Workhorse Group Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Workhorse designs and manufactures commercial electric vehicles and develops delivery drones, aircraft and fleet telematics. Management said its near-term focus was launching the N-GEN electric cargo van and fulfilling existing vehicle orders.
Financial results and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $0.76 million | $10.04 million |
| Gross loss | $15.19 million | $14.48 million |
| Operating expenses | $18.88 million | $26.56 million |
| Net loss | $36.50 million | $41.22 million |
| Net loss per share, basic and diluted | $0.74 | $1.06 |
| Cash used in operating activities | $21.75 million | $38.66 million |
| Cash and cash equivalents at year-end | $1.51 million | $4.07 million |
| Current assets / current liabilities | $6.37 million / $18.92 million | $10.70 million / $11.28 million |
| Working capital | $(12.55) million | $(0.59) million |
| Stockholders’ equity (deficit) | $(15.42) million | $3.51 million |
Fourth-quarter 2018 sales were $21,263, gross loss was $11.09 million and net loss was $17.69 million. The fourth-quarter gross loss included a $6.9 million increase in the warranty reserve.
FY2018 revenue fell approximately 92% as truck sales volume declined following a strategic shift toward N-GEN development. The lower operating loss reflected reduced R&D spending, partly offset by higher SG&A and interest costs. Warranty expense rose to $7.97 million from $0.12 million; the company cited battery-pack performance issues in certain 2016 and 2017 E-GEN and E-100 vehicles. It also recorded a $2.49 million inventory reserve for legacy-platform materials and work in process it said could not then be repurposed.
At year-end, long-term debt was $8.31 million net of discounts, representing $10 million principal under the Marathon facility. The company also recorded a $1.34 million Duke financing obligation. Marathon’s facility provides a $10 million term tranche and a $25 million production tranche that may be redrawn, with draws subject to purchase orders and covenant compliance. The loans bear interest at LIBOR plus 7.625% and are secured by substantially all company and subsidiary assets, including real estate. Required minimum liquidity of $4 million applies from March 31, 2019.
Outlook, risks and unusual items
- Funding and going concern: Management said existing resources, including Marathon financing, were expected to support current and projected funding needs into the second quarter of 2019, but additional funding would be required. The auditor’s report stated that losses, negative working capital and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. Workhorse warned that it lacked committed funding for operating costs beyond the specified credit facility.
- Products and execution: Workhorse expected to launch N-GEN in 2019 and continued developing the W-15 pickup. These are forward-looking plans, not reported results. The filing provides no clear numeric revenue or profitability guidance. Management’s stated goal was to reduce costs and reach gross-margin profitability on the delivery-van platform.
- Orders and demand: Workhorse disclosed six UPS orders totaling up to 1,405 vehicles, but cautioned that delivery depends on its ability to finance parts and meet deadlines and that further orders were not assured. The W-15’s more than 5,500 letters of intent are not purchase orders. The company remained one of four participants pursuing the USPS NGDV project after delivering prototypes; the filing does not report a production award.
- Battery and supply risks: The company was investigating battery-pack issues and vendor quality, while relying on Panasonic as its only fully qualified battery-cell supplier. Product failures could lead to additional warranty costs, recalls or liability.
- Financing and dilution: Marathon warrants cover 8,053,390 shares at $1.25 per share, with additional warrant issuance provisions. In February 2019, the company raised $1.365 million through a share subscription with down-round protection for certain investors. Further equity financing could dilute existing holders.
- Controls and listing: The auditor gave an adverse opinion on internal control over financial reporting, citing inadequate financial-reporting monitoring and reliance on manual entries due to an incomplete ERP system. The company also disclosed Nasdaq’s minimum-bid-price notice, with a June 3, 2019 deadline to regain compliance.
- Other unusual matters: The company paid off its Arosa loan using Marathon proceeds and recognized approximately $2.2 million of debt-extinguishment loss. It settled a former service provider dispute for $600,000 in cash and specified property and intellectual property. A former vendor’s $132,189 claim and a Quebec litigation matter related to a motor-home fire were also disclosed.
Most important facts for investors to verify
- Whether Workhorse secured enough operating capital and met Marathon’s liquidity and other covenant requirements after March 31, 2019.
- Actual N-GEN launch timing, production volumes, customer purchase orders, delivery performance and vehicle-level gross margins.
- Resolution and ultimate cost of the battery-pack issues, warranty reserve adequacy and any vendor recoveries.
- Whether UPS orders translated into completed deliveries and whether any USPS NGDV production contract was awarded.
- Progress in remediating internal-control weaknesses and maintaining Nasdaq listing compliance.
- Actual share dilution from warrants, subsequent financing and other equity-linked obligations.