Workhorse(WKHS) - 2021 Q4 - Annual Report

Part I Business Workhorse designs and manufactures all-electric delivery trucks and drone systems, shifting to new W56/W34 platforms post-C-1000 recall - The company's primary focus is providing sustainable and cost-effective solutions to the commercial transportation sector by designing and manufacturing all-electric delivery trucks and drone systems[14] - A revised strategic product roadmap focuses on two new truck chassis platforms: the W56, with production expected in 2023, and the W34, with production expected in 2024[16] - To accelerate market entry in 2022, Workhorse entered a strategic supply agreement with GreenPower Motor Company for a Class 4 step van, to be branded as the W750[17][33] - In September 2021, the company suspended deliveries and recalled all C-1000 vehicles due to non-compliance with Federal Motor Vehicle Safety Standards (FMVSS) The C-1000 is now considered a limited production vehicle, and manufacturing focus will shift to new platforms[18][19] - The company is developing the HorseFly™ Unmanned Aerial System (UAS) for package delivery and is pursuing FAA Type Certification[24][26] - As of December 31, 2021, the company had 221 full-time employees, none of whom are represented by a labor union[56] Risk Factors The company faces significant operational, financial, and regulatory risks, including financing, product roadmap, and C-1000 recall - The company may need to raise additional financing in 2022 and beyond, and there is no certainty it will be available on acceptable terms[67] - There are significant execution risks associated with the new strategic product roadmap, which involves developing two new truck chassis platforms (W56 and W34) for production in 2023 and 2024[68] - The company has a history of unprofitability, with an accumulated deficit of $510.4 million as of December 31, 2021, and has experienced negative cash flow from operating activities, which was $132.6 million in 2021[70][72] - Regulatory risks are high, demonstrated by the September 2021 recall of C-1000 vehicles for non-compliance with FMVSS The company is also cooperating with SEC and DOJ investigations regarding the USPS contract bidding process and revenue recognition[75][78][80] - The business is exposed to supply chain risks, including reliance on key suppliers for critical components like battery packs and potential global shortages of materials such as microchips[104][105] - The conversion of the company's outstanding convertible notes could dilute the ownership interest of existing stockholders and potentially depress the stock price[123] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[129] Properties Workhorse operates corporate, R&D, and manufacturing facilities in Ohio, Indiana, and Michigan, deemed adequate for current needs - The company's corporate headquarters and research and development facility are located in Southwest Ohio, and its primary manufacturing facility is in Union City, Indiana[130] Legal Proceedings This section refers to Note 18 of financial statements for material legal proceedings and MD&A for regulatory matters - For a description of material legal proceedings, the report refers to Note 18, Commitments and Contingencies, in the consolidated financial statements[132] Mine Safety Disclosures This item is not applicable to the company - Not applicable[133] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Workhorse common stock trades on NASDAQ (WKHS); no dividends paid or anticipated, earnings retained for expansion - The company's common stock is traded on the NASDAQ Capital Market under the symbol "WKHS"[135] - As of February 1, 2022, there were approximately 200 shareholders of record[136] - The company has never declared or paid cash dividends on its common stock and does not anticipate paying any in the foreseeable future[137] Reserved This item is intentionally left blank Management's Discussion and Analysis of Financial Condition and Results of Operations 2021 saw C-1000 recall, negative sales, and a large net loss, despite increased cash from LMC sale and financing Overview and 2021 Highlights 2021 focus was C-1000 compliance, production increase, and new W56/W34 product roadmap with new leadership - The company's 2021 focus was on C-1000 compliance, increasing vehicle production, and developing next-generation products[147] - A revised product roadmap was developed, focusing on two new truck platforms: the W56 (production expected in 2023) and the W34 (production expected in 2024)[148] - A new executive leadership team was appointed to support the company's transition to an efficient manufacturing operation[149] Management Opportunities, Challenges and Risks and 2022 Outlook C-1000 recall and strategic shift led to significant financial charges; 2022 focuses on new W56/W34 platforms - In Q3 2021, the company suspended deliveries of its C-1000 vehicles and recalled all 41 delivered units due to non-compliance with Federal Motor Vehicle Safety Standards (FMVSS)[150] - Following extensive testing, the C-1000 platform was deemed a low-volume, limited cargo capacity vehicle, leading to a decision to transition manufacturing to new platforms[153] Financial Impact of C-1000 Production Shift (as of Dec 31, 2021) | Charge Type | Amount | Source | | :--- | :--- | :--- | | Inventory Reserve | $77.0 million | Excess or obsolete inventories exceeding planned production | | Prepaid