Participants
Richard F. Dauch; President, CEO & Director; Workhorse Group Inc.
Robert M. Ginnan; CFO; Workhorse Group Inc.
Stan March; VP of Corporate Development & Communications; Workhorse Group Inc.
Christopher Curran Souther; Research Analyst; B. Riley Securities, Inc., Research Division
Colin William Rusch; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division
Craig Edward Irwin; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division
Gregory Robert Lewis; MD & Energy and Infrastructure Analyst; BTIG, LLC, Research Division
Jeffrey David Osborne; MD & Senior Research Analyst; TD Cowen, Research Division
Michael Shlisky; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Presentation
Operator
Ladies and gentlemen, greetings, and welcome to the Workhorse Group’s First Quarter 2023 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.
Stan March
Thank you, Darryl. Good morning, and welcome to all of you joining us on today’s first quarter 2023 results call. Before I begin, I’d like to note that we posted our results for the first quarter ending March 31, 2023, 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 first quarter Form 10-Q this morning. We will be tracking to the posted presentation during today’s call, so please follow along either from the link on the press release or through the website directly.
And with that, let’s get started. Joining me on today’s call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. The agenda for today’s call can be found on Slide 3. Following my brief opening remarks, I’ll hand the call over to Rick, who will give you an update of the progress we’ve made on our strategic and operational priorities during the quarter. Bob will then walk us through our financial results for the quarter and cover our 2023 guidance. We’ll then take your questions.
Our disclaimer can be found on Slide 4. Some of the comments that will be made today are forward-looking and, therefore, are subject to certain provisions as well as risks and uncertainties. You can find the full disclaimer statement in our Form 10-Q and other periodic filings on file with the SEC as well as in today’s press release.
With that, I’ll now turn the call over to Rick Dauch. Rick?
Richard F. Dauch
Thanks, Stan. Good morning, everyone. Thank you all for taking the time to join us today. Before I jump into the details of our Q1 performance, I want to spend a moment or to discuss in the primary market segment that Workhorse serves, The North American, Class 4 to 6 commercial, electric vehicle business, true work trucks. These are challenging times for nearly every company competing in this segment, both start-ups and well-established OEMs. The generational technology transition from ICE to EV powered commercial vehicles is a true paradigm shift and it’s not an easy one.
The ICE/EV transition will occur over decades and will require significant investment in electric charging infrastructure, power generation, vehicle and component engineering and R&D, supplier tooling, factory conversion or new factory construction. Not all of those trying to establish themselves in the commercial EV space will make it. There will be casualties along the way and likely a consolidation of competitors in the segment, at both the OEM and supplier levels.
Make no mistake, Workhorse is one of the pioneers in the commercial EV industry, specifically in the step van segment. We are not a SPAC funded startup company. We are not doing EV retrofits of internal combustion engine vehicles. We are a company that rich and long heritage in the EV steadfast space. While the industry transition challenges sound ominous, here at Workhorse, we have an executable plan to emerge as winners.
First and foremost, we have assembled the right team. We brought in experienced, capable leaders and operators from the automotive, commercial truck and military service, who are armed that can do, get it done spirit and mentality. The manufacturing complex at Union City has been upgraded and expanded. It is ready to roll and is now in production. We have the foundational plant, warehouse and battery storage facilities capable of producing up to 10,000 vehicles a year by 2025, 2026. Very few of our start-up competitors can make that claim or actually show you an operating production facility. Ask them if you can go visit their plant.
Our new product road map is fully defined. We have a family of industry-leading EV-powered Class order 6 commercial vehicles being launched over the next 3 years with 3 new products alone in 2023.
We have strategically selected proven financially stable supply chain partners we can count on to supply our critical component needs. So we have or we will soon have the family of products necessary to compete in the emerging EV Class 4 to Class 6 market. The W56 family of vehicles we are launching in Q3 this year are completely new vehicles from the ground up, internally designed, tested, tooled and launched in less than 2 years with less than 50 engineers and technicians. I’m really proud of them.
We are moving quickly to establish a commercial dealer network and secure the necessary manufacturing licenses to serve commercial fleets from coast to coast as they make their own transition to EV power trucks. These deals are excited by the W56 family of products. We are well positioned to capture the wave of market momentum emerging for commercial EV vehicles.
On all fronts, we are pushing the boundaries and overcoming real challenges as we create a successful commercial EV OEM. I’d like to tell our team here at Workhorse that they are true pioneers in that we are on the precipice of success.
Moving to Slide 6. The generational shift to EV powered vehicles is now underway and it continues to pick up speed, ramping up specifically in 2024. The easiest way to illustrate this is a quick review of the 2-pronged regulatory efforts underway in California. The state’s Advanced Clean Truck Rule forecast focuses on commercial vehicle OEMs and mandates the percentage of 0 emission vehicles that those companies must build and sell in the state by the OEMs. The corollary to the clean truck mandate is the California Advanced Clean Fleet Rule. This new regulatory mandate targets commercial fleet owners aiming for a fully 0 emission fleet throughout the state by 2024 — 2025, excuse me. It won’t surprise you that California’s municipal governments, with both small and large fleets were common guests in our booth at the ACT show last week in Anaheim.
They have a clear mandate and they have the funding available to move to EV powered vehicles starting in 2024.
And we will have the types of vehicles they need across the Class 4 to 6 segment. These 2 new car generate rules essentially reset the state’s supply and demand minimums for commercial EV requirements over the next two decades, and where CARB leads, other states follow.
On Slide 7, you can see the graphical version of this regulation, which kicks in on January 1, 2024, at 9% in Class 4 to 8 vehicles. As you can see, the requirement ramps to 50% by 2030 with a 75% requirement for OEM sales percentage of 0 emission by 2035. This is exactly the segment where our products are targeted.
On Slide 8, you can see the other states that are following the California mandates. It includes 13 more states in the District of Columbia with 5 of those states adopting the regulations in the ensuing 3 years. This is the definition of a target-rich environment for an EV industry pioneer.
