Workhorse Group Inc. quarterly report, Q2 FY2014

Filing summary

Issuer and period: The filing is AMP Holding Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, signed August 14, 2014. The filing describes AMP as the owner of the Workhorse brand and chassis business; it is not filed under the name Workhorse Group Inc. The company identifies itself as a development-stage business developing and manufacturing medium-duty trucks and advanced powertrains.

Financial performance and condition

• The company says the $177,459 of 2014 revenue came from delivery of an all-electric, 12-passenger paratransit bus to BARTA. Direct costs were also reported as $177,000, implying approximately no gross profit on that sale.
• At June 30, 2014, total assets were $6.451 million, current assets $2.247 million, current liabilities $1.785 million, and stockholders’ equity $2.169 million. The balance-sheet figures imply positive working capital of about $462,000, but the risk-factor discussion states a $3.1 million working-capital deficiency; the filing does not reconcile this discrepancy.
• Total long-term debt, including the current portion, was approximately $2.536 million. This included a $2.475 million secured debenture bearing 10% interest, secured by the Union City plant and related assets. The debt note says the debenture is due March 2016, while the maturity schedule places $2.459 million in 2015; the filing does not explain the difference.
• Common shares outstanding rose from 82.7 million at December 31, 2013 to 146.9 million at June 30, 2014. The filing also reports 41.8 million investor warrants outstanding at period end.

Changes versus prior period

• Revenue increased from zero to $177,459 in both the quarter and first half. The company reported that several fleet orders were being filled and expected delivery within the following 12 months, but provided no order values or firm delivery schedule.
• First-half net loss narrowed by $573,076 year over year, while first-half operating cash use increased by about $390,000. First-half operating expenses decreased by about $449,000, principally reflecting lower stock-based compensation and other cost changes.
• Cash rose from $7,019 at year-end 2013 to $1.806 million at June 30, 2014, largely alongside equity financing. The company reported $5.942 million of stock issuance proceeds for the first half, offset in part by debt payments and shareholder-advance repayments.
• First-half interest expense increased to $156,977 from $103,995. Management attributed the increase mainly to the 2013 plant acquisition and noted that interest on the secured loan was capitalized to principal.

Outlook, risks, and notable matters

• Management’s strategy is to develop the Union City facility into an OEM producer of Class 3–6 chassis, with electric, gasoline, propane, and CNG configurations, alongside electric powertrains. The filing gives no quantified production, revenue, or profitability guidance.
• Management highlighted the E-GEN range-extending system, a provisional patent filing, EPA approval for on-road use, and an E-100 full-electric truck with a stated range of up to 100 miles. It described customer economics and a three-year payback as company beliefs, not reported results.
• The company disclosed substantial doubt about its ability to continue as a going concern, citing limited revenue and funding needs. It said it was evaluating financing options; additional funding was not assured. Cash at mid-August 2014 was reported at approximately $1.6 million.
• Key risks include execution and integration of the Workhorse acquisition and plant, the ability to begin and scale production, continued access to capital, limited customer commitments, competition, supplier dependence, vehicle technology and safety risks, and reliance on government incentives.
• Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2014. Management identified material weaknesses involving inadequate segregation of duties, dependence on outside consultants and attorneys, and the absence of a formal audit committee.
• The company reported no material legal proceedings and no material off-balance-sheet arrangements. It disclosed a subsequent July 1, 2014 grant of 10 million stock options to employees and consultants.

Important facts for investors to verify

• Confirm the issuer’s identity and corporate history: this filing is by AMP Holding Inc., which operated the Workhorse chassis business.
• Reconcile the stated $3.1 million working-capital deficiency with the balance-sheet amounts, which imply positive working capital at June 30, 2014.
• Clarify the secured debenture’s stated March 2016 due date versus the 2015 maturity amount in the debt schedule, and review the related interest capitalization and collateral terms.
• Assess near-term liquidity, cash use, financing availability, and the going-concern disclosure, including the reported mid-August cash balance.
• Verify the status, delivery timing, and economics of fleet orders and whether the company can commence and sustain production at Union City.
• Evaluate dilution from the increase in shares outstanding, warrants and options, including the July 2014 option grant.
• Track remediation of the disclosed material weaknesses and the effectiveness of the company’s financial reporting controls.