Workhorse Group Inc. Q4 FY2022 Earnings Call

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.

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 31, 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 of 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. And with that, let's get started. Joining me on today's call, shown on Slide 2 are Richard Dauch, our CEO; and Bob Ginnan, our CFO. The agenda today is found on Slide 3. Following my opening remarks, I'll hand the call over to Rick, who will give you an update on the progress we've made on our strategic and operational priorities during the fourth quarter and the beginning of 2023. Bob will then 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 4, 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. And with that, I'll now turn the call over to Rick Dauch. Rick?

Thanks, Stan, and good morning, everyone. Thank you for taking the time to join us today and for your continued interest in and support of Workhorse. Over the past 12 months, we've taken decisive actions across the organization to position Workhorse 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 5. Giving the right people in the right seats is the foundation of building a company that can successfully make the transition from being a technology start-up into becoming a real commercial EV OEM. It takes relevant industry experience, functional expertise, and the 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 effectively. 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 road maps, in the fourth quarter, we delivered 23 W4 CC vehicles to customers. We resolved our shipping issues with Green Power 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 trouble 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 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 W next, 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. We had the facilities outside of the Union City plant. We have concluded equipping our Wickes 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 is that we now have the physical infrastructure and tools in place to design, test, and build world-class commercial vehicles, both wheel 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 customers; and second, conducting a successful field test for the internal operations of a separate last-mile delivery customer. I will say that both of the potential customers are highly impressed with what our Workhorse product and our flight team can do. We also successfully field-tested humanitarian and logistics operations or HALO Drone internationally. The Aero team also want to 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 stable installs initiatives, 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 and sales split by the end of Q2. We continue to explore options to establish a second stable operation in an incentive-based 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 has 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 that platform could not be redesigned or repaired sufficiently to create 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 6. We continue to make important progress executing our commercial vehicle product road maps 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 and quality control processes for both vehicles. As I mentioned before, we are 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 the need to field many of these vehicles in our stable installed operations. Turning to the W56, which we first spoke about a little over a year ago, as the first new Workhorse fully designed and purpose-built Class 56 chassis platform. This program remains on track, both on a 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 seriously 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 show in Anaheim, and customer demo vehicles will be in the field starting in late Q2. Moving to the W next 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 has an accessible low floor frame, improved ride and handling, efficient lightweight systems, and advanced safety technology. We expect to begin production of this vehicle in 2025 and the new vehicle platform will continue to come to market just as the government mandates for Class 4 to Class 6 commercial vehicles start to take effect. Moving to our aerospace update on Slide 7. We continue to make significant progress in advancing the 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 pounds and travel over 10 miles, a payload capability that 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 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 has significant drone experience, and the newly trained team successfully field tested our Halo drone internationally. Additionally, we have also partnered with the U.S. Department of Agriculture and have secured new federal and state-level grants, including from Michigan, to help accelerate the feeling of this product, and we are actively exploring new opportunities for collaboration with both federal and state government agencies. On Slide 8, 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 Dino in Q2, our new assembly line and a dedicated paint line is being installed ahead on site of the W56 production in Q3. Additionally, 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.

Thanks, Rick. I will now cover our financial results for the fourth quarter and full year on Slide 9 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 a negative $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 noncash 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 $0.5 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 recall of 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. The C1000 program incurred a $19.5 million increase in the inventory reserve prepaid purchase reserve in 2022 attributable to the discontinuation of the C1000 program compared to a $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 a $20 million legal settlement expense and a $6.5 million increase in professional and 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-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 road map, such as the new W56 and the W Next 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 the 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 31, 2021, compared to no gain recognized in 2022. Other income for the full year 2022 increased to $13.6 million, primarily attributable 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 sales of investment in Lordstown Motors Corp., which was sold during the third quarter of 2021. For the years ended December 31, 2022, and 2021, the company incurred taxable losses and thus no provision for income tax expense has been recorded. 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 the exchange transaction in Q2. As of December 31, 2022, the company had $99.3 million in cash and cash equivalents. We also continue to have our ATMs in place and used them judiciously in Q4. You'll also see that we recorded a $35 million liability for the shaver 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 the 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 and $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 and with revenue expected in the range of $75 million to $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 that will allow us to deliver on our goals and generate value for our customers and shareholders.

