Workhorse Group - Q4 2022

Transcript

Operator (participant)

Ladies and gentlemen, greetings and welcome to the Workhorse Group's fourth quarter and full year 2022 investor call. As a reminder, this conference call 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 (VP of Corporate Development & Communications)

Thank you, Darryl. Good morning, and welcome to all of you joining us on today's fourth quarter and full year 2022 results call. Before we begin, I'd like to note that we've posted the results for the fourth quarter and full year ended December 31st, 2022 via press release. We also issued a second press release this morning that covers the planned board of directors transition for the annual upcoming meeting of shareholders. You can find both these press releases as well as the accompanying presentation for this call in the investor relations section of our website. We'll be tracking to the posted presentation during the call, so please follow along either from the link in the press release or through the website directly. With that, let's get started.

Joining me on today's call shown on slide two are Rick Dauch, our CEO, and Bob Ginnan, our CFO. The agenda today is found on slide three. Following my opening remarks, I'll hand the call over to Rick, who will give you an update on the progress we've made on our strategic and operational priorities during the fourth quarter and the beginning of 2023. Bob will walk us through our financial results for the quarter and full year, and then provide our outlook for the year ahead in 2023. After Rick's summary, we'll take your questions. Moving to slide four, you can find our forward-looking statement. As you know, some of the comments that will be made today are forward-looking and therefore are subject to certain provisions, and as a result, are subject to risks and uncertainties.

You can find the full disclaimer statement in our 10-K or 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.

Rick Dauch (CEO)

Thanks, Stan, and good morning, everyone. Thank you for taking the time to join us today and for your continued interest in and support of Workhorse Group. Over the past 12 months, we've taken decisive actions across the organization to position Workhorse Group for long-term success. We made great progress in the fourth quarter and are poised for a breakout year in 2023. We're encouraged by the progress we've made and are confident that our stakeholders will see the benefit of these actions in the near future. Let's start with some of our highlights and key accomplishments from the fourth quarter on slide five. Getting the right people in the right seats is the foundation of building a company that can successfully make the transition from being a technology startup into becoming a real commercial EV OEM.

It takes relevant industry experience, functional expertise, and a selfless work ethic to be part of the Workhorse team. Throughout last year, we talked extensively about the key hires we made across our executive leadership, engineering, operational, commercial, administrative, and financial teams, all of whom are instrumental in driving our go-forward strategy. We are pleased to have completed building out our strong team, hiring almost 160 people last year, which is the right one to execute our business initiatives and achieve our vision of pioneering the transition to zero-emission commercial vehicles. We also need to have the right systems and processes in place, and they need to be operating effective. We have worked diligently on these important basic building blocks from engineering design revision control, fundamental lean manufacturing planning, to adopting appropriate human resource systems.

These sorts of things do not sound critical, but they are absolutely critical to running an effective business on a day-to-day basis. In terms of our new commercial vehicle product roadmaps, in the fourth quarter, we delivered 23 W4 CC vehicles to customers. We resolved our shipping issues with GreenPower and now have more than 100 base W4 CC vehicles at Union City ready for production in Q1. As it relates to our W750 step van, pilot builds are underway right now, and we start regular production of this Class 4 vehicle in Q2 this year. We also began shipping Tropos vehicles assembled at our Union City facility and are looking forward to ramping up production on that vehicle each quarter in 2023.

Most importantly, we are on track to unveil the W56 at the upcoming NTEA Work Truck Show and begin production of the same, this game-changing vehicle in Q3 this year. Launching four new commercial vehicles over the course of 12 months takes a lot of hard work and coordination, trust me. Finally, we are doing the necessary market data analysis for the future design of the WNext, which we plan to bring to market in 2025. As you know, in December, we held our first Analyst Day at our revitalized world-class manufacturing complex in Union City, Indiana.

We thank those of you who were able to make the trip to Union City back in December, and we were excited to show you the real tangible progress we're making across our electric vehicle and drone product families firsthand, as well as show off our transformed manufacturing operations and deep bench of talent. Looking at the facilities outside of the Union City plant, we have concluded equipping our Wixom, Michigan Technical Center. Our Sharonville, Ohio prototype shop is near completion, just waiting for a few key components to hook up some electricity, and we are installing production lines in our drone manufacturing facility in Mason, Ohio, as we speak. The takeaway summary from all of this hard work on facilities that we now have the physical infrastructure and tools in place to design, test, and build world-class commercial vehicles, both wheeled and rotor-based products.

Drilling down a bit more into Aero, we continue to advance our drone technology development and are excited about the tremendous opportunities in this space. We conducted demonstrations of our HorseFly during the first two months of 2023, first by flying simultaneous package deliveries by multiple aircraft for prospective last mile delivery customer, and secondly, conducting a successful field test for internal operations of a separate last mile delivery customer. I will say that both of these potential customers were highly impressed with what our Workhorse product and our flight team can do. We also successfully field tested its humanitarian and logistics operations or HALO drone internationally. The Aero team also won a state, a grant to support beyond visual line of sight work in Michigan, and we continue to fly in support of the U.S. Department of Agriculture.

