WORKHORSE GROUP INC. Overview
We are a technology company with a vision to pioneer the transition to zero-emission commercial vehicles. Our primary focus is to provide sustainable and cost-effective solutions to the commercial transportation sector. We design and manufacture all-electric delivery trucks and drone systems, including the technology that optimizes the way these vehicles operate. We are focused on our core competency of bringing our electric delivery vehicle platforms to market.
Recent Developments
GreenPower Motor Company Inc. Supply Agreement
InFebruary 2022 , we entered into a multi-year vehicle purchase and supply agreement (the "Supply Agreement") with GreenPower Motor Company Inc. ("GreenPower") to facilitate the manufacturing and delivery of medium-duty Class 4 step vans into the North American market. Under the Supply Agreement, we will purchase 1,500 base vehicles fromGreenPower , and complete the manufacturing process on the base vehicles. We will market two versions of the vehicle, a cab chassis version known as the W4 CC and a complete vehicle with a step van body, known as the W750, to customers inthe United States andCanada . The W4 CC will have a payload capacity of 7,000 pounds and the W750 will have a payload capacity of 5,000 pounds. Both the W4 CC and the W750 will feature up to 150 miles of all-electric range. Delivery of base vehicles began in July of 2022.
Securities Exchange Agreement
InApril 2022 , we entered into a securities exchange agreement to exchange the remaining$27.5 million in aggregate principal of our convertible notes for approximately 7.8 million shares of our common stock. The number of shares issued was calculated by dividing$29.4 million , which represents 107% of the principal amount of the notes, plus$0.3 million of interest accrued on the notes, by the average of the daily volume weighted average price for the 10 days immediately precedingApril 21, 2022 . We recognized a loss of$1.8 million in the first quarter of 2022, which includes a$0.4 million adjustment to the fair value of the convertible notes to the value of the shares issued under the exchange and a$1.4 million adjustment related to the realization of the amount previously recognized in Accumulated Other Comprehensive Loss. The total loss was recorded in Interest Expense for the six months endedJune 30, 2022 . Subsequent to the exchange, we have no convertible notes outstanding, and the indenture and related security agreement under which the 2024 Notes were issued have been terminated.
Recent Trends and Market Conditions
COVID-19. The impact of COVID-19, including pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy. Recent COVID-19 outbreaks in certain regions have continued to cause intermittent disruptions to our supply chain and, although we have been relatively successful in navigating the impact of the COVID-19 pandemic, we have previously been affected by temporary manufacturing closures. As ofJune 30, 2022 , our locations and most of our primary suppliers are in operation and we continue to work through supplier constraints as a result of the COVID-19 pandemic, as well as other supply chain difficulties. Commodities. Prices for commodities remain volatile, and we expect to experience price increases for base metals and raw materials that are used in batteries for electric vehicles (e.g., lithium, cobalt, and nickel) as well as steel, aluminum and other material inputs. Global demand and differences in output across sectors as a result of the COVID-19 pandemic have generated divergence in price movements across different commodities. We expect the net impact on us overall will be higher material costs. The help ensure supply of raw materials for critical components (such as batteries), we have engaged in multi-year sourcing agreements. Inflation. Inflation has significantly risen during the first half of 2022, resulting from both supply and demand imbalances as economies continue to recover from the COVID-19 pandemic as well as the impact on the availability and cost of energy and other commodities resulting fromRussia's invasion ofUkraine inFebruary 2022 , which is ongoing. We are seeing a near-term impact on our business due to inflationary pressure. In an effort to dampen inflationary pressures, central banks have started to raise interest rates which will likely raise the cost of any financing the Company may undertake in the future. 18 --------------------------------------------------------------------------------
Results of Operations
Our condensed consolidated statements of operations data are as follows:
Three Months Ended
June 30, Six Months Ended June 30,
2022 2021 2022 2021
Sales, net of returns and allowances $ 12,555 $ 1,202,876 $ 26,854 $ 1,723,936
Cost of sales 3,020,204 14,796,130 6,943,555 21,021,429
Gross loss (3,007,649) (13,593,254) (6,916,701) (19,297,493)
Operating expenses
Selling, general and administrative 13,030,143 7,005,537 24,940,402 13,891,367
Research and development 5,027,061 2,123,860 9,038,995 5,987,575
Total operating expenses 18,057,204 9,129,397 33,979,397 19,878,942
Loss from operations (21,064,853) (22,722,651) (40,896,098) (39,176,435)
Interest expense (income), net 95,419 10,478,717 2,318,709 (4,441,756)
Other loss - 11,699,666 - 148,305,618
Loss before benefit for income taxes (21,160,272) (44,901,034)
(43,214,807) (183,040,297)
Benefit for income taxes - (1,281,947) - (18,914,439)
Net loss $ (21,160,272) $ (43,619,087) $ (43,214,807) $ (164,125,858) Sales, net of returns and allowances
Sales, net of returns and allowances for the three months endedJune 30, 2022 and 2021 were$12,555 and$1,202,876 , respectively. Sales, net of returns and allowances for the six months endedJune 30, 2022 and 2021 were$26,854 and$1,723,936 , respectively. The decrease in net sales was primarily due to a decrease in volume of automotive vehicle sales.
