Workhorse Group Inc. annual report, FY2021

Workhorse Group Inc. — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. The filing was signed March 1, 2022. Workhorse designs and manufactures electric commercial delivery vehicles and develops delivery-drone technology.

Financial performance and liquidity

• FY2021 sales were negative because returns and allowances associated with the C-1000 recall exceeded sales. A gross-margin percentage is not meaningful with negative net sales.
• Cost of sales was $132.5 million, including a $77.0 million inventory reserve, a $23.9 million reserve on prepaid purchases, and a $6.8 million impairment of C-Series-related assets.
• Cash and cash equivalents were $201.6 million at year-end, versus $46.8 million a year earlier; current assets were $216.2 million and current liabilities $27.6 million. Management said available resources were expected to cover projected requirements for at least 12 months.
• Cash from investing activities was $99.8 million, principally reflecting $105.1 million in proceeds from selling the Lordstown Motors investment. Cash used in financing activities was $6.8 million.
• Convertible-note principal outstanding was $27.5 million and its reported fair value was $24.7 million. The notes are senior secured, bear 4% interest, and mature in 2024. Total liabilities were $53.4 million; total equity was $174.7 million.
• Management expected $25–$35 million of 2022 capital expenditures. The filing reports $5.9 million in minimum lease payments.

Changes and unusual items

• Net sales declined by about $2.2 million year over year, primarily due to C-1000 recall-related returns. The company suspended deliveries and agreed to refund customers for recalled vehicles.
• The FY2021 net loss included a $225.4 million other loss, primarily from fair-value changes and sale of the Lordstown Motors investment. In FY2020, a $323.1 million other gain, primarily from favorable fair-value changes in that investment, contributed to reported net income.
• Interest expense fell to $12.6 million from $190.5 million in FY2020, largely because of lower convertible-note fair-value and conversion-related charges. In late 2021, Workhorse exchanged $172.5 million of note principal for approximately 27.7 million common shares.
• Operating cash use increased from $70.3 million to $132.6 million, largely reflecting C-Series production ramp-up, inventory build, and related labor costs.
• Workhorse reported an accumulated deficit of $510.4 million and cautioned that it may continue to incur losses and negative cash flow.

Outlook, risks, and contingencies

• The revised product roadmap targets W56 production in 2023 and W34 production in 2024. The company expected first deliveries of the GreenPower-based W750 step van later in 2022. A February 2022 supply agreement specified an initial schedule for 1,500 base vehicles, with approximately $20 million of working-capital requirements over the agreement’s life.
• Following testing completed in February 2022, the C-1000 was deemed eligible for certification and reintroduction only as a limited-production vehicle with constrained cargo capacity. Workhorse planned corrective rework during 2022 and said it intended to repair and resell most returned vehicles.
• The 2024 notes require minimum sales backlog of $25 million at March 31, 2022, rising quarterly to $100 million at December 31, 2022. The company said it planned to convert prior purchase orders to new-platform orders to meet the covenant. Confirm current compliance and consequences of any shortfall.
• Key risks include product-development and production delays, limited manufacturing scale, supply-chain and semiconductor constraints, customer concentration and lack of long-term minimum-volume commitments, continued cash burn, and possible need for additional capital or dilution.
• Workhorse is cooperating with NHTSA regarding the C-1000 recall and cannot estimate potential regulatory penalties. The SEC requested information concerning the USPS award process and vehicle revenue recognition; the DOJ informed the company of a related open investigation. The company said it could not predict the investigations’ scope or outcome.
• The filing also describes pending securities class-action and shareholder derivative litigation. Workhorse disputes the claims and intends to defend itself; potential outcomes and financial effects were not determinable in the filing.
• Workhorse was not selected for the USPS Next Generation Delivery Vehicle contract; it withdrew its bid protest in September 2021.
• The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified convertible-note fair value and inventory reserves as critical audit matters.

Important facts for investors to verify

• Whether the company met each 2022 sales-backlog covenant and whether purchase orders are firm, deliverable, and recognized as backlog under the note terms.
• Actual cash burn, capital spending, and remaining liquidity against the stated 12-month funding expectation and W750 working-capital needs.
• Progress and costs of C-1000 repairs, refunds, recertification, and any NHTSA action or penalties.
• Delivery timing, production readiness, customer demand, and unit economics for W750, W56, and W34.
• Developments in the SEC and DOJ investigations and litigation, including any material financial exposure.
• Further inventory or prepaid-purchase write-downs, additional financing, and dilution from equity issuance or convertible securities.