We will continue to work on securing additional new federal and state-level grants or long-term contracts for our Aero business. We expect to start the production of drones and generate revenue in this business later this year. Our Stables & Stalls initiative in the fourth quarter successfully managed deliveries to the peak holiday season, gaining valuable insight into the challenges of running and managing a fleet of the aging ICE vehicles. We are using our first EV, one of the inaugural W750 in commercial service on a daily basis, and expect to fully electrify our Stables & Stalls fleet by the end of Q2. We continue to explore options to establish a second Stables & Stalls operation in an incentive bait state sometime this year.

Finally, we resolved a number of legacy and regulatory issues, which has been a critical mandate for our new team. This includes proposed settlements to resolve the securities class action lawsuit and related shareholder derivative actions, and a notice from the SEC that its previously disclosed investigation concluded with a recommendation not to enforce action against the company. These are important steps that allow us to further sharpen our focus and our resources on our strategic priorities. In Q4, we made the tough decision to discontinue the C1000 program. Our team did a thorough engineering review and conducted extensive durability testing. However, we decided the platform could not be redesigned or repaired sufficiently to put a safe, reliable, and durable vehicle on the road for our customers.

Therefore, the best step for our company was to reallocate engineering and supply chain resources towards the development and production of our other products. We expect previously built C1000 units will be decommissioned, disassembled, and disposed of by the end of Q1 2023. Turning to slide six. We continue to make important progress executing on our commercial vehicle product roadmaps throughout the fourth quarter with the goal of delivering high quality, safe, and reliable electric vehicles to our customers. Starting with our Class 4 offerings, the W4 CC and the W750. Our supply pipeline is now functioning much better, and we are buttoning down the manufacturing quality control processes for both vehicles. As I mentioned before, we were pleased to be able to produce and deliver 23 W4 CC vehicles in the fourth quarter.

We are encouraged by the strong customer interest and expect to continue to ramp up production and delivery of this vehicle in 2023. W750 pilot builds are taking place right now, and the company will start production of that vehicle in Q2. We have plenty of customer interest and a need to field many of these vehicles in our Stables & Stalls operations. Turning to the W56, which we first spoke of about a little over a year ago, as the first new Workhorse fully designed and purpose-built Class 5, Class 6 chassis platform. This program has remained on track, both on time basis and budget basis since its inception, thanks to our engineering and supply chain teams, and we expect to start production in Q3 this year. You can see a rendering image on the lower right-hand side of the slide.

It's an impressive vehicle with superior driver visibility and turning radius. Having driven one of the program builds myself, I can tell you it's a serious, capable work truck. We plan to showcase the new production intent step van vehicle next week at the NTEA Work Truck Show in Indianapolis to allow prospective customers to see the product firsthand for the first time. Ride and drives of this vehicle will be offered in May at the ACT Expo in Anaheim, and customer demo vehicles will be in the field starting in late Q2. Moving to the WNext vehicle, which we outlined at Analyst Day. We are combining our previous and extensive Class 3 and Class 4 vehicle field experience to develop a next generation vehicle that with an accessible low floor frame, improved ride and handling, efficient lightweight systems, and advanced safety technology.

We expect to be in production of this vehicle in 2025, and the new vehicle platform will continue come to market just as the government mandates for Class 4- Class 6 commercial vehicles start to take effect. Moving to our aerospace update on slide seven. We continue to make significant progress in advancing development of our drones during the fourth quarter as we target two compelling and growing markets, package delivery and agricultural and infrastructure data acquisition. Let me start with our HorseFly platform, which can deliver 10 lbs and travel over 10 mi. A payload capability we believe is market leading in the nascent drone industry. In January, we successfully conducted an extensive demonstration for a last mile delivery company.

As you can see on the slide, our demo consisted of 50 nonstop deliveries with three drones, two of which were in constant automatic or autonomous flight operational mode. In our second test, we flew a series of demonstrations for a different last mile delivery company to validate a concept they are considering to support their own internal flight operations. We had a completely different flight team do this demo and again, it could not have gone any better. We had a third field team travel to Europe to train a foreign flight crew that had significant drone experience, and then the newly trained team successfully field tested our HALO drone internationally. Additionally, we have also partnered with the U.S. Department of Agriculture and secured new federal and state-level grants, including Michigan, to help accelerate the fielding of this product.

We are actively exploring new opportunities for collaboration with both federal and state government agencies. On slide eight, as I mentioned earlier, we have completely transformed our Union City manufacturing facility into a world-class operation with open, flexible space with room to grow. I was amazed yesterday when I was there watching four different vehicles be put together by our new team up at Union City. The plant continues to ramp up production of the W4 CC, the W750 pilot builds, Tropos vehicles, and soon the W56 line will open up. I am pleased we are finally getting the plant into production mode. We will be installing the end-of-line dyno in Q2, our new assembly line, and a dedicated paint line is being installed ahead on site of the W56 production in Q3.