Thanks, Bob. I want to 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 builds are underway right now, and we will start regular production of that vehicle in Q2 and deploy several of them to electrify our stable installs 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 start-up 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 that make the transition a reality. Before we turn the call over to Q&A, I want to reemphasize five key takeaways that I'd like you all to walk away with today, and I will use stabilize my stabilized fix and grow slide as a backdrop. First, we have built an incredible team of leaders, engineers, supply chain and sales leads, operational experts, and 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 start-up company in the world. Second, we have real tangible progress. We have made real tangible progress on our new product road maps and are now well positioned to ramp up production in 2023 through 2025 on multiple Class 4 to 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 system improvements, we have the necessary tools in place and are 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 road maps and delivering high-quality, safe, reliable, and durable products for our customers. We remain confident in the market opportunities ahead 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. Daryl, please provide the appropriate instructions.

Our first questions come from Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks so much, guys. 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 going to go through a period of underutilization and then catch up and start leveraging some of the hard assets here.

Yes, Colin, that's a great question. We received the trucks in late fourth quarter last year and are now working on our production. Our team had not used the facility for some time in terms of torque tools and similar equipment, so we are validating some of our production processes. We are ensuring that our quality control measures are in place to build safe and reliable vehicles. Currently, we are producing about two vehicles a day for W4 CC, and we aim to reach a target of 40 to 50 vehicles as we move into the second quarter. As for W750, we are still in pilot build mode, having completed one full pilot, with another 90% finished and three at about 50% completion. We are awaiting some essential parts and making engineering adjustments to ensure everything fits properly. I am quite confident we will achieve production pace for this in the second quarter and will see how many trucks we can build this year. For W56, we anticipate starting pilot production in late second quarter, followed by regular production with a gradual ramp-up in the third quarter, leading to a more significant increase in the fourth quarter. It will be a continuous year of launches, and although we have some experience, launches can be unpredictable due to supply chain, tooling, and training challenges. We may experience some hiccups along the way, but I believe we will end 2023 in a strong position as we head into 2024.

Okay. And with the cadence of the cost reduction, is that going to just be an inversion of the cadence of the production ramp or are there going to be some...?

So, 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. And so, 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 clearing out all the old C1000 inventory out of the warehouse will all be gone by March 15, and then we can start laying out all the inbound materials that come in for W4 CC, W750, and W56. So right now, our focus is on getting a 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 miles that can carry a payload of 5,000 pounds. So, 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 at opportunities in '25 and '26 on how we can take out some of the bill of material costs for sure.

Okay. That's helpful. And then that leads into my second question about customer dynamics. Now that you have some trucks available for people to drive, how is that affecting customer engagement, your ability to close sales, and build a pipeline of opportunities?

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 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-plus years in the industry, and 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. So, we have the systems in place or soon we'll have the systems in place to build trucks, 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 will 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.

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

Thank you, and good morning everyone. In relation to guidance, can you clarify whether the difference between the high and low ends is primarily due to the timing of the W750 rollout or if it relates more to our capacity to scale the cabin chassis, which seems to be reaching about 40 to 50 units per month?

Yes, I'd say a couple of things. We want to make sure we set a range that we can achieve. As I said, we have 80% visibility into the low end of the range. 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 into the hands of customers, the more they're going to 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? So, 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 in the back, the better our sales will be. I think we were surprised; we brought the W4 CC over in December of '21 to show a couple of customers, thinking about we build the step van. And 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. So, I think that's a big opportunity for us. You got to go through the update. I know we have four or five trucks sitting at upfitters right now. One is getting a dry van on it, one is getting a refurb, one is getting it configured for a shovel bus, one is getting put together for a flatbed. We've got a really important commercial partner that we've had, who has been helping us work our way through and better understand how these vehicles go to market. We thank that.

Okay, great. I was hoping you could provide a bit more detail about the units you deployed in the fourth quarter. Can you share insights on how that ramp-up is progressing, particularly in terms of production as we compare February to last year? How do you see the potential for scaling up as we move forward in 2023?