Cost of sales
Cost of sales for the three months endedJune 30, 2022 and 2021 were$3.0 million and$14.8 million , respectively. The decrease in cost of sales was primarily due to a$6.7 million decrease in inventory write-downs and a$2.0 million decrease in cost due to a reduction in volume of automotive vehicle sales. Additionally, the decrease in cost of sales was due to a reduction in costs associated with the initial production of the C-Series vehicle platform. Cost of sales for the six months endedJune 30, 2022 and 2021 were$6.9 million and$21.0 million , respectively. The decrease in cost of sales was primarily due to a$6.5 million decrease in inventory write-downs and a$2.9 million decrease in cost due to a reduction in volume of automotive vehicle sales. Additionally, the decrease in cost of sales was due to a reduction in costs associated with the initial production of the C-Series vehicle platform.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses during the three months
ended June 30, 2022 and 2021 were $13.0 million and $7.0 million , respectively.
The increase was primarily driven by an increase of $4.8 million in employee
compensation and related expenses due to increased headcount, non-cash
stock-based compensation expense, and the appointments of our new executive
leadership team.
SG&A expenses during the six months ended June 30, 2022 and 2021 were $24.9
million and $13.9 million , respectively. The increase was primarily driven by an
increase of $7.5 million in employee compensation and related expenses from
increased headcount, non-cash stock-based compensation expense, and the
appointments of our new executive leadership team. Additionally, there was a
$2.4 million increase in professional and legal services primarily related to
litigation. The increases were partially offset by a $2.5 million decrease in
consulting fees as a result of an initiative to reduce reliance on external
resources by hiring internal resources.
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--------------------------------------------------------------------------------Research and development expenses
Research and development ("R&D") expenses during the three months ended June 30,
2022 and 2021 were $5.0 million and $2.1 million , respectively. The increase was
primarily driven by an increase of $1.3 million in employee compensation and
related expenses due to increased headcount. Additionally, there was a $1.1
million increase in consulting and prototype expenses related to the continued
development of our HorseFly™, W56, and W750 vehicle programs.
R&D expenses during the six months ended June 30, 2022 and 2021 were $9.0
million and $6.0 million , respectively. The increase was primarily driven by an
increase of $2.0 million in employee compensation and related expenses due to
increased headcount. Additionally, there was a $0.5 million increase in
prototype expenses related to the continued development of our HorseFly™, W56,
and W750 vehicle programs.
Net Interest Expense (Income)
Net interest expense (income) is comprised of the following:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Realization of accumulated other
comprehensive loss $ - $ - $ 1,402,500 $ -
Change in fair value of convertible notes - 8,500,000 367,357 (7,000,000)
and loss on conversion to common stock
Contractual interest expense - 1,977,777 332,707 3,977,777
Gain on forgiveness of PPP Term Note - - - (1,411,000)
Other 95,419 940 216,145 (8,533)
Total interest expense (income), net
Net interest expense for the three months endedJune 30, 2022 and 2021 was$0.1 million and$10.5 million , respectively. The decrease in net interest expense was primarily due to a$8.5 million increase in fair value of the 2024 Notes during the three months endedJune 30, 2021 , as compared to no changes in fair value during the three months endedJune 30, 2022 . Additionally, contractual interest expense on the 2024 Notes for the three months endedJune 30, 2021 was$2.0 million , as compared to zero for the three months endedJune 30, 2022 . Net interest expense for the six months endedJune 30, 2022 was$2.3 million as compared to$4.4 million of interest income for the six months endedJune 30, 2021 . The change in net interest expense (income) was primarily due to a$7.0 million net decrease in fair value of our convertible notes during the six months endedJune 30, 2021 , as compared to no changes in fair value during the six months endedJune 30, 2022 . Additionally, contractual interest expense on the 2024 Notes for the six months endedJune 30, 2021 was$4.0 million , as compared to$0.3 million for the six months endedJune 30, 2022 . Further, we recognized a gain of$1.4 million on the forgiveness of our prior PPP Term Note during the six months endedJune 30, 2021 . The changes in expense described above are primarily due to the exchange of the remaining aggregate principal of 2024 Notes for shares of the Company's common stock during the second quarter of 2022. A description of the exchange is contained in Note 5, Debt, of the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Other loss
Other loss during the three and six months endedJune 30, 2022 was zero. During the three and six months endedJune 30, 2021 , we recognized a loss of$11.7 million and$148.3 million , respectively, attributable to unfavorable changes in fair value of our prior investment in Lordstown Motors Corp ("LMC").
