Workhorse Group Inc. quarterly report, Q2 FY2013

Business Context and Reporting Period

This is AMP Holding Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2013—not a filing under the name Workhorse Group Inc. AMP had acquired Workhorse Custom Chassis assets on March 13, 2013, including its brand, dealer network, intellectual property, and Union City, Indiana facilities. The company remained a development-stage business focused on commercial vehicles and electric-drive systems.

Financial Results and Position

• Revenue: None in either the second quarter or first six months of 2013. In the comparable 2012 periods, revenue was $222,098, from prototype vehicle sales.
• Loss: Second-quarter net loss was $2.16 million, versus $672,027 in Q2 2012. Six-month net loss was $3.75 million, versus $1.83 million in the first half of 2012. Basic and diluted loss per share were $0.03 for Q2 and $0.05 for the first half of 2013.
• Expenses: Total expenses were $2.16 million for Q2 and $3.75 million for the first half, up from $894,125 and $2.05 million, respectively, in 2012. Key first-half costs included stock-based compensation of $1.14 million, consulting of $675,171, and payroll and payroll taxes of $731,860. The company reported no gross margin; with no revenue, operating margins are not meaningful.
• Cash flow: Cash used in operations was $558,442 in Q2 and $1.50 million in the first half. First-half investing cash outflow was $5.00 million, principally for the Workhorse asset acquisition. Financing provided $6.61 million, including $4.30 million from stock issuance and $2.25 million from the secured acquisition debenture.
• Liquidity: June 30 cash was $146,344, versus $39,819 at year-end 2012. Current assets were $645,147 and current liabilities $3.03 million, a working-capital deficit of approximately $2.38 million. Management reported cash of about $30,000 in mid-August.
• Debt: Total debt was approximately $2.80 million, including a $2.25 million secured debenture bearing 10% interest and due in March 2016. Shareholder advances were $558,000; the balance sheet also showed $1.35 million in accounts payable and $351,350 payable to related parties. Stockholders’ deficit was approximately $181,000.
• Acquisition: Workhorse assets were purchased for $5.00 million, funded with $2.75 million cash and a $2.25 million secured debenture. The acquired assets included $400,000 of inventory, $500,000 of equipment, $300,000 of land, and $3.80 million of buildings.

Changes, Outlook, and Risks

• Year-over-year losses and expenses rose substantially, driven in part by stock-based compensation and consulting and other costs associated with financing and the Workhorse acquisition. The company issued substantially more shares: 80.5 million were outstanding at June 30, versus 56.0 million at December 31, 2012.
• Management said the Workhorse plant would incur approximately $100,000 in quarterly fixed maintenance costs until operational. It anticipated revenue from product sales in 2014, but expected to need $12 million–$15 million over the next 12 months to execute its plan. These are management expectations, not assurances; the filing says profitability and continued operations depend on product rollout, sales, and additional financing.
• The filing states there is substantial doubt about the company’s ability to continue as a going concern. It had delinquent supplier, employee, and contractual obligations, no revolving credit facility, and said it could not meet operating and capital expenses from current resources. Additional financing was uncertain and could dilute existing holders.
• The company disclosed a covenant violation on $500,000 of shareholder notes: financing above $2 million had occurred without the required repayment. A City of Loveland loan’s 2012 principal and interest payment was past due after the company failed to meet specified conditions for forgiveness.
• Customer deposits of $380,000 were refundable on request; final prices and delivery dates for the reserved production slots were undetermined. Separately, the company reported delivering a two-unit electric paratransit bus conversion in August 2013, with $355,000 of associated revenue—after the reporting period.
• California had approved a minimum $35,000 point-of-purchase voucher for the AMP E-100; New York approval for a $60,000 incentive was reported as a subsequent event. The filing also cites a federal vehicle tax credit of up to $7,500. Incentive availability and customer demand remain risks.
• Disclosure controls and internal control over financial reporting were deemed ineffective. Management identified weaknesses involving segregation of duties, reliance on outside consultants and attorneys, and absence of a formal audit committee.
• A Canadian lawsuit concerned cleanup of a leak from an older truck produced at the acquired plant. AMP asserted that it bought assets, not liabilities, but the matter had not been resolved.

Important Facts to Verify

1. Whether the company obtained the stated $12 million–$15 million of needed financing, and on what terms, given mid-August cash of about $30,000.
2. Whether it cured or renegotiated the shareholder-note covenant violation, past-due City of Loveland obligation, and delinquent payables.
3. Whether the Workhorse facility became operational and generated orders, deliveries, and cash revenue consistent with management’s 2014 expectations.
4. Whether reported customer deposits converted into nonrefundable orders and completed deliveries, and whether the August paratransit revenue was collected.
5. How much further share issuance, warrants, and options diluted existing shareholders; the filing reported 80.5 million common shares outstanding at June 30 and 18.1 million investor warrants outstanding.
6. Whether management’s planned control improvements addressed the disclosed material weaknesses, and the outcome and potential cost of the Canadian lawsuit.