Workhorse Group Inc. annual report, FY2022

Workhorse Group Inc. — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; standalone fourth-quarter financial results are not clearly provided in the filing text.

Business context

Workhorse designs and manufactures electric commercial delivery vehicles and drone systems. Its 2022 priorities included increasing production capacity and advancing its revised vehicle roadmap. The company began producing and selling the Class 4 W4 CC, expects W750 deliveries later in 2023, targets W56 production in 2023 and WNext production in 2025, and discontinued the C1000 program in December 2022.

Key financial metrics

2022 sales primarily reflected W4 CC vehicle sales. The 2021 sales figure was negative because of C1000 recall-related returns and allowances. The company reported a $627.6 million accumulated deficit and $108.6 million of stockholders’ equity at year-end. It had no convertible notes outstanding after exchanging the remaining $27.5 million principal in April 2022 for common shares. Lease liabilities totaled $10.1 million, including current and long-term amounts.

Changes versus the prior period

• Sales improved by approximately $5.9 million, mainly reflecting vehicle sales versus 2021 recall-related returns.
• Gross loss narrowed by approximately $100.7 million, principally because 2021 included a much larger inventory and prepaid-purchase reserve associated with the C1000. The 2022 statements included a $19.5 million reserve increase tied to the discontinued program.
• Operating loss narrowed by approximately $56.0 million, while operating expenses rose $44.7 million. SG&A increased, including litigation-related costs, and R&D rose with spending on new platforms.
• Net loss improved by approximately $284.1 million; the comparison is affected by 2021’s large loss on the LMC investment and other nonrecurring items.
• Operating cash use declined by approximately $38.8 million, but year-end cash fell by $102.4 million. Investing activities used $20.0 million, including capital expenditures and a $5.0 million Tropos investment.

Outlook, risks and unusual items

• Management expects additional sales within the next 12 months and plans to reduce discretionary spending if needed. It projected 2023 facility capital expenditures of $15 million to $25 million and expected negative operating cash flow could continue.
• The filing says expected sales and spending controls alleviated substantial doubt about the company’s ability to continue as a going concern, but Workhorse expects to seek additional equity financing, including through its ATM program. Future financing is not assured and could dilute shareholders. In 2022, it sold 4.9 million shares through the ATM for net proceeds of $12.9 million.
• The $175 million ATM program had up to $162.1 million of offering capacity remaining at year-end 2022. The company identified no committed future funding beyond potential contingent or royalty payments.
• The securities class action and related derivative litigation settlement calls for $15 million cash, expected to be covered by insurance, and $20 million in company shares. A $35 million legal reserve and $15 million insurance receivable were recorded at year-end. Preliminary court approval was granted in February 2023; final approval remained pending.
• The C1000 discontinuation, inventory valuation and recovery of prepaid supplier deposits are material judgment areas. Year-end inventory reserves were $59.2 million, and prepaid-purchase reserves were $22.2 million.
• Key execution risks include production ramp-up, W56/WNext development and certification, supply constraints and input-cost inflation, customer concentration, competition, product quality and warranty exposure, and the need to raise capital. Workhorse also disclosed ongoing regulatory matters concerning C1000 certification and E-Series retrofits. The SEC notified the company in December 2022 that it did not intend to recommend enforcement action based on information then available.
• The financial statements received an unqualified audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an opinion on internal control effectiveness.

Most important facts for investors to verify

• Whether W750 and W56 production and delivery targets are achieved, and whether production can scale with acceptable cost, quality and supply availability.
• Actual vehicle orders, deliveries, revenue, gross margins and customer payment performance; the filing notes no long-term customer volume commitments.
• Cash burn, capital expenditures and remaining liquidity, including how much additional equity is issued and the resulting dilution.
• Final court approval and settlement completion, including the insurance funding of the cash portion and issuance of settlement shares.
• Whether C1000-related reserves and supplier deposits prove adequate, and whether any further regulatory, warranty or recall costs arise.