Benefit for income taxes
Benefit for income taxes during the three and six months endedJune 30, 2022 was zero. During the three and six months endedJune 30, 2021 , we recognized a benefit for income taxes of$1.3 million and$18.9 million , respectively, attributable to an increase to the valuation allowance recorded against deferred tax assets due to the sale of our prior investment in LMC and the uncertainty about our ability to utilize our remaining deferred tax assets in future years. 20 --------------------------------------------------------------------------------
Liquidity and Capital Resources
From inception, we have financed our operations primarily through sales of equity securities and issuance of debt. We have utilized this capital for R&D and to fund designing, building and delivering vehicles to customers and for working capital purposes. As ofJune 30, 2022 , we had approximately$140.1 million in cash and cash equivalents, compared to approximately$201.6 million as ofDecember 31, 2021 , resulting in a decrease of$61.6 million . The decrease was primarily attributable to cash used in operations related to employee and related costs, consulting and professional services, capital expenditures and inventory build. OnMarch 10, 2022 , we entered into an At-The-Market Sales Agreement, which established an at-the-market equity program (the "2022 ATM Program"). Under the 2022 ATM Program, we may offer and sell shares of our common stock having an aggregate sales price of up to$175.0 million , in amounts and at times determined by management. During the three and six months endedJune 30, 2022 , we issued 0.1 million shares under the 2022 ATM Program for net proceeds of$0.2 million , leaving shares of common stock having an aggregate offering price of up to$174.8 million available for issuance under the 2022 ATM Program. We believe our existing capital resources will be sufficient to support our current and projected funding requirements for at least the next twelve months, after which time additional funding may be required. However, if market conditions are appropriate, we may raise additional capital during the remainder of 2022, including utilization of our 2022 ATM Program.
Cash Requirements
From time to time in the ordinary course of business, we enter into agreements with vendors for the purchase of components and raw materials to be used in the manufacture of our products. However, due to contractual terms, variability in the precise growth curves of our development and production ramps, and opportunities to renegotiate pricing, we generally do not have binding and enforceable purchase orders under such contracts beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to accurately project.
We currently expect our capital expenditures to upgrade our facilities in
As ofJune 30, 2022 , we have no convertible notes outstanding following the Company's exchange of the remaining$27.5 million in aggregate principal of the 2024 Notes for shares of the Company's common stock during the second quarter of 2022. A description of the exchange is contained in Note 5, Debt, of the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. As ofJune 30, 2022 , our total minimum future lease payments are$13.4 million . A description of our lease obligations is contained in Note 7, Leases, of the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Sources and Condition of Liquidity
With the exception of contingent and royalty payments we may receive under our existing collaborations, we do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, including under the 2022 ATM Program, our stockholders could at that time experience substantial dilution. Any debt financing that we can obtain may include operating covenants that restrict our business.
Our future funding requirements will depend upon many factors, including, but not limited to:
•our ability to acquire or license other technologies we may seek to pursue; •our ability to manage our growth; •competing technological and market developments; •the costs and timing of obtaining, enforcing and defending our patent and other intellectual property rights; and •expenses associated with any unforeseen litigation. For the three and six months endedJune 30, 2022 , we maintained an investment in a bank money market fund. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize 21
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the potential effects of concentration and degrees of risk. We will continue to monitor the impact of the changes in the conditions of the credit and financial markets to our investment portfolio and assess if future changes in our investment strategy are necessary.
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