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General Motors and Workhorse
Friday, May 10, 2019

We noticed the other day that General Motors ($GM) has been talking up the idea of selling its factory in Lordstown, Ohio, to Workhorse ($WKHS), an electric-vehicle business that supposedly wants to use the factory to make electric trucks.

You might already know some of the history here. Last November, GM announced that it would eliminate 14,000 jobs across the whole company and “unallocate” several factories — including the Lordstown plant, which employed more than 1,200 people until it closed its doors on March 8.

Since then, General Motors, the autoworkers’ union, and politicians have been scrambling to figure out the factory’s ultimate fate. Technically GM cannot close the plant without first negotiating with the union; hence invention of the word “unallocating” instead. GM has also been trying to sell the plant so it can get that liability off its balance sheet.

Including, apparently, an electric vehicle firm called Workhorse.

How feasible is that sale, really? We fired up the Calcbench databases to take a look.

First, our Company-in-Detail page shows some pretty sparse financials at Workhorse. The company had only $2.85 million in cash and equivalents at the end of first-quarter 2019, and only $7.8 million in current assets. More than half of that amount was tied up in inventory and prepaid expenses.

Meanwhile, Workhorse also has more than $9 million in warranty liabilities, plus $8.4 million in long-term debt. Stockholders’ equity stands at negative $18 million.

Then there’s the income statement, which is no better. Workhorse at $364,000 in sales in the first quarter. Aside from a stretch in mid-2016 to mid-2017 where sales were in the low several millions per quarter, revenue has been pitiful. Like, $11,000 in the third quarter of 2018 pitiful.

Then we went to the Interactive Disclosures database to see what Workhorse said about its controls and procedures. Workhorse wins points for candor:

We identified the following material weaknesses in our internal control over financial reporting as of December 31, 2018:
  • The Company has not established adequate financial reporting monitoring activities to mitigate the risk of accounting errors.
  • The lack of a fully implemented enterprise resource planning (“ERP”) system caused over reliance on manual entries.
Because of the material weaknesses noted above, management has concluded that it did not maintain effective internal control over financial reporting.

Workhorse did say it has hired an accounting firm for a top-to-bottom review of its accounting systems, and vowed to finish an ERP implementation to get a grip on its inventory and purchase order issues.

Our disclosures database also has the auditor’s opinion from Workhorse. The company’s firm is Grant Thornton, and it also gives a thumbs down to Workhorse’s internal controls, for the same reasons management cites.

Most interesting, however, might be the $35 million that Workhorse has borrowed from Marathon Asset Management, a hedge fund that apparently sees a horse worth betting on here.

In theory, Workhorse could ask Marathon for enough capital to buy the Lordstown plant, especially if GM is under political and business pressure to sell the plant pronto.

That said, Workhorse has a lot of disclosure about its financing from Marathon. For example, Workhorse has a debt payment of $10 million due to Marathon at the end of 2021. You can read all the details about the Workhorse-Marathon relationship in the Long-Term Debt disclosures and several other parts of Workhorse’s report. As always just type “Marathon” into the text search box on the right side of the page, and Calcbench will pull up whatever it can find.

So overall — this sale to Workhorse seems like a long-shot bet. A lot of numbers would need to line up just right.

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