Workhorse Group Inc. quarterly report, Q3 FY2013

Business context and reporting period

This is AMP Holding Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013, filed November 19, 2013. The filing is not issued under the name Workhorse Group Inc.; AMP had acquired Workhorse Custom Chassis assets in March 2013, including the Workhorse brand, dealer access, intellectual property, and Union City, Indiana facilities. AMP described itself as a development-stage company pursuing electric and other medium-duty commercial trucks.

Financial results and liquidity

• For the nine months, revenue was $177,500 versus $222,098 in 2012; net loss increased to $4,791,275 from $3,116,104, and operating cash used increased to $2,235,170 from $1,710,996.
• The quarter’s revenue related to a BARTA para-transit bus contract. AMP charged $176,233 of direct costs to operations against the $177,500 revenue, leaving about $1,267 before other expenses; the filing does not present a gross-margin subtotal.
• Working capital was negative by $3,099,092. Stockholders’ deficit was $936,853. The company reported $1,213,000 in shareholder advances and $1,409,632 in accounts payable at September 30.
• The $2.25 million secured Workhorse debenture bears 10% interest and is due March 2016, secured by the Union City plant and related assets. Total debt maturities were concentrated in 2016.

Material changes, outlook, and risks

• The March 2013 Workhorse asset acquisition was valued at $5 million, funded with $2.75 million cash and a $2.25 million secured debenture. AMP reported $5 million of investing cash outflow for the acquisition and $7.20 million of financing cash inflow during the first nine months, including $4.30 million from common-stock issuance.
• Despite lower Q3 expenses and a smaller quarterly loss, nine-month expenses rose to $4,968,775 from $3,338,202, primarily due to noncash consulting costs associated with the Workhorse acquisition. Nine-month stock-based compensation was $1,173,179.
• Management estimated it would need $12 million to $15 million over the following 12 months and anticipated sales revenue in 2014. It warned that additional financing was necessary and not assured, and that failure to raise funds or generate significant 2014 revenue could force the company to scale down or cease operations. Management expected losses to continue through 2013.
• Cash was approximately $40,000 in mid-November. The filing reports delinquent supplier, employee, and contractual obligations, delayed employee salary payments, and layoffs. The company had no revolving credit facility. Management said the plant would incur about $100,000 per quarter in maintenance costs until operational.
• The company disclosed a covenant violation on $500,000 of shareholder notes: financing exceeding $2 million had occurred without the required repayment. It also reported that it failed to meet City of Loveland loan requirements for forgiveness of the 2012 principal and interest payment, which was past due.
• Customer deposits were $202,500 and refundable on request; final prices and delivery dates for the reserved conversion slots were not determined. The BARTA contract’s total revenue was stated as $355,000 for two units and wireless charging integration.
• Management and the financial statements cited substantial doubt about the company’s ability to continue as a going concern. Disclosure controls and internal control over financial reporting were deemed ineffective, with material weaknesses including inadequate segregation of duties, reliance on outside consultants and attorneys, and no formal audit committee.
• Key risks include execution and integration of the Workhorse assets, obtaining capital, limited customer commitments and operating history, competition, supplier dependence, vehicle compliance and product liability, and reliance on government incentives. The filing reported no material legal proceedings.

Important facts for investors to verify

• Whether AMP secured the stated $12 million to $15 million of funding, and its actual cash, payables, and overdue obligations after the filing date.
• Whether the Workhorse plant became operational, what production volumes and costs were achieved, and whether anticipated 2014 sales materialized.
• The status and terms of the delinquent shareholder notes and City of Loveland loan, including any waivers, repayments, or defaults.
• Customer deliveries, collections, remaining BARTA contract revenue, and potential refunds of customer deposits.
• Potential dilution: common shares outstanding rose to 81,474,200 at September 30 from 55,955,463 at year-end 2012; the filing also reported 18,145,288 investor warrants outstanding.