Workhorse Group Inc. annual report, FY2014

Workhorse Group Inc. — 2014 Form 10-K Summary

Filing entity: The filing is for AMP Holding Inc., which marketed trucks under the Workhorse brand; the supplied filing does not identify the registrant as Workhorse Group Inc. This is the annual report for the fiscal year ended December 31, 2014, filed March 27, 2015. It reports annual results, not standalone fourth-quarter results.

Business context

The company designed and developed medium-duty commercial trucks, electric powertrains and chassis, including all-electric E-100 trucks and extended-range E-GEN vehicles. It also described HorseFly, a delivery-focused unmanned aircraft concept. The 2013 acquisition of the Workhorse brand and Union City, Indiana assembly plant was intended to establish the company as an original equipment manufacturer. The company characterized itself as a development-stage business with limited revenue.

Financial results and position

• Revenue came from delivery of an all-electric 12-passenger paratransit bus to BARTA. Management reported direct costs of approximately $177,000 in each year against the $177,500 of sales; the filing does not provide a clear gross-margin presentation.
• At year-end, cash was $442,000, current assets $910,000, current liabilities $3.27 million and working capital deficit $2.36 million. Stockholders’ deficit was $809,000.
• Long-term debt was $2.49 million, primarily the 10% secured debenture related to the Union City plant. Current notes payable were $1.24 million. The debenture is secured by the plant and related assets.
• Financing activities provided $4.92 million, while investing activities used $23,000. Cash increased by $435,000 during the year.
• Common shares outstanding rose from 82.7 million at year-end 2013 to 149.9 million at year-end 2014. The filing reports 150.2 million shares outstanding as of March 27, 2015.

Material changes versus 2013

• Sales were unchanged, while net loss increased by about $498,000.
• Research and development expense increased by about $544,000, mainly due to engineering consulting and E-GEN prototype motors and batteries. Selling, general and administrative expense fell by about $187,000, primarily due to lower stock-based compensation.
• Operating cash use increased by about $1.73 million. The company raised capital through stock issuance and notes; shareholder advances were converted into equity during 2014.
• Cash improved from $7,000 to $442,000, but the company continued to report a substantial working-capital deficit and stockholders’ deficit.

Outlook, risks and unusual items

• The independent auditor included a going-concern explanatory paragraph: limited sales, negative working capital and stockholders’ deficit raised substantial doubt about the company’s ability to continue as a going concern. Management said additional financing would be needed and was not assured.
• The filing estimated a need to raise approximately $10 million to implement operations through June 30, 2015, and approximately $20 million to implement its business plan through December 31, 2016. It reported no revolving credit facility.
• Subsequent to year-end, the company reported orders from a national fleet for 18 all-electric vehicles for 2015 delivery and orders for two E-GEN vehicles; the first E-GEN was delivered in March 2015. It also responded to a USPS request for information for a potential large fleet procurement, but stated there was no assurance it would advance or win an award.
• Management reported EPA on-road approval for E-GEN. E-100 had California approval and access to certain incentive programs. Sales, incentives, production scale-up, supplier availability and customer adoption remained uncertain.
• Risk factors included continued losses and cash burn, dependence on new financing, limited customer commitments, production and supply-chain execution, competitive pressure, changing regulation and incentives, and lithium-ion battery safety. The company also disclosed delinquent supplier obligations; as of December 31, 2014, it reported accounts payable of $1.60 million on the balance sheet, while a later disclosure cited $1.1 million, without clearly reconciling the figures.
• The audited notes report $1.243 million of December 2014 convertible notes; other filing text describes $900,000 of such notes. The filing also describes the notes as convertible following an increase in authorized shares, which occurred in February 2015. These amounts and conversion details warrant reconciliation.
• Management said disclosure controls and internal control over financial reporting were effective at year-end and that a previously reported material weakness had been remediated. The auditor did not provide an opinion on internal-control effectiveness.

Important facts for investors to verify

• Current liquidity, financing raised after the filing, and the status of the stated $10 million and $20 million funding requirements.
• Reconciliation of delinquent accounts payable and the conflicting disclosures of December 2014 convertible-note amounts and terms.
• Delivery, acceptance, payment and follow-on orders for the 18 electric vehicles and two E-GEN vehicles.
• Whether production at Union City has scaled, and whether suppliers can provide components at viable cost and volume.
• Actual unit economics, gross margins and cash requirements as commercial production progresses, given negligible 2014 revenue and continued substantial losses.
• Potential dilution from equity issuance, convertible notes, warrants and outstanding options, as well as the effect of the plant-secured debt.