year. Bob will then walk us through our financial results for the quarter and cover our 2022 guidance. Then we'll take your questions. Moving to some other important items. Please note that in today's press release, we provided a note to specify what we mean when we use the term orders, which refers to a customer's contractual commitment to purchase, as well as defining what we mean by a slot reservation, which means a commitment to make a portion of our production capacity available and which is secured by a customer deposit.

Our disclaimer can be found on slide 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?

Richard “Rick” Dauch - Chief Executive Officer

Thanks, Stan, and good morning, everyone. Thanks for taking the time to join us today. My one-year anniversary as Workhorse's CEO was just one week ago on August 2. And what an interesting and challenging 370 days it has been. On slide 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 start-up company into a full-fledged OEM, providing best-in-class commercial EVs. An organization's collective success starts with recruiting, hiring and retaining experienced professionals and capable staff. I identified the need to reshape the leadership team here at Workhorse shortly after I arrived. There is not one part of the organization which has not been strengthened over the past year.

From reshaping my direct reports in the corporate staff, to building an operations team from scratch, to adding the necessary experience, talent and depth to our engineering and technical staffs, we have completely rebuilt the organization, and more importantly, the capability and skill sets of the Workhorse team. I will not belabor the point further, but will simply say this cohesive leadership group is now full of accountable driven and capable individuals who are fully aligned on our critical business initiatives. And as a team, we are just getting started on our journey together. We also undertook a number of critical actions in a timely fashion to strengthen the company in the near term such as grounding and recalling the C1000s, eliminate all of our debt and dropping the USPS lawsuit. While painful, these were absolutely the harder right decisions to make for our company. When I got to Workhorse, we were a one-trick pony from a production portfolio perspective.

The only vehicle we could offer customers was the unprofitable C1000, and we needed to ground, redesign and repair all of those. After taking a few weeks to assess the C1000, the marketplace and our competitors, we quickly pivoted and developed and are now fully executing on a new three-year product portfolio road map, and we'll be one of the only players in the last-mile EV medium truck space with a full line 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 & Advanced Engineering Center here in Sharonville, Ohio just three months ago. Our manufacturing complex in Union City, Indiana has been expanded, basically doubling the available production floor space.

The plant has been completely revitalized and is ready for production now. We have slimmed down our warehouse locations from three to one and co-located it on the Workhorse Ranch up in Union City. Our Aerospace business plan has been revised, product plans developed. The team expanded, and we also relocated them into a new site in Q2 as well. We are now targeting multiple market segments for revenue opportunities and developing unique drones and systems for each. We're very excited about the revenue and profitability potential of our Aerospace business. All of these initiatives are easy to talk about or show on a PowerPoint slide. But trust me, they are extremely complicated, Super Bowl-type challenging to actually execute in less than one year with a team of individuals who, for the most part, had never worked together in their career.

I could not be prouder of the Workhorse team at all levels of the organization, which speaks to my earlier point about bringing together talented, selfless leaders and aligning the organization around core values and a common vision. Finally, we are gaining commercial momentum thanks to all the developments I just referenced. We have been awarded multiple federal and state government grants for aerospace. We have signed our first contract manufacturing agreement and have been able to secure a significant purchase order for our commercial vehicles. Demos of our last-mile delivery vans will be ready in Q4 for the W750 and first quarter of 2023 for the W56, both with industry-leading benchmark payload capacities. I will stop there and move to the specifics of our second quarter activities. But make no mistake, Workhorse is a fundamentally different company today than it was a year ago. We have a full medium-duty EV portfolio, both four-wheels and four blades. We have rejuvenated our facilities and infrastructure.

We have no debt. And most importantly, we have a more capable, talented and competitive staff and workforce compared to what we all knew one year ago. I expect us to continue forward and hit our stride as a team in the year to come. Moving to slide six. During the second quarter, we continued to make progress executing our product road maps and building a solid foundation based on our stabilized fixed and grow business model. As I mentioned earlier, the foundation of our company is our people. At every level of the organization, they are critical to driving our success. During the quarter, we hired additional highly experienced, next-level functional engineering and operational staff for critical positions throughout the organization. The talent that we are tracking is top-notch and it reflects the strength of what we are building here at Workhorse.

