Q4 2023 Workhorse Group Inc Earnings Call

Participants

Stan March; VP of Corporate Development & Communications; Workhorse Group Inc

Rick Dauch; CEO; Workhorse Group Inc

Bob Ginnan; CFO; Workhouse Group Inc

Presentation

Operator

Ladies and gentlemen, greetings, and welcome to Workhorse Group's fourth quarter 2023 investor call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Workhorse's Group's Vice President of Corporate Development and Communications, Stan March. Sir, you may begin.

Stan March

Thank you, Donna, and good afternoon and thanks to all of you for joining us for the Fourth Quarter and Full Year 2023 Results Call for we begin I'd like to note that we posted our results for the fourth quarter and full year that ended December 31, 2023 via press release, as well as filed our 2023 10-K. You can find both these documents as well as the accompanying presentation that will form the basis of today's conversation in the Investor Relations section of the website. We track it along with the presentation during the call.
Joining me on today's call are Rick Dauch, our CEO; and Bob Ginnan, our CFO. After my opening remarks, on slide 3, you'll see it. You'll see the agenda for today's call. I'll turn it over to Rick for an update on our strategic and operational priorities throughout 2023 and during the fourth quarter, and Bob will walk us through the financial results for the fourth quarter and full year and provide our outlook for 2024.
Then we'll take any questions on slide 4, you'll see our forward-looking statement. As you know, some of the comments that we've made today are forward-looking and therefore, 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, which was filed today as well as in today's press release. And with that I'll now turn the call over to Rick.

