Workhorse Group Inc. quarterly report, Q1 FY2024

Workhorse Group Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. The financial statements are unaudited. Workhorse designs, manufactures and sells electric commercial vehicles and also operates drone and vehicle-service businesses.

Financial performance and liquidity

Vehicle sales were primarily W4 CC trucks. Other sales, including after-sales services, parts, the Stables by Workhorse route and Drones as a Service, increased but did not offset lower vehicle sales. Higher inventory reserves, depreciation and production-related compensation contributed to increased cost of sales; a warranty-expense reversal partially offset the increase. SG&A and research and development expenses declined, principally with lower headcount and reduced development and prototype spending.

At March 31, cash and cash equivalents were $6.73 million, with no restricted cash, versus $35.85 million in cash and restricted cash at year-end. Current assets were $65.64 million and current liabilities $41.40 million, representing $24.24 million of working capital. Inventory was $49.85 million, including $10.07 million of reserves; the company attributed the reserve increase primarily to slower-than-expected vehicle sales. Total liabilities were $46.45 million, including $7.87 million of current convertible notes and $8.46 million of lease liabilities. The company reported an accumulated deficit of $780.72 million.

Operating cash use improved year over year, mainly due to lower inventory spending and employee compensation. Investing activities used $3.03 million. Financing activities used $8.13 million, including repayment of the 2026 Notes, partly offset by equity proceeds and issuance of 2024 Notes. The 2026 Notes were repaid in full during Q1.

Material developments, outlook and risks

• Going concern: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance of the statements. Management plans to increase vehicle and service sales, reduce costs and capital spending, and raise capital. It warns that financing may not be available on acceptable terms or at all; absent funding, the company may have to further curtail operations or seek bankruptcy protection.
• Financing and dilution: A March 2024 agreement provides for up to $139 million in senior secured convertible notes and warrants. The initial $9 million note was fully converted after quarter-end. On May 10, the company issued a further $6.3 million note and a warrant for up to 36.8 million shares; up to $123.7 million of additional notes may be issued subject to conditions. Notes bear 9% annual interest, mature after one year unless earlier converted or redeemed, and have variable conversion terms. The financing and other equity programs may materially dilute existing shareholders. The company reported $95.6 million of remaining ATM capacity at quarter-end, subject to restrictions.
• Cost reductions and business changes: Workhorse eliminated approximately 20% of its workforce, excluding direct labor; executives deferred approximately 20% of cash compensation into Q2. In April, it furloughed 73 Union City employees without pay and began discussions with vendors to extend or restructure payment terms. It stopped drone design and manufacturing and planned to divest the remaining Aero business; no cash proceeds were expected, though cost savings and possible contingent earn-outs were anticipated.
• Facility sale-leaseback: A proposed Union City facility transaction at approximately $34.5 million was not expected to close at that price. The company was exploring revised terms or alternatives and expected any completed transaction to have a materially lower price.
• Demand and execution: Management attributed lower Q1 sales to slower industry EV adoption, limited incentives available to dealers and delays in charging infrastructure. It expects adoption to improve in 2024, citing emissions requirements and the W56’s approval for a California voucher program, but adoption and incentives remain uncertain. Production scale-up, customer demand, supply-chain availability and material-cost inflation are significant risks. The company continued W56 production and cited W56 variants and the WNext platform as product priorities; it provided no quantified revenue or earnings guidance.
• Nasdaq listing: Nasdaq extended the deadline to regain the $1 minimum bid-price requirement to September 16, 2024. Workhorse said it considered compliance through a 1-for-10 to 1-for-20 reverse split; shareholders approved the split on May 14, but the timing and ratio were undetermined. Failure to regain compliance could threaten continued listing.
• Legal matter: Coulomb Solutions Inc., a battery supplier, sued on April 19 over approximately $4 million in alleged late payments. Workhorse said it was negotiating a resolution.
• Controls: Disclosure controls and internal control over financial reporting were not effective as of March 31 due to a previously identified material weakness in review of third-party fair-value calculations for convertible notes and warrant liabilities. Remediation work was ongoing.

Key facts investors should verify

• Whether Workhorse can secure additional financing and maintain enough liquidity to fund operations, including the conditions, costs and dilution associated with further note closings and ATM sales.
• Cash burn, working-capital needs, inventory reserves and the timing and profitability of vehicle deliveries as demand and production develop.
• Whether the Union City sale-leaseback or another asset transaction closes, and the resulting proceeds, lease costs and any debt-redemption obligations.
• Progress on Nasdaq bid-price compliance and the reverse split, alongside potential effects on trading and shareholder value.
• The outcome of the CSI dispute and the company’s remediation of its material weakness in financial-reporting controls.