We have hired a new VP of Commercial Vehicle Sales and Marketing, who will join us next month. She is an experienced and well-respected sales leader with both OEM truck and Tier 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 Hadrian Rory, body engineering; Kenneth Knettle, Electrical Systems; Jason McConnell, Controls and Telematics; and Dave Reed, body and chassis. These engineers collectively bring 134 years of automotive experience on board, and we're glad to have them. In Aerospace, our new Chief Engineer, Jared Patton, brings a broad experience in systems engineering, development and testing from both the Air Force and specialized defense contractor roles to drive our UAV product development programs forward.

In operations, we now have experienced in-house leaders in place across all of the critical operating functions: manufacturing at the corporate staff and plant level and quality systems and across multifunctions in the supply chain. These groups, likewise, bring a wealth of essential automotive experience, especially in lean operating principles as we move to start production here in Q3. We have also added important skills in our back office and administrative functional groups, including an experienced internal auditor, a top-notch paralegal as well as important new IT and finance staff capabilities. I will say that we are about 95% complete in filling out our leadership team. Looking to the back half of the year, we will focus on rounding out our commercial and aftermarket and service teams. With our product plans on track and the Workhorse Ranch ready to produce vehicles, we can now confidently feel 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 returning repaired C1000s to customers in September. Over the past nine months, we have redesigned over 26% of the parts on the C1000, and we feel we now have a safe, reliable and capable vehicle to sell to our customers. This took us a bit longer than we expected. After completion of the final testing next week, we will move to repair and sell the remaining 161 currently manufactured vehicles sitting at Union City. We then plan to manufacture 50 to 74 additional C1000s by year-end from inventory on hand. And of course, we will provide service and repair and parts support as we retire the model at the end of the year. Turning to the W750 and W4 CC vehicles, which, you will recall, serves a bridge for the gap between the C1000 product and the future production of W56 and W34 platforms.

We have been showcasing these vehicles across the U.S. and customer feedback has been strong. Our product's ability to carry 5,000 pounds of cargo is a clear differentiator in the market. We are the only truck, I think, at the ACT show that actually was fully loaded. The program is on track. Test shipments of the base vehicles have been received at our plant recently, and we will start regular production of the W4 CC in Q3 and the W750 in Q4 of 2022. We already have 17 vehicles at Union City today and multiple shipments ordered and on their way for Q3 and Q4 production. Turning to the W56, which we introduced two quarters ago as the first new Workhorse fully designed and purpose-built chassis platform. The W56 will serve the Class 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 over nine million plus miles of service time on the road with the E-GEN vehicle. And will have various wheelbase options with a common part spin. We have chosen proven Tier 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 build materials. An early mule was assembled in Wixom last month. We expect to have production intent vehicles ready for testing in Q4, customer demo vehicles in Q1 of '23 and be in a position to complete testing in the second quarter and start full production on time in Q3. It's a strict production cadence following automotive practices. I have mentioned that we continue to make major improvements in Workhorse's facilities.

Our true gem in the company is the transform Union City plant, which is fast becoming a world-class manufacturing complex right here at 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. And just so you can see it all for yourselves, we will be hosting our promised Analyst Day at the plant on December 7, 2022. And so please save the date. In addition to seeing the revitalized facility in the manufacturing mode, we will also have product ride and drives, drone operations and a chance to meet the extended Workhorse team. We plan to share further details at a later day. On slide 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 met with staff members that have returned after being away from the plant for several years that cannot believe that this is the same facility. From the outside to the inside with new lighting and paint, we have methodically transformed the Union City facility to a world-class operation. The remaining open items include installing an end-of-line dynamometer in early Q1 '23, further upgrading our security and IT systems and putting our leak test and paint capabilities in place next spring and summer. With the revitalized plant facilities, process improvements and high-caliber of operating staff we added to our team, we have business opportunities appearing that Workhorse did not have in the past. I'd mentioned in the last couple of quarterly calls that we had a number of contract manufacturing opportunities we are evaluating, and we can announce our first major CM award today.

On slide 10, you can see a couple of images of products that we'll be rolling out of Union City in the fourth quarter this year. We have signed a contract manufacturing and assembly agreement with TROPOS Technologies. Beginning in Q4, we will be assembling their sub-Class 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 is about 75,000 square feet, and it's about a 15-minute drive from our new headquarters in Sharonville, Ohio. It gives us the administrative, engineering, warehousing and manufacturing space we need since we plan to start prototype drone production in Q3 2022. In fact, we are in prototype drone production. We have not talked much about the Aerospace business in our recent calls given the need for us to focus on our commercial vehicle business and associated product road maps. But I feel very comfortable where we are on the commercial vehicle side, and I'm spending more personal time at the Aerospace business.