Greg, that's a great question. I'll say two things. When we first got the vehicles, we experienced a little bit of shipping issues in terms of we got to do some repairs, we worked quickly with Green Power to get those taken care. Two, when we got some of the W4 CC chassis into the hands of the upfitters, we got some real feedback late December and in early January, and 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, etc. The CAP chassis are coming over with what we call a cutaway back, and they want a fixture across the back. So, 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 that on the test track last week; thank God we built the test track. And we have already tooled up a supplier, and he is ramping up as we speak, and we'll have a bunch of those back in with the liners in mid-March, and then we'll be really off and running. And 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 in our manufacturing to be able to be so nimble to move that quickly, okay? And that was like seriously literally, we got some trucks out between December 15 to 31 by the first week of January; you got some feedback. Hey, we got a few issues with you guys that we need to get addressed. And here we are into February; I guess today is March 1, and we've already got solutions to get to the customers here between now and the end of the quarter.

Our next questions come from Chris Souther with B. Riley. Please proceed with your question.

Hi, everyone. I appreciate you taking my question. Regarding the 80% visibility to the lower end of the range, I’d like to know what the contribution from W56 is ahead of next week's commercial launch. Is it primarily about the W750 at this stage? Also, what kind of contributions are you anticipating from drones, contract manufacturing, and other areas for the guidance outlook?

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

Got it. Okay. You mentioned that customer interest is quite high. Can you explain how you're reconnecting with some of the legacy backlog customers and how that process compares to engaging with new customers and the new team members you have brought on?

Yes, Chris, that's a great question. I'll tell you, first of all, I'm kind of known in the industry as an operational animal. So, I'm going to 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 products to take out to customers. Showing somebody something on a PowerPoint is one thing; actually having to drive the vehicles and see how they work is another thing. And 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 want to be able to test them for themselves with their team for two to four weeks. So, as part of our pilot and program builds, we're building some commercial demos that will be sent out. And each one of our field sales team will have a family of either W750, W4 CC, W56 to take around to the different regional customers. On the drone side, out of one of our successful demonstrations that customers ask for two of our drones to be tested for 30 to 60 days at their own test facilities somewhere here in North America. So, I think we're at a point now after 18 months of super hard work to actually have viable products that are not only technically viable, safe, and 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.

Sure. Yes. No, that all makes sense. Great. And maybe just you talked about adding stable installs into another region. Is this about just demonstrating closer to potential customers, going through all the customer incentive processes to help hold customer hands through those processes? Or how many more of these do you think you'll be setting up essentially is kind of what I'm getting at?

Good question. We decided to start in Ohio because it's near our technical team and factory, allowing our leadership team to be within a short distance. We received support from FedEx, both locally and in Memphis, to move forward. We secured and leased a facility, transitioned it, and installed charging stations. We're nearly finished with the interior setup, where we will add the lifts for servicing trucks. We've learned a lot, sometimes through difficult experiences, about new transmissions, tire repairs in snowy conditions, engine changes, and maintaining qualified and safe drivers. While Ohio has advantages like low-cost electricity from the Ohio River, it lacks state incentives. Our commercial team has been researching the regulations and incentives across various states, particularly California. Stan March is leading this initiative as we aim to focus on either the West Coast or East Coast, where there are substantial commercial incentives, with some states offering up to $100,000 per vehicle. We're collaborating with FedEx to pinpoint the best location for a second operation, which we plan to launch this year. Our goal is not to create an extensive network of installations but instead to develop two or three stable sites to gain a better understanding of the costs involved in transitioning from traditional internal combustion engines to electric vehicles, including acquisition and overall ownership costs. This will help us justify the business case to customers, whether they are independent FedEx contractors or large commercial users delivering to grocery stores and factories. Everyone is working to find ways to make this transition successful. The government needs to support the development of EV infrastructure, which they are doing, but until we achieve volume, there must be incentives since EVs are currently more expensive. We are in the very early stages of this transition. Although there is a lot of media coverage about the rapid advancement in EVs, having the necessary infrastructure and a viable economic model for suppliers, manufacturers, and end customers is crucial. Without that, it won't succeed. We believe we are on the right path to achieving this.

