Ladies and gentlemen, greetings, and welcome to Workhorse Group's Third Quarter 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, Rob. Good morning, and welcome to all of you joining us on today's third quarter 2022 results call. Before we begin, I'd like to note that we've posted our results for the third quarter ending September 30, 2022, via press release. You can find this release as well as the accompanying presentation on the Investor Relations section of our website. We also filed our third quarter Form 10-Q this morning. We will be tracking with the posted presentation during the call today, so please follow along either from the link in the press release or through our website directly. And with that, let's get started. Joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. We have a straightforward agenda today, which is found on Slide 3. Following my opening remarks, I'll hand it over to Rick, who will give you an update on the progress we've made on our strategic and operational priorities for the third quarter of this year. Bob will then walk us through our financial results for the quarter and cover our 2022 guidance. Then we'll take your questions. Our disclaimer can be found on Slide 4. Some of the comments that will be made today are forward-looking, and therefore, are subject to certain provisions and are subject to risks and uncertainties. You can find the full disclaimer statement in our Form 10-Q and other periodic filings on file with the SEC as well as in today's press release. I'll now turn the call over to Rick Dauch. Rick?

Thanks, Stan. Good morning everyone and thanks for taking the time to join us today. We had a very productive third quarter here at Workhorse, and here are some of the highlights on Slide 5. Let me start with a brief summary of our key hires during the quarter. Last quarter, I'd mentioned that hire and experience and capable commercial vehicle sales team was a critical focused area for us and we did just that, and I will cover those details shortly. Additionally, we continue to strengthen our operating teams in both commercial vehicles and aerospace. Hiring a new plant manager at Union City and bringing on board two new Vice Presidents in Aero, one in flight operations and technology and another in manufacturing and supply chain. These individuals each bring more than 25 plus years of relevant industry and technical experience to their roles. We also made important additions to in our finance, IT and HR staffs bring on experienced professionals to improve our back office administration processes and systems. On the product portfolio front, I'm extremely pleased to report that we delivered our first W4 CCs and made progress across our entire product roadmap. Getting safe, reliable vehicles in our customers' hands was an important milestone for the Workhorse team. Importantly, the W56 program remains on schedule and on budget. We also completed necessary preparations for executing the Tropos vehicle launch here in Q4, and we did experienced a setback and testing on the C1000 vehicles and I will provide details about this a bit later. We also made significant strides across several other major initiatives, including upgrading and transforming our facilities while expanding our engineering and testing capabilities. In the aerospace, we're in the process of doing final flight testing for the Horsefly and we developed a…

Thanks, Rick. Let’s turn to Slide 11. Our results demonstrate the steady progress; our team continues to make executing on our objectives to strengthen our financial position and operations. Looking at the income statement, sales, net of returns and allowances, for the third quarter of 2022 were recorded at $1.5 million compared to a negative $600,000 in the same period last year. The increase in net sales was primarily due to an increase in volume of commercial vehicle sales and the launch of the Stables & Stalls initiative. Cost of sales decreased to $9.5 million from $11.5 million in the same period last year. The decrease in cost of sales was primarily due to a $1.4 million decrease in inventory write-downs and a $1.2 million decrease in consulting and warranty expenses. The decrease in cost of sales was partially offset by an increase in costs associated with the vehicles sold during the period. SG&A expenses increased to $34.8 million from $10.6 million in the same period last year. The increase was primarily driven by the net $20 million legal settlement expense, which is net of $15 million in insurance proceeds and an increase of $3.8 million in professional and legal services related to the securities and shareholder derivative litigation. Additionally, there was an increase of $3.1 million in employee compensation and labor related expenses from increased headcount, non-cash equity compensation and the appointments of our new leadership team. R&D expenses increased to $6.1 million from $2.8 million in the same period last year. The increase was primarily driven by an increase of $1.6 million in employee compensation and related expenses due to increased headcount. Additionally, there was a $1.1 million increase in consulting and prototype expenses related to the continued development of the Horsefly, W56, and W750 vehicle programs. Net…

Thanks Bob. I want to briefly discuss our Q4 priorities on Slide 14. First, we must continue to execute on our product program plans. This means completing our W750 pilot builds, keeping the W56 program on time and on budget, completing the C1000 testing and completing the Horsefly and HALO drone flight testing all this year. Operationally, we want to continue to ramp up production for the W4 CC begin manufacturing to Tropos vehicles and finalize plans of startup drone production in 2023. We need to grow revenues and add new customer orders for both wheeled and aerial vehicles. We also need to complete the electrification of the Stables & Stalls facility here in Ohio. Finally, we need to execute on our common systems deployment plans, including kicking off our transition to a new ERP system, which will help us immensely in late 2023. Lastly, we are looking forward to hosting our Analyst Day on December 7 and hope you will join us. Before we turn the call over to Q&A, I want to reemphasize six important points from our call today on Slide 15. First, in less than one year, we have built an incredible team of business leaders, engineers, supply chain and sales professionals, operational managers, plant and back office support staffs that are talented and experienced in their fields. Each of them will play a critical role as we execute on our go forward strategies. We have added over 100 associates in the past year. The right people in the right seats on the bus are the absolute foundation of our company. We are now in production at our fully renovated state-of-the-art manufacturing complex, which we believe get prizes with a true advantage and a big head start on many new EV startup companies who seem to…

Thank you. [Operator Instructions] Thank you. And our first question is from the line of Jeff Osborne with Cowen & Company. Please proceed with your question.

Yes, good morning. Had a couple questions on my end. I was wondering, first of all on this Stables & Stalls initiative, what the revenue model is there? I think, you mentioned in the prepared remarks that there was some revenue contribution this quarter and it looked like the pricing was a bit higher than anticipated, at least in our model for the 10 units that you shipped?

Yes, Jeff. This is Bob. Right now, the Stables & Stalls revenue just includes the route revenue and I would put that at about 10% of the revenue for the quarter.

Got it.

And Jeff, regards to price, we’re not going to go into specific vehicle pricing. But I’ll just say we’re in the early parts of this – early inns of this EV evolution, there’s still some price elasticity in the market right now.

Got it. That makes sense. And then, the settlement, what are the cash ramifications of that? I’m sure there’ll be more details in the 10-Q, but you reserved 35 million as the liability. When would that cash potentially be paid and when would you anticipate an insurance piece to come in? I’m just trying to understand with the 120 million and what the burn rate is and then you throw on top of that the liability potentially a cash payment and the timing there?

So if you break it down into two components, there’s 15 million of cash, which will be funded by the insurance. So, no net cash out of pocket there. And then the 20 million of stocks. So, really the settlement doesn’t have a net cash impact on us other than we are – we did spend above and beyond our retention on the legal side, which was the 3.8 million. So really that’s the net cash impact. Timing wise, it’ll still by the time it goes to the process will still be a little while yet probably Q2 of next year, I’m guessing.

Got it. That’s helpful. And the last one is, with the suspension issue in the C-1000 and just hypothetically if you were not to move forward with that vehicle, is there any financial ramifications of that, for people that you had previously delivered to and their expectations of likely remediation of the problems that you had had in the past? I’m just trying to understand what the P&L and potentially reputational risk there would be?

I do not think there’s any financial risk from our customers. We bought back the vehicles that we had already delivered. We are in discussions with those customers who had done, had placed some orders before about our new portfolio of vehicles that’ll come out primarily the W4CC and W750 through the first half of 2022 – 2023. And then we’ll have the W56 available going forward. And I would just say the initial response, we’ve gone back and introduced our new team and our new product plans to several customers who had basically written off work course in the past and now we’re having doors open up again for us and at least two of those customers who had written us off before have asked for specifically for one of the first five W56 demos that we’ll have in the second quarter next year. So that’s a good sign for us, I think, Jeff.

Sounds like it. Look forward to seeing you folks on the seventh. Thank you so much.

Great.

Thanks, Jeff.

Our next question is from the line of Chris Souther with B. Riley. Please proceed with your questions.

Hey, guys. Thanks for taking my question here. So looking at the uptake in revenue, we’re expecting for the fourth quarter. Seems like the bulk is now W4 and that C-1000 inventory clears probably like a 2023 story if you do decide to move forward. So I just wanted to get a sense of whether there’s anything else in the mix besides W4 and maybe a small contribution from Turbos and that FedEx route. And then, just – go ahead.

That’s about right. So basically W4CC production, which we’ve already, like I said, we’ve already built vehicles. We have a bunch of coming from our supplier that should be arriving here. Some have already arrived, another batch will arrive later this month, then we have some more coming in December. The FedEx route is now stable. I think it took us a while to get that under control. I would say when we first looked at the vehicles that we purchased, it was pretty incredible the number of miles they had, the number of years they have and the kind of maintenance condition they’re on. If those are reflective of the current contracted last mile deliveries vehicles out there across many customers, there’s going to be plenty of opportunities for us to replace them with much better and safer vehicles in the future. So I’d like to say we started to crawl in the third quarter. We’ll start walling [ph] a little bit here in the fourth quarter, but we should be running pretty full hard in the first quarter next year so.

Got it. Okay. And then just maybe this is something for the Analyst Day, but visibility from kind of an order book. Can you just share anything at this point around different models and what that conversion is? Keep in mind that I think you’ve said in the past that people want to see the vehicle often before, they’re going to be making orders at this stage.

Yes, good question. We’re not going to comment an order book today. I see as, if I look back over the industry, lots of people have made lots of promises about order books. But an order book is one thing and having a factory to build them and a team to build them is a different thing, right? So our focus has always been on, get the plant ready to go, get the products right, get the right people on the bus, hire the team, and let’s go out and sell, right? So we’ll do that. I think, we will be able to cover a little bit more detail at the Analyst Day and we’ll go from there. We do now have W4CCs, we can put in the hands of customers. We’ve had them in demo vehicles already for the last 60 days. We’ll have the pilot builds of the W750 here in the – between now and the fourth quarters. We’ll have some of those vehicles in the hands early in first quarter, and we’ll have the demos for the W56 obviously in the second quarter. And we’re going to be very judicious about who we give those W56 vehicles to, right, so.

Okay, great. And then just to kind of go off of Jeff’s question there, the FedEx program, what is kind of the strategy around purchasing at a route, that route is it just being able to test vehicles, walk through pain points for customers like just higher level? What is the business plan in the charging space? Is it you guys owning the infrastructure, selling – reselling hardware, doing kind of installation, EPC type work like, what is kind of the higher level plan here?

There’s no better field market research than having our own team drive the vehicles deliver packages day in and day out. Whether it’s the time you get sent over for dispatch to loading the vehicles or unloading the vehicles to fight for the talent who drive the vehicles who have to be licensed to maintaining vehicles that are somewhere anywhere from five to 25 years old with over – some of them have 400,000 miles on them. And doing that without a facility, it’s incredible what we’ve learned in the first 90 days. Also, having our engineers actually leave their offices and their computers and get behind the wheel with the driver and seeing how these vehicles get used and where the iPad goes, where the Cup Holder goes, how many times the driver has to step in and out of the truck, either the left side or the back, or out the right side, how the shelving works. All that’s great and we’re bringing all that information back to the redesign of the W56 in the future W34.

Okay. Makes sense. I will hop in the queue. Thanks, guys.

Thanks. Great questions, Chris.

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

Yes, hi, thank you, and good morning, everybody. I did want to touch a little more on the Stables & Stalls initiative. I guess, two questions here. Obviously, FedEx was interested in doing that. What has been the appetite from other potential customers around you doing something similar? And then the other question I have is it doesn’t seem like it would be, but would the stables, it seems like the Stables & Stalls is more of a broader network and something not exclusive to Workhorse produced vehicles?

That’s absolutely correct. The number of vehicles we have that are ice powered right now is a smorgasbord, right? There’s some Morgan Olson vehicles, there’s some ship vehicles, there’s some Nissan vehicles, there’s some Ford, there’s some GM. And so we’re not going to be a 100% Workhorse. We’re going to take an opportunity to buy one or two of our competitor vehicles and put them on the route as well. The routes range from 40 miles a day to 120 miles a day. So that validates what we thought. Most trucks travel less than a 100 miles a day. A few go out to 100, 150. There is an opportunity and we can have other companies or other owners of fleets come and charge at the Stables & Stalls rather than them putting in their own charging systems, which are pretty expensive to think about. You’ve got to install, you’ve got to buy, install the charging systems, you’ve got to link to the grid. You’ve got to have a place to charge all night long and monitor those fundings. For an independent operator do that, they’re really operating on a pretty much a shoestring budget, especially with diesel prices up some place of the country, $5 or $6 a gallon. So I think in one month or one week we spent over $8,000 just in fuel running our little 10 trucks, right? And so we are taking all this information, the condition of the trucks, the time it’ll take the charge, the cost of fuel, maintenance. We’ve had transmission leaks; we’ve had someone run over a fire hydrant. And so this is just a real life of daily operations, right? And so if we can make it, we can help that fleet operator figure away economically to move to EVs, that’s going to help us sell more vehicles. And in doing so, we can help service our vehicles, change tires, wash the vehicles, repair things that get damaged, right? You watch when you walk around in the city, look at all the vehicles, UPS, DHL, Amazon, FedEx, others that are banged up and damaged. Just step in the truck. Next time you’re at a 7-Eleven or in a downtown store, look at the condition of the trucks. You’d be amazed.

Yes. Thank you for that. And then I had the, another question around the contract manufacturing, pretty exciting to see Tropos getting ready to launch here. As you think about that opportunity, and it seems like that should be a larger opportunity, is it kind of as we think about the road ahead, is it okay, hey let’s, we have our first contract manufacturer, we’re going to bring them in and then as soon as that’s up and running successful, we then can then bring in another one and then, or could we see I guess, dual contract – dual timing contract manufacturers being brought on, as opposed to a one and then a one and then a one.

I’d say, we’re going to, we have so much floor space up at the ranch. We’re just under 400,000 square feet right now in two different buildings. We have a separate battery storage building and we have plenty of land. So, we are looking at very judiciously with the finance team and what’s the best use of our floor space. We’re obviously going to build our own trucks. We’ve already got those layouts there. We now have room to do contract manufacturing. We have one contract. We’ve entertained RFPs for two others. And as I said earlier, there are some EV companies out there who are struggling with, it’s much different to put a new plant proposal on a PowerPoint that actually go out and acquire land, build the infrastructure, install all the utilities that go with it, bring in the equipment, hire and staff people in a very tight job market. We have that ability already in workforce that would save somebody else about a capital and get them into production much sooner, which is one of the reasons Tropos came to us. The lead time for them to go build or lease a factory, lease if they could find one that was available, was probably minimally three months to six months to build a brand new factory here in North America. It’s 18 months to 24 months now based on lead time of critical supply chain issues, especially electrical connectors and others.

Okay. And then Rick, just so I what kind of I can squeeze one in, clearly you lay out the investment you made in Tropos. Is it, should we be think, could we see contract manufacturers, at the facilities, that are just really, you’re just providing those services, i.e. we’re not making an investment inside the company, or at least for now, just given the opportunity set, you’re more interested in actually participating in the upside of some of these companies?

Yes, I think we all learned in school that cash is king. So, we’re going to, conserve our cash and make sure we had the ability to fund our own operations. Tropos was a unique opportunity to get in on the ground floor of a business and take a small stake and partner with them, and we’ll take a look at other contract manufacturing opportunities in the future, whether we’re going to put any equity stake into them or cash into them, get an equity stake or just be a contract manufacturers.

Okay. Great to hear. Thank you very much.

Great.

[Operator Instructions] The next question is from the line of Mike Shlisky with D.A. Davidson. Please proceed with your questions.

Hello, good morning, and thanks for taking my question. I wanted to follow up once on the earlier questions about the Stables & Stalls program. I know it was 10% of revenues in the third quarter. I’m not sure if that was a full quarter. You said it started in July, maybe it was a full quarter. But does the percent of revenues go up in the fourth quarter given the holiday is the get deliveries and how much is in the $15 million to $25 million guidance for the full year on that route revenue and give a sense that the, how to kind of model that for next year? Will it be a separate segment? Or is it still going to be very much a de minimis part of your overall business here?

Hi, Mike, this is Bob. I think, in terms of the quarter, the fourth quarter, you have pretty much most of a quarter in there. Packages are generally up in the fourth quarter, so there could be some in there, but it still will be as you said, compared to truck sales, it’ll be de minimis. It’s, about the process and what we’re learning and the opportunities and we get paid doing it. So it’s not a huge part of our revenue goal, but it’s a very important part.

Okay. And then just kind of similarly, I see your investment in Tropos on the balance sheet at quarter end. What I don’t see is the investment in these route and the trucks at quarter end. Was that also de minimis, is it other category on your assets?

It’s just part of normal assets for the trucks and, as Rick said, may be these trucks are pretty old, so it’s not a ton of value on the trucks themselves. And those are the trucks that we’ll be looking to convert over to electric here.

And the route itself was purchased at like an auction or was it a private sale? Those were often auction office.

It was a private sale. Yes, there’s the active market for FedEx routes out there right now. It’s one of the things we learned as well. Can’t remember how many whole routes out there, but there’s a hell of a lot of vehicles I know that. So…

Got it. And also it is going to see that there’s, a lot of strides being made in the kind of W56 step van products. I’m curious do you have a body partner for that step van and is that body partner providing the distribution for that product? Or are these early units going through the Workhorse your new hires and Chris’s team?

That’s a great question. We’re going to build both the stripped chassis version. So if an end customer wants a Workhorse chassis versus the other chassis in that space, they can choose a body supplier at their choosing, right? Typically in these step vans, that means it’s either a shift body or a Morgan Olson body, so, and been around that before. We are also going to provide full step vans. So, we’ll have our own body and we’ll have our own body suppliers that work with us, right? As we start to ramp up production here on the W4CC chassis. One of the things we’ve discovered is that there’s a lack of capacity in some areas of the back end of the truck, whether that’s boxes or flatbeds or dry vans, reefers, et cetera. So that’s an opportunity for us to either find a partner out there in the future or do some things in house as well, something we’re studying right now.

Okay. Okay. That’s great. Great color. I appreciate it. I’ll pass it along.

Good question, Mike.

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

Jeff, you’re back?

Sorry for the follow up and I would be remiss if I didn’t say I don’t want to beat a dead horse given all of your analogies with horses on the horses or Stables & Stalls program. But I just want to be crystal clear that this isn’t a precursor or you foreshadowing that you’re intending to go into a capital intensive fleet business in terms of producing trucks and then bidding on routes or, owning the asset yourself and showing growth that way. Do you intend to be completely an OEM and selling trucks to third parties? Or do you have ambitions of being a capital intensive fleet industry yourself?

I think we don’t have those ambitions. Our intent was to better understand how these independent contractors who make up a huge population of the work trucks and the Class 3 through Class 5 space or even Class 6 space, how they’re going to make the transition from traditional ICE powered vehicles to EVs. EV vehicles are much more expensive than traditional ICE vehicles. You don’t have the government subsidies that are coming through like the HVIP PRAC [p] program in California, or the 14 other states who have it programs right now. It’ll be hard for them to make that transition. On top of that, you have to put in the infrastructure for the charging systems, whether that’s slow chargers or fast chargers and all that works. So this is one of our ways to study how to best do this and then target our vehicles and our sales to specific customers.

Got it. That makes perfect sense. I just want to make sure going to be covering a fleet as a service company. Thank you.

Thank you. Ladies and gentlemen, this will conclude today’s conference. Thank you for your participation. You may disconnect your line at this time, and have a wonderful day. Thank you.