Workhorse Group Inc. quarterly report, Q2 FY2018

Workhorse Group Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2018. Workhorse develops and manufactures electric commercial vehicles and aircraft, along with fleet telematics. Its core activities are in Automotive and Aviation.

Financial performance and position

• Revenue and margins: Q2 sales fell 32% year over year, and first-half sales fell 60%, primarily because fewer trucks were sold. Gross losses continued; cost of sales exceeded revenue in both periods.
• Expenses: First-half SG&A rose to $5.40 million from $4.50 million, with higher advertising and legal and consulting costs related to the planned SureFly transaction. R&D fell to $4.23 million from $9.05 million, mainly due to lower USPS vehicle and SureFly prototype costs.
• Cash flow: Operating activities used $7.58 million in the first half, compared with $19.74 million in 2017. Investing cash flow was zero; financing provided $4.09 million, versus $24.64 million in 2017.
• Liquidity and debt: Cash was $586,441 at June 30, down from $4.07 million at December 31, 2017. Current assets were $5.94 million. The balance-sheet presentation shows current liabilities of $15.07 million, indicating a substantial working-capital deficit. Debt included $5.75 million of senior secured notes due July 6, 2018, $550,000 in related-party notes, a $350,000 former-owner note, and a mortgage; the filing’s debt table reports total principal of $8.37 million.
• Equity: Stockholders’ deficit was $5.16 million at June 30, compared with equity of $3.51 million at year-end. Common shares outstanding were 45.0 million at June 30 and 45.98 million at August 6.

Material changes and unusual items

• In June, holders exchanged all September 2017 warrants for 1,968,736 common shares. A down-round feature also reduced the warrant exercise price from $3.80 to $2.62, producing a $765,179 deemed dividend and increasing the loss attributable to common stockholders.
• First-half financing included common-stock issuance proceeds, including the April private placement of 531,066 shares for $1.44 million and sales under the Cowen at-the-market agreement. The company also issued 113,874 shares to settle a $298,350 vendor invoice.
• After quarter-end, Workhorse borrowed $6.1 million from Arosa at 8% and used proceeds to repay the $5.75 million senior secured notes and the $350,000 former-owner loan. On August 2, Arosa advanced another $1.7 million. Arosa received a five-year warrant for 5,000,358 shares at $2.00 per share; further warrant issuance may be required for certain future financings.
• The Arosa loan is secured by substantially all company assets and includes covenants to raise $10 million in equity by September 30, 2018, sell SureFly for at least $20 million, and appoint an Arosa designee to the board. The August amendment also requires satisfaction of the Loveland facility mortgage by October 1, 2018.
• Workhorse separately borrowed $500,000 after quarter-end at 12%, due January 2019. A $550,000 related-party loan issued in June also bears 12% and is due December 2018, subject to specified financing-related repayment provisions.

Outlook, risks and controls

• Management said existing resources, including the Arosa loan, were expected to fund operations through the end of Q3 2018, but acknowledged that assumptions could prove wrong and additional funding needs were uncertain. The company stated it would require significant additional funding and that obtaining debt or equity financing was not assured.
• The filing identifies substantial doubt about the company’s ability to continue as a going concern, citing limited revenue, negative working capital and stockholders’ deficits. Failure to obtain funding could force delays, reductions or cessation of development, sales or production activities.
• Management’s product plans include additional electric and range-extended vehicles in late 2018 and 2019, and continued development of N-GEN vans and the W-15 pickup. Management cited expected vehicle savings and fuel-economy benefits, but these are estimates, not reported results. No quantified financial guidance is provided.
• Disclosure controls were deemed ineffective because of unremediated material weaknesses in internal control over financial reporting. Remediation efforts included ERP implementation, improved reconciliations and closing procedures, and hiring a public-company-experienced controller.
• The company reported no material change in market-risk disclosures and no legal proceedings it believed would materially adversely affect its financial statements. It adopted the new revenue-recognition standard without a material impact.

Key investor verification points

• Confirm the company’s post-quarter funding, remaining cash runway, debt obligations, and compliance with Arosa’s financing, SureFly sale and mortgage covenants.
• Assess whether vehicle sales and production can grow enough to improve gross margins, given very low revenue and continuing gross losses.
• Verify the likelihood and economics of the planned SureFly transaction and the company’s ability to raise the required equity.
• Review potential dilution from Arosa warrants and other financing needs, alongside the company’s reported share count.
• Track remediation of internal-control material weaknesses and the company’s going-concern position.