We are in the process of installing production lines for our drones at our engineering, technical design, and production facility in Mason, Ohio, so we can start regular production in Q2 this year. With that, I'll now turn the call over to Bob to discuss our financial results.

Bob Ginnan (CFO)

Thanks, Rick. I will now cover our financial results for the fourth quarter and full year on slides nine and 10. Our results demonstrate the significant work our team has been doing to strengthen our financial position and operations. Sales net of returns and allowances for the fourth quarter of 2022 were $3.5 million compared to -$2 million in the fourth quarter of 2021. The increase was primarily due to increased W4 CC sales. Cost of sales decreased to $21.2 million from $99.9 million in the same period last year, as the company recorded several non-cash charges, including $12.8 million in additional inventory reserves and disposal costs for the discontinued C1000 program, compared to a $94.3 million C1000 charge in Q4 2021.

Selling, general, and administrative expenses decreased to $13.5 million from $15.7 million in the same period last year. The decrease in SG&A expense was primarily driven by one-time contract termination costs recorded in 2021. Research and development expenses increased to $8 million compared to $2.8 million in the same period last year. The increase in R&D expense was primarily related to increased engineering staff related to the design and sourcing of the company's new products, including the W4 CC, W750, W56, and two drone product lines. Net interest income was half a million compared to net interest expense of $35.7 million in the same period last year. The change in interest income was primarily driven by the exchange of the convertible notes concluded earlier in 2022.

Net loss was $38.6 million compared to $156.1 million in the same period last year. Loss from operations for the fourth quarter was $39.3 million compared to $120.4 million in the same period last year. As of December 31, 2022, the company had $99.3 million in cash and cash equivalents. Moving to our full-year results on slide 10. Sales, net of returns and allowances for the full year 2022 were $5 million compared to a negative $0.9 million in 2021. The increase in sales was primarily due to an increase in sales volume in 2022 compared to sales net of returns and allowances recorded in 2021 in connection with the recalled C1000 vehicles announced in the third quarter of 2021.

Cost of sales for the full year 2022 decreased by $94.8 million to $37.7 million compared to $132.5 million in 2021. The decrease was primarily due to the shift in production to new vehicle platforms at lower volumes compared to the C1000 program in production in 2021. C1000 program incurred $19.5 million increase in the inventory reserve and prepaid purchase reserve in 2022, attributable to the discontinuation of C1000 program, compared to $105.7 million charge recognized in 2021. SG&A expenses for the full year 2022 increased to $73.2 million from $40.2 million in 2021.

The increase was primarily driven by the $20 million legal settlement expense and a $6.5 million increase in professional legal services primarily related to the securities and shareholder derivative litigation. The increase was also attributable to an increase of $11.1 million in employee and labor-related expenses, including stock compensation, increased headcount, and the appointments of the new executive leadership team during the year. R&D expenses for the full year 2022 increased to $23.2 million from $11.6 million in 2021.

The increase was primarily due to a $6.1 million increase in employee and related expenses resulting from an increase in headcount, a $2.4 million increase in prototype components, and a $2.1 million increase in consulting fees to support the expanding product roadmap, such as the new W56, the WNext truck chassis platform, and continuing development of the HorseFly and HALO drones. Net interest expense for the full year 2022 decreased to $1.8 million compared to $12.6 million in 2021. The decrease was primarily due to a reduction of $7 million related to fair value adjustments and losses on conversion of the convertible notes and a $6.4 million reduction in contractual interest expense. Additionally, the company recognized $0.3 million of interest income in 2022.

Further, the company recognized a gain of $1.4 million on the forgiveness of the prior PPP term note during the year ended December 31st, 2021, compared to no gain recognized in 2022. Other income for the full year 2022 increased to $13.6 million, primarily attributed to gains from the sale of inventory related to obsolete C1000 vehicle parts. The 2021 losses are related to unfavorable changes in fair value and sale of investment in Lordstown Motors Corp., which was sold during the third quarter of 2021. For the years ended December 31st, 2022 and 2021, the company incurred taxable losses and thus no provision for income tax expense has been reported. Net loss was $117.3 million, compared to a net loss of $401.3 million last year.

Turning to slide 11 to discuss our balance sheet for the year ended 2022. As we mentioned last quarter, we are debt-free following exchange transaction in Q2. As of December 31st, 2022, the company had $99.3 million cash and cash equivalents. We also continue to have our ATMs in place and use it judicially in Q4. You also see that we recorded a $35 million liability for the shareholder lawsuit, offset by a $15 million insurance receivable. The other item of interest on the balance sheet is a $10 million investment in Tropos and a related $5.4 million of deferred revenue. We currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio and Michigan to be between $15 million-$25 million in 2023.

We believe our existing capital resources and capital availability will be sufficient to support our current and projected funding requirements through 2023. If an opportunity arises, we will raise additional financing in 2023, including through a continuance of our at-the-market offering. Moving to slide 12, which covers our guidance. We had positive momentum coming out of 2022 and took the necessary steps to prepare for expanded operations in 2023. Looking ahead, we will focus on manufacturing, operational excellence and financial discipline as we ramp up sales, production and deliveries of commercial vehicles and drones. We expect to generate significant revenue growth in 2023, with revenue expected in the range of $75 million-$125 million based on the current supply chain lead times.

We believe we have the resources to ensure the financial position to execute our strategic plan will allow us to deliver on our goals and generate value for our customers and shareholders. I'll now turn the call back to Rick Dauch to wrap up the call.

Rick Dauch (CEO)

Thanks, Bob. I wanna briefly discuss some of our key Q1 priorities, which are outlined on slide 13. Above all else, we are focused on advancing our new product programs. We are now in pure execution mode on all four programs. Specifically, we expect to ramp up production of our W4 CC in the first quarter, targeting 40 to 50 trucks per month by Q2. W750 pilot builds are underway right now, and we will start regular production of that vehicle in Q2 and deploy several of them to electrify our Stables & Stalls also in Q2. Final testing is underway on the W56 program at multiple locations, and we will begin showcasing the W56 to customers in March, both at trade shows and with personal demonstrations at key customers.

HorseFly and HALO testing is now complete, validation is complete, and both drones are now available for sale to our customers. We are in the final stages of expanding our certified dealer network, ensuring we have commercial business partners capable of serving both niche, regional and national fleet customers. We are quickly building a nice backlog of orders, first for the W4 CC and W750, and soon for the W56 vehicles. Finally, we will execute on our common systems deployment plans in 2023, including transitioning to a new ERP system, QAD, which will help drive operational efficiencies as we ramp up production of our products. We expect to complete this ERP transition in Q3 this year. On slide 14, making the transition from a technology startup to being a real OEM is not easy, nor is it for the faint of heart.

It takes time, a great team of dedicated people, significant capital and capable back office systems to make the transition a reality. Before we turn the call to Q&A, I wanna re-emphasize five key takeaways that I'd like you all to walk away with today, I will use my stabilize, fix and grow slide as a backdrop. First, we have built an incredible team of leaders, engineers, supply chain and sales leads, operational experts, hourly and back office staff that are experienced in their respective fields. Every team member contributes to our success. I will put up our team against any commercial EV startup company in the world.

Second, we have made real tangible progress on our new product pro-roadmaps and are now well positioned to ramp up production in 2023 through 2025 on multiple Class 4-Class 6 commercial vehicles. We continue to advance our drone development efforts and believe that there are tremendous revenue opportunities in this segment, both in the commercial and government segment areas. Third, our facilities have been completely transformed and modernized, and we now have state-of-the-art capabilities to design, test, and produce our vehicles and deliver high-quality products and services to our customers. Coupled with our process and IT systems improvements, we have the necessary tools in place or underway to become a leading commercial EV OEM. We are not talking about building and tooling plants in the future. Our plants are production ready now in 2023.

Fourth, we have resolved our legacy, legal and regulatory issues, which allows us to focus our time, resources, and efforts on advancing our product roadmaps and delivering high quality, safe, reliable and durable products for our customers. We remain confident in the market opportunities in our industry and know that we have the right team, right products, and right production plans in place to deliver significant value to our customers, our shareholders and other stakeholders. There's a strong market demand and governmental support for commercial EVs, UAVs, and enabling infrastructure. Finally, we have the financial strength to support our business strategy. While others continue to struggle for survival, we fully expect to emerge as a winner in the nascent commercial EV market. That concludes our prepared remarks. We're now ready to open the call for your operators. Darryl, please provide the appropriate instructions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question has come from the line of Colin Rusch with Oppenheimer & Co. Please proceed with your questions.

Colin Rusch (Managing Director and Senior Research Analyst)

Thanks so much, guys. You know, could you talk a little bit about the cadence of production, on a quarterly basis throughout the year, as well as the cost reduction effort? I assume that you're gonna go through a period of underutilization and then, catch up and start leveraging some of the hard assets here.

Rick Dauch (CEO)

Yeah, Colin Rusch, good question. You know, we got the trucks in late fourth quarter last year. We're now exercising our production. You know, people hadn't worked at the facility for quite some time in terms of torque tools, turning wrenches, et cetera, so we're proving out some of our production processes. We're making sure we have the quality control process controls in place to make sure we're building safe, reliable vehicles. We're probably up right now at about two a day on W4 CC, and we're moving towards, you know, somewhere between 40-50 as we go into the second quarter, we'll see how it goes from there. That's primarily on W4 CC. W750, we're still in pilot build mode. I think we've got one full pilot done.

We have another one that's 90% done, and we have a third that's about 50% done, so we're waiting for a few key parts as we're making some engineering changes to make sure we have fit, form, function going together in that. I'm pretty confident we'll be on production pace in the second quarter there, and we'll see how many trucks we build there this year. W56, we won't really get into pilot production until, like, late second quarter, and then we'll start regular production with a very slow ramp-up in the third quarter, and then we'll start ramping up pretty hard in the fourth quarter. It's gonna be a nice continuous year of continuous launches. Having gone through launches before, they don't always go perfectly.

