Workhorse Group Inc. quarterly report, Q1 FY2017

Workhorse Group Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017, compared with December 31, 2016. The company designs and manufactures commercial electric vehicles and develops delivery drones, aircraft and fleet telematics. Its automotive and aviation products include medium-duty delivery vans, the W-15 pickup under development, Horsefly delivery drones and the SureFly multicopter concept.

Financial performance and position

Sales were primarily from delivery vehicles supplied to UPS and other customers. The gross loss reflects cost of sales substantially exceeding revenue; management attributed high initial unit costs to low-volume material and component purchasing and said it was negotiating volume pricing and vendor credit terms. SG&A rose to $2.11 million from $1.17 million, and R&D increased to $3.24 million from $2.94 million. R&D included costs related to the USPS vehicle project, the pickup and aviation prototypes, as well as pre-production plant expenses.

Cash increased primarily following the February 2017 public offering and customer collections. Financing activities provided $22.73 million, including $22.49 million reported from common-stock issuance; operating activities used $13.04 million. Investing activities provided $74,835, mainly reflecting lease proceeds offset by capital spending. The company reported approximately $20.5 million of net proceeds from its public offering. It had no preferred shares outstanding. Common shares outstanding rose from 27.58 million at year-end to 35.96 million at quarter-end; 35,966,683 shares were outstanding on May 5, 2017.

Changes versus the prior comparable period

• Sales increased from $236,000 to $1.78 million, but cost of sales rose faster, widening the gross loss to $2.53 million.
• Net loss increased by $3.54 million, and operating cash use increased by $9.64 million. Management cited higher operating losses, inventory purchases, accounts-payable payments and receivables as factors in the increased cash use.
• The February offering materially strengthened cash and equity, while increasing the share count. Inventory more than doubled, principally due to parts purchases; finished goods and work in process were reported at zero at quarter-end.
• Debt remained broadly stable. The balance includes a $350,000 note with a balloon payment due in August 2018 and a $50,000 City of Loveland note. The company disclosed that a past-due City note payment did not qualify for forgiveness under the loan terms.

Outlook, developments and risks

• Liquidity and going concern: The filing states that recurring losses, limited revenue and historical negative working capital raise substantial doubt about the company’s ability to continue as a going concern. Management estimated existing capital resources would support current and projected funding requirements through October 2017, while also warning that the estimate depends on assumptions and that significant additional funding will be needed. Further financing is not assured; equity financing could dilute shareholders and debt financing could impose restrictive covenants.
• Commercial execution: Management said medium-duty electric delivery vans were in production and sought higher production volumes and gross-margin profitability. It reported letters of intent for 4,650 W-15 pickups at an average price of about $50,000, but these were not binding purchase agreements. Prototype road validation and crash testing remained ahead.
• USPS program: Workhorse and partner VT Hackney were one of five awardees selected to build prototypes for the USPS Next Generation Delivery Vehicle project. The company expected to deliver prototypes by September 2017; the USPS planned testing before selecting winning bids. No award of a production contract is reported in this filing.
• Post-quarter developments: Workhorse entered a Ryder services partner agreement on April 27, 2017, for distribution, repair services and parts in the U.S., Canada and Mexico, generally through December 31, 2027, subject to termination provisions. The company also unveiled the W-15 concept in early May. These events occurred after quarter-end.
• Key risks: The company has a limited operating history, recurring losses and substantial cash needs; relies on a small number of customers and suppliers; and has no long-term customer commitments or guaranteed component pricing. Other cited risks include scaling production, battery-cell availability and cost, market acceptance, competition, fuel prices, regulatory or incentive changes, product safety/liability and potential dilution.
• Other disclosures: The company reported no material legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether the stated cash runway and financing assumptions remain valid, and whether additional capital is available on acceptable terms.
• Whether production can scale, unit costs can decline and gross margins can improve from the substantial Q1 gross loss.
• How much of the reported W-15 interest converts from nonbinding letters of intent into binding orders, and the timing and outcome of USPS prototype testing and any subsequent award.
• Customer order, delivery and payment status—particularly UPS orders—and the terms, performance obligations and economics of the Ryder agreement.
• Inventory composition and recoverability, supplier pricing and battery availability, and the timing and terms of the City of Loveland note repayment or resolution.
• The effects of the public offering, outstanding options and warrants, and any future financing on share count and shareholder dilution.