Turning now to highlights for the quarter on Slide 9. Over the past 21 months, we have rebuilt Workhorse’s Foundation, following our stabilized, fixed and grow turnaround framework. We completed building out our experience engineering, operations, administrative and leadership teams, transformed our, Union City facility into a world-class manufacturing complex and made tangible progress on our new product portfolio road maps. In 2023, we remain laser-focused on execution, specifically the production and delivery of world-class trucks and drones.
We made important progress on all fronts in the first quarter. First, we advanced our commercial vehicle programs. We ramped up production of the W4 CC vehicles. We completed the initial builds of the — the pilot builds of W750 step van. We successfully unveiled the W56 vehicle at multiple industry events, which was well received by prospective customers. While behind after Q1, we feel we are on track for our full year W4 CC and W750 delivery targets and look forward to beginning production of W56 in the third quarter. We also assembled and shipped 18 Tropos vehicles as part of our 3-year contract with that company and are continuing to ramp up shipments of these unique vehicles in the coming months.
We also made significant strides in our aerospace business, and saw continued strong interest in both our HORSEFLY and FALCON Drones. We performed a large number of flight demonstrations with prospective government and commercial customers during the first quarter. We are ready to ramp production in the factory and have the parts on hand to build initial orders. The Air Force’s North Spark Defense laboratory based at Grand Forks Air Force Base in North Dakota is working to finalize its purchase of one of our Falcon drones and our suite of supporting systems. Qualifying to sell to the United States Air Force is no small thing.
We continue to execute our Stables & Stalls package, delivery routes for FedEx’s ground, and we expect to electrify our fleet by the end of the second quarter. We are also continuing to look at the best options for expansions into a second Stables & Stalls site in either incentive-based state and/or possibly at a federal government-owned location. Additionally, we completed facility improvements at our drone engineering technical design and production facility in Mason, Ohio, and we are on track to install the end-of-the-line dynamometer, assembly and paint lines at Union City ahead of the W56 launch in Q3.
Turning to Slide 10. I want to provide some additional details on the important progress we’re making on our commercial vehicle product road maps. Starting with our Class 4 offerings, the W4 CC and W750. After receiving the Green Power chassis units at the end of December of 2022, Workhorse worked hard, modify and upgrade these base units to fully meet Workhorse quality centers in Q1. These upgrades took longer than expected to work through as we experienced delivery issues on a few key components tied primarily to tooling and production ramp-up of a handful of parts, specifically related to light vessels, cab heaters, back panel covers and liners.
As a result of these specific parts issues, we were only able to deliver 10 trucks during the first quarter. However, we exponentially resolved these issues and the company is currently shipping an additional 40 W4 CC trucks to fulfill a fully executed purchase order.
With the chassis delivery and W4 CC supply issues now behind us, we remain on track to meet our full year 2023 W4 CC delivery targets for the year. As mentioned earlier, the initial W750 pilot builds are complete. We are working through a handful of design and supplier tooling changes on this vehicle, but initial production remains on track to start in the second quarter.
Turning to Slide 11. The W56, which is the first new Workhorse fully designed and purpose-built chassis platform, it remains on track to start production in Q3 ’23. Importantly, this quarter, we successfully unveiled the new step van vehicle of an NTEA, Work Truck Show in Indianapolis and had a fully subscribed ride and drive chat session at the ACT Expo in Anaheim, California last week, both of which garnered significant positive feedback from prospective customers. As I have mentioned in the past, the W56 is a foundational lifeblood product for Workhorse.
Moving on to the WNext Vehicle. This is our longer-term project. We plan to combine our previous Class 3 and Class 4 vehicle experience to develop a next-generation vehicle with an accessible low [floor] frame, improve ride and handling, efficient lightweight systems and advanced safety technology. We will focus on prototype design, test and build in ’23 and ’24, and we expect to begin production of the WNext in 2025.
Moving to Slide 12. As we announced during the first quarter, Workhorse is developing a certified dealer network to meet end customer needs across the U.S. As you can see on the slide, we have already identified and begun or have completed the onboarding of dealers in the light blue shaded states. This process includes prospective dealers visiting the Union City plant, meeting with and being trained by our field service and warranty teams.
Feedback from these dealer day events have been universally positive. As part of the dealer agreement process, the dealers signed up for initial stocking orders on W4 CC and W750s. We plan to onboard 8 to 10 new dealers in 2023, many with multiple locations across 22 states.
Several states require us to have manufacturing licenses in order to sell vehicles and each state’s application process is different, and some are quite cumbersome. A few of our officers, including me, have had to go and get fingerprinted and have background checks completed in multiple states in order to secure these licenses. As of today, we now have 13 of the 22 manufacturing license required to sell vehicles in our targeted states.
On Slide 13, a few words about our Stables & Stalls initiative launched last year. This fleet electrification initiative provides services and charge the infrastructure to support small fleet operators with EV power fleets. We recently renewed our contract to deliver last mile packages for FedEx Ground in Ohio, and have continued to execute our package delivery routes throughout the first quarter. We expect to electrify the 11 in Ohio fleet by the end of Q2 ’23 and are currently exploring opportunities to establish 1 to 2 additional sites in incentive-based state and our federally-owned location.
The Stables & Stalls initiative is expected to provide some valuable insights into the owner-operator business model and how we can provide a meaningful advantage to further boost the transition to EV platforms, especially for smaller fleets.
Moving on to our Aerospace Business on Slide 14, which had a very busy start to the year. We advanced the development and testing of our drones to target 2 compelling growing markets, package delivery and agricultural and infrastructure, data acquisition and data use. We conducted demonstrations of simultaneous package deliveries by multiple HORSEFLY aircraft to 2 prospective last-mile delivery clients and a potential industry partner. In addition, we successfully completed demonstrations of both the Horsefly and the Falcon drones for the U.S. Military, multiple branches.
