Workhorse Group Inc. quarterly report, Q2 FY2023

Workhorse Group Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023; unaudited. Workhorse designs and manufactures all-electric commercial delivery vehicles and drone systems.

Financial performance and liquidity

• Q2 gross margin was approximately negative 112%; six-month gross margin was approximately negative 143%, as cost of sales exceeded revenue.
• At June 30, cash and cash equivalents were $62.4 million, working capital was $66.2 million, and accumulated deficit was $675.7 million. Cash was down from $99.3 million at year-end 2022.
• Six-month investing cash outflow was $10.5 million, principally capital expenditures. Financing provided $39.4 million, primarily from ATM share sales.
• Total liabilities were $69.5 million. Lease liabilities totaled $9.6 million; the filing does not report other outstanding borrowings at June 30.
• Inventory was $34.6 million versus $8.9 million at year-end, reflecting the production ramp and inventory build. The company reported a $2.3 million inventory reserve, down from $59.2 million.

Changes and operating developments

• Revenue growth was primarily driven by W4 CC vehicle sales; the filing says Q2 sales also included delivery services, parts and other services. Management reported increased sales of W4 CC, W750 and HorseFly vehicles.
• Compared with the first half of 2022, first-half 2023 revenue increased substantially from a very small base, but net loss widened by $4.8 million and operating cash use increased by $10.3 million.
• First-half operating expenses rose to $41.0 million from $34.0 million. R&D increased to $12.3 million from $9.0 million, reflecting development of HorseFly, W56, W750 and W4 CC programs.
• Workhorse issued 38.7 million shares through its ATM program in the first half for $40.3 million net proceeds; $120.7 million of program capacity remained at June 30. Shares outstanding were 205.2 million at June 30 and 210.8 million at July 31.

Outlook, risks and unusual items

• Management expects additional vehicle sales over the next 12 months and says it expects cash burn to decline overall in the second half of 2023, despite higher working-capital and R&D needs. It did not provide a specific revenue or earnings forecast.
• Management estimated 2023 facility-upgrade capital expenditures of $15 million to $25 million. It said discretionary spending, including non-contracted capital expenditures, could be reduced if necessary.
• The company reported that sales, losses and operating cash use raised substantial doubt about its ability to continue as a going concern; management said anticipated sales and expense-control plans alleviated that doubt. It cautioned that failure to achieve sales, control spending or obtain funding could cause continued losses and negative cash flows. Additional equity financing may be needed and would dilute shareholders.
• A securities class-action settlement received final court approval on July 24, 2023, after quarter-end. The settlement provides for $15 million cash and $20 million in Workhorse shares. The balance sheet included a $35 million legal reserve and a $15 million insurance receivable. The related derivative settlement includes a $0.5 million company-paid legal fee and corporate governance changes.
• On August 10, 2023, Workhorse entered a one-year revolving floorplan credit facility with a maximum limit of $5 million, secured by eligible inventory; the stated rate is typically a reference rate such as SOFR plus 4.86%.
• Risks include commodity and inflationary cost increases, supply-chain constraints, dependence on incentives such as California’s HVIP, execution of production ramps, and access to capital. The company said authorized common shares were limited and sought shareholder approval to raise the authorization from 250 million to 450 million shares.
• Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Investor verification checklist

• Track W4 CC and W750 production, deliveries, customer demand and gross margins as volume scales.
• Compare actual cash burn and capital expenditures with management’s second-half expectations and the $15 million to $25 million full-year facility-upgrade estimate.
• Verify the timing and final share impact of the $20 million stock settlement, alongside ATM issuance and any further financing.
• Check the outcome of the proposed increase in authorized shares and assess the company’s remaining liquidity and funding needs.
• Monitor incentive eligibility, supply availability and costs, and the use and repayment terms of the $5 million floorplan facility.