Workhorse Group Inc. quarterly report, Q3 FY2020

Workhorse Group Inc. — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. Workhorse designs and manufactures commercial electric vehicles, with a near-term focus on launching and ramping production of its C-Series delivery trucks and fulfilling its backlog. Figures below are unaudited.

Financial performance

Revenue growth reflected initial C-Series production, but cost of sales substantially exceeded revenue. The filing does not report a gross-margin percentage; gross margin remained negative. Q3 net loss included $74.3 million of net interest expense, chiefly fair-value adjustments and conversion-related losses on convertible notes, plus a $4.7 million loss on redemption of Series B preferred stock. For the first nine months, net interest expense was $185.6 million, including approximately $164.1 million of convertible-note fair-value adjustments and conversion losses. These items substantially increased reported losses and are not representative of operating expense alone.

Cash, liquidity and capitalization

• September 30 cash and cash equivalents were $80.2 million, versus $23.9 million at December 31, 2019. Nine-month operating cash use was $37.6 million, investing cash use was $1.6 million, and financing provided $94.6 million.
• Cash funding included $68.9 million of proceeds from the $70 million Convertible Note II and $49.3 million of net proceeds from warrant, option and restricted-share activity. The company also paid $25 million to redeem Series B preferred stock.
• Current assets were $99.7 million and current liabilities $132.1 million, a working-capital deficit of approximately $32.4 million. Stockholders’ deficit was $12.2 million.
• At quarter-end, Convertible Note II had $70 million contractual principal but a $121.8 million fair-value carrying amount, classified as current. It is senior secured and bears 4.5% interest; the holder could require limited redemptions beginning October 1, 2020. The company exchanged the note’s full principal for about 5.2 million shares on October 14.
• After quarter-end, Workhorse issued $200 million principal of 4.0% senior secured convertible notes due 2024. Net proceeds were approximately $194.5 million before release from escrow and other expenses; the filing says release was subject to collateral-related requirements. The notes carry restrictive covenants and are secured by substantially all company and subsidiary assets.

Changes, outlook and risks

• Year-to-date revenue rose to $0.741 million from $0.374 million, driven primarily by initial C-Series production. SG&A more than doubled to $15.5 million, reflecting consulting, employee and incentive compensation costs; R&D increased to $5.1 million as C-Series and HorseFly design work advanced.
• Workhorse said existing capital resources, including the October financing, were expected to fund current and projected requirements for several years. However, the company has limited revenue and a history of negative working capital and stockholders’ deficits; the filing states these conditions raise substantial doubt about its ability to continue as a going concern. Additional financing is not assured, and equity financing could dilute shareholders.
• COVID-19 was already affecting operations at filing time: approximately 36% of production employees had tested positive or were awaiting results, and supplier capacity constraints limited shipments. Management expected a significant reduction in planned Q4 2020 production. The duration and overall impact were uncertain.
• On October 23, Lordstown Motors completed its merger with DiamondPeak. Workhorse received approximately 16.5 million shares, representing 9.99% of the combined company, subject to a six-month lockup; the shares were valued at $13.05 each on October 30. Workhorse also defined a $4.75 million royalty advance and retained potential royalties and commissions under its LMC agreements. The investment will be measured at fair value in future periods.
• Legal matters included a $250,000 settlement of the All Cell patent litigation, paid in July, and dismissal of a wrongful-death suit against Workhorse on jurisdictional grounds; the plaintiff sought jurisdictional discovery after quarter-end. The filing does not quantify a potential exposure for that remaining matter.
• Management reported disclosure controls and procedures were effective and no material changes to internal control over financial reporting. It reported no material changes to previously disclosed market risks.

Key facts for investors to verify

• Whether C-Series production, deliveries and customer backlog can scale, and whether sales growth can improve the sharply negative gross margin.
• Actual Q4 production and supplier/workforce recovery following the disclosed COVID-19 disruption.
• Availability and terms of the October note proceeds, compliance with secured-debt covenants, and the resulting debt service and dilution exposure.
• Cash burn and working-capital needs against management’s multi-year liquidity estimate, given the going-concern substantial-doubt disclosure.
• Market value, lockup and eventual monetization of the LMC/RIDE stake, and realization of the royalty advance, royalties and commissions.
• Developments and any financial exposure in the remaining litigation, and the outcome of the PPP loan-forgiveness application.