As a reminder, our HORSEFLY platform is an all-electric multipurpose uncrewed aerial system designed to tackle a variety of commercial applications. It uses a winch delivery system to provide safe, reliable and precise last-mile delivery in various conditions and carry up to 10 pounds or 10 miles to 45-minute flight time. Our other drone is our humanitarian aid and logistics operations or HALO aircraft, which we’ve internally called the FALCON. It has the same airframe, propulsion system and set of navigational capabilities at the HORSEFLY, but has a longer, a lower gross weight, so we can carry more payload across a longer distance.
This drone is designed to use an austere, difficult training conditions. We are about to secure our first purchase order for the Falcon from the U.S. government and are close to landing additional new orders for this top duty drone.
Our team has another large demo with the U.S. government agencies next week, and we hope to build on our success to the U.S. Air Force. We completed scanning land in Arkansas and Mississippi with the U.S. Department of Agriculture’s government’s second grant in support of underserved farmers and ranchers. We are actively exploring additional opportunities for collaboration with both the federal and state government agencies. The initial feedback we are receiving from USDA is very encouraging. In their words, the data we are providing is game-changing in terms of detail and timeless versus the current data collection methods employed across not only farmland but other larger federally owned areas across the country.
Overall, we are pleased with our progress in Aero and look forward to announcing additional appeals or government grants in the coming months.
With that, I’ll now turn the call over to Bob to discuss our financial results for the quarter.
Robert M. Ginnan
Thanks, Rick. Let’s turn to Slide 15 to discuss our first quarter financial results. Our first quarter results demonstrate the team’s focus on operational execution and financial discipline. As Rick stated, we are ramping up the production and delivery of vehicles and expect that to continue throughout the rest of the year. We expect this will generate significant revenue growth in 2023. At the same time, we are managing our cash burn well and enhancing our back-office systems to make us an even more efficient organization.
Turning now to results. Sales net of returns and allowances for the first quarter of 2023 were $1.7 million compared to $14,000 in the same period last year. The increase in net sales is primarily due to sales volume of the W4 CC. As Rick explained earlier, getting suppliers tooled up and launched on key components required to upgrade the W4 CC product took longer than expected. It impacted our throughput and sales in Q1. We expect to make up those units across the balance of 2023.
Cost of sales increased to $5.3 million from $3.9 million in the same period last year, primarily due to the $900,000 increase in costs related to direct materials and a $1.1 million increase in employee compensation and related expenses to support vehicle sales during the period. The increase in cost of sales was partially offset by a $400,000 decrease in inventory reserve expenses and a $200,000 decrease in other related overhead costs.
Selling, general and administrative expenses increased to $14.7 million from $11.9 million in the same period last year. The increase in SG&A expenses was primarily driven by a $3.1 million increase in employee compensation and related expenses primarily due to increased headcount and noncash stock-based compensation expense.
Research and development expenses increased to $7.2 million compared to $4 million in the same period last year. The increase in R&D expense was primarily driven by a $1.7 million increase in prototype expense related to the continued development of the company’s expanded product road map, including the HORSEFLY, FALCON, W56 and W750 vehicle programs, an increase of $700,000 employee compensation-related expenses as the company increased headcount and a $300,000 increase in consolidating expenses.
Net interest income was $600,000 compared to a negative $2.2 million in the same period last year. Net interest income in the current period is driven by interest earned on the cash in our money market investment account. Net interest expense in the prior period was primarily related to fair value adjustments, contractual interest expense and a loss on the conversion of the company’s former convertible notes due 2024. The entire outstanding aggregate principle of these notes were exchanged for the shares of the company’s common stock during 2021 and 2022.
Turning to Slide 16 to discuss our balance sheet. We are continuing to operate debt-free. And as of March 31, 2023, we had approximately $79.1 million in cash and cash equivalents. In addition, we have our at the market program in place. And during the first quarter, we issued 14.4 million shares under the ATM for net proceeds of $18.6 million. You might have noticed that we recently filed a $150 million shelf registration statement with the SEC. I just want to point out this was a normal renewal of the former shelf’s 3-year term was expiring. The former shelf had approximately $143 million remaining on it.
We believe our existing capital resources and capital availability will be sufficient to support our current and projected funding requirements through 2023. If the opportunity arises and market conditions are appropriate, we will raise additional financing in 2023, including through a continuance of our at-the-market offering.
Turning to Slide 17. We are reaffirming our guidance as we expect to ramp up production and delivery throughout the rest of the year. We are now shipping W4 CC vehicles to customers and production is ramping up to 5 units per day by the end of Q2 as component suppliers stabilize their own production. Start of W750 production is on track to begin later this quarter and the W56 is on schedule to launch in Q3. We continue to expect revenue to be in the range of $75 million to $125 million for calendar year 2023, assuming current supply chain lead times remain unchanged.
Securing state manufacturing license and onboarding our new dealers is critical to our success over the next 2 quarters. At the same time, we are managing our cash burn well and enhancing our systems’ intro to make us even more efficient organization. We are confident that the actions we are taking now will allow us to deliver on our goals and generate value for our shareholders.
I’ll now turn it back to Rick to wrap up the call.
Richard F. Dauch
Thanks, Bob. I want to briefly discuss some of our key second quarter priorities, which are outlined on Slide 18. Above all else, we are focused on advancing our product — new product road map and keep them on time and on budget. Specifically, we are continuing to ramp up production and delivery of our W4 CC in the second quarter and expect to deliver significantly more vehicles than in Q1. We are on track to begin production of the W750 vehicles in Q2. The W56 program remains on track as well, and we will continue to showcase the new step van vehicle to prospective customers ahead of starting production in Q3.
These trucks are now in the critical vehicle durability, component and system testing phase, which we expect to complete in June and July time frame. When the testing is complete, we will put safe, reliable demo trucks in the hands of our large last mile delivery fleets and worked to secure future purchase orders for Q4 ’23 and ’24 and beyond.
