Workhorse Group Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Workhorse designs and manufactures commercial electric vehicles and develops telematics and aviation products. Management said its near-term focus was bringing the N-GEN electric cargo van to market and fulfilling its existing backlog.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $5,508 | $170,684 | $369,690 | $730,913 |
| Gross loss | $(924,656) | $(1,485,221) | $(1,958,080) | $(2,639,362) |
| Operating expenses | $3,212,781 | $4,897,914 | $6,665,946 | $9,635,692 |
| Interest expense, net | $32,718,876 | $526,162 | $34,496,459 | $1,052,049 |
| Net loss | $(36,856,313) | $(6,909,297) | $(43,120,485) | $(13,327,103) |
- Q2 sales fell sharply, which the company attributed mainly to fewer trucks sold amid a strategic shift toward N-GEN development. Six-month automotive revenue was $240,000, versus $523,252 in 2018.
- Gross losses narrowed as cost of sales declined with lower sales volume. Q2 cost of sales included an $0.8 million charge for excess and obsolete inventory.
- SG&A and R&D declined year over year, reflecting lower marketing, employee-related, prototype and product-design costs.
- Interest expense included a $31.1 million Q2 and $31.7 million six-month noncash mark-to-market charge on lender warrants. The filing reports warrant liabilities of $33.5 million at June 30, up from $1.8 million at year-end; changes in fair value are recognized in interest expense.
Cash, liquidity and financing
- Cash and cash equivalents were $23.5 million at June 30, 2019, versus $1.5 million at December 31, 2018. Current assets were $27.5 million and current liabilities $53.7 million, indicating negative working capital of approximately $26.2 million.
- For the first six months, operating cash use was $11.8 million (versus $7.6 million in 2018), investing cash use was $3.0 million, and financing cash inflow was $36.8 million. Investing outflows primarily funded tooling; financing included $25.0 million from Series B preferred stock, $5.9 million from common stock and $5.9 million drawn on the Marathon revolving facility.
- Marathon debt was reported at $14.4 million net of unamortized discount and issuance costs, including $5.85 million classified as current. The loans carried a 10.25% variable rate at June 30 and mature December 31, 2021. The company also reported a $1.34 million Duke financing obligation.
- The $25.0 million Series B preferred stock carries an 8% annual dividend, payable quarterly in common shares, and is mandatorily redeemable at stated value plus accrued dividends on the fourth anniversary. Its reported balance-sheet liability was $18.4 million after accounting for the warrant-related discount.
- Common shares outstanding were 66.1 million at June 30 and 66.2 million at July 31. The filing also reports 28.9 million warrants outstanding at June 30.
Outlook, risks and notable items
- Management said available capital resources and Marathon revolving loans were expected to support current and projected funding needs through the end of 2019, while cautioning that assumptions could prove wrong. The company expects to need additional funding and may pursue debt, equity or asset monetization; none of that future funding was committed.
- The filing states that limited revenue, a history of negative working capital and stockholders’ deficits raise substantial doubt about the company’s ability to continue as a going concern. Continued operation depends on raising capital, meeting future bank covenants and successfully executing operations.
- Marathon covenants include a minimum $4 million liquidity requirement and financial tests beginning in Q4 2019. Management expected to meet the requirements through operating results or an equity cure. The agreement provides a limited cure period for a liquidity shortfall.
- Workhorse was in production ramp-up and reported delivery vans in customer use. It described N-GEN development and customer testing, and said it was negotiating and conducting due diligence with a potential buyer for SureFly; no sale was assured.
- Disclosure controls were deemed ineffective because of unremediated material weaknesses in financial-reporting monitoring and reliance on manual entries due to incomplete ERP implementation. Remediation efforts included ERP work and engaging an accounting firm.
- On July 18, 2019, All Cell Technologies and Illinois Institute of Technology filed a patent-infringement complaint. Management characterized the lawsuit as baseless and said it intended to defend the company vigorously.
Most important facts for investors to verify
- Whether Workhorse can raise additional capital and maintain liquidity, and whether it meets Marathon’s covenants as they take effect.
- Actual N-GEN production, deliveries, backlog conversion, sales growth and progress toward positive gross margins.
- The valuation and potential earnings impact of lender warrants, including sensitivity to the share price and volatility assumptions.
- The terms, dilution implications and eventual redemption funding for Series B preferred stock, warrants and other equity-linked instruments.
- Progress in remediating internal-control weaknesses and developments in the patent litigation and potential SureFly sale.