Workhorse Group Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Workhorse develops and manufactures electric commercial delivery trucks and drone systems, with a stated focus on bringing its C-Series trucks to market and fulfilling its existing order backlog. Financial statements are unaudited.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1.2 million | $0.1 million | $1.7 million | $0.2 million |
| Gross loss | $13.6 million | $1.4 million | $19.3 million | $3.1 million |
| Gross margin | Approximately -1,130% | Approximately -1,543% | Approximately -1,119% | Approximately -1,749% |
| Operating expenses | $9.1 million | $5.6 million | $19.9 million | $13.0 million |
| Net loss | $43.6 million | $131.3 million | $164.1 million | $126.6 million |
| Net loss per share | $0.35 | $1.76 | $1.33 | $1.77 |
Sales growth was attributed mainly to higher C-Series production volume. Cost of sales rose with production, consulting and compensation costs, and inventory write-downs. The company recorded $7.2 million of inventory write-downs in Q2 and $7.6 million in the first half. Gross losses substantially exceeded sales.
First-half other losses were $148.3 million, primarily reflecting the decline in fair value of Workhorse’s Lordstown Motors Corp. (LMC) investment. Q2 net interest expense was $10.5 million; first-half net interest income was $4.4 million, including a $7.0 million fair-value gain on convertible notes and $1.4 million of PPP loan forgiveness income. These non-operating fair-value items materially affected reported results.
Cash, liquidity and debt
- June 30 cash and cash equivalents were $156.6 million, versus $46.8 million at December 31, 2020. The prior-year-end balance also included $194.4 million of restricted escrow cash; total cash and restricted cash then was $241.2 million.
- First-half operating cash use was $81.3 million, compared with $17.8 million in the prior-year period. Management attributed the increase mainly to C-Series production, inventory build, employee costs and contract labor. Capital expenditures were $3.3 million.
- Current assets were $430.6 million, including $49.5 million of inventory and a current LMC investment valued at $182.3 million. Total liabilities were $221.6 million and stockholders’ equity was $222.8 million.
- The 4.0% senior secured convertible notes had $200.0 million contractual principal and a $200.9 million fair value at quarter-end; they mature in October 2024. The company reported no known covenant default. The notes include minimum sales-backlog requirements beginning in 2022.
- Management said existing capital resources were expected to support projected funding requirements for several years, while noting future additional funding would eventually be required and that it might raise capital in 2021. Equity financing could dilute shareholders; debt financing could impose restrictions.
Material developments, outlook and risks
- Guidance withdrawn: Following the appointment of Rick Dauch as CEO, effective August 2, 2021, the company withdrew its previously stated guidance. Dauch planned a broad operational review and development of a strategic plan. The prior guidance values are not stated in the provided filing text.
- LMC investment and subsequent sales: Workhorse held approximately 16.5 million LMC shares at June 30. From July 1 through August 6, it sold approximately 11.9 million shares for expected net proceeds of about $78.8 million and recorded an approximately $52.1 million loss. LMC’s share-price volatility creates potential earnings and liquidity variability.
- Operations and supply chain: The company cited supplier delays, logistics and port congestion, and microchip shortages. It also disclosed that E-Series vehicles require retrofitting; management was working on remediation and did not expect a material financial impact.
- Legal matters: A consolidated securities class action alleges misrepresentations concerning the USPS vehicle procurement process, manufacturing capabilities and vehicle backlog; the company said it considers the amended complaint without merit and intends to defend itself. Workhorse also filed a bid protest challenging the USPS award to Oshkosh; the United States and Oshkosh moved to dismiss, and Workhorse opposed the motion. Multiple related shareholder derivative actions were also disclosed.
- Leadership changes: Former CEO Duane Hughes was departing, and senior executives Stephen Fleming and Anthony Furey notified the company of their intended departures. The filing describes forward-looking statements as subject to risks including product acceptance, competition, expense control, regulation and execution.
Important facts for investors to verify
- Current C-Series production, delivery volumes, order backlog quality and progress against the convertible-note backlog covenants.
- Gross loss drivers, inventory valuation and whether production costs can decline enough to improve margins.
- Cash burn, funding runway and actual net proceeds from the LMC share sales, including the effect of any further share-price changes.
- Outcomes and potential costs of the USPS bid protest, securities litigation and derivative actions.
- Operational findings and any updated strategy or guidance following the CEO’s review, along with the E-Series retrofit scope and cost.