We’re also continuing to electrify our fleet under our Stables & Stalls program, first with the W750 in the second quarter and then with the W56 vans in the third quarter. During the second quarter, we intend to earn more customer orders, grow our sales and further build out our CV dealer network. We are making steady progress building out our CV dealer network with plans to onboard 8 to 10 new dealer groups in 2023.
I’ll be on the road myself the next 2, 3 weeks, meeting with targeted dealers and fleets around the country, and we have our third dealer day set up at Union City later this month on May 31. On the aerospace front, we are excited to be on the cusp of having our initial purchase order from the U.S. Air Force, and we’ll continue completing flight testing and demonstration with prospective customers. We expect to earn additional significant work with the USDA also in Q2. Finally, we will continue executing on our common systems plans in the second quarter, including transitioning to a new ERP system, which will help drive operational efficiencies as we ramp up production of our products. We expect to complete the ERP transition in Q3 this year.
Before we turn the call over to Q&A, I want to re-emphasize a few important takeaways from our call today. First, with few exceptions, most notably transition to the new ERP system and establishing a nationwide dealer network, we have completed rebuilding the foundations of our company. We have an incredibly talented team of functional experts and business leaders with extensive automotive, commercial vehicle and aviation industry experience, great team here at Workhorse.
Second, we have state-of-the-art manufacturing engineering facilities and equipment in which to execute our new product road maps for both our commercial vehicles and aerospace drones. We are focused on execution, execution and execution. We are finishing the design and testing phase, ramping up production for our vehicles, trucks and drones and delivering safe, reliable and efficient vehicles to customers.
Most importantly, we expect to generate profitable contribution margins on every vehicle we produce and ship going forward. We remain confident in the market opportunities ahead of in our industry to deliver value to our customers, shareholders and other stakeholders.
The transition to EV-powered commercial vehicles is significantly progressing and there are strong market demand and government support for EV, UAVs and infrastructure to make them work.
And finally, we have the necessary access to cash and capital resources to execute on our go-forward plan. We will continue to monitor our financial position, investments and future capital needs to support our business strategy. The Workhorse team is highly experienced. We know that we still have significant work ahead of us, and we are ready to meet head on the challenges we will encounter on our EV journey.
We’re encouraged by the progress we are making. The solid foundation is now in place and the positive feedback we are receiving from our current and prospective partners. We’re confident in our portfolio of EV products. After almost 2 years of hard work, Workhorse is ready to run and establish ourselves as a winner in the transition to commercial electric vehicles, both on the ground and in the air.
That concludes our prepared remarks. Thank you all again for your time this morning. We’re now ready to open the call for your questions. Daryl, please provide the appropriate instructions.
Question and Answer Session
Operator
(Operator Instructions) Our first questions come from the line of Colin Rusch with Oppenheimer.
Colin William Rusch
Congrats on getting the trucks out. Can you talk a little bit about how much rework you had to do on those vehicles before you got them out and how the operating software is performing now that you’ve got them on the road?
Richard F. Dauch
Yes, a couple of things. I think when we initially started the process with Green Power, we were talking about putting 14 or 15 parts on the trucks. I think we’re now up to 75 and 90 parts on the trucks. There were a couple of parts that required us to go out and tool up some suppliers. I think we told you in the last earnings call that we put out a few trucks in December. We got some initial feedback both from the dealer customers and the upfitters that are putting the backs or custom bodies that they wanted a different back panel.
That was our biggest challenge in the first quarter. We had to go out tool up a supplier in North Carolina, designed the part, tooled up, get the prototypes and then we had to change the liners. That was a big issue for us in the first quarter. We got that done towards the end of the quarter, and that’s now in production. So longer than we thought, but based on — that’s — I guess I would say while that’s disappointing to us in the first quarter. It does show how fast our team was able to turn on a dime and go find a solution in less than 75 days. Not 6 months, 75 days from the time we are identified the issue in early January to the time we had parts going on trucks in the middle of March.
So I want to thank our CTO and our engineering team and our supply chain team, they did cartwheels to get that done in the first quarter. Operating systems, so far, so good. We’ve done a lot of testing on the truck up at Union City, we don’t see any issues.
Colin William Rusch
Okay. Perfect. And then with the drone, I’m just trying to get a sense of how close you guys are to like material revenue for the company. How should we be thinking about that revenue opportunity for you guys, particularly on the agriculture side?
Robert M. Ginnan
So on the agricultural side, I think we’re progressing pretty quickly there and have some good programs in place, and I think we’ll continue to see that growth. So I feel like that’s on track. On the drone side, obviously, it’s a tough market and bringing it to market has been longer than we had hoped, but I think we have the technological breakthroughs. And now it’s about building that market network and distribution so that we can start selling those here in the latter half of the year.
Richard F. Dauch
Yes. I’ll add some color, too. I think the commercial part, the last mile delivery of packages is we got to get through with the FAA, and we got to make sure that UPS and FedEx and others really want to use these drones. We bounce back and forth from taking them off the trucks to doing it from ground stations, warehouses. We have some more demos we’re going to do here in the quarter, second quarter.
I think the good decision we made over 18 months ago is can we go after use the LiDAR systems and camera systems. We’re finding traction with the USDA, which also owns the Forest Department or Forest Natural Resources. So there’s opportunity — there’s a lot of land that needs to be scan. The way they’re doing things right now is with horses and 4-wheelers, right? We can scan literally hundreds of acres in just a few hours. And in DoD, we’ve taken the FALCON out to multiple branches, and we think there’s an opportunity there, too. So I think we’re going to grow faster on the government side than we are on the commercial side. And hopefully, we’ll get that ramped up faster.
Operator
Our next questions come from the line of Jeff Osborne with TD Cowen.
Jeffrey David Osborne
A couple of questions on my side. Rick, I think one of the themes of both the Work Truck Show and the ACT show was the challenges with trucking being integrated with charging and the time to get the charging infrastructure in place. What level of confidence do you have in terms of the ability to work with the dealers to — with potential customers to sort of push that along and avoid an air pocket between expected delivery of the trucks and when that infrastructure is in place?
Richard F. Dauch
That’s a good question. The larger dealers we’re meeting with have already started putting in their own charging systems at their locations. Several of these dealers run large rental fleets and so they’re looking at some of the areas we use the W4 CC or the step van specifically where they’re using that. We’ve gone out to a couple of interesting locations, one in L.A. company. I won’t mention their name right now, but they put in a large charging station area. They’ve got multiple EV trucks they purchased and they’re leasing them to the little fleets in L.A. right now, and they’re going to expand that program to multiple cities across the United States, including New York, Houston, Atlanta, et cetera, in Florida.
So some people are out there on the cutting edge, I’ll say. On the back side, last week in Indianapolis, we met with a distribution company has 800 trucks. And he said, basically, I need help. Can you help me chart the path to EV? I need your kind of trucks, Class 4 and Class 5, 6 step van, specifically. He’s got 800 trucks, 100 above the — in Canada and 7 in the United States at multiple locations. He needs an education on fast charging, slow charging, how often you charge them, what’s the route availability, how does the batteries handle the charging and the cold weather, hot weather. That’s exactly what we’re learning on Stables & Stalls. We can give you a lot of data now for over a year of how to run an [ICE] fleet with old trucks, but it costs to repair them, fuel them, staff them, and we’re going to soon have that same data for the EVs and we electrify the Stables & Stalls.
We’ll be able to help those fleets that need to make the conversion. I’ll also tell you that, that distribution company is owned by a European company, and he was given a mandate to convert at least 50 of this 800 trucks this year to EV before the end of the year. And that wasn’t a choice, you’ve got to go do it. Now you’ve got to find the right OEMs, the right charging system. So we do get a lot of questions about who are the right charging partners. We’ve done some work with ChargePoint, we’ve done some work with ABB. We’ve done some work with Shell. So we have some good information about that.
So — but I do think it’s going to take time, right? So the federal governments put the money behind, putting in the charging infrastructure and then the big fleets are starting to put their own money into it as well. And there’s a cottage industry, Jeff, that’s popping up of people who can go in and help secure the land and tie the grids in there. And there’s programs specifically in California with the San Diego Power Light and the guys out West are doing some charging systems there. So lots of work to be done that’s for sure.
Jeffrey David Osborne
Got it. And then just 2 other quick ones here. The other revenue broken out of roughly $339,000, is the majority of that affiliated with the 18 Tropos vehicles that you assembled? Or is there something else moving that line item?
Robert M. Ginnan
No. The majority of that is going to be the revenue from the Stables & Stalls in package delivery. A little bit of a Tropos, but most of it is Stables & Stalls.
Jeffrey David Osborne
Got it. And then Rick, in your concluding remarks, you made reference to positive contribution margins with every vehicle delivered going forward or produce going forward. I forget how you phrased it. Were you intending to say that in 2Q, you would be gross margin positive? Or that’s just the objective?
Robert M. Ginnan
That’s a little bit early good. No, I think at a truck contribution level, they are positive, but positive gross margin will be a factor of volume as we start to cover the fixed cost. So that — no, that will not be the case in Q2.
Richard F. Dauch
Yes. This company has a history of designing some pretty unique trucks and selling them for about half of what they put into them. So we put (inaudible) when we got here and say we’re going to design, test and build trucks that we can make money. We’re a publicly traded company, got to have a path forward to profitability, just designing a building, selling cool trucks and lost puts you out of business long term.
Jeffrey David Osborne
Is there an annualized run rate that you would hit that or units delivered of the 750, I assume the W4 CC wouldn’t get you there, but should that be something you think about in the spring of ’24?
Robert M. Ginnan
Yes. We really haven’t put together any guidance on that, but I will say that overall, our fixed costs on the manufacturing side are relatively low. So with a fair amount of volume, we should be able to get to that positive gross margin.
Richard F. Dauch
I think one of the things, Jeff, we talked about in a couple of calls is that we’re early — still in the very early innings of this ICE-to-EV transition. There’s still some price elasticity, which is a good thing for those of us who are out in the cutting edge, right? And so I’m sure we’ll all have to ramp down costs in the future, specifically on batteries. But for now, the market demand, based on the California mandates alone of 9% of the fleets, when they buy trucks next year, 90% of the buys, they have to be have to be EV. That’s one out of every 10 on most, right? So I sat with one big dealer last week and said, hey, in order for me to sell these big ICE trucks, I got to sell some EV trucks now, too. That’s real bite in the regulatory laws out there in the clean fleet, Advanced Clean Fleet.
Operator
Our next questions come from the line of Chris Souther with B. Riley.
Christopher Curran Souther
Maybe just a little bit on the sales pipeline and backlog. How does thing up at this stage, you called out 500 to 600 chassis you’re expecting to receive this year for — to maybe just visibility of either W4 or W750 on that? And then what are we getting as kind of an early sense of the W56 as far as kind of backlog building would be helpful for folks.
Richard F. Dauch
Yes. We don’t really publish right now on the backlog. I think that’s a (inaudible). I’ve seen a lot of that in the last couple of years with companies quoting all kinds of backlog, yet they don’t have a factory, so how they going to produce them. So we are building it from the ground up. Part of our dealer agreements as we sign up dealers, they agree to take stocking orders. So typically, that’s 10 per dealer. Some dealers have multiple sites. One dealer has 35 locations and other has 21. Not every location is an EV target area. So I’d say as we build up our dealer network, you’ll see the backlog of our W4 CC and W750s growth.
