Workhorse Group Inc. quarterly report, Q1 FY2019

Workhorse Group Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; balance sheet compared with December 31, 2018. The company designs and manufactures electric commercial vehicles and aircraft, with telematics capabilities. Management said its near-term focus was bringing the N-GEN electric cargo van to market and fulfilling existing orders.

Financial results and liquidity

• Cash and cash equivalents were $2.85 million at March 31, versus $1.51 million at year-end. No separate short-term investment balance is clearly reported in the balance sheet.
• Current assets were $7.79 million and current liabilities $22.68 million, implying negative working capital of about $14.89 million. Stockholders’ deficit was $18.00 million.
• Debt under the Marathon Credit Agreement had a net carrying value of $12.55 million, including $4.10 million drawn on its revolving tranche; $8.44 million was classified as long-term debt. The separate Duke financing obligation was $1.34 million.
• Inventory was $2.49 million, net of a $2.49 million reserve. Warranty liability was $6.91 million.

Changes and management commentary

• Sales fell mainly because fewer trucks were sold, partly offset by improved pricing. Management attributed lower cost of sales to reduced truck volume as the company shifted toward N-GEN development.
• SG&A decreased to $2.09 million, primarily from lower marketing and employee-related costs, partly offset by about $0.7 million of additional stock compensation. R&D fell to $1.36 million, reflecting lower USPS NGDV and SureFly prototype expenses.
• Interest expense rose substantially, which management attributed primarily to higher debt associated with the Marathon facility. Operating cash use increased, mainly due to changes in receivables, payables and accrued liabilities.
• Management reported electric delivery vans in customer use, including with UPS, FedEx Express, Alpha Baking and W.B. Mason. It described N-GEN as a key development and production priority. The filing gives no numerical revenue or profitability guidance.
• Management cited estimated customer fuel and maintenance savings, including a claimed approximately 500% fuel-economy improvement versus comparable gasoline trucks and an expected four-year-or-better customer return on investment. These are company estimates, not reported financial results.

Outlook, risks and subsequent events

• Going concern: The company said existing capital resources would not fund operations through the first half of 2019 and raised substantial doubt about its ability to continue as a going concern absent additional financing, increased revenue, cost reductions or a strategic relationship. Additional funding was not assured; equity financing could dilute shareholders and debt could impose restrictive covenants.
• Credit covenant changes: April amendments delayed the start of a $4 million minimum-liquidity requirement to May 31, 2019. They also deferred specified leverage and debt-service coverage tests from the September to the December 2019 quarter. The filing describes a five-business-day cure mechanism for certain liquidity shortfalls.
• Subsequent financing: A May 1, 2019 registered direct offering sold 3,957,432 shares at $0.74, with expected net proceeds of approximately $2.9 million. This followed the February sale of 1,499,684 shares for $1.365 million.
• Dilution and share authorization: At the May 2 special meeting, shareholders approved increasing authorized common shares from 100 million to 250 million; the amendment was filed May 3. Marathon and Arosa warrant terms included provisions tied to shareholder approval and authorized-share capacity.
• Other risks and items: The company said it was exploring monetization of non-core intellectual property and continuing efforts to sell the SureFly business, with no assurance of success. Management disclosed material weaknesses in financial reporting controls, including inadequate monitoring and reliance on manual entries due to an incompletely implemented ERP system; remediation was ongoing and weaknesses remained at March 31.
• The company reported no material off-balance-sheet arrangements and said pending legal proceedings were not expected to have a material adverse effect on the financial statements.

Most important facts for investors to verify

• Whether the company secured enough additional capital to fund operations and meet the amended minimum-liquidity covenant.
• Actual N-GEN production, deliveries, backlog conversion, customer acceptance and unit economics versus management’s stated goals.
• Debt balances, interest costs, covenant compliance, and any further amendments or financing after the reporting date.
• The dilution and potential share issuance associated with the May offering, authorized-share increase, stock awards and outstanding warrants.
• Progress remediating the material weaknesses in internal controls and the adequacy of warranty reserves and inventory valuation.