But I want to give you a bit of insight to why we find the UAS business so compelling and exciting. Moving to slide 12, we present some market data for the most recent Teal study on UAS trends in the coming years. The top left plot shows the total estimated civil UAS production growth forecast. However, if you dig a little deeper into the key segments of the overall UAS growth, you will see that the delivery forecast looks a lot like the proverbial hockey stick, 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 has also been a very important year for our development efforts. As a result, we have begun manufacturing UAS mules in the plant to validate our processes, the orange birds you see in the picture. We are just beginning the process of laying out higher volume manufacturing and supply chain processes. Our new aero site provides us with lots of room to grow over the next few years. Potential aerospace customers continue to affirm that we have market-leading payload and range capabilities. We believe that our robust and patent-protected winch delivery system capable of delivering, and if need be, retracting 10-pound packages is unique in the industry.

We are continuing to fly almost daily for development and testing purposes. We have made vast improvements in our drones' autonomous operational capabilities and have multiple customer demonstrations and tests planned in Q3 and in the fourth quarter of this year. We continue to fly under Part 107 certification. We've also been flying in support of the U.S. Department of Agriculture to provide monitoring, data procurement and analytics as part of its demonstration projects and were awarded multiple grants to do so. We are currently flying in Ohio, North Dakota and Mississippi to support multiple government programs. We're excited about our drone operations and are exploring additional projects with federal and state governments as well as large retailers and contractors.

With that, I'll now turn the call over to Bob to discuss our financial results.

Robert “Bob” Ginnan - Chief Financial Officer

Thanks, Rick. Let's turn to slide 14. Our results demonstrate the steady progress our team continues to make to strengthen our financial position and drive greater operating efficiencies, which will allow us to deliver enhanced value to our customers and shareholders. Sales, net of returns and allowances, for the second quarter of 2022 were recorded at $12,600 compared to $1.2 million in the same period last year. The decrease in net sales was primarily due to a decrease in volume of vehicle sales in connection with the previous recall of our C1000 vehicles. Cost of sales decreased $3 million from $14.8 million in the same period last year. The decrease in cost of sales was primarily due to a $6.7 million decrease in inventory write-downs and a $2 million decrease in costs due to a reduction in volume of vehicle sales.

Additionally, the decrease in cost of sales was due to a reduction in costs associated with the initial production of the C Series vehicle platform. Selling, general and administrative, or SG&A, expenses increased to $13 million from $7 million in the same period last year. The increase was primarily driven by an increase of $4.8 million in employee compensation and labor-related expenses from increased headcount, noncash equity compensation and the appointments of our new executive leadership team. R&D expenses increased to $5 million from $2.1 million in the same period last year. The increase was primarily driven by an increase of $1.3 million in employee compensation and labor-related expenses due to increased headcount. Additionally, there was a $1.1 million increase in consulting and prototype expenses related to the continued development of our Horsefly, W56 and W750 vehicle programs.

Net interest expense was $100,000 compared to $10.5 million, respectively. The decrease in net interest expense is primarily due to an $8.5 million increase in fair value of our convertible notes during the three months ended June 30, 2021, as compared to no change in fair value during the three months ended June 30, 2022. Other loss was $0 compared to $11.7 million in the same period last year. The loss in the prior period was primarily attributable to unfavorable changes in fair value of our prior investment in Lordstown Motors Corp., which was sold entirely in Q3 of 2021. Net loss was $21.2 million compared to a net loss of $43.6 million in the same period last year. Loss from operations for the second quarter was $22.1 million compared to $22.7 million in the same period last year.

Turning to slide 15. I want to spend just a moment on the balance sheet. First, I want to emphasize that due to the exchange transaction early in Q2, we are now debt free. This is an important milestone for Workhorse. Also, you can see the company had approximately $140.1 million in cash and cash equivalents at the end of Q2. Additionally, I want to flag that our down payments to GreenPower for the base vehicles we're receiving through them had a cash usage associated with it of $10.6 million, which shows up in the prepaid in the balance sheet. It's also worth noting that our ATM is in place. On slide 16, we summarize the cash and debt position. I want to add that we currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio and Michigan to be between $15 million and $25 million in 2022.