There’s — I’m going down to see dealer tonight and tomorrow down in the Southeast region. They have a real strong interest in W750. I go to other locations with the sales team, they only want W4 CC, so it’s kind of jumping around. But we’re confident that we have the balance right in terms of supply and demand. We know how many chassis we’ve ordered from green power and are being delivered. We have over 500 chassis on order right now and on their way into us. We had our 200 in the first quarter, and we think we’ll be able to sell all those between now and the end of the year, early first quarter next year.
Christopher Curran Souther
Got it. Okay. That’s really helpful. And then maybe just on…
Richard F. Dauch
You asked about…
Christopher Curran Souther
[W56] as well, it would be good, yes.
Richard F. Dauch
W56, I’d say, is early. We’ve had some excellent preliminary meetings in Indianapolis with some of the big companies. We had additional needs of those exact same companies. Now this time in California, they are able to actually ride and drive the W56. It got very strong reviews. Most everybody drove it on Tuesday, Wednesday and Thursday. I was surprised or we were surprised how much attention are W56 chassis, the strip chassis got. I came in one morning on Thursday, a little bit early to show, and I found 4 people on our truck with tape measures and taking photos of our chassis. So there’s an interest there.
As you know, in the step van space, it currently is basically either a Freightliner custom chassis or a Ford chassis with an engine in it, and it goes to either Utilimaster, Morgan Olson for the body, right? We’re kind of a disruptor here. We’re going to be able to come in and build a chassis and put a body on or we can sell our EV chassis to somebody if they want to put a Morgan Olson body, great. They want to put you Utilimaster body on it, that’s great. We’ll be able to play in all 3 areas there.
So I would say it’s a little early. I think they’re reticent to give us orders until they get a demo on their hands. We have 1 customer who wants 1 for a minimum of 2 weeks, 1 wants it for a month and 1 wants it for 6 months. And one of those customers, a large lending company that wants a special truck in the back, and we’ll see. And I’d say we had multiple meetings in California with either lending companies or bakery companies, which are very interested in W56. And those are big target-rich environments. One California lending company said they have over 1,000 trucks and they are in our mandate now to convert at least 9% less than 90 trucks alone in 1 year in 2024. So I think hopefully, we’ll give you — I’ll give you a more clear picture as we move through the year here in the third and fourth quarter.
Christopher Curran Souther
Okay. That’s super helpful. And then on the drone side, can you talk a little bit about kind of the production path? It seems like the customers are getting pretty close to moving forward here on the government side, just what are the production rates you guys would be targeting and be able to kind of (inaudible) any incremental capital needs we should expect to kind of flow through…..
Richard F. Dauch
We’ve built the assembly lines in there to build somewhere between 500 to a 1,000 I’m not sure we’ll build that many this year. We’ll see. I think the customers are being very cautious to make sure they want to get their hands on the vehicles, the drones and actually prove to their paces. We expect to get 3 or 4 — well, I’d say 2 or 3 more POs in the quarter, early third quarter.
And there will be like maybe dozens of birds, total. Once we get that, I think we get through all their internal testing, and I think you can see some bigger orders as we head out of the year.
Robert M. Ginnan
And I would add that the capital requirements for the production lines are pretty minimal.
Richard F. Dauch
Guys actually guys bought standard equipment built their own substations. They’ve done some modifications. We have the substations built. We have the final assembly line build. We’ve staffed very lightly right now to make sure we can build some there. But I think we have, I don’t know, 15 or 20 birds on the shelf right now ready to go. So we’ve worked through our little pilot builds and that kind of stuff.
Operator
Our next questions come from the line of Greg Lewis with BTIG.
Gregory Robert Lewis
Rick, I was hoping for a little bit more color around on the fix for the cabin chassis. And really what I’m wondering is, it seems like from the start, you know there have to be some upgrading of the chassis. I guess it was more than you thought about. Is any of that stuff where we can go back to the supplier and have those — some of those changes fixed before you take delivery? Or is that something where we know what we’re getting now on an ongoing basis, and we’re just going to have to do all these fixes ourselves?
Richard F. Dauch
Great question, Greg. So I’d say a couple of things. One, we’ve already talked to our friends at Green Power and their supplier to make some permanent changes. One of the changes on the light.
We thought we could get that done by February or March. It turns out they couldn’t get their suppliers tool up until September. So we had to go out and pivot. We had tooled up a small supplier to handle 25 or 30 that we ship back in December, and that was okay. But when you’re starting to build up to 80 to 100 a month, you’ve got to do something different. So we had — that’s one of the gaps we had to fill, and we’ve worked that out both engineering wise, supply chain wise and financially with Green Power.
The back panels, I think, was that I think we thought we’d sell more of the step van, et cetera. When it came in and the customers started saying, no, no, we want more cap chassis. We had a pivot to come up with that. That’s something we haven’t finalized yet. We’ve got a nice supplier that can keep up with us at the current build rates and (inaudible) whether we keep that here or we have to put that in coming in from China. So we’ll see.
Gregory Robert Lewis
Okay. And then you mentioned the customer where the 40 deliveries kind of highlight that, hey, we’re getting things going. Was that a total 40 delivery order? Or was that actually larger?
Richard F. Dauch
That’s — currently, it’s a one — it’s a PO for 40. It’s part of — if you remember last year, we talked about a reservation over 1,000 vehicles. So that’s a conversion of some of those reservations into a real purchase order. We’re talking to that same customer about a more steady pace of POs on a monthly basis. On their own nickel, they’ve gone up and tooled up and secured build slots at custom body builders for different versions, specifically a dry van, a reefer and a flatbed and they have some large quote activities they’re working on right now with some large fleets that are in the hundreds, I’ll say, right? So if they’re successful landed.
As they like to say to us, you’re the only Class 4 pure EV truck in the market today. Go to the last 2 shows, I’ve been to, I see a lot of introductions of other people’s chassis, but most of them come from the market in 2025 or 2026, specifically [Zuzu] and a couple of other people like that, right?
Gregory Robert Lewis
Yes. Then definitely in a good spot. And then, Bob, as I think about R&D realizing, we’re still doing some things in development on the drone side, the existing portfolio overall and out the next. As I don’t know, any kind of way for us to think about R&D on an ongoing basis or at least for the rest of the year?
Robert M. Ginnan
I think probably the easiest way to think about it is our run rate captures our spend. And as we move to rollout on the W56, we’ll reallocate that spend. I don’t see big lumpiness in R&D spend, I think it will continue on its pace.
Operator
Our next questions come from the line of Mike Shlisky with D.A. Davidson.
Michael Shlisky
A couple of follow-up questions here. First, on the Tropos, some of your earlier questions on Tropos, is there a sense — do you have a (inaudible) when that might ramp up to a number of deliveries that kind of shows up in a material way our numbers? Or at some point, is there a point where you could tell us when you might get to that full 2,000 rate?
Richard F. Dauch
Yes, I’d say right now, we — just like other companies, we’ve had some supply chain delivery issues there. We got our initial kits, and I think we got 56 kits in. Unfortunately, some of those kits were in complete or some of the parts came in with quality issues. We put a production pause in place for like 5 or 6 weeks. We ask the guys at Tropos to go to the Clifford Gallant supplier, a company called (inaudible) and get their act together. They have committed to do that. They’re making investment. And so we think we’re now starting to flow the right kind of parts here. So we get a box out, we get to build a full truck.
I’d answer your question that I think it’s going to take us the balance of the second quarter to get that supply chain under control, probably late third quarter, fourth quarter rate, we should have a run rate there. But they’re having some good success commercially with selling the trucks. Some of the bigger name companies in education systems on the West Coast specifically. So I think there’s a market there for that truck, and we’re prepared to build them.
Michael Shlisky
Great. Thanks for that. And I wanted to also ask for about some more details on the dealerships we’ve got signed up or are talking with at the moment. You had mentioned they want to have inventories of demo units. You think you said something like 10 or a modest number for each facility that will have them available for sale. Do they also — at this point of your those agreements also have kind of long-term run take rates? I remember the old Workhorse management team had several dealerships signed up for thousands of units and things like that. Obviously, they weren’t necessarily guarantee commitments, but they were guidelines and there were some take rates there. Is that how your new dealership are structured at this point?
Richard F. Dauch
I’d say slightly different. When I got here, I think we had 8,032 orders from 3 different customers, 500 from the Pritchard Group out of Iowa, 1,000 from UPS and 6,000 some north of the border, up in Canada, okay? When we went back to those guys and said, hey, first of all, the old C1000 you only carry 3,000 pounds that rolled out the UPS order. When we total at the cost, it was a hell of a lot more than [75,000 or 80,000] that rolled out the Canadian guy. And I give the Pritchard family a lot of credit for sticking with us. They help they give us a lot of feedback on the C1000. They helped guide us on the W4 CC and W750. And so they stuck with us and they are the ones who gave us 1,000 reservations.
To come to specific dealers, all these dealers are putting their toes in the water to on the EV space, right? And so they’re learning how — what it takes to become an EV. We don’t want every commercial dealer. We want a handful of dealers that we can serve with trucks, so we don’t get an allocation type situation.
There are some that are very, I’d say, Ford in the south, looking at their areas. They know the incentive programs in their states, places like New Jersey and New York, where there’s great incentives for Class 4, 5, 6, up to $100,000 a truck. Texas, not — you would think of that as an EV-friendly state, but they got a lot of ports down there, and there’s a lot of money coming in from the federal government to electrify the ports. So there’s a need down there along the Charleston, the South Carolina, Florida borders and stuff like that where the ports are as well.
So the demos I talked about we have — each one of our field sales team now has at least 1 W4 CC or W750 demo they could take around the different trade shows with dealers. There’s 1 going on next week in California. The ones I was talking about were the W56 demos. We’re going to put those in the hands of 5 of the biggest companies in the last-mile delivery space. You can — you know they are 3-letter initials in a couple of places, big leasing companies, big lending companies, big bakery companies. They’re the ones who will buy thousands of trucks a year, right?
I’ve watched it before as a Board member at a previous company. They buy 5,000 trucks a year. They split it among 2 or 3 players, right?
So that’s where the W56 will get sold, right? That will be direct to those big guys through a dealer somehow. So that’s where we’re going to work out right now. But hard to sell and convince them to spend upwards of $200,000 on a truck that they’ve never written on before, right? So they want to make sure it’s real. And so one of the good things we have here is we have those 280 (inaudible) down the field, mostly with UPS with almost 9 million miles on it. They know we stand behind our products. Those products run pretty good. They’re still out there since 2017. So we can build on that with people like UPS. So when I got here, UPS said, if you can’t carry 8,000 pounds, quit talking to me. And now they’re talking to us.
Michael Shlisky
Got it. Got it. That’s great color. Maybe 1 last one for me, and this is on Stalls and Stables. So (inaudible). It appears that some (inaudible) have already gone electric or are partially electrified elsewhere in the country. And I’m curious whether you’ve compared notes with any of them. Are they kind of (inaudible) for you that clearly open to being having EVs in their fleet? Or do you plan to at least when you up and run maturity compare and contrast your results of theirs either privately or publicly once that’s available?
Richard F. Dauch
I would tell you that it stands working closely, we’re constant discussions with the team at FedEx in the West Coast, where they’ve had some success in putting some bright drop vehicles out there in the West Coast and some of their locations. They’re anxious to get some of our vehicles in there as well that we can compare and contrast and they’re different.
And we’re learning on Stables & Stalls. Some trucks are just Class 3 trucks that we deliver certain routes, small packages to houses. Then we have some Class 4, 5 and 6 big step van. We’re delivering appliances, tires, lawn mowers, those have to have a better, bigger payload. And it’s interesting for me being new to the segment is that the UPS model and the FedEx model are totally different, same as DHL, different-sized trucks. Some own their fleets, some don’t own the trucks. Some of them have their drivers work for them. They’re unionized, some are not. So there’s a lot of different dynamics we’re working through.
What we want to be able to do is we want to be agnostic and say, if you want to order a brown truck, we’ll build your brown truck if you carry 1,000 pounds. You want to have a white truck with a purple orange label or a green label on it. They can carry only 2,000 or 3,000 pounds, we can do that as well. The common theme is they have all committed to meet the pairs of course of being 0 emissions by 2040. And so they have to convert the fleets. These fleets are huge, 100,000, 120,000, one bakery has 66,000 delivery trucks for their baked goods here in North America and Europe.
Other companies have tens of thousands or tens of thousands of trucks as well. So there’s going to be plenty of opportunities for us. As we said, we’re ramping up this year, our factory eventually, we’ll get to a 5,000 run rate per shift, probably by ’25 and then if we need to, we’ll go to 2 shifts, and that will be 10,000 trucks a year. That’s a real company, right? 10,000 trucks (inaudible) $220,000 per truck. That’s a big number, right?
Operator
Our next questions come from the line of Craig Irwin with ROTH MKM.
Craig Edward Irwin
So most of my questions actually have been pretty thoroughly answered. But I was hoping maybe we could dig in just a tiny bit on the expense side and the 10 vehicles you got out in the quarter. Can you maybe just give us color on onetime expenses as far as identifying those suppliers and engineering and integrating these new solutions into the vehicle? And how that benefits you as you move to the 40 that you delivered, I guess, in the current quarter. And would you expect some of these early setup and start-up expenses to have a material impact on margins?
Robert M. Ginnan
I think overall, Craig, I don’t expect them to have a material impact on margins. I think my previous comment on the R&D side kind of applies there that we’ll just move those into the building of the next vehicles. I don’t think it’s substantial. I think the biggest issue for what you’re trying to get at is as we talked last year, we’ve maintained our workforce in — at our plant. And so obviously, with the smaller volume, we’ve got those — everyone is working on other stuff. And as we ramp up volume, they’ll be reallocated to the direct production vehicles. So I think that’s probably the biggest issue that’s kind of getting at what you’re trying to get to is when you look at the Workhorse, they’ll become more fully productive as we ramp up volume.
Richard F. Dauch
Yes. We made conscious decision when we had to shut down production, you can see not to lay off our hourly workers, right? I’ve said it before, they didn’t make a mistake, right? Why should they be punished in a very tight labor market, we want to make sure we keep our skilled workers. There’s some expense that we have right now as we get production going on, that will be better. We had to move locations. We opened up Wixom, we moved aerospace. We moved to headquarters. We had to upfit those offices. There’s some expense there that’s going to be behind us as well, right, I think? We’re putting all the test equipment in the prototype center up in Wixom, so pretty good.
So we have a pretty tight handle. Bob’s got a tight control on the reins there. So keeps the first nice and tight. But I think first quarter is pretty good window into our expense structure.
Craig Edward Irwin
Excellent. It’s good to hear Bob’s got that strong grip. So just to pivot a little bit, the W56, you guys disclosed 8 of the 12 build programs are complete. I guess as of this call is not as of the end of the quarter. So if you could maybe clarify that? And then if you could maybe talk a little bit more about the remaining 4 build programs and what initial production would look like there? Are we starting with 1 week? Are we starting with a couple of weeks? What should we expect?
Richard F. Dauch
Yes, great question. So Dave Berke came to us, 40 years plus experience in the industry building unique vehicles. He laid out very quietly for us, how many trucks you wanted to get built. Number 1 was just let’s build it, just to come together, right? And so we had a team at Union City putting the parts together. And one of them — I’m really proud that the engineers supply chain, the manufacturing and sometimes the suppliers are sitting right on line as we build the trucks. We’re not building them a prototype shops, we’re doing it right in the factory, and we’re learning a lot.
So that means you fit-up issues, torque you can’t get that bolt touched and that kind of (inaudible) that wire is crossing over. So we’re now in the stage. The first four, I think we’re basically just chassis to make sure we could build the chassis, right? (inaudible) the build chassis. Then we started getting into the full vehicle. We have one built in time for an NTEA show. I think we now have 3 full vehicles out at tests, one in thermal testing, one at brake testing and one on a durability testing. Those tests take anywhere from 2 weeks to 40 days, 40 work days. You start the truck without a load in about a week, you put it in a half load and then basically towards the end of the testing, you put it in 100% low. So W56 can carry 10,000 pounds of payload. So we’ll load that thing up with 10,000 pounds of water, basically big totes.
We learned a lot already. So we learned a lot. There’s a lot of software configurations that have to be done. So we’re doing that. And then we go in right now, the next 2 big ones we do are actually slow walk manufacturing. So we actually build the whole chassis and turn around to the Dyno, we go build the bodies to make sure we have all our work instructions, our process control charges done. And then the last 3 or 4 trucks will be the ones we’re going to send out to the customers. That means we’ll build those towards the end of June and July. They should be in the hands of the customer in early July. And then we’ll probably have a slow ramp. We’ll start in August. We’ll build chassis, get the chassis down the line, 14 stations across the Dyno, then we’ll start coming back. I think we have 14 stations for the bodies as well.
So we haven’t defined the exactly daily build rate. It’s probably like one a week for a while until we get all the bugs worked out, make sure all suppliers are there, then we’ll just gradually ramp it up. But we know how many we want to build this year and sell in our budget, and we have expectations we’ll be able to build all those trucks and chassis.
Craig Edward Irwin
Excellent. Congrats on the progress.
Operator
There are no further questions at this time. I would now like to hand the call back over to management for any closing remarks.
Richard F. Dauch
Well, I appreciate your questions and your interest in Workhorse, and we’re going to go back and put our nose on the grindstone and kick some a** in the second quarter and get ready to build and sell some trucks and drones. Thanks a lot, and have a great day.
Operator
Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.