Workhorse Group Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Workhorse develops and manufactures electric commercial vehicles, delivery drones, and aircraft. Its automotive and aviation programs were in different stages of production and development.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $3.285 million | $1.906 million | $5.333 million | $3.377 million |
| Gross loss | $4.273 million | $2.267 million | $7.533 million | $3.556 million |
| Operating expenses | $8.368 million | $2.993 million | $22.170 million | $8.980 million |
| Net loss | $12.668 million | $5.263 million | $29.788 million | $12.579 million |
| Basic and diluted loss per share | $0.35 | $0.25 | $0.83 | $0.61 |
- Quarterly sales increased about 72%; nine-month sales increased about 58%. Management attributed the increase primarily to higher UPS vehicle deliveries and increased production capacity.
- Gross margin remained negative: cost of sales exceeded revenue by $4.273 million in Q3 and $7.533 million in the nine-month period. Management said initial low-volume component pricing raised costs and that it was negotiating volume pricing and vendor credit terms.
- Q3 R&D expense rose to $5.084 million from $1.024 million; nine-month R&D reached $14.139 million versus $4.224 million. SG&A also increased, to $3.283 million for Q3 and $8.031 million for nine months.
- Operating cash use was $28.283 million for the first nine months, versus $13.338 million a year earlier. Investing activities provided $49,000; financing activities provided $37.604 million, principally from stock offerings and warrant exercises.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $9.840 million, compared with $470,000 at December 31, 2016. Current assets were $19.492 million and current liabilities $10.327 million, implying working capital of about $9.165 million.
- Total debt was $2.099 million, including a $350,000 note with a balloon payment due August 2018. Stockholders’ equity was $13.028 million, versus $3.817 million at year-end 2016.
- Cash increased primarily due to 2017 equity financing: the February offering generated approximately $20.5 million net; the September offering generated approximately $10.9 million net; and ATM sales generated $3.5 million gross through September 30. The September offering included warrants with full-ratchet anti-dilution provisions, subject to exceptions.
- The company reported substantial doubt about its ability to continue as a going concern. Management estimated existing resources would support current and projected funding needs into Q1 2018; the filing also states the company would need additional financing in 2018 and beyond and had no committed future funding.
Material changes and operating developments
- Workhorse produced 73 E-GEN delivery trucks in Q3, described as a record, and delivered six USPS prototype vehicles. Management reported building and delivering 64 E-GEN vehicles in the first 37 days of the following quarter.
- The company introduced the NGEN electric delivery van and said Ryder would support sales and national service. It reported more than 5,000 W-15 pickup letters of intent; initial production was targeted for late 2018. Consumer availability was conditional on at least 10,000 paid preorders.
- Workhorse was one of five USPS NGDV prototype awardees. The USPS program could involve approximately 180,000 vehicles, but the filing does not report a production award or purchase commitment to Workhorse.
- The company continued developing its Horsefly delivery drone and SureFly manned multicopter. It targeted a first manned hover test in late 2017 and FAA certification in 2019; these were plans, not completed milestones.
- Shares outstanding rose to 41.127 million from 27.579 million at December 31, 2016, reflecting equity issuance and other share activity. The 2017 stock plan reserved 5 million shares.
Outlook, risks, and contingencies
- Management expects significant additional funding needs and continued negative cash flow while developing products and scaling production. Further equity financing could materially dilute shareholders; debt financing could impose restrictive covenants.
- Key risks include continued losses and inability to reach profitability; dependence on UPS and a limited customer base; production ramp and supply-chain execution; high component costs and reliance on qualified battery-cell suppliers; market adoption, fuel prices, incentives, competition, regulation, and product safety.
- Autokinetics, Inc. sued Workhorse in May 2017, seeking $2.099 million for alleged breach of contract and unjust enrichment. Workhorse filed a counterclaim and said it intended to defend the action; the ultimate outcome was not clear from the filing.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Workhorse secured adequate additional capital after the stated Q1 2018 runway estimate, and on what dilution or financing terms.
- Whether UPS deliveries and production volumes translated into improving unit economics, positive gross margins, and reliable customer demand.
- Whether the USPS prototype process led to a production award, and whether W-15, NGEN, and SureFly timelines and funding requirements remained achievable.
- The status and potential financial exposure of the Autokinetics litigation, and the effects of the September warrant anti-dilution terms and future equity issuance.