Workhorse Group Inc. — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015. Workhorse designs and develops medium-duty trucks and electric powertrains, and was preparing to scale production at its Union City, Indiana facility. The company changed its name from AMP Holding Inc. to Workhorse Group Inc. on April 16, 2015, after the quarter.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Sales | $0 | $0 |
| Operating expenses | $1.915 million | $1.115 million |
| Net loss | $2.059 million | $1.207 million |
| Loss per share, basic and diluted | $0.01 | $0.01 |
| Net cash used in operating activities | $1.494 million | $0.556 million |
| Cash at period end | $287,066 | $442,257 at Dec. 31, 2014 |
| Current assets | $699,590 | $909,630 at Dec. 31, 2014 |
| Current liabilities | $4.883 million | $3.267 million at Dec. 31, 2014 |
| Long-term debt, including current portion | $2.775 million | $2.530 million at Dec. 31, 2014 |
| Stockholders’ deficit | $218,649 | $809,387 at Dec. 31, 2014 |
With no sales, gross margin is not meaningful. The company reported a working-capital deficiency of approximately $4.2 million and states that its limited revenue, negative working capital and stockholders’ deficit raise substantial doubt about its ability to continue as a going concern.
Financing activities provided $1.365 million, including $727,108 from stock issuance, $200,000 in note proceeds and $392,000 from conversion of a note payable. Investing activities used $26,248, primarily for equipment. The filing reports no material off-balance-sheet arrangements.
Changes versus the prior comparable period
- Operating expenses rose approximately 72%; SG&A increased to $1.068 million from $546,000, and R&D rose to $847,000 from $569,000.
- Net loss increased approximately 71%, while interest expense rose to $144,000 from $92,000.
- Operating cash use increased to $1.494 million from $556,000, reflecting higher operating costs and spending on product development, customer orders and testing.
- Common shares outstanding increased from 149.9 million at year-end to 165.3 million at March 31. Financing and debt conversions during the quarter contributed to this increase.
Outlook, risks and notable items
- Management said it expected to need approximately $10 million to fund operations through June 30, 2015, and approximately $20 million to implement its business plan through December 31, 2016. Additional financing was not assured; the company had no committed credit facility.
- Workhorse was selected for the USPS Next Generation Delivery Vehicle program’s shortlist and expected to submit specifications and prototypes. The USPS anticipated a single award in 2017, but Workhorse cautioned there was no guarantee it would win.
- The company reported a purchase agreement with UPS for 18 all-electric E-100 vans and two E-Gen vehicles ordered for testing. It also disclosed a $7 million letter of intent from an RV manufacturer; this was not described as a completed sale. Management said it expected deliveries from fleet orders in subsequent quarters, subject to financing, and reported first E-Gen truck deliveries in Q2 2015.
- Key risks include persistent losses and cash burn, dependence on raising capital, production ramp-up and supply-chain execution, customer and market adoption, competition, and reliance on government incentives. The $2.723 million secured debenture to Workhorse Custom Chassis bears 10% interest and is secured by the Union City plant and related assets; the filing warns that failure to repay could jeopardize those assets.
- The City of Loveland loan’s forgiveness depended on job and payroll targets; the company disclosed it had been notified it did not meet requirements for forgiveness of the 2012 payment. The filing reported no material legal proceedings.
- Management reported disclosure controls and internal control over financial reporting were effective at March 31, 2015, and stated that a previously reported material weakness had been remediated.
- After quarter-end, Marshall Cogan was terminated as Chief Investment Officer on May 15, 2015; he remained Chairman. His employment and stock-option agreements were terminated.
Important facts for investors to verify
- Whether the company obtained the capital it said it needed, and how long available cash funded operations.
- Whether announced fleet orders and the RV letter of intent converted into funded, deliverable orders, and whether deliveries occurred as expected.
- The status, maturity and repayment terms of the secured debenture and the City of Loveland obligation.
- The effect of share issuances, debt conversions and outstanding options and warrants on future dilution.
- Whether USPS procurement milestones, production readiness, supply availability and customer adoption support management’s growth expectations.