Workhorse Group Inc. annual report, FY2017

Workhorse Group Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; quarterly figures below are unaudited. Workhorse designs and manufactures commercial electric and range-extended vehicles, and develops delivery drones, aircraft and fleet telematics.

Financial performance and position

• Revenue increased approximately 69%, but losses widened substantially as production costs and operating expenses grew. R&D rose to $18.06 million from $6.15 million; SG&A increased to $10.33 million from $6.20 million.
• Q4 2017 revenue was $5.51 million, gross loss $6.14 million and net loss $12.46 million. Q4 2016 revenue was $3.04 million, gross loss $3.61 million and net loss $6.98 million.
• Year-end cash was $4.07 million, up from $0.47 million. Financing provided $42.41 million, largely from stock issuance and senior secured notes; operating and investing activities used $38.66 million and $0.14 million, respectively.
• Current assets were $10.31 million versus current liabilities of $11.92 million, resulting in negative working capital of $1.61 million. Stockholders’ equity was $2.49 million, down from $3.82 million.
• Year-end debt included $5.75 million principal of senior secured notes, due June 30, 2018 (carrying value net of discount and issuance costs: $4.76 million), and $2.09 million of building-related debt, including a $350,000 balloon payment due August 2018. The filing reports no revolving credit facility.

Business developments, outlook and risks

• Workhorse reported more than 360 electric and range-extended delivery vehicles built and delivered. UPS, which represented approximately 98% of 2017 sales (91% in 2016), had placed six orders totaling up to 1,405 vehicles; the filing cautions that orders do not guarantee future purchases or delivery.
• The company delivered six USPS Next Generation Delivery Vehicle prototypes for testing. USPS had identified approximately 180,000 vehicles for potential replacement; Workhorse was one of five prototype awardees, with no award decision disclosed.
• Management aimed to reduce costs and reach gross-margin profitability for its delivery-van platform. N-GEN cargo vans and the W-15 pickup were in development, with launches targeted for late 2018 and 2019. The company cited more than 5,500 W-15 letters of intent, representing nearly $300 million, not firm orders.
• A Delivery as a Service pilot began in one metropolitan market in Q4 2017. A SureFly spin-off was being pursued for 2018, subject to financing, regulatory and other conditions; completion was not assured. The related senior secured notes generated $5 million in gross proceeds.
• Management said existing resources and access to its at-the-market sales agreement were expected to support funding into Q2 2018, but anticipated additional funding needs through year-end for R&D, inventory and working capital. No future funding was committed. The auditor’s report highlighted substantial doubt about the company’s ability to continue as a going concern.
• The filing states that the company lost money on each medium-duty vehicle sold without an associated voucher. