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WORKHORSE GROUP INC.

(WKHS)
  Report
Real-time Estimate Cboe BZX  -  10:52 2022-09-27 am EDT
2.835 USD   +5.39%
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WORKHORSE GROUP INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/09/2022 | 09:09am EDT

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


In February 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 from GreenPower, 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 in the United States and Canada. 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


In April 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 preceding April 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 ended June 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 of June 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 from Russia's invasion of Ukraine
in February 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.
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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 ended June 30, 2022
and 2021 were $12,555 and $1,202,876, respectively. Sales, net of returns and
allowances for the six months ended June 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 ended June 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 ended June 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.


                                       19
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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 $ 95,419 $ 10,478,717 $ 2,318,709 $ (4,441,756)




Net interest expense for the three months ended June 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 ended June 30, 2021, as compared to no changes in fair
value during the three months ended June 30, 2022. Additionally, contractual
interest expense on the 2024 Notes for the three months ended June 30, 2021 was
$2.0 million, as compared to zero for the three months ended June 30, 2022.

Net interest expense for the six months ended June 30, 2022 was $2.3 million as
compared to $4.4 million of interest income for the six months ended June 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 ended June 30, 2021, as compared to no changes in fair value during the
six months ended June 30, 2022. Additionally, contractual interest expense on
the 2024 Notes for the six months ended June 30, 2021 was $4.0 million, as
compared to $0.3 million for the six months ended June 30, 2022. Further, we
recognized a gain of $1.4 million on the forgiveness of our prior PPP Term Note
during the six months ended June 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 ended June 30, 2022 was zero. During
the three and six months ended June 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 ended June 30, 2022 was
zero. During the three and six months ended June 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
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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 of June 30, 2022, we had approximately $140.1 million in cash and cash
equivalents, compared to approximately $201.6 million as of December 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.

On March 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 ended June 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 Indiana, Ohio and Michigan to be between $15.0 and $25.0 million in 2022.


As of June 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 of June 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 ended June 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.

© Edgar Online, source Glimpses

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