Rick Dauch

Thanks, Dan. Good afternoon, everyone. We appreciate taking the time to call in today, and thank you for your continued support of Workhorse. Today, we're going to discuss our fourth quarter and full year 2023 results and also cover the actions we're taking to position the Company for success.
During the year, we rolled out our first W56, Stefan signed up our first W56 fleet customers and increase our production capabilities for our W4CC and W750 vehicles. We also expanded our commercial network, adding key dealers and partners in multiple states. At the same time, we've taken actions to strengthen our financial position trucks.
As we disclosed today in our 10-K, we are in the process of completing negotiations on a financing transaction that, along with our pending sale lease back transaction and the aggressive cost cutting actions, we are taking will position our business to have the financial runway necessary to execute on our business plans.
As part of the cost-saving actions, we are reducing headcount across the organization for an executive compensation and suspending drone design and manufacturing in our aero business, which I will discuss in more detail later in my comments.
From a manufacturing and customer service demand perspective, we have built strong capabilities. We have had initial successes last year and this year and have had key demonstrations with several large last mile fleet operators as well as state and municipal fleets which are either already underway or planned to begin in early 2024.
We'll talk about all of this in detail in a moment, but I want to pause and acknowledge that I'm extremely proud of the hard work and dedication of our outstanding team here at Workhorse. Our team has overcome every obstacle place in our path, and I know that everyone of us has deeply and passionately committed to success. I'm incredibly proud of the workforce team and great for those for the contributions of all of our employees, including those whose jobs are impacted by the difficult but necessary actions we are taking to reduce our operating costs.
Moving to slide 5, let me take a few minutes to address the state of the commercial EV industry. From our perspective, the workhorse leadership and sales team spent the majority of last week at the industry tradeshow, the NTA Trade Show in Indianapolis. Every OEM and the major upgraders proud to display their future zero emission Class three to seven commercial vehicle product lineup.
There's no question that the transition to a new generation of powertrain technology is coming. The question is really when will it come? The new car fleet Clean Fleet mandate took effect on January first out in California, but it has not yet been in force. The commercial truck industry is uncertain on how to proceed with the transition to EVs, mostly both big and small, our reluctance to make large investments on the necessary infrastructure to make the shift to either natural gas or electric power vehicles. If the car mandates might get delayed or revise several OEMs are hedging their product development investments and supplier investments plans for EVs pushing out some timing?
Yes, Workhorse after 2.5 years of back breaking work, we feel that we are on the precipice of success and we can and we will find a path forward. We have the products, supplier and dealer partners, engineering capabilities, business systems and manufacturing processes in place to emerge as a winner in the Class four to six segments, but that only happens if fleet customers, both large and small start buying our products in 2024.
In 2023, we continued to advance our product roadmap all while navigating and solving challenges, both internal and external to the company progress. And this nascent commercial EV industry is not linear, and we know we will need to continue to address challenges as a up. And while our results for the year were affected by issues that slowed us down, we never stopped driving forward to create a viable and profitable EV OEM company. During the year, we rolled out our first W. five six step them signed up our first fleet customers and establish our production capabilities for the W4CC and W70 vehicles. We also expanded our commercial dealer network, adding new dealers and upfitting partners in multiple states.
In our aero business. We continue to expand our relationship with key government agencies and partners.
Let's review the key accomplishments and successes we achieved that workforce. In 2023, we will have four distinct commercial EV products and production. We have four distinct commercial EV products into production. We received important H Phipps certification for both our Class four and our Class five six vehicles. We secured initial fleet orders for the W56 step van and strip chassis, and we organically grew the Staples business. Additionally, we completed the overhaul of our Union City manufacturing complex. Workhorse Ranch is now capable of building 5,023 thousand vehicles per year on one shift.
Our lean, highly flexible production facility can ramp up staffing and production in line with future market demand at our aero business. We sold our first units. We are on track for FAA certification first quarter this year landed several government funded grants all while we continue to evaluate alternatives for the business moving to slide 6, we have stabilized production above the W4CC. and W550 miles and handed those production over to the plant while continually deal dealer programs and field demonstrations for both of these vehicles.
Notably, we successfully overcame unexpected issues with California's agent program and work with the California Air Resources Board to list the W4CC & WM50 in the H, the program in a first of its kind program for intermediate vehicle manufacturers. We were able to do this by demonstrating the strength of our service, warranty and delivery network and complete care options for customers purchasing any workforce badged product with enough finished inventory in place. We have temporary pause production of these products shifting our workforce over to focus on the ramp up of the W. five six production in the first quarter. As orders materialize, we will add the necessary were hourly workforce to meet future customer demand for all of our products.
Moving to slide 7, we received final a strip certification approved for the W56 step down in Q4 of final critical milestone, delivering these vehicles to the important California market in advance of the advance Clean Fleet regulations. We continue to increase our dealer network in California and have adjusted staff.
Turning to slide 8, I wanted to share a few pictures with you of what really has been done at the Union City plant to produce our industry game-changing step van, which went from concept to production, including passing more than 250,000 miles of validation in less than 22 months.
And just in case you are wondering, this is a robust and I mean a really robust vehicle based on the comments we are hearing back from our customers on these field demonstrations. I do not know of any startup OEM that could have delivered this type of product in less than two years. Chassis units are moving down the line on a consistent basis by the end of 2024. There will be four variants of the W. five six in production. We now have our fixtures and lift assist tools in place for both the chassis line as well as the body line shown in the middle of the slide. Finally, we are now painting the Stefan's in one of three colors. Workhorse Ranch is ready to roll and fulfill future customer orders.
On Slide 9, we continue to have strong customer interest in the W56. This is demonstrated by the receipt of our first two 15 vehicle unit orders for the step van that we expect to deliver in 2024. As we like to say here, Workhorse were two for two. We also intend to reduce a longer wheelbase version of the W56 in second half of '24 based on the direct request of several of our fleet customers, specifically in the linen & Industrial supply segments.
The company has multiple product demonstrations are underway are set to begin in early '24 for several large last mile fleet operators as well as state and municipal fleets and other smaller fleet operators based on the demos we've had to date, we are optimistic about the prospects for the W56 as well as our W750 and W4CC products. We are able to go from order to delivery of a finished step van in five to six weeks.
The shortest lead time for the Class56 step van market in North America, including custom upfit paint and branding. We have extreme each received extremely positive driver and fleet manager feedback, reflecting the vehicle strong performance in the field. As recently as last week, the NTA. show in Terminal one of the largest package delivery companies in the country. According to customers, the W. five six is a superior truck with innovative technology.
Turning to slide 10, we continue to build out our commercial dealer and service capabilities to capitalize on our product roadmap. I'm particularly excited by the significant expansion of our dealer network using our strict selection criteria we continue to expand our dealer network with a focus on those regions, work hard clean fleet and clean chart mandates will be adopted in 24 through 2027.
We successfully added new certified dealers, bringing our network to 11 dealers nationwide with a 12 pending and soon to be announced as we continue to actively expand, we have a target number of 15 to 20 deals by the end of 2024. In addition, we have added 21 upfitting partners in the past nine months. As we recently shared, we also established partnerships with WW. Williams and Zane solutions to expand service and support options for customers in the field.
On Slide 11, within our sales operations, we continue to electrify our delivery fleet, which is operating multiple delivery routes here in the Cincinnati area for FedEx Ground organically, gaining new route assignments due to our superior performance, we now have seven class for 80 years in the delivery fleet and expect the whole fleet to be electrified in 2024. We executed peak season extremely well with Q4 23 revenue up more than 90% compared to Q4 of 22, including the benefit of organically adding 20% of our signed route.
At the request of FedEx, the lessons we are learning at Staples are evaluable and give us tremendous credibility to fleets, not only Fed Ex, but all the fit the fleets we meet with.
Moving to our aero business on slide 12, we achieved important progress in the last year on drone deployment and delivery to customers. First, we launched production sold and delivered our first units of the HorseFly unmanned aerial vehicle or UAV. Nevertheless, during the first quarter of 24, we have decided to suspend drone design and manufacturing and exclusively focus on less capital-intensive drones as a service model and further develop our DAS products and services in this area where we see near term profitable growth opportunities.
Continuing to expand driving this decision was Arrow's continued ability to win additional grant awards from the USDA to support national resources, Conservation Service. What we do for the USDA flying drones equipped with sensors and delivering actionable data is what our drones and the service model is all about service has continued to grow over the last few years as we first pioneered this capability with the USDA in January.
Workhorse receive an additional 500,000 grant and in February received a separate to 300,000 grant to provide actionable data from sensor scanning to increase the efficiency of underserved farmers and ranchers land use. We are in advanced discussions with additional guard bases on future scanning and service opportunities at a significant potential grant or contract level. More broadly, our strategic view for the aero business remains underway to ensure we are unlocking the most value for Workhorse shareholders while also best positioning our aero business to capture and fund future growth opportunities as they see them.
With that, I'll turn it over to Bob to discuss our financial results.