Purchases Reserve | $23.9 million | Deposits on planned future inventory purchases no longer needed | | Asset Impairment | $6.8 million | Tooling and machinery related to C-Series production no longer intended for use | Results of Operations 2021 saw negative net sales, surging cost of sales, and a $401.3 million net loss, due to C-1000 recall and LMC investment loss Consolidated Statements of Operations Summary | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Sales, net | $(851,922) | $1,392,519 | | Cost of sales | $132,492,110 | $13,067,108 | | Gross loss | $(133,344,032) | $(11,674,589) | | Loss from operations | $(185,114,854) | $(40,981,178) | | Net (loss) income | $(401,344,813) | $69,776,499 | - Sales decreased by $2.2 million year-over-year, becoming negative due to sales returns and allowances from the C-1000 vehicle recall[169] - Cost of sales increased by $119.4 million, primarily due to a $75.0 million inventory reserve, a $23.9 million prepaid purchases reserve, and a $6.8 million impairment charge related to the C-Series platform[171] - Other loss (income) changed unfavorably by $548.5 million, driven by a $225.4 million loss from the investment in Lordstown Motors Corp (LMC) in 2021, compared to a $323.1 million gain in 2020[179] Liquidity and Capital Resources Cash increased to $201.6 million by year-end 2021, driven by restricted cash release and LMC sale, sufficient for next 12 months Cash and Cash Equivalents | Date | Amount | | :--- | :--- | | December 31, 2021 | $201.6 million | | December 31, 2020 | $46.8 million | - The increase in cash was mainly due to the release of $194.4 million of restricted cash from the October 2020 convertible notes and proceeds of $105.1 million from the sale of the LMC investment[183] - Management believes existing capital resources are sufficient to support funding requirements for at least the next twelve months[184] - Expected capital expenditures for 2022 are between $25.0 million and $35.0 million to upgrade facilities in Indiana, Ohio, and Michigan[186] Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio minimizes interest rate risk through short-term securities, with no significant foreign currency exposure - The company's investment portfolio is maintained in a variety of securities, including money market funds and government/non-government debt with maturities of less than one year, to minimize interest rate risk[215] - Due to the short-term nature and low yield of its investments, management believes there is no material exposure to interest rate or market risk[215] - The company has not had any significant exposure to foreign currency rate fluctuations as it transacts business primarily in the United States[216] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021, including the independent auditor's report and detailed notes - The financial statements were audited by Grant Thornton LLP, which issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[221][229] - Critical audit matters identified were the fair value determination of the convertible notes and the valuation of inventory reserves, both of which involved significant management judgment and complex assumptions[232][233][235] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting principles, financial disclosure, or auditing scope were reported - None[381] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management, including the CEO and CFO, concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[383] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[385] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, internal controls[388] Other Information The company reports no other information in this section - None[389] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - None[390] Part III Part III incorporates information on directors, executive compensation, security ownership, and accountant fees from the 2022 Proxy Statement Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Information regarding directors, executive officers, and corporate governance will be included in the 2022 Proxy Statement and is incorporated herein by reference[393] Executive Compensation Information on executive compensation is incorporated by reference from the 2022 Proxy Statement - Information regarding executive compensation will be included in the 2022 Proxy Statement and is incorporated herein by reference[394] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2022 Proxy Statement - Information regarding security ownership will be included in the 2022 Proxy Statement and is incorporated herein by reference[395] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information regarding certain relationships, related transactions, and director independence will be included in the 2022 Proxy Statement and is incorporated herein by reference[396] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement - Information regarding principal accountant fees and services will be included in the 2022 Proxy Statement and is incorporated herein by reference[397] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed or incorporated by reference, including corporate governance documents - This item lists all exhibits filed as part of the annual report, including the Certificate of Incorporation, Bylaws, material contracts, and various certifications[401] Form 10-K Summary The company has not provided a summary for its Form 10-K - None[405]