Workhorse Group Inc. quarterly report, Q2 FY2017

Workhorse Group Inc. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated results. Workhorse develops and manufactures commercial electric vehicles and aircraft, with Automotive and Aviation divisions.

Financial results and liquidity

• Gross margin remained negative: approximately -269% for Q2 and -159% for the first half, based on reported sales and gross loss.
• At June 30, cash and cash equivalents were $5.42 million, versus $0.47 million at year-end 2016. Current assets were $15.99 million and current liabilities $8.65 million. Inventory increased to $9.47 million from $2.46 million.
• Total debt was about $2.11 million, including $30,493 current and $2.08 million long-term. The company also reported $1.00 million in shareholder advances/deposits not yet issued as common stock.
• First-half operating cash used was reported as $19.74 million in the cash flow statement; investing activities provided $54,407, while financing activities provided $24.64 million. Financing included approximately $20.5 million net proceeds from a February public offering and $1.7 million gross proceeds from the ATM through June 30.

Changes versus the prior comparable period

• Q2 sales fell about 78% year over year, which management attributed primarily to supply-chain delays that were remediated in July. First-half sales rose about 39%, reflecting completion of the initial UPS order and start of the next order.
• First-half net loss more than doubled. Research and development rose to $9.05 million from $3.20 million, driven by the USPS next-generation delivery vehicle project, W-15 pickup prototypes, and SureFly development. SG&A increased to $4.75 million from $2.79 million.
• First-half operating cash use increased from $9.24 million to about $19.74 million, reflecting operating losses and inventory purchases, partly offset by higher accounts payable and lower receivables.
• Common shares issued and outstanding rose from 27.58 million at December 31, 2016 to 36.41 million at June 30, 2017; 37.32 million were outstanding on August 4, 2017.

Business developments, outlook and risks

• Workhorse said it began production of 200 E-GEN trucks ordered by UPS and delivered six in Q2, followed by 36 more in Q3 through the filing date. It reported 195 vehicles delivered and 170 in backlog. The filing also cautions that customer discussions and orders may not lead to further purchases.
• The W-15 pickup was unveiled in May; corporate-fleet letters of intent represented more than 5,000 units, not firm purchase orders. Initial production was targeted for late 2018. USPS prototype vehicles were targeted for delivery by September 2017, followed by a six-month test and selection process.
• Ryder became the primary distributor, with specified exclusive repair and parts-distribution roles in the U.S., Canada and Mexico. The agreement runs through December 31, 2027, subject to its terms.
• Management cited estimated fuel-economy improvement of about fivefold and potential lifetime customer savings exceeding $150,000 per E-GEN truck; these are company estimates, not reported financial results. SureFly manned hover testing was expected in late 2017, with FAA certification targeted for 2019.
• No specific revenue or earnings guidance was provided. Management estimated existing resources would support current and projected funding requirements through October 2017, while the risk disclosure said resources would be insufficient beyond the end of Q4 2017 without additional financing or substantially higher sales. The filing also states that substantial doubt exists about the company’s ability to continue as a going concern and that additional funding is not assured.
• Key risks include continued losses and cash burn, production scaling and supply-chain execution, dependence on UPS and other major customers, battery-cell supply and cost, competition, customer adoption, and potential dilution from future equity issuance. The company reported no material off-balance-sheet arrangements and said disclosure controls were effective.
• Autokinetics sued Workhorse in May 2017, claiming breach of contract and unjust enrichment and seeking $2,098,550. Workhorse filed an answer and counterclaim and said it would vigorously defend the case.
• The filing contains inconsistent cash-flow figures: the statements report operating cash used of $19,739,197, while MD&A reports $19,739,137 and a risk-factor passage says $19.2 million.

Important facts for investors to verify

• Available liquidity, cash burn, and timing and terms of additional financing; reconcile the differing runway statements.
• UPS order fulfillment, reported backlog, July supply-chain recovery, and whether prospective customer interest converts into binding orders.
• Unit economics and progress toward positive gross margins, including inventory quality and the effect of production scaling and supplier pricing.
• Share issuance and potential dilution from the public offering, ATM facility, authorized-share increase, and any future financing.
• Status, potential exposure, and outcome of the Autokinetics litigation.
• Reconcile the operating cash-flow figures presented in different parts of the filing.