Bob Ginnan

Next, let's turn to Slide 13. We'll cover our full year results. For the year, sales increased $8.1 million to $13.1 million for the full year 2023 compared to $5 million in 2022, primarily resulting from an increase in W4CC sales and volumes. The W750, W56 products, which launched in the second half of 2023, as well as tables by workhorse in our drone as a service offering also contributed to the increase in revenue.
Cost of sales for full year 2023 increased $0.7 million to $38.4 million compared to $37.7 million in 2022. The increase was primarily due to increased production overhead cost to support higher sales volumes related to the new vehicle platforms and an increase in employee compensation related expenses compared to 2022 levels. This increase was partially offset by a decrease in inventory reserves, adjustments and disposals, which are driven by the disposition of C-Series inventory in 2022.
SG&A expenses for the full year were two 2023 were $55.6 million, a decrease of $17.6 million compared to $73.2 million in 2022. The decrease was driven by a $25.2 million reduction in legal expenses and expenses attributed to the securities and derivative litigation settlements recognized in the prior year. This decrease was partially offset by a $3 million increase in employee compensation related expenses, including non-cash stock-based compensation expense, $2.1 million increase in professional and other services expense and a $0.6 million increase in corporate insurance expenses.
R&D expenses for the full year 2023 were $24.5 million, an increase of $1.3 million compared to $23.2 million in 2022. Increase was primarily driven by an increase of $1.4 million in employee compensation related expenses and a $0.8 million increase in development expenses for new products. These increases were partially offset by $1.4 million decrease in consulting expense.
Other loss for the full year 2023 was $10 million compared to $13.6 million income in 2022, other the loss of 2023 represent the impairment of our investment trusts. Other income in 2022 represented proceeds from the sale of C Series inventory that was previously fully reserved. Net interest expense in the current year was driven by a fair value adjustment of our convertible notes and warrants of $8.3 million and $2.1 million fees applied in connection with the securities purchase agreement and the equity line of credit purchase agreement offset by interest earned on cash balances in our money market investment account.
Net interest expense in the prior year was primarily related to $1.4 million of fair value adjustments for $3 million of contractual interest expense and $0.4 million loss on conversion of former convertible notes, which were exchanged for common shares during 2022.
For the years ended December 31, 2023, and 2022, we incurred taxable losses and thus no provisions for income tax benefits have been recorded. Net loss for the full year 2023 was $184.6 million compared to a net loss of $117.3 million in 2022 loss from operations for the year full year 2023 was $105.3 million compared to $129 million in 2022.
Turning to slide 14, discuss our balance sheet. As of December 31, 2023, we had inventory of 40 -- net inventory of $45 million as well as $35.8 million in cash, which includes $10 million in restricted cash. We are operating efficiently and selectively resizing our team here at Workhorse while maintaining the necessary resources and skills of the team to continue to design, test and build world-class commercial trucks.
Importantly, we are taking major strengths to strengthen our financial position. We entered into a sale leaseback agreement for Union City manufacturing complex in January. The agreement we entered strengthens workforces financial position reflects the investments and work our team has put into refurbishing the plant. It turned into a first-class manufacturing facility. Workforce continues to support the activities of the purchaser and closing is expected in May of 2024.
Turning to Slide 15. In our 2024 overview. Given the number of key customer demonstrations underway in Q1 and Q2, we intend to report on progress when it occurs. As a result, we will not be providing specific annual revenue or unit guidance at this time for courses entering 2024 with strong production delivery capabilities as well, a keen focus on financial discipline and cost control as we speak. We are working hard to resolve short term liquidity issues described in our 10-K over the year. We will maintain our focus on operational excellence and cost reduction as we increase production, expand delivery of our commercial vehicles to meet our financial targets for 2024. At the same time, we will continue to evaluate opportunities to strengthen our financial position.
With that, I'll turn it back to Rick now to conclude.

Rick Dauch

Thanks, Bob. To wrap up the call, I want to discuss our key near term priorities, which are on slide 16. Our focus on strengthening our financial position while we continue advancing our product roadmaps and ramp up production as we secure orders for our commercial EVs and plain and simple terms, we want to make sure we have the financial runway to build and sell trucks and provide drone services to our customers, achieving our goal of hiring the transition to zero-emission commercial vehicle is no easy feat and it's definitely not for the faint of heart. We believe we can.
We believe we will emerge as a segment winner in this once-in-a-generation powertrain technology transition the pace of the transition to EVs is unpredictable, and we cannot predict the speed at which the transition will occur, but we can control to ensure we are 100% ready to meet the needs of our customers. We are prepared for the transition from every touch point of the delivery process.
We have the people, products, processes, supplier and commercial business partners to meet the needs of the market. When this EV transition hits its stride, we need our customers to start ramping up their own transition to EV powered vehicles and believe that two or three of the largest fleets here in North America are ready to do so. Hopefully soon, our team's perseverance in the face of market and regulatory challenges is commendable and we remain determined and optimistic groundwork is done and the foundations are in place for us to be the Class four site, six segment later in the commercial EV segment, we expect to emerge a winner in this space, and we look forward to continue to do the work to get ourselves there.
Now we'll open the call for questions.
Donna, I'll turn it back over to you.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
[Sharieff Al McGratty, BTIG].

Hey, everyone, thanks for taking my questions. So first, I want to start with how do you prioritize as orders between the W56, 750 and the W for SDC this year how are you managing that capacity?

Rick Dauch

We have to separate line. We actually have three separate lines. We have a dedicated chassis lines with W56, which has a corresponding cab and box line. So that's a separate line and we can do about 5,000 vehicles a year there. We talk to our suppliers and they can ramp up that levels well, within Type two separate lines. We have the W4CC line, which we are building at about four a week and a four day site before we put it on pause. And that leads into a separate W750 line, which we can build one or two a day there.
Okay. So if you add our plant, you'd see very distinct assembly lines and still leaves about a third of the plant open for future products. We want to do something that.

That's helpful. Thank you. And then on the card mandate, can you tell us what you're hearing regarding its enforcement or revision?

Rick Dauch

That's like the million-dollar question. We've heard both sides of the equation in terms of the California trucking inflation association taken upset exception with car and car saying that they're very keen for a firm and they're going to put it in place this year. We just don't know the timing. I'd be guessing if I tried to guess right now. So we hope sooner rather than later, and we've talked to many fleets and many fleets in California, they have a very good handle on how many trucks they have in the state. They know what they have to do to meet the car, the car mandate by the end of the year. And that's with that gets kicked in is a significant demand. And we're not sure there's a whole lot of people left to fill that demand. We want to be one of them.

That's helpful. Thanks for taking my questions.

Rick Dauch

Welcome.

Operator

(Operator Instructions)
I would like to turn it back over to Mr. Dauch for closing comments.

Rick Dauch

Well, it must be lunchtime on the East Coast, and we appreciate it. And hopefully if you have any questions reach out to stand and we'll do that and hopefully we'll be able to report some good news on our demos and that turn into orders, get our plant work and stay busy.

Bob Ginnan

Thanks a lot for your interest in Workhorse.

Rick Dauch

Thanks, bye.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.