Workhorse Group Inc. annual report, FY2019

Workhorse Group Inc. — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. Workhorse designs and manufactures commercial electric vehicles, with its near-term focus on launching the C-Series delivery truck and fulfilling existing orders.

Financial performance and position

• Sales fell about 51%, primarily because the Company reduced legacy-truck sales while shifting resources to C-Series development. The filing reports no positive gross margin; the gross loss was about 1,452% of sales.
• The operating loss narrowed mainly because FY2019 included $15.85 million of other income: $12.19 million from the LMC intellectual-property transaction and a $3.66 million gain on the SureFly sale. These items are not evidence of recurring vehicle profitability.
• Net loss increased modestly despite the lower operating loss, largely reflecting net interest expense of $29.15 million, including a $15.37 million increase in the fair value of warrant liabilities and a $6.08 million loss on debt extinguishment.
• FY2019 financing activities provided $58.57 million, including $38.95 million net proceeds from a convertible note, $25 million from Series B preferred stock, and $5.93 million from common stock issuance, offset by debt repayments. Operating cash use increased year over year.
• At year-end, total assets were $50.67 million and current liabilities were $47.04 million. Current assets were $31.52 million, leaving negative working capital of approximately $15.52 million. Stockholders’ deficit was $34.91 million.
• Year-end obligations included a convertible note with a $39.02 million fair value and $40.5 million contractual principal, plus $19.14 million of mandatorily redeemable Series B preferred stock. The note is secured by substantially all Company assets, carries 4.5% interest, includes a minimum $8 million liquidity covenant, and requires repayment at 112% of principal. A $16.34 million warrant liability is also reported.

Material changes and significant transactions

• Warranty expense dropped to $0.09 million from $7.97 million in 2018, when expense reflected battery-pack issues in certain E-Series trucks. The warranty liability remained $6.00 million at year-end.
• SG&A decreased to $10.20 million from $11.49 million; research and development increased to $8.20 million from $7.39 million, reflecting C-Series and USPS prototype work. Inventory reserves were $0.69 million in 2019 versus $2.49 million in 2018, and inventory included reserves for legacy-platform materials.
• Workhorse licensed W-15 pickup-related intellectual property to Lordstown Motors Corp. (LMC) for a recorded $12.19 million investment, representing a 10% ownership interest. Further royalties and commissions depend on LMC raising capital and selling vehicles; the Company cautions that these payments are not assured.
• The Company sold its SureFly business for $4.0 million, recognizing a $3.66 million gain, and formed a 50/50 joint venture with Moog for HorseFly drone technology.
• Workhorse agreed to acquire certain Hackney assets for $7 million. A $1 million initial payment was released from escrow in January 2020; a further $6 million payment is subject to conditions, with potential additional payments or release of escrow shares if it is not made on time.

Outlook, risks and contingencies

• Management said available capital was expected to support operations only through the second quarter of 2020, after which additional funding would be required. The auditor’s report includes a going-concern explanatory paragraph; the filing cites recurring losses, negative working capital and stockholders’ deficit as raising substantial doubt about continued operations.
• Management’s execution priorities include bringing the C-Series to market, increasing production, and reducing costs to achieve gross-margin profitability. It reported that USPS prototype testing was completed in 2019 and that USPS issued a production-program request for proposals in December 2019. The filing does not report a USPS production award.
• The Company received an EPA Certificate of Conformity on February 14, 2020; California certification testing was underway. COVID-19 and related supply-chain disruption were identified as risks, with potential effects on third-party parts supply, production schedules and cash flows.
• Other key risks include reliance on a small number of fleet customers and orders, lack of committed future funding, high vehicle costs and uncertain electric-truck adoption, dependence on qualified battery suppliers, challenges scaling Union City production, and potential dilution from future financing.
• Contingencies include a patent-infringement lawsuit and a separate vehicle-fatality lawsuit; outcomes and potential financial effects are not established in the filing. The filing also describes prior vendor matters settled during 2019.
• The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of year-end. Management said material weaknesses identified in 2018 were remediated during 2019.

Important facts for investors to verify

• Cash runway, access to financing, compliance with the note’s $8 million liquidity covenant, and the timing and form of note redemptions.
• C-Series production readiness, customer commitments and deliveries, realized unit costs, and progress toward sustainable positive gross margins.
• Whether LMC completes its capital raise and whether the recorded investment or contingent royalties and commissions are realized.
• USPS procurement outcome and any resulting production volumes, alongside the conditions and remaining payment obligations for the Hackney acquisition.
• Developments in the patent and vehicle-fatality litigation, battery-related warranty claims, and COVID-related supplier disruptions.