Got it. And maybe just my last one, timing around kind of positive gross margins and where we start to get the leverage. Is that something exiting this year we should expect, given kind of the ramp-up throughout the year? And then I'll hop in the queue.

So, every truck we sell, we expect contribution on it from the very beginning. But as you said, total gross margin is about fixed cost coverage. So, I don't think we'll be there by the end of this year, but we will, I think, make significant progress towards positive gross margin as we ramp up production. Yes, Chris, I think 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 lot tougher to go from concept to production, and it costs a lot more to get there, okay? Just go back and look at all the old forecasts of some of the other EV specs and stuff on that; they are coming up short; have they built their plants, etc. 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 take a couple of years. So, we were able to get that Union City facility turned around and ready to go in less than six to nine months for about $20 million, and we'll put another $15 million or $20 million this year in terms of the paint line, Dinos, in-line Dino testers, and the AG EVs to move the vehicles around the plant, right?

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

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

Yes, Jeff, this is Bob. We expect somewhere in the $15 million to $25 million range. So pretty consistent. And primarily Rick just outlined the three major projects, AGVs, Paint Booth, and Dino are the bulk of that. A little bit of money on an ERP, but in that $15 million to $25 million range.

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

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

My last question is just to think about pricing. And I think Rick mentioned that the cab chassis is a bit more interest. Is that maybe lower prices vehicle say that's on.

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

That's what I was trying to get.

Yes. We saw some signs in the fourth quarter that allow us to estimate revenue based on the number of vehicles sold. We did not sell any drones, but our sales revenue remained stable and we generated some revenue from drone services, so you could make a rough estimate for a range. As we scale up, prices are slightly better than we anticipated in our modeling. We are expecting some large orders, and while there may be some discounts, they won't be significant. One dealer has expressed interest in purchasing between 250 and 260 vehicles this year already, which is just one customer.

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

Good morning, and thank you for taking my question. I did miss your first few comments. Can you just comment on the potential royalties that might be coming or not be coming from the old Lordstown deal? It sounds like there was a filing that they're trying to get out of the deal. I'm curious, can you just kind of leverage us do that? And are there any unusual legal costs, we would be looking at for 2023 to get that deal in force? It's a big number. It's like probably worth nine figures to Workhorse. So, I just want to make sure that that's still going to happen.

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

It's not a start to that cover, but I'm aware they have shipped a few units. At this point, have you invoiced them for the hack change that they might owe you for the first few?

No, we're still waiting on reporting so that we can do that next step.

Okay. Great. Kind of moving on, I don't want to open any old wounds here and open up the old USPS question again. We are now awarding EV contracts beyond just Oshkosh. They are somewhat smaller, but they are awarding them. They just award over in 9,000 vans yesterday. Is there a very active buyer there? Does Workhorse have any opportunities to bid on those comp orders going forward?

We saw the announcement that they awarded some, I think, their Class 2 or Class 3 transit vehicles to Ford. So, congratulations to Ford Motor Company, well learned. We do think there's opportunity at some point with us 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.

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

Great question. The deliveries were not done from the truck. The first customer we did the demo for required 50 deliveries across six different addresses from ground-based locations. At their request, we aimed to demonstrate the ability to deliver from a warehouse or fixed location to various individual or business locations first. We successfully completed that test. In my first month with the company, I visited that customer who provided a three-page list with approximately 25 specifications, including the need for a parachute, the ability to deliver off a tether, and the capacity to retrieve the package if issues arose. Meeting certain range and payload requirements was also necessary. We achieved all of their specifications after nearly 18 months of extensive work, during which we doubled our engineering team and tripled both our software and flight operations teams. We invested countless hours into this project, and we're feeling quite confident about our progress. The customer directed us to focus on the fixed location delivery first and to revisit vehicle delivery later. We have only tested flights using the old engines, which we have some still in service but aren’t building more of. We need to adapt W56 and W750 tops for future use, but that was not our priority in 2022 or 2023. We anticipate addressing that sometime in 2024.

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.