Workhorse Group Inc. quarterly report, Q3 FY2011

SEC Filing Summary: AMP Holding Inc. 10-Q

Entity note: The supplied filing is for AMP Holding Inc., not Workhorse Group Inc. It reports the period ended September 30, 2011 and describes AMP as a development-stage electric-vehicle company. The filing says AMP became the accounting acquirer in a 2009 reverse merger; its financial history is presented after that transaction.

Business context and reporting period

AMP designed, marketed and sold conversions of existing vehicles to all-electric drivetrains and battery systems. Management said planned principal operations generating sustaining revenue had not fully commenced. Revenue to date consisted of limited vehicle conversions and converted-vehicle sales.

Financial results and liquidity

• Nine-month 2011 revenue came from three customer vehicle conversions and one converted-vehicle sale. The filing does not provide a clear gross-margin figure or a revenue-cost breakdown sufficient to calculate margins.
• At September 30, 2011, cash was $103,917, current assets were $303,336, and current liabilities were $1,147,772, implying negative working capital of $844,436. At December 31, 2010, cash was $385,293, current assets $453,190 and current liabilities $784,608.
• Long-term bank debt was $26,822, of which $6,413 was current. Current liabilities also included $105,000 in shareholder advances, accounts payable of $860,605 and related-party accounts payable of $150,754. The shareholder notes were described as unsecured and repayable upon demand.
• Nine-month investing cash outflow was $137,525; financing cash inflow was $4,670,905, principally from common-stock issuance. Nine-month operating cash use more than doubled year over year.

Material changes versus the prior comparable period

• Expenses and net loss increased substantially in both the quarter and nine-month period. Management attributed the increase to expanded product-development and promotional activity, including hiring additional employees.
• Payroll and payroll taxes, stock-based compensation, and batteries, motors and supplies were major expense categories. Nine-month stock-based compensation was $1,367,818, versus $430,104 in 2010.
• Cash declined from $385,293 at year-end 2010 to $103,917 at September 30, 2011, despite $4.6 million of equity proceeds during the nine-month period.
• Common shares outstanding increased from 27,712,401 at December 31, 2010 to 37,334,041 at September 30, 2011. The filing separately reports 37,509,041 shares outstanding as of November 9, 2011.

Outlook, risks and unusual items

• Funding and going concern: Management said cash on hand would not meet the company’s needs and estimated it required $12 million to $15 million to execute its business plan over the next 12 months. The filing states that limited revenue, negative working capital and stockholders’ deficit raised substantial doubt about the company’s ability to continue as a going concern. Management expected losses to continue through 2011 and said additional financing might not be available on acceptable terms; failure to obtain funds could require scaling down or ceasing operations.
• Subsequent financing: After quarter-end, the company sold 175,000 shares for $105,000 gross on October 26. On October 31, a director and officer loaned it $200,000 under a note bearing 15% annual interest, due November 30, 2011, secured by company assets subject to the agreement’s terms. A separate $50,000 city loan was also obtained in October, with potential forgiveness dependent on employment and payroll benchmarks.
• Payroll deferrals: September officer and executive payroll was reduced or delayed and paid October 31. A further adjustment to October executive payroll was planned to be paid with the next capital raise.
• Commercial outlook: An Iceland distribution agreement contemplated an initial 250-vehicle development-phase purchase and at least 150 vehicles per year in a later sales-and-marketing phase. AMP said the development phase was pushed into 2012 after the anticipated Icelandic VAT repeal had not been approved. These were contractual plans, not reported completed sales.
• Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective as of September 30, 2011. Cited material weaknesses included inadequate segregation of duties and monitoring, accounting software limitations, insufficient oversight, and reliance on outside consultants and attorneys. Management said the weaknesses had not caused material misstatements in the reported financial statements.
• Other risks and unusual items: Forward-looking risks included ability to raise capital, competition, regulation, general economic conditions, and electric-vehicle market growth. The company reported no material legal proceedings and no material off-balance-sheet arrangements. The filing disclosed substantial outstanding options and warrants, creating potential dilution.

Most important facts for investors to verify

• Confirm the issuer: this filing is AMP Holding Inc.’s 2011 report, not a Workhorse Group Inc. filing.
• Check subsequent cash needs, debt repayment and payroll obligations against actual later financing and operating cash flows; the filing’s $12–15 million funding estimate is management’s estimate.
• Verify whether the Iceland agreement advanced to binding orders, deliveries and recognized revenue; the planned development phase had already been delayed.
• Review the company’s going-concern status and whether the disclosed internal-control weaknesses were remediated.
• Reconcile the share count and potential dilution from equity raises, options and warrants, including securities issued after September 30.