Workhorse Group Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Workhorse develops and manufactures electric commercial vehicles and aircraft, telematics, and related technology across Automotive and Aviation.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $560,229 | $1,570,037; down 64%, primarily fewer trucks sold |
| Cost of sales | $1,714,370 | $4,312,088 |
| Gross loss | $1,154,141 | $2,742,051 |
| SG&A | $2,400,147 | $1,899,582 |
| Research and development | $2,337,631 | $3,243,322 |
| Interest expense, net | $525,887 | $35,651 |
| Net loss | $6,417,806 | $7,920,606 |
| Basic and diluted loss per share | $0.16 | $0.24 |
Cash used in operating activities was $4.58 million, versus $13.04 million in Q1 2017, reflecting lower operating losses and improved working capital. Financing provided $1.27 million, compared with $22.73 million, which included substantial proceeds from a 2017 public offering. No investing cash flow was reported in Q1 2018.
Cash and cash equivalents fell to $753,563 from $4.07 million at December 31, 2017. Inventory was $5.03 million; total assets were $12.12 million. Stockholders’ deficit was $1.56 million. Total debt carrying value was approximately $7.34 million, including $5.26 million in senior secured notes net of discount and issuance costs. The $5.75 million principal amount of those notes is due June 30, 2018; a separate $350,000 building-related note has a balloon payment due August 2018. Current liabilities were $11.98 million.
Changes, outlook, and risks
- Revenue declined sharply with lower truck volume. Management also attributed lower cost of sales to reduced truck volume; initial manufacturing materials were purchased at low-volume prices, and the company was negotiating volume pricing and vendor credit terms.
- SG&A increased, primarily due to legal and consulting costs for the planned SureFly spin-off and higher staffing costs. R&D decreased as prototype spending for the USPS NGDV program and SureFly declined.
- Management targeted gross-margin profitability for the last-mile delivery van platform through increased production and cost reductions. It expected additional light-duty electric and range-extended vehicles in late 2018 and 2019. The N-GEN platform was described as under development; management estimated approximately 60 MPG, a projection rather than a reported result.
- Management said available capital was expected to support projected requirements only through the end of Q2 2018, subject to assumptions. The company expected significant additional funding needs and said future debt or equity financing was not assured. The filing states that limited revenues, negative working capital, and stockholders’ deficits raise substantial doubt about the company’s ability to continue as a going concern.
- Disclosure controls were deemed ineffective because of continuing material weaknesses in financial-reporting oversight, staffing, and processes. ERP purchase-order and inventory modules had been implemented, but the weaknesses had not been remediated as of March 31.
- After quarter-end, Workhorse raised $1.44 million through a common-stock sale and issued shares valued at $298,350 to settle a vendor invoice. The company reported no material off-balance-sheet arrangements and said pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Workhorse obtained sufficient financing to meet near-term cash needs and address the June 2018 senior-note maturity and August 2018 balloon payment.
- Actual production, delivery volume, customer demand, unit economics, and progress toward positive gross margins, including the transition to higher-volume supplier pricing.
- Whether the company’s product-development timelines and performance projections, including N-GEN specifications and planned vehicle introductions, were achieved.
- Progress in remediating internal-control weaknesses and the effect of subsequent stock issuance and vendor-share settlements on dilution and liquidity.