You have supply chain issues, you have tooling issues, you got training issues. We'll have some hiccups and starts and stops, but I think that we come out of 2023 in a really good position rolling into 2024.

Colin Rusch (Managing Director and Senior Research Analyst)

Okay. with the cadence of the cost reduction, is that gonna just be an inversion of the cadence of the production ramp or are there gonna be some meaningful steps-?

Rick Dauch (CEO)

We'll get more efficient as we go forward. Our team has spent almost six or seven months in the classroom learning about lean manufacturing. Now they're starting to practice lean manufacturing. Whether it's how we walk around a station to build a truck to minimize steps or how we deliver materials to the floor, we're cleaning out all the old C1000 inventory out of the warehouse. It'll all be gone by March 15th, and then we can start laying out all the inbound materials that come in for W4 CC, W750, and W56. Right now, the focus is on getting the truck out there. We're the only one, I think, and correct me if I'm wrong, that has a fully electric Class 4 vehicle with a range of 150 mi that can carry a payload of 5,000 lbs.

We have some ability to get out there to be first to market, which gives us some flexibility in terms of our pricing, and then we can keep driving costs down the road. We already are looking out at opportunities in 2025 and 2026 of how we can take out some of the bill of material costs for sure.

Colin Rusch (Managing Director and Senior Research Analyst)

Okay. That's helpful. It's a good segue into my second question around the customer dynamics. Now that you have some trucks to show folks that they can drive, you know, how is that changing the dynamics with, you know, customer engagement, your ability to close sales, you know, building up a pipeline of opportunities and starting to close that?

Rick Dauch (CEO)

Great question. First thing we did was hire a dynamic leader in Chris Amy to take over our commercial vehicle sales responsibility. She has over 20 years of experience selling commercial trucks across the country, both on a traditional ICE and EV. She's built an outstanding team. We have three regional sales members who've got key customer contacts. All three of those people have over 20 years+ in the industry. We've also built the back office now, both here from an administrative standpoint and also from service support to make sure we can take care of our customers. That's number one. We have the systems in place, or soon we'll have the systems in place to build trucks and ship trucks and take care of trucks in the field.

I'd say this, the feedback I've got, and I've been on the road quite a bit in the first quarter meeting with customers, we've hosted several up at Union City. They're impressed by our facilities. We're on track to have 11 certified dealers here in the second quarter of this year, and that'll lead to quite a bit of sales. I think right now, Bob and I feel comfortable that we have 80% visibility into the low end of our $75 million sales range in 2023.

Colin Rusch (Managing Director and Senior Research Analyst)

That's super helpful. Thanks, guys.

Rick Dauch (CEO)

Thanks. Thanks, Colin.

Operator (participant)

Thank you. Our next questions come from the line of Greg Lewis with BTIG. Please proceed with your questions.

Greg Lewis (Managing Director and Energy and Infrastructure Analyst)

Thank you, and good morning, everybody. You know, just following up on that, you know, as we think about, you know, the kind of the puts and takes of that, is the high end of the guidance, is that or however you wanna talk about it, is the delta to the high end and the low end more a function of the timing of the rollout of the W750, or is it maybe around the ability to scale the cab chassis, which it sounds like is You know, almost in the 40 to 50 per month range already?

Rick Dauch (CEO)

I'd say a couple of things. We wanna make sure we set a range that we can achieve. As I said, we have 80% visibility into the low end of the range. You know, I've been in this industry now for over 30 years. Pilot and launches don't always go perfect, right? If they do, great. If they don't, we've got a little wiggle room, I'll say right now, right? The more we can get demos in the hands of customers, the more they're gonna like them, I think. We've had at least three customers in the last 60 days come to Union City, and they turned around and signed up as new dealers, almost within 30 days. Okay?

I think the more we get our products in the hands of customers, they can test drive them, they can think through all the different variations on the W4 CC of what they can put on the back, the better our sales will be. I think we were surprised. We brought the W4 CC over in December 2021 to show a couple of customers, thinking about we build the step van. Overwhelmingly, the customer said they really want the W4 CC cab chassis. That's where the bigger opportunity, that we didn't see that when we first started looking at the market. I think that's a big opportunity for us. You got to go through the upfit. I know we have four or five trucks sitting at upfitters right now.

One's getting a dry van on it, one's getting a reefer, one's getting it configured for a shuttle bus, one's getting to put together for a flatbed. We've got a really important commercial partner that we've had for a while who's been helping us work our way through and to better understand how these vehicles go to market. We thank them, so.

Greg Lewis (Managing Director and Energy and Infrastructure Analyst)

Okay. Great. I was hoping you could provide a little bit more color around Tropos. You know, you got a few units out, you know, in the fourth quarter. Any kind of color you can give around on how that ramp is going, maybe where we are as kind of as we look at, you know, how things were on a production basis stand, like as we think about February versus where they were last year and kind of how you think about the potential to scale that up as 2023, you know, moves forward.