This is a downward revision due to timing and more limited robot usage requirements in our plants at Union City. Slide 17 covers our 2022 guidance with our vehicle redesign effort for the C1000, being more extensive than we first thought. We lost about 60 days of supply chain response time, which also had a knock-off impact on testing. This is only a timing issue. Assuming current supply chain lead times remain unchanged, we expect to manufacture between 150 and 250 vehicles and generate between $15 million and $25 million in revenue for the rest of the year.

I'll now turn the call back to Rick to wrap up.

Richard “Rick” Dauch - Chief Executive Officer

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 level - layers in the company with an emphasis on the commercial and aftermarket and service teams. We need to keep executing on our product road maps 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 want 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 100 - 150 hourly and salary associates in '23 and '24 to staff our production and testing sites. Second, our strategic product road map plan is on track and on budget, and we made important progress during the quarter with the initial production to start this month at both the CV and Aero sites. And 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.

Question & Answers

Operator

[Operator Instructions] Our first question today is from Jeff Osborne of Cowen & Company. Please proceed with your question.

Jeff Osborne - Cowen & Company - Analyst

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

Richard “Rick” Dauch - Chief Executive Officer

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

Robert “Bob” Ginnan - Chief Financial Officer

So Jeff, the - I'll start with the contract manufacturing business. As Rick mentioned, up to a couple of thousand vehicles per year. Our component will be basically the labor to do that. So that will be somewhat minimal there, but we will have a positive margin that we expect in a - who might see a normal operating margin there for contract manufacturing. So it should be something pretty normal and basic there.

On the Aero side, as Rick 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 we'll also come with follow-on parts, services, etc, too. So 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 the scale.

Richard “Rick” Dauch - Chief Executive Officer

Yes. And Jeff, I think today we have three or four individuals dedicated to production over at Aerospace business. We're buying one-off parts in the open market. And so as we look to model that out, we have better numbers probably for you in the fourth quarter in terms of - it takes about 70 hours right now to build a drone. I'm not sure exactly where our target is in the future, but it will be a lot less than 70 hours. And we want to be able to get out and lower our build material costs. Even the way we do things today, it's still a very profitable business. So…

Jeff Osborne - Cowen & Company - Analyst

Got it. And then just two other quick ones. On the - can you touch on your battery supply for '22 and '23 just given the inflation? If you could walk through how much batteries you have for next year? And more importantly, how the prices adjust given the inflation on nickel and lithium that we've seen in recent weeks?

Richard “Rick” Dauch - Chief Executive Officer

So we're locked in on our contracts. We will have some metal modifications to these contracts. We won't really start getting into full needs until midyear next year. And of course, the sourced chassis that we're getting now come with batteries already in them. So we're locked in there as well. So it's - right now, I feel like we're in pretty good shape there. Obviously, things change every month, it seems like. But right now, I think our timing works out well for us.

Jeff Osborne - Cowen & Company - Analyst

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

Richard “Rick” Dauch - Chief Executive Officer

Yes, it's basically 100% tied to the C1000. I think the redesign was more extensive than we thought it was going to be, talking about frames, full front suspensions, several issues that we caught during the FMVSS testing. So we've 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. So first, you got to get the redesigns done. You've got to validate that on your computers. Then you've got to go do some testing of parts. Then you got to go buy parts. And you're going to buy some parts from people who you just told we're going to kill the vehicle. So they're not too happy about doing that, right? So 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. So it's lots of excuses. As my old Mama says, “Don't give me your excuses. Just deliver results.” And we're going to make up that production and get it done. It might just take us a little bit longer than we thought. So it's still the plan: redesign, fully test, repair and build and sell C1000s. It might take us just a little bit longer than we thought. The good news is that we've had we've had fruitful discussions with customers that we think we have a home for every C1000 we're going to build. So…

Jeff Osborne - Cowen & Company - Analyst

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

Robert “Bob” Ginnan - Chief Financial Officer

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

Jeff Osborne - Cowen & Company - Analyst

Got it. Thank you.

Robert “Bob” Ginnan - Chief Financial Officer

Thanks, Jeff.

