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, we'll 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 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…

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 $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 onetime 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…

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 2Q. 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 be in 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…

[Operator Instructions]. Our first questions come from the line of 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, good question. We got the trucks in late fourth quarter last year. We're now exercising our production. 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 somewhere between 40 to 50 as we go into the second quarter, and then we'll see how it goes from there. That's primary 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 three that about 50% done. So, we're waiting for a few key parts as we're making some -- as you go through pilots, you make some engineering changes to make sure we have fit, form, function going together in that. So, I'm pretty confident we'll be on production pace in the second quarter there, and we'll see how many trucks we build here this year. W56, we won't really get into pilot production until like a 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. So, it's going to be a nice continuous year of continuous launches and haven't gone through launches before. They don't always go perfectly. You have supply chain issues, you have tooling issues, you've got training issues. So, we'll have some hiccups, starts and stops, but I think we come out of 23 in a really good position rolling 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. So, 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 cleaning 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 could 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 out 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'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 -- how is that changing the dynamics with customer engagement, your ability to close sales, building up a pipeline of opportunities and starting to close that?

Great question. First thing we did was hire a dynamic leader and 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, both, 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 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 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 everybody. And just following up on that around the guidance. As we think about the kind of the puts and takes of that, is the high end of the guidance? Is that -- or however you want to 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 cabin chassis, what it sounds like is almost in the 40 to 50 per month range already?

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 in 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 Unicity 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 cap 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 up fitters 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. And then I was hoping you could provide a little bit more color around top you got a few units out 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 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 move forward?

Greg, that's a great question. I'll say two things. When we first got the vehicles and 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 up fitters, 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, et cetera. 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 up fitters. 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 go 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.

[Operator Instructions]. Our next questions come from the line of Chris Souther with B. Riley. Please proceed with your question.

Hi, guys. Thanks for taking my question. On the 80% visibility to the low end of the range, I'm curious what the W56 contribution is there ahead of the commercial launch next week? Or is it really just for the W750 at this point? And then maybe what kind of contribution are you expecting from drones, contract manufacturing, other stuff for -- as far as the guidance picture there?

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. And maybe just on the -- you talked about customer interest being pretty high. Could you talk about how you guys are reengaging with some of the legacy backlog customers, how that process is going versus kind of new customers that you've been engaging with some of the new team members you've added?

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 the customers. Showing somebody something on a PowerPoint is one thing, actually have 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 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 sent out. And each one of our field sales team will have a family of either W750, W4 CC, W56 take around the different regional customers. On the drone side, out of our 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, durable, but also commercially be 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 to?

Good question. So, 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 and is less than literally 15 or 20 miles away. We got buy-in from FedEx, both here regionally and back in Memphis to try it. We built the -- we secured facility, leased it. We've transitioned it. We put the charging stations in. We're almost done buttoning up the interior, where we can put the lifts in that go work and 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 the 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 of days in some trading sessions to make sure we understand the car rules in California and all the different incentives across the 17 or 18 states. And so, Stan March is leading that effort for us, and he's buttoning down. It looks like we're going to focus on one of two regions, one in the West Coast or one in 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, and 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. And then we'll stop. Remember, our goal is not to build out a whole network of stable and…

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 hell a lot tougher you go from concept to production, and it cost a hell of a lot more to get there, okay? Just go back and look at all the old forecast of some of the other EV specs and stuff on 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 was taken a couple of years. So, we were able to get that Unicity 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 paint line, Dinos, in-line Dina 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 [technical difficulty].

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

I apologize I got a bad connection here. I was just curious if there's more interest in the cab chassis than anticipated what that does to average. [technical difficulty]

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

That's what I was trying to get...

Yes. You kind of saw some indications in the fourth quarter, you can kind of do some backward math in terms of revenue and the number of vehicles sold. We didn't sell any drones. We did have some stable in sales revenue. We had some drone service revenue, so 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. We can have some discounts in there, but they're not huge discounts is what I'd say, right? I think we have one dealer has indicated they want to buy somewhere between 250, 260 vehicles this year already. So 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 that these areas and answered, just let me know. First, could you 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 got 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 [indiscernible] person they have shipped a few just asking about, at this point, have you invoiced them for that hack change that they might owe you for the first handful?

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 very active buyer there? Does Workhorse have any opportunities to bid on those comp orders going forward? -- is going to be that...

We saw the announcement that they awarded some, I think, their Class 2 or Class 3 transit vehicles to Ford. So, congratulations 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 leaf from the old demos to any moving truck demos to make that happen?

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 sex different addresses. They were done from ground-based locations. At the request of that customer, they want to 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 cases an issue with it. You've got to handle a certain range, you got to 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. And we have only tested that flight off the old engines, which were no longer -- we have some in service, but we're not building any more of those. And we're going to have to use -- we got 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 '24.

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.