Workhorse Group Inc. quarterly report, Q2 FY2022

Workhorse Group Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. Workhorse designs and manufactures electric commercial vehicles and drone systems, with a focus on bringing electric delivery-vehicle platforms to market.

Financial results and liquidity

• Gross losses substantially exceeded the very small sales base; a gross margin percentage is not meaningful in this context.
• Cash and cash equivalents were $140.1 million at June 30, down $61.6 million from year-end 2021. Six-month operating cash use was $55.5 million; capital expenditures were $5.7 million.
• Total liabilities were $26.7 million, including $10.0 million of lease liabilities. The $27.5 million principal balance of convertible notes was exchanged for approximately 7.8 million shares in April; no convertible notes remained outstanding at quarter-end.
• Inventory, net, was $12.6 million after $70.1 million of reserves. Stockholders’ equity was $163.8 million.

Changes versus the prior comparable period

• Sales fell sharply, which the company attributed primarily to lower vehicle-sales volume. Q2 sales were $12,555 versus $1.20 million a year earlier.
• Gross loss narrowed, mainly reflecting lower inventory write-downs, lower vehicle-sales costs, and reduced initial C-Series production costs.
• SG&A rose to $13.0 million in Q2 from $7.0 million, primarily due to higher employee compensation, headcount, stock-based compensation, and new executive leadership. R&D rose to $5.0 million from $2.1 million, including costs for HorseFly, W56, and W750 development.
• Q2 net loss improved year over year, but the comparison included substantial prior-year unusual charges: the 2021 period included losses on the LMC investment and convertible-note fair-value changes. The six-month 2021 comparison also included an $18.9 million income-tax benefit. These items make the net-loss comparison less indicative of underlying operating performance.

Outlook, commentary, risks, and contingencies

• Management said existing capital resources were expected to fund current and projected requirements for at least the next 12 months, but additional funding may be needed thereafter. It reserved the option to raise capital in 2022.
• The company may sell up to $175 million of common stock through its 2022 at-the-market program. It had raised $0.2 million net through June 30, leaving approximately $174.8 million available; further equity issuance could dilute shareholders.
• Management expected 2022 facility-upgrade capital expenditures of $15 million to $25 million. The company reported $13.4 million in minimum future lease payments.
• A multi-year agreement calls for Workhorse to purchase 1,500 GreenPower base vehicles and complete them as W4 CC and W750 vehicles. Base-vehicle deliveries began in July 2022. The filing provides no quantified revenue or earnings guidance.
• After testing, the C-1000 was deemed eligible for certification and reintroduction as a limited-production vehicle with constrained cargo capacity. Workhorse chose to repurchase all vehicles involved in the 2021 recall and said it had no further recall obligations. It could not estimate whether NHTSA or other authorities might impose fines or penalties.
• The company is cooperating with SEC and DOJ investigations concerning, among other matters, USPS-related disclosures and certain customer sales and complaints. It could not predict their scope, duration, or outcome. Securities and shareholder derivative litigation is also pending; the company believes the securities class action is without merit. Management said ordinary-course proceedings were not expected to materially affect the company, but outcomes remain uncertain.
• Management cited supply-chain constraints, commodity and labor cost inflation, rising interest rates, COVID-19 disruptions, and the Russia-Ukraine conflict as risks that could raise costs or impede financing. An E-Series regulatory retrofit issue remains under remediation; management did not expect a material impact.

Most important facts for investors to verify

• Whether the W750, W4 CC, W56, and other programs achieve production, delivery, customer acceptance, and revenue targets; the filing gives no quantified guidance.
• Whether cash burn, planned facility spending, and working-capital needs remain consistent with management’s stated liquidity horizon, and whether further financing or ATM share sales are required.
• How the C-1000’s limited-production status and any remaining regulatory or customer issues affect costs, demand, and potential penalties.
• Developments and potential financial exposure from SEC/DOJ investigations, securities litigation, derivative actions, and the E-Series retrofit.
• Whether inventory reserves and supplier deposits are recoverable or usable, and whether cost inflation and supply constraints affect planned vehicle production.