Operator

The next question is from Greg Lewis of BTIG. Please proceed with your question.

Greg Lewis - BTIG - Analyst

Yeah, hi. 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, the opportunity with TROPOS. I guess those vehicles a little bit smaller, not directly competing with what Workhorse is going to be producing in the near and longer term, it looks like.

I guess in that, like are they going to - do you see the opportunity for additional contract manufacturing opportunities with other customers? And is this something where you've actually been able to kind of - just given how you've quickly repositioned the company, is there an opportunity for Workhorse really to develop a niche in assembly for other EV producers?

Richard “Rick” Dauch - Chief Executive Officer

Yes, a good question. First of all, remember, I consider myself to be an operational animal. So I love being in the factories and I like creating jobs here in America, right? So there is an opportunity here. What we inherited in terms of the Union City plant, there 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 ownership a few times. Lack of investment up there. So we've gone up and revitalized that. But again, the bones were good. We expanded and we leased the warehouse next door. We can convert that into a factory space. And we leased a storage place to put all our batteries rather than have them in two or three different places.

So we have a unique situation at Union City to create a real hub for EV production. We had the land expand. We have the building space to do things. It's an opportunity. When you look at other EV manufacturers, they talk about, “We need to build a factory. It's going to take us 12 months or 18 months.” Or some say 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 talked to the state level in Indiana about how we get some incentives, whether that's tax breaks or training money to put people back to work in good jobs so they're not driving 40 or 50 miles away from the farming community of Union City to go find a good paying job.

And I think that's a good thing to do. We talked to TROPOS. I met them in August of 2021 when I first joined the company. I didn't think it had any fit for us. We've continued our discussions. We met again this year at the NTA show over at Indianapolis, and those discussions continued. Our team went out and visited, where they make them today out in California. And they've got real orders. And it's a truck that we want to exercise our muscles. Our people have been sitting idle basically, cleaning up the facility, rehabbing the facility. It's been a long time since we turned a torque wrench or assembled things.

We want to do some of that this year, both on the C1000, which is mostly repairs and some assembly, but also the TROPOS vehicles is something we think we can build efficiently and help them out. And on top of that, we have the floor space and other people are calling us, right? And we're in a good location in the heart belt, right, in a region of where a lot of the suppliers are for specialty vehicles, up there in the Elkhart, Indiana area over to Ohio and down into Tennessee, Kentucky, Illinois. So it's a great location for us.

Greg Lewis - BTIG - Analyst

Okay. Great. Great. And then just…

Richard “Rick” Dauch - Chief Executive Officer

Yes. One funny thing over dinner - and we were talking about TROPOS. They're talking about, “Well, you guys are kind of in the middle of the country.” I'm like, “Well, actually, you can get parts 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. John and Steve are California based guys. Not everything has to come through the ports in California and Washington, Oregon.

Greg Lewis - BTIG - Analyst

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

Richard “Rick” Dauch - Chief Executive Officer

Absolutely.

Greg Lewis - BTIG - Analyst

And you did - I guess, on the drone opportunity, I guess, for a lot of people that have been following it, historically, this was going to be something that was going to really be something focused on last-mile delivery. I think you called out some government work. And as well as you have the 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 drone was going to - the Horsefly was going to be used. Is there any way to kind of throw rough - I don't know - TAMs around what the drone opportunity could be over the next five years, even - or maybe even outside of, say, last-mile delivery? Or is it still too early?

Richard “Rick” Dauch - Chief Executive Officer

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. And 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 the flights. Now we're in a different facility. We have plenty of parking. We have plenty of room to grow. And one of the first questions I asked John was, “What else could our drone do if we can carry a 10-pound package 10 or 12 miles?

And we came up with some of the ideas about the aerial reconnaissance and the mapping that's 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 in the oilfields 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 pounds. It can go 10 or 12 miles, basically a round trip. What else can we do?” And so 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-foot space, probably triple what we needed from the old space. But if we can put our supplies in there and we can manufacture in volumes - I think we've said before: 10, 20 this year; hundreds next year. We're talking thousands of drones by '24, all right, at pretty good pricing. And the pricing there - it's a new market. There's not a lot of players. There's two opportunities we're talking to very actively about delivering last-mile delivery: one off the truck and one not off the truck. And there's other opportunities to deliver packages around the world. Greg, we'll try to give you some more details over the next few quarters on the opportunity in the drone business, but it's real.