Rick Dauch (CEO)

Greg, that's a great question. I'll say two things. You know, when we first got the vehicles in, we experienced a little bit of shipping issues in terms of we got to do some repairs. We worked quickly with GreenPower to get those taken care of. Two, when we got some of the W4 CC chassis into the hands of the upfitters, we got some real feedback in late December and in early January. We're making a few quick changes that they want to see. They like the base truck, they like the powertrain. They want some things that are better for the fit of the boxes, et cetera. The cab chassis are coming over with what we call a cutaway back, and they want a fixture across the back.

Our engineering team, literally, in less than three weeks, came up and designed a new back to put on the back of the truck that provides a much better fit for the upfitters. We think they're very happy with that solution. We just finished testing it on a test track last week. Thank God we built the test track. We have already tooled up a supplier, and he is ramping up as we speak, and we'll have a bunch of those backs in with the liners in mid-March, and then we'll be really go off and running. I think that is indicative of the investments we've made, whether it's in the technical team, the supply chain team, and our test facilities and our manufacturing to be able to be so nimble to move that quickly. Okay?

That was like, seriously, literally, we got some trucks out between December 15th and 31st. By the first week of January, we got some feedback, "Hey, we got a few issues with you guys that we need to get addressed." Here we are into February. I guess today is March 1st, and we've already got solutions to get to the customers here between now and the end of the quarter.

Greg Lewis (Managing Director and Energy and Infrastructure Analyst)

Thank you for the thoughts.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Chris Souther with B. Riley Securities. Please proceed with your questions.

Chris Souther (Senior Equity Research Analyst)

Hey, guys, thanks for taking my questions here. On the 80% visibility of the low end of the range, I'm curious what the W56 contribution is there ahead of the commercial launch next week. Is it really just for the W4 CC, W750 at this point? Then, you know, maybe what kind of contribution are you expecting from, you know, drones, contract manufacturing, you know, other stuff for as far as, you know, the guidance picture there?

Bob Ginnan (CFO)

Hi, Chris Souther, this is Bob. I would say that, you know, that visibility is predicated on the W4 CC platform. From there, we anticipate the W56, W750, and then ultimately getting the drones contributing to the number as well. Right now, the visibility is on our really first launch, and then those will ramp it up from there.

Chris Souther (Senior Equity Research Analyst)

Got it. Okay. Maybe just. You talked about, you know, customer interest being pretty high. Could you talk about how you guys are reengaging with some of the legacy, you know, backlog customers, you know, how that process is going and, you know, you know, versus kind of new customers that you've been engaging with some of the new team members you've added?

Rick Dauch (CEO)

Yeah, Chris, that's a great question. I'll tell you, first of all, I'm kinda known in the industry as an operational animal, so I'm gonna have to take my operational hat off pretty much in the next 30, 45 days and turn into a commercial animal and reengage with some of those big legacy potential customers, right? I didn't feel comfortable until we had hard physical product to take out to customers. So showing something showing somebody something on a PowerPoint is one thing. Actually have them drive the vehicles and see how they work is another thing. I think our vehicles will sell themselves once we get them in the hands of customers. We have at least five large commercial, either last mile delivery or work truck customers who ask specifically for a W56 demo.

They wanna be able to test them themselves with their team for two-four weeks. As part of our pilot and program builds, we're building some commercial demos to send out, and each one of our field sales team will have a family of either a W750, a W4 CC, and a W56 to take around to different regional customers. On the drone side, one of our successful demonstrations that customers ask for two of our drones to be tested for 30-60 days at their own test facilities somewhere here in North America. I think we're at a point now, after 18 months of super hard work, to actually have viable products that are commercial...

Not only technically viable, safe, durable, but also commercially viable in terms of the way we can build them at a cost and sell them at a price and make money. That wasn't the fact when we got here back in 2021.

Chris Souther (Senior Equity Research Analyst)

Sure. Yeah. No, that all makes sense. Great. Maybe just you talked about adding Stables & Stalls into another region. Is this about, you know, just demonstrating closer to potential customers, you know, going through all the, you know, customer incentive processes to help hold customer hands through those processes? How many more of these do you think you'll be setting up essentially, is kinda what I'm getting at too.

Rick Dauch (CEO)

Good question. We chose to do the first one here in Ohio. It's close to our technical team, it's close to our factory, and we can get there as leadership team. It's less than literally 15 mi or 20 mi away. We got buy-in from FedEx, both here regionally and back in Memphis to try it. We built the facility, we secured the facility, leased it, we transitioned it, we put the charging stations in. We're almost done buttoning up the interior where we can put the lifts in to go work on service trucks. We have learned a lot, I'll say, sometimes painful in terms of new transmissions, repairing tires in the snow, having to change an engine, what it takes to maintain and keep qualified drivers and have safe drivers on the road.

