Workhorse Group Inc. quarterly report, Q3 FY2021

Workhorse Group Inc. — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended September 30, 2021; filed November 9, 2021. Workhorse develops electric commercial delivery vehicles and drone systems, with near-term focus on bringing its C-Series trucks to market and fulfilling orders.

Financial performance and position

• Q3 net sales were negative because Workhorse recorded a $1.1 million refund liability related to the C-1000 recall. The filing does not provide a meaningful positive gross-margin rate for the quarter; reported gross loss was $12.1 million on negative net sales.
• Higher cost of sales included inventory write-downs, increased warranty reserves, and higher production costs. Inventory write-downs were $3.4 million in Q3 and $10.9 million for the first nine months.
• Net loss included substantial non-operating fair-value and investment effects. The company recorded $77.1 million of other loss in Q3 and $225.4 million for the first nine months, primarily relating to its Lordstown Motors (LMC) investment. Nine-month net interest income was $23.0 million, versus $185.6 million of expense in the prior-year period, mainly reflecting convertible-note fair-value changes.
• At September 30, cash and cash equivalents were $230.4 million; current assets were $327.0 million and current liabilities $174.9 million. Stockholders’ equity was $140.9 million. The company reported $200.0 million contractual principal on its 2024 convertible notes, carried at a fair value of $180.3 million ($155.5 million current and $24.8 million long-term).
• For the nine months, cash used in operations was $110.0 million, largely from C-Series production and inventory build; capital expenditures were $3.8 million. The sale of LMC shares generated approximately $105.1 million net proceeds. Cash declined by $10.8 million from year-end, when the balance included restricted escrow cash.

Material changes and outlook

• On September 22, Workhorse suspended C-1000 deliveries and recalled 41 delivered vehicles. It estimated 27 would be repaired or retrofitted and returned to customers, while 14 would be returned for refunds. The company said further testing and modifications are needed for FMVSS compliance and to address customer feedback, particularly payload capacity.
• Management stated existing funds were expected to provide adequate liquidity for the 12 months following September 30, but the company had no committed future funding and could seek additional capital. Equity financing could dilute shareholders; debt financing could impose restrictive covenants.
• The 2024 notes require minimum sales backlog thresholds of $25 million by March 31, 2022, rising quarterly to $100 million by December 31, 2022. Workhorse reported no covenant default as of September 30.
• After quarter-end, exchanges converted $90.0 million principal of notes into approximately 15.6 million shares in October and another $82.5 million into approximately 12.1 million shares in November. As of November 4, $27.5 million principal remained outstanding. The company recorded exchange losses of approximately $17.5 million and $17.4 million, respectively.

Risks, contingencies, and unusual items

• Workhorse said it could not estimate the ultimate cost or impact of the C-1000 recall and compliance matter; regulatory fines or penalties could be significant. It warned that additional inventory write-downs, costs, or production delays could materially harm results.
• The SEC requested information regarding events and trading around the USPS vehicle contract announcement and recognition of vehicle revenue. The DOJ informed the company of a related open investigation. Workhorse is cooperating and said it could not predict the scope or outcome.
• Pending matters include securities class-action and shareholder derivative litigation. The company withdrew its USPS bid protest in September 2021. It also disclosed an E-Series retrofit issue, which management did not expect to materially affect financial condition or operations.
• COVID-related supply-chain constraints, including supplier delays and microchip shortages, continued. Management reported disclosure controls and procedures were effective at quarter-end.

Investor verification points

• Progress, cost, timing, and regulatory outcome of C-1000 testing, modifications, recall repairs, and refunds.
• Actual sales backlog and ability to meet the convertible-note backlog covenants, alongside production ramp and customer deliveries.
• Cash burn, working-capital needs, financing plans, and any further debt exchanges or share dilution.
• Developments and potential financial exposure from SEC and DOJ inquiries, securities and derivative litigation, and other regulatory matters.
• Inventory valuation and warranty reserves, given write-downs, the recall, and the very low sales base.