Workhorse Group Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Workhorse develops and manufactures electric commercial delivery vehicles and drone systems, with a focus on bringing its C-Series trucks to market and fulfilling its order backlog.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $521,060 | $84,300 |
| Gross loss | $5.7 million | $1.7 million |
| Operating expenses | $10.7 million | $7.5 million |
| Net loss (income) | $120.5 million | $4.8 million income |
| Basic loss (income) per share | $(0.98) | $0.07 |
| Operating cash used | $34.9 million | $7.8 million |
- Revenue increased mainly from initial C-Series production; automotive sales were $495,000. Cost of sales rose to $6.2 million, leaving a gross loss substantially greater than revenue.
- The $136.6 million other loss primarily reflected a decline in the fair value of Workhorse’s Lordstown Motors Corp. (LMC) investment. That investment was valued at $194.0 million at quarter-end, down from $330.6 million at December 31, 2020.
- Cash and cash equivalents were $205.1 million at March 31, versus $46.8 million at year-end. The company also held a $194.0 million LMC investment classified as current. Total current assets were $467.4 million and current liabilities were $17.6 million.
- Operating cash use increased mainly due to C-Series production spending, including inventory build, employee costs and contract labor. Capital expenditures were $1.3 million; financing provided $14,220.
- Convertible notes had $200 million contractual principal and a $182.2 million reported fair value; they mature in October 2024 and bear 4% interest. The $1.4 million PPP note was forgiven in January 2021.
Changes, outlook and risks
- Compared with Q1 2020, sales grew from a low base, while gross loss, operating expenses and operating cash use increased. The company moved from net income to a substantial net loss, driven chiefly by the LMC investment fair-value decline.
- Management said resources should support projected funding requirements for several years if the company monetizes its LMC position; it also said it may raise additional financing in 2021. No specific revenue, production or earnings guidance is provided in the filing.
- The six-month restriction on selling LMC shares ended in April 2021, after the quarter, allowing the company to monetize some or all of its holding. Management noted that additional funding may eventually be required and that equity financing could dilute shareholders.
- COVID-19-related supply-chain pressures, including logistics costs, port congestion, supplier delays and a microchip shortage, remained ongoing constraints. Management also identified market acceptance, competition, expenses, technology changes and ability to scale as risks.
- Two putative securities class actions filed in March 2021 allege misrepresentations regarding prospects for the USPS vehicle contract; the company said it believes the cases are without merit. A derivative action was filed in April. Management stated that ordinary-course legal matters were not expected to materially affect the company, but outcomes remain uncertain.
Key facts for investors to verify
- Whether C-Series production and deliveries can scale enough to reduce unit costs and improve gross margins.
- The LMC shares’ value, sale restrictions and any actual monetization proceeds after the April 2021 lockup expiration.
- Cash burn, inventory growth, and the assumptions behind management’s liquidity outlook and potential 2021 financing.
- Compliance with the convertible-note sales-backlog covenants beginning in 2022.
- Developments and potential costs related to the USPS-related securities litigation and derivative action.