Workhorse Group Inc. quarterly report, Q1 FY2020

Workhorse Group Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020. Workhorse designs and manufactures electric commercial vehicles and related fleet technologies, with a stated focus on bringing its C-Series electric delivery truck to market and fulfilling its order backlog.

Financial performance and position

Gross margin remained deeply negative: gross loss was approximately 1,973% of sales, versus approximately 284% in Q1 2019. Net income did not reflect profitable core operations: it was principally driven by noncash fair-value gains, including a $9.15 million reduction in warrant liability and a $5.14 million reduction in Convertible Note fair value recorded in interest income. The Company reported no income tax provision.

Cash used in investing activities was $0.46 million, primarily for C-Series tooling; financing activities provided $0.24 million, mainly from warrant and option exercises. Inventory, net, was $2.63 million, up from $1.80 million at year-end. Current assets were $24.29 million and current liabilities $39.29 million, implying a $15.00 million working-capital deficit. Stockholders’ deficit was $22.00 million.

At March 31, the Convertible Note had a $36.0 million contractual principal balance and a $27.59 million reported fair value, of which $20.16 million was classified current. The note is secured, bears 4.5% stated interest, and permits monthly holder redemption requests subject to its terms. The Company also reported $19.52 million of mandatorily redeemable Series B preferred stock, with 8% annual dividends and redemption due in 2023, and a $7.19 million warrant liability.

Changes from the prior comparable period

• Sales fell as the Company shifted focus toward C-Series development and sold fewer trucks. Revenue mix changed: Q1 2020 sales were principally aviation ($60,783) and other ($23,517), with no automotive sales; Q1 2019 included $240,000 of automotive revenue.
• Cost of sales rose despite lower revenue, which management attributed in part to C-Series production tooling. SG&A increased to $5.57 million from $2.09 million, including $1.0 million of selling expense and higher employee-related and contract-labor costs. R&D rose to $1.90 million from $1.36 million as C-Series design was finalized.
• Operating cash use increased by about $2.05 million, which management attributed to the C-Series ramp-up, labor costs, and inventory build. Cash and cash equivalents declined by about $7.04 million from year-end.
• Reported net results swung to income, largely because of mark-to-market movements in warrant and note liabilities; operating results remained loss-making.

Outlook, risks, contingencies, and unusual items

• Liquidity and going concern: Management said existing capital resources were expected to fund operations through Q2 2020, after which additional funding would be required. The filing states that substantial doubt exists about the Company’s ability to continue as a going concern absent additional financing, increased revenue, cost reductions, or a strategic relationship. Future funding was not committed, and equity financing could dilute shareholders.
• COVID-19: Operations and primary suppliers were operating as of the filing, but management warned of possible supply, manufacturing, liquidity, cash-flow, and customer-order disruption. The duration and extent of effects could not be reasonably estimated.
• Subsequent financing: On April 14, 2020, the Company received $1.4 million under a Paycheck Protection Program note bearing 1% interest. Forgiveness is subject to program requirements; any unforgiven balance converts to a term loan under the disclosed repayment schedule.
• LMC transaction: Workhorse held a 10% interest in Lordstown Motors valued at $13.1 million at quarter-end and received additional anti-dilution shares valued at about $0.9 million during the quarter. Potential royalties, commissions, and a capital-raise payment are contingent; the filing says their receipt is not assured.
• Litigation: The filing describes a patent-infringement case brought by All Cell Technologies and Illinois Institute of Technology, a wrongful-death action relating to a W-42 truck, and Workhorse’s separate lawsuit against battery-thermal-management supplier Outlast Technologies. Management said it intended to defend the claims; the filing does not provide a clear quantified exposure.
• Management claims: Workhorse cited estimated vehicle fuel-economy and maintenance benefits and anticipated customer interest in C-Series trucks. These are company estimates and expectations, not reported financial results or guarantees.

Important facts for investors to verify

• Whether additional financing was obtained after the filing and whether it was sufficient to address the stated post-Q2 2020 funding need.
• C-Series production timing, deliveries, backlog conversion, unit economics, and progress toward gross-margin improvement.
• Operating cash burn, working-capital needs, and compliance with the Convertible Note’s $8.0 million minimum-liquidity covenant.
• How much of the Q1 net income arose from fair-value changes, and the effect of subsequent changes in the Company’s stock price and debt valuation.
• Resolution and potential financial exposure from the disclosed litigation, and the status and value of contingent LMC consideration.
• The extent to which COVID-19 affected supply, production, customer orders, and liquidity after March 31, 2020.