So here in Ohio, we're blessed with the Ohio River and low cost electricity, but we're not blessed with incentives from the state of Ohio. We've done some work as a commercial team. We spent a couple days on some training sessions to make sure we understand the CARB rules in California and all the different incentives across the 17 or 18 states. Stan March is leading that effort for us, and he's buttoning down. It looks like we're gonna focus on one of two regions, one on the West Coast or one on the East Coast, where there's significant commercial incentives, up to $100,000 per vehicle in some states, $60,000 in others for our vehicles. We'll choose one of those selections.

We're working with FedEx to identify the best location, and we'll probably have a second operation up and running this year. Then we'll stop. Remember, our goal is not to build out a whole network of Stables & Stalls. It's to build out two or three Stables & Stalls to better understand what it costs an operator to transition a historically ICE fleet to EV. The acquisition costs, the total cost of operations and ownership, and where the savings we can help justify the business case to take back to some of the customers, whether that's independent contractors on the FedEx Ground side or to other large commercial users of commercial trucks, people who deliver to grocery stores, people who deliver to goods and supplies to factories. Everybody's trying to figure out how to make this transition work, right?

Quite honestly, the government's gotta help put in the EV infrastructure. They're doing that. Until we get the volume, the government's gotta provide incentives or else it doesn't make a lot of logical sense. The EVs cost a lot more money until we get batteries at a volume, then costs come down significantly, so.

Chris Souther (Senior Equity Research Analyst)

Okay. No, that's very helpful color-

Rick Dauch (CEO)

We are in the very, very early stages of this transition. You can read all the press publications about the crazy how fast we're gonna go on EV. At the end of the day, you have to have the infrastructure in place, and you have to have a economic model that works for both the suppliers, the manufacturers, and the end use customers. If you don't, then it doesn't work, right? We think we're on a path forward to get that done.

Chris Souther (Senior Equity Research Analyst)

Maybe just my last one, you know, timing around kind of positive gross margins and, you know, where we start to get the leverage. You know, is that something exiting this year, we should expect, you know, given kind of the ramp up throughout the year? Then I'll hop in the queue.

Rick Dauch (CEO)

You know, every truck we sell, we expect contribution on it from the very beginning. As you said, total gross margin is about fixed cost coverage. I don't think we'll be there by the end of this year, but we will, you know, I think, make significant progress towards positive gross margin as we ramp up production.

Chris Souther (Senior Equity Research Analyst)

Appreciate it. Thanks. I'll hop in the queue.

Rick Dauch (CEO)

Yeah, sure. I think one, the one thing I'd say to you is that if you take a look at the commercial EV space, there were a lot of projections over the last two or three years, and almost all of them came up short in two areas. One, it's a hell of a lot tougher to go from concept to production, and it costs a hell of a lot more to get there, okay? Just go back and look at all the old forecasts of some of the other EV SPACs and stuff, and that. Are they coming up short? Have they built their plants, et cetera? We're very fortunate here at Workhorse that we got a plant that's been around for almost 20 years.

It didn't cost us as much to renovate and upgrade the factory as it would have to build a brand new greenfield site, which would have taken a couple years. We were able to get that Union City facility turned around and ready to go in less than six months-nine months for about $20 million. We'll put another $15 million or $20 million in this year in terms of paint line, dyno test, in-line dyno testers, and the AGVs to move the vehicles around the plant, right?

Operator (participant)

Thank you. Our next question has come from the line of Jeff Osborne with TD Cowen. Please proceed with your questions.

Jeff Osborne (Managing Director and Senior Research Analyst)

Hey, good morning. Most of my questions have been answered, but a couple quick ones. One was actually on CapEx, which you were just touching on. What should we assume for 23? I might have missed that when you prepared remarks.

Bob Ginnan (CFO)

Yeah, Jeff Osborne, this is Bob. We expect somewhere in the $15 million-$25 million range, so pretty consistent. Primarily Rick just outlined the three major projects, AGVs, paint booth, and dyno are the bulk of that. Little bit of money on an ERP, but in that $15 million-$25 million range.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. Another quick one, Bob, on the modeling side. There was a bunch of, sort of OpEx in the OpEx. Can you give us a run rate for the first half of the year or for the full year, how we should think about, total OpEx on a annual and quarterly basis?

Bob Ginnan (CFO)

I think when you look at the fourth quarter from an OpEx perspective, it's pretty indicative of where we are now. I think that's pretty good run rate.

Jeff Osborne (Managing Director and Senior Research Analyst)

Got it. My last question is just how should we think about pricing? I think Rick mentioned that the cab chassis is a bit more interest. You know, is that a bit maybe lower prices than a full vehicle? You guys showed at the end when saying, you know, that's the predominant mix, how should we think about ASPs through you?

Rick Dauch (CEO)

Jeff, you broke up a little bit, so can you repeat that? You said something about the sales price of the cab chassis versus the full vehicle, but I didn't quite understand your question.

Jeff Osborne (Managing Director and Senior Research Analyst)

I apologize. I got a bad connection here. I was just curious if there's more interest in the cab chassis than you anticipated and what that does to average ASPs through the year.

