Workhorse Group Inc. quarterly report, Q3 FY2022

Workhorse Group Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Workhorse designs and manufactures electric commercial vehicles and drone systems. The company is focused on bringing new electric delivery-vehicle platforms to market.

Financial results and position

Gross loss exceeded sales in both current periods; the filing does not present a positive gross margin. Q3 net loss included a $20 million legal settlement expense, partly offset by $13.4 million of other income from selling previously fully reserved inventory. The nine-month net loss comparison is also affected by 2021 losses on the fair value of the company’s former Lordstown Motors investment.

At September 30, 2022, cash and cash equivalents were $120.1 million, down from $201.6 million at December 31, 2021. Total assets were $201.9 million and stockholders’ equity was $131.3 million. The company reported no convertible notes outstanding after exchanging $27.5 million principal of notes for about 7.8 million common shares in April 2022. Lease liabilities totaled $9.8 million, including $1.1 million current; future minimum lease payments were $13.0 million. Common shares outstanding were 160.4 million at quarter-end.

Material changes and developments

• Q3 sales improved from the prior-year quarter, which included a $1.1 million refund liability related to the C1000 recall. Nine-month sales increased to $1.58 million from $1.15 million, but remained modest relative to operating costs.
• Nine-month cost of sales fell to $16.5 million from $32.6 million, primarily reflecting lower inventory write-downs, reduced C1000 production, and lower related expenses.
• SG&A rose to $34.8 million in Q3 and $59.7 million for nine months, driven in substantial part by the $20 million legal settlement expense, litigation-related professional fees, increased compensation, and stock-based compensation. R&D rose to $6.1 million in Q3 and $15.2 million for nine months, reflecting staffing and development spending on HorseFly, W56, W750, and W4 CC programs.
• Inventory reserves declined to $47.2 million from $77.0 million at year-end, primarily as the company disposed of inventory not expected to be used in future production. The C1000 platform was designated for low-volume production as Workhorse transitions toward new platforms.
• Under a three-year agreement, Workhorse will assemble at least 4,250 Tropos vehicles in total during 2023–2025. It received a $10 million Tropos preferred-stock investment, consisting of $5 million cash and a $5 million deposit for future assembly services; $4.9 million of assembly-related deferred revenue was recorded.
• Workhorse agreed to purchase 1,500 GreenPower base vehicles for its W4 CC and W750 programs. Base-vehicle deliveries and W4 CC production began in Q3 2022.
• The company began operating a FedEx delivery route through its Stables & Stalls initiative, acquired for $0.6 million, and stated its intention to transition the route to electric vehicles by Q2 2023.

Liquidity, outlook, and risks

Management said existing capital resources were expected to support current and projected funding needs for the next 12 months, after which additional funding may be required. The company had an at-the-market equity program permitting up to $175 million in sales; only about $0.2 million of net proceeds had been raised through September 30, leaving approximately $174.8 million available. Further equity issuance could substantially dilute shareholders. Management expected 2022 facility-upgrade capital expenditures of $15–$20 million; $9.7 million had been spent on capital expenditures during the first nine months.

Management cited supplier constraints, volatile and rising commodity and battery-material costs, inflation, and higher prospective financing costs. The Inflation Reduction Act includes commercial EV and domestic manufacturing incentives effective beginning in 2023; the company was evaluating potential effects. The filing provides no quantified revenue or earnings guidance.

Legal and regulatory matters: A binding term sheet to resolve securities and related derivative litigation provides for $15 million cash, expected to be funded by available insurance, and $20 million in Workhorse shares, subject to final documentation and court approval. At September 30, the company recorded a $35 million legal reserve and a $15 million insurance receivable. The company also disclosed ongoing SEC and DOJ investigations, which it is cooperating with; their scope and outcome were uncertain. Following C1000 testing, the platform was considered eligible for certification and reintroduction as a limited-production vehicle with constrained cargo capacity. Workhorse repurchased all recalled C1000 vehicles but could not rule out potential government fines or penalties. An E-Series retrofit issue remained under remediation. A products-liability suit concerning a W-62 truck was also disclosed.

Most important facts for investors to verify

• Whether the proposed litigation settlements receive required court approval, and the ultimate cash, share-issuance, insurance, and indemnification impacts.
• Whether cash burn, production spending, and the stated 12-month liquidity expectation remain consistent with available cash and any future financing needs.
• Progress, customer demand, production costs, and delivery performance for the W4 CC, W750, W56, and other planned platforms; the filing does not establish material vehicle revenue at this stage.
• Execution and economics of the Tropos assembly agreement and the company’s ability to realize value from its $10 million investment.
• Resolution and potential financial effects of the SEC/DOJ investigations, vehicle compliance matters, warranty obligations, and other litigation.
• Potential dilution from the ATM program, equity awards, and any further financing, as well as the impact of commodity, supply-chain, and inflation pressures.