Operator

The next question is from Colin Rusch of Oppenheimer. Please proceed with your question.

Colin Rusch - Oppenheimer - Analyst

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

Richard “Rick” Dauch - Chief Executive Officer

Yes. It's a good question, Colin. So 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. And we've looked at bringing some of the trucks from Asia, different ports versus coming into Southern California. So that's number one, is more logistics. The first trucks we build, the W750 and the W4CC - the 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 pounds. 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 fan, 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; PEP or plan for every part; operator balance charts, machine balance charts; material flow; working capital management. And so we're getting that button down pretty good. I'm starting to hear the language when I go there, runners, repeaters and strangers, not just 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. So it just react, 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 30s, 40s and 50s who built complex chassis for General Motors and for Navistar in the past. So I'm confident they know what to do.

Colin Rusch - Oppenheimer - Analyst

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

Richard “Rick” Dauch - Chief Executive Officer

Yes, a good question. So I'd tell you, it's a Wild Wild West in the EV space, especially on commercial vehicles. Yes. There'll be some casualties. We've talked about that before. Even from the first time - at the 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 down who we think are going to 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 going to 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 C1000, but we've quickly pivoted and we are - we feel we're in a really good position with the W750, the W56 that's coming down the road.

Those will be benchmarked 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. So the market needs someone like us to come in. And not everybody is happy we're coming in. But we know we're going to come in, and we're going to fight and win.

Colin Rusch - Oppenheimer - Analyst

Great, thanks so much guys. Thanks guys.

Operator

The next question is from Chris Souther of B. Riley. Please proceed with your question.

Chris Souther - B. Riley - Analyst

Hey, guys. This to my question here. Maybe on the W56. You mentioned 75% of the build materials is locked in here. What are the critical components you're still looking to dial in over the rest of the year here? And could you maybe walk through vehicle - how vehicle pricing is shaking out as we're getting better clarity on the supply chain? That would be helpful.

Richard “Rick” Dauch - Chief Executive Officer

Yes. We're basically 85%, 90% sourced on the key chassis components, so the brake, suspension, batteries, I should say, powertrain as well. The last things really to source are going to be the cab, 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 put in place here now, where we track both the time lines and the dates we have to meet so we don't get behind schedule.

And two, we have budgets, right? And so that's something that was new here, I think, at Workhorse. You just can't design a truck that works. You got to have a design a truck that works, is safe, is reliable and makes money. And so we're trying to put that discipline in here. It's like that. So I think we're in good shape. You asked the question - well, you asked about a specific part or - did you say brakes? Or what did you say? I can't remember what you said.

Chris Souther - B. Riley - Analyst

No, I was just - 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? It sounded like previously when you talked about it, you thought there was kind of room upward from where the C1000 had been pricing for the entire kind of fleet given the competitive landscape. I just want to get a sense on the W56, if you had any sense of pricing? Or if it's still too early to kind of tell there?

Richard “Rick” Dauch - Chief Executive Officer

No, we know - we bought a couple of the current competitor vehicles, non-EV, and we've torn those down. And so 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. So 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 laid it down to our supply chain team from a component standpoint. So I think we're confident.

So Bob is - his team is right in there with us in all these reviews and making sure our models are right. And we'll see what happens. Now one of the wild cards is the money that the governments are going to put forward, whether that's in California, the HVIP program, or if this Inflation Reduction Act actually gets passed. You'll see significant incentives there to move towards EV-type vehicles, not just passenger cars and trucks, but also commercial vehicles. And so we'll take that into account as well. At the end of the day, you have to go and get an EV powered that can allow the final customer to make money in what they do with these trucks, whether that's 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 to $7 a gallon, higher than that in California right now, the TCO calculation gets pretty good. And 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've got to cross heavy congested traffic or river ways.

Chris Souther - B. Riley - Analyst

Okay. And then maybe just on - it sounds like the guidance movement is - the potential, from C1000 being pushed into kind of early next year. So I just wanted to get a sense of, if that was indeed the case versus - W4 or W750 expectations remaining pretty similar. And then as we're looking at kind of that order book conversion for folks who had previously been waiting for the C1000s, can you just talk a little bit about what the customer discussions are? If you're either - that kind of next-gen W56 versus the 750, where those discussions are kind of shaking out at this point?

Richard “Rick” Dauch - Chief Executive Officer

Great. A good question. So yes, on the C1000 is that basically we're going to slide a little bit to the right. I told the guys, “Maybe no one goes home for Christmas unless they're all prepared and built.” I think they're confident. It's all about getting the parts in, okay? And so 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. So that's C1000. But as I said, we think we have a home for every one of those. And we've adjusted some of the pricing that covers 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. So we feel that's a good start. Now we've got to convert those reservations to firm orders, which we intend to do. But 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 to be van versions, and some will be just go out to the market like a Mitsubishi or an Isuzu truck that gets a different package on the back. You can go to a lot of upfitters there. The W56 and the W750, our customers want to 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. And the W56, we just did our mule chassis build 10 days ago. We'll have our first program builds here in October, November. So we'll be in a position by Christmas to get on the road and start seeing the customers with real vehicles. So 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 to see what we do, okay? A 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 going to 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? And so that's straining the industry a little bit right now. Our ability to design and build our own chassis will differentiate us from a couple of other players in this last-mile delivery space.

Chris Souther - B. Riley - Analyst

Thanks me. Our all in the queue.

Richard “Rick” Dauch - Chief Executive Officer

Thanks.

Operator

The next question is from Mike Shlisky of D.A. Davidson. Please proceed with your question.

Mike Shlisky - D.A. Davidson - Analyst

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

Stan March - Vice President of Corporate Development and Communications

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

Richard “Rick” Dauch - Chief Executive Officer

Yes. One of the nice things about TROPOS is they're out talking to some customers that would not be our first target from a last-mile delivery, but they're institutions or organizations who are fully committed to going green. They've already ordered some of the TROPOS vehicles, and we want to come in behind with TROPOS and say, “Hey, let me also introduce you to a Class five truck or a Class five van.”

If you're going to do your whole university campus or, in some states, your whole state university system is going to go green, you got the small trucks, whether ambulances or shuttles or whatever, but you need some trucks to go service the cafeterias and the sports facilities, etc. And we think that's a target-rich environment. And we think that the TROPOS' team has been out ahead of us on that for probably 12 to 18 months.

Mike Shlisky - D.A. Davidson - Analyst

Yes. Got it. Hello? Are you there?

Richard “Rick” Dauch - Chief Executive Officer

Yes, we're here.

Mike Shlisky - D.A. Davidson - Analyst

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

Robert “Bob” Ginnan - Chief Financial Officer

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. And we've not really had a full sales function. And we'll want to round that team out with some expertise on the selling side. So we still have that to add into this. So I think - 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.

Richard “Rick” Dauch - Chief Executive Officer

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

Mike Shlisky - D.A. Davidson - Analyst

Okay. Okay. Maybe lastly, I want to touch on charging real quick. A few companies we heard from this quarter have discussed charging as a bit of a sticking point. The customers want vehicles, but they haven't put all the effort into and all the thought into how they're going to charge them once they get them. With Workhorse, you've got like a second bite of the apple here.

You're kind of starting with some brand new platforms and vehicles. You had a charging strategy in the past. I was wondering if you're making any changes to how you will help customers make sure that they're ready to take these vehicles and charge them as soon as they get them? Or is your old strategy sufficient for the time being?

Richard “Rick” Dauch - Chief Executive Officer

Mike, that's a great question. I'm still relatively new to this industry, but I continue to hear infrastructure, infrastructure, right? Obviously, the federal government is putting money forward, whether it's through the DOT Infrastructure Bill for charging systems. The Inflation Reduction Act adds some more money for investments in EV infrastructure.

The Department of Energy has put forward some grants to allow companies like ours to transform old ICE-related factories over to EV. So there's lots of opportunities there. We have a partnership that we signed up with ChargePoint. We think they're the leaders here. We've been out and checked out their hardware and their software. I'll just say stay tuned. We're working on some things we'll probably talk about later in this year.

Mike Shlisky - D.A. Davidson - Analyst

Okay, thanks for that color. I appreciate. I'll pass along. All right.

Operator

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

Richard “Rick” Dauch - Chief Executive Officer

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

Operator

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WORKHORSE GROUP INC

Q2 2022

Earnings Transcript

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