Workhorse Group Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Workhorse develops and manufactures electric commercial vehicles, delivery drones and the SureFly aircraft, alongside fleet telematics. The company reported that its electric delivery vans were in production and in customer use.
Financial performance and liquidity
- Revenue: Q3 sales were $10,997, versus $3.07 million in Q3 2017. Nine-month sales were $741,910, down from $4.89 million. Management attributed the declines primarily to fewer trucks sold.
- Gross loss: $1.47 million in Q3 and $4.11 million for the nine months, compared with $4.49 million and $7.98 million, respectively, in the prior-year periods. Q3 cost of sales was $1.48 million despite minimal sales.
- Operating costs and earnings: Q3 operating expenses were $4.81 million, including $3.36 million SG&A and $1.45 million R&D. Nine-month operating expenses were $14.45 million. Net loss was $5.49 million for Q3 and $18.81 million for nine months; nine-month loss attributable to common stockholders was $19.58 million, including a $765,179 deemed dividend.
- Cash flow: Nine-month operating cash use was $17.33 million, compared with $28.28 million in 2017. Financing provided $16.38 million; investing used $126,518. Cash declined by $1.08 million to $2.99 million.
- Liquidity: Current assets were $8.51 million and current liabilities $12.17 million, implying a $3.66 million working-capital deficit. Total assets were $14.17 million; stockholders’ equity was $1.99 million.
- Debt: The Arosa loan had $7.8 million principal outstanding, an 8% rate and a July 6, 2019 maturity; its net carrying amount was $4.78 million after discounts and issuance costs. The loan is secured by substantially all company assets. A related warrant liability of $2.01 million was recorded.
Changes versus the prior comparable period
- Revenue fell sharply as truck sales volume declined. Lower sales were accompanied by lower cost of sales, but the company continued to record substantial gross losses.
- Nine-month net loss and operating cash use improved year over year, while SG&A rose to $8.77 million from $7.31 million. R&D decreased to $5.68 million from $14.14 million, primarily due to lower prototype and consulting spending for the USPS vehicle program and SureFly.
- Interest expense increased to $1.79 million for nine months from $84,394, including amortization of debt discounts and issuance costs. The company also recorded a $1.53 million gain from the change in fair value of its warrant liability.
- Common shares outstanding increased from 41.53 million at December 31, 2017 to 56.27 million at September 30, 2018, reflecting equity issuances and other share transactions.
Outlook, risks and notable items
- Management stated that existing capital resources, including the Arosa loan, would not support projected funding needs through the end of Q4 2018 and that additional funding was required. The filing says the company has limited revenue and a history of negative working capital and deficits, raising substantial doubt about its ability to continue as a going concern. Additional financing was not assured and could dilute shareholders or impose restrictive debt covenants.
- The Arosa agreement required the company to raise $10 million in equity by September 30, 2018 and to complete a SureFly sale generating at least $20 million in cash. Although the company completed an August public offering and reported gross proceeds of about $11.8 million including the over-allotment, the filing does not clearly state whether all financing-covenant conditions were satisfied or whether the SureFly sale requirement was met.
- Management aims to increase production and reduce costs to achieve gross-margin profitability for its delivery-van platform. It described the N-GEN cargo van and W-15 pickup as planned offerings and presented fuel-economy, maintenance-savings and vehicle-lifetime savings estimates as expectations, not reported results. SureFly had received experimental airworthiness certifications and FAA acceptance of its type-certification application; certification and commercialization remain subject to uncertainty.
- Disclosure controls were judged ineffective due to continuing material weaknesses in internal control over financial reporting. Remediation efforts included ERP implementation, improved reconciliations and hiring a public-company-experienced controller, but the weaknesses had not been remediated as of September 30.
- Legal matters included settlements of $200,000 with Autokinetics and $87,000 plus attorney fees with a former employee. A former vendor’s complaint sought $132,189 plus fees and costs; it remained pending.
Important facts for investors to verify
- Cash runway, near-term financing plans and whether subsequent funding was obtained on acceptable terms.
- Compliance with Arosa’s equity-raising and SureFly-sale covenants, any waivers or amendments, and the status of the secured loan and warrant obligations.
- Vehicle deliveries, production levels, realized revenue and gross margins, and progress toward the company’s cost-reduction targets.
- Status of SureFly and other product certifications, commercialization timelines and the assumptions behind management’s savings estimates.
- Progress in remediating internal-control material weaknesses and the outcome of the pending vendor litigation.