Workhorse Group Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Quarterly report for the three and nine months ended September 30, 2016. Workhorse designs and manufactures medium-duty commercial vehicles, including battery-electric and range-extended models, and is developing truck-integrated drone and fleet-telematics products. The company said it was shifting from research and development toward manufacturing.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $1.906m | $0.072m | $3.377m | $0.140m |
| Gross profit (loss) | $(2.267)m | $0.072m | $(3.556)m | $0.140m |
| Operating expenses | $2.993m | $3.535m | $8.980m | $5.376m |
| Net loss | $(5.263)m | $(3.793)m | $(12.579)m | $(5.674)m |
| Loss per share | $(0.25) | $(0.24) | $(0.61) | $(0.36) |
- Gross margin was approximately negative 119% for Q3 and negative 105% for the first nine months of 2016. Management attributed high vehicle costs to initial low-volume purchasing and said it was negotiating volume pricing and vendor credit terms.
- At September 30, cash was $3.049m, down from $7.677m at December 31, 2015. Current assets were $7.299m and current liabilities $4.759m, implying working capital of about $2.540m. Inventory rose to $3.569m from $0.079m.
- Operating cash use was $13.338m for the first nine months, versus $4.175m in 2015; investing cash use was $0.148m. Financing provided $8.858m, including $10.271m from warrant exercises and $1.309m in net shareholder advances, partly offset by $2.723m of debt repayment. Ending cash was $3.049m.
- Reported debt at September 30 was $50,000, all current; the $2.723m Navistar debt was repaid in February. Separately, after quarter-end, the company bought its Loveland facility for $2.5m, financing $1.7m with a 6.5% note maturing January 1, 2027.
- Shareholders’ equity was $6.138m, compared with a $3.783m deficit at year-end 2015. The company reported that $13.534m of notes payable and $112,487 of accounts payable, net of related deferred offering costs, were converted to equity during the period. Common shares outstanding increased from 18.205m at year-end to 26.369m at September 30.
Changes, outlook and risks
- Revenue rose substantially from a small base as vehicle deliveries began, but cost of sales exceeded revenue. Nine-month SG&A increased to $4.756m from $2.758m, and R&D increased to $4.224m from $2.618m; Q3 R&D declined year over year to $1.024m from $1.746m. Nine-month interest expense fell to $43,035 from $437,919 after early repayment of the Navistar note.
- Workhorse reported UPS orders, including a 125-unit E-GEN order and a September 2016 purchase order for 200 E-GEN vehicles. It also fulfilled an 18-unit E-100 order in July. The risk section separately states that UPS orders totaled 343 E-GENs; the filing’s descriptions should be reconciled. Delivery schedules could change, and the company warned that it might be unable to meet orders without sufficient capital and parts.
- For the USPS next-generation delivery vehicle program, Workhorse’s partner VT Hackney was among six prototype awardees; Workhorse was named exclusive chassis and powertrain subcontractor for the prototypes. This was not a disclosed award for the full production fleet.
- Management said additional financing might be required and could come from debt or equity, but availability was not assured. The filing cites an estimated need to raise approximately $6m to fund operations through December 31, 2016. Management expected continuing losses and negative operating cash flow; no profitability or revenue guidance was provided.
- The financial statements were prepared on a going-concern basis, but management disclosed substantial doubt about the company’s ability to continue as a going concern, citing limited revenue and a history of losses and negative working capital. The company had incurred approximately $56.6m in cumulative losses through September 30, 2016.
- Principal risks include production ramp-up and cost control, supplier availability and pricing, customer concentration and order timing, market adoption of commercial electric vehicles, competition, ongoing financing needs, regulatory changes and product/battery safety. The company reported no material legal proceedings, and management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether UPS orders and delivery schedules are current, and how the stated 343 E-GEN total reconciles with the orders described.
- Production costs, achievable vendor pricing, gross margins and the company’s ability to deliver vehicles on time.
- Cash needs and financing availability, including the stated approximately $6m funding requirement and the effects of the post-quarter facility purchase.
- Cash burn, customer collections and inventory conversion as production scales.
- The scope and economics of Workhorse’s USPS prototype subcontract, distinct from any eventual production award.