Rick Dauch (CEO)

You talking about average pricing across the two different, the other cab chassis or step van? Is that what you're asking?

Jeff Osborne (Managing Director and Senior Research Analyst)

That's what I was trying to get at, yes. Thank you.

Rick Dauch (CEO)

You kind of saw some indications in the fourth quarter. You can kind of do some backward math in terms of revenue and number of vehicles sold. We didn't sell any drones, so, you know. We did have some Stables & Stalls revenue. We had some drone service revenue. You can probably get to a back of the envelope calculation for a range. As we ramp up, prices are pretty a little better than we thought when we did the modeling. We are looking at when we're receiving some big orders, you know, we can have some discounts in there, but they're not huge discounts is what I'd say, right? I think we have, well, one dealer's indicated they wanna buy somewhere between 250-260 vehicles this year already.

Just one customer so.

Jeff Osborne (Managing Director and Senior Research Analyst)

Great to hear that. Thank you.

Rick Dauch (CEO)

Thanks. Thanks, Jeff.

Operator (participant)

Thank you. Our next question has come from the line of Mike Shlisky with D.A. Davidson. Please proceed with your questions.

Mike Shlisky (Managing Director and Senior Research Analyst)

Good morning, thanks for taking my questions. I did miss your first few comments, so if these are half the answer, just let me know. First, could you comment on any potential royalties that might be coming or not be coming from the old Lordstown deal? It sounds like there's a filing that they're trying to get out of the deal. I'm curious, can they just, you know, can you and Larry just do that? Are there any unusual legal costs we should be looking at for 2023 to get that deal in force? It's a big number. It's, like, probably worth 9 figures to Workhorse, so I just wanna make sure that that's still gonna happen.

Rick Dauch (CEO)

We, as, you know, as we stated in our, in our release, we believe that, you know, the royalties still apply regardless of the status of the agreement. I would also say that, you know, the main dependency here is they gotta ship trucks and that's that at the end of the day, that's what generates the royalty. We believe we still have the royalty in place, and that's kind of where we stand right now.

Mike Shlisky (Managing Director and Senior Research Analyst)

It's not a thought that I cover, but I'm under the impression they have shipped a few. Just out of curiosity, Bob, at this point, have you invoiced them for that per-truck change that they might owe you for the, for the first handful?

Bob Ginnan (CFO)

We're still waiting on reporting so that we can do that next step.

Mike Shlisky (Managing Director and Senior Research Analyst)

Okay, great. kind of moving on, I don't wanna open any old wounds here and open up the old USPS question again. They are now awarding EV contracts beyond just Oshkosh. They are, you know, somewhat small orders, but they are awarding them. They just awarded over, I think, 9,000 vans yesterday. They're a very active buyer there. Does Workhorse have any opportunities to bid on those COF orders going forward? Perhaps it's gonna be that-

Rick Dauch (CEO)

We saw the announcement yesterday that they awarded some, I think, their class 2 or class 3 transit vehicles to Ford. Congratulations, Ford Motor Company. Well earned. We do think there's opportunity at some point with the U.S. Postal Service and other government agencies for our class 5, class 6 trucks and potentially for our drones. That's all we'll say for now, so.

Mike Shlisky (Managing Director and Senior Research Analyst)

Okay. Maybe last one from me. The Aero demos that you've talked about here, it's hard to tell from the pictures. With those drones, with those Aero products actually taking off and landing on a Workhorse truck, or is that the next level of kind of public demo? Is there a large difficulty leap from the old demos to any moving truck demos to make that happen?

Rick Dauch (CEO)

Great, great question. Those were not off the truck. The customer, the first customer we did the demo for, where we did the 50 deliveries across six different addresses, they were done from ground-based locations. At the request of that customer, they wanna prove out the concept of being able to deliver from a warehouse or a fixed location to multiple individual or business locations first. We did that test, and we passed that test. The first month I was here, I went down to that customer. They gave me a three page list with about 25 specifications to include: you have to have a parachute, you have to be able to deliver off a tether, you have to be able to pull the package back up in case there's an issue with it, you gotta handle a certain range, you gotta hit a certain payload.

We've met every single one of their specifications. It took us almost 18 months to get there. Hell of a lot of work. We doubled our engineering team. We tripled our software team. We tripled our flight operations team. We have countless hours now, and we're pretty confident. The customer asked us to prioritize the fixed location delivery first and then come back to the vehicle delivery. We have only tested that flight off the old E-GEN. We have some in service, but we're not building any more of those. We're gonna have to use, we're gonna have to modify a W56 and a W750, the tops at some point to do that, but that wasn't our priority in 2022 or 2023. We'll probably get to that sometime in 2024.

Mike Shlisky (Managing Director and Senior Research Analyst)

Great. That makes a lot of sense. It sounds very exciting. I'll pass it along. Thank you.

Operator (participant)

Thank you. We have reached the end of the question and answer session. With that, I would like to bring the call to a close. We do appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.