Workhorse Group Inc. annual report, FY2016

Workhorse Group Inc. — FY 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Workhorse develops and manufactures commercial electric vehicles and related technology, with automotive and aviation projects. Its electric delivery vans were in production; the W-15 pickup, USPS prototype vehicle and drone-related programs were under development.

Financial performance and liquidity

• Fourth-quarter 2016 revenue was $3.038 million, gross loss was $3.608 million and net loss was $6.977 million.
• Year-end current assets were $3.917 million against current liabilities of $4.334 million, producing negative working capital of $418,000. Total assets were $10.240 million.
• Year-end debt was approximately $2.168 million, primarily related to financing the Loveland headquarters; the prior-year balance included a $13.534 million note payable that was converted to equity in 2016. The company also paid $2.725 million of long-term debt during 2016.
• Financing activities provided $12.355 million in 2016, principally from warrant and option exercises, while cash declined by $7.208 million.

Changes versus the prior period

• Revenue increased sharply from a small base as production vehicle deliveries began, but cost of sales exceeded revenue, resulting in a substantial gross loss.
• Net loss more than doubled, and operating cash use increased by approximately $10.8 million. SG&A rose to $6.203 million from $3.861 million; R&D rose to $6.146 million from $4.740 million.
• Liquidity at year-end deteriorated materially as cash fell from $7.677 million to $470,000. Equity moved from a $3.783 million deficit to $3.817 million, largely reflecting equity issuance and conversion of debt to equity.
• One customer accounted for approximately 91% of 2016 sales, versus 100% in 2015.

Outlook, commentary and risks

• Management said existing resources were expected to support projected funding requirements through October 2017, subject to assumptions that could prove incorrect. The auditor’s report highlighted substantial doubt about Workhorse’s ability to continue as a going concern. The filing says further financing and/or increased sales are necessary; no committed credit facility was in place.
• After year-end, Workhorse reported a $2 million convertible debenture that was agreed to be converted into shares, and a February 2017 public offering of 7.475 million shares at $3.00 per share, generating approximately $22.4 million gross and $20.5 million net. The company reported $15.3 million cash as of March 14, 2017.
• Workhorse had received UPS orders for 343 E-GEN vehicles, but disclosed delivery execution, financing, customer concentration and the absence of long-term minimum-volume commitments as significant uncertainties.
• The company reported letters of intent for 2,150 W-15 pickups and planned to unveil a working concept in May 2017. With VT Hackney, it was one of five USPS prototype awardees and expected to deliver prototypes by September 2017; USPS had described a potential replacement program of approximately 180,000 vehicles. These were development opportunities, not guaranteed sales.
• Management described the business as transitioning from R&D toward manufacturing and aimed to reach gross-margin profitability in delivery vans. The filing provides no quantified revenue or earnings guidance.
• Key risks include continued losses and cash burn; inability to obtain financing; scaling production and controlling vehicle costs; dependence on a limited number of customers and qualified battery suppliers; competition, fuel prices and changes to incentives or regulation; and product, battery-safety and vehicle-compliance risks. The company stated that it currently loses money on each vehicle sold.
• The auditor issued an unqualified opinion on the financial statements and internal controls, with an emphasis-of-matter paragraph concerning going concern. Management and the auditor assessed internal control over financial reporting as effective at year-end. No material legal proceedings were reported.

Important facts for investors to verify

• Cash runway and actual liquidity after the February 2017 offering, including the timing and use of net proceeds.
• UPS delivery performance, customer acceptance, payment collection and whether additional binding orders or long-term commitments were secured.
• Per-vehicle economics, production costs, gross-margin progress and the assumptions behind management’s stated savings and return-on-investment claims.
• W-15 and USPS prototype milestones, conversion of letters of intent into firm orders, and the capital required to scale production.
• Battery supply availability and pricing, customer concentration, and any subsequent changes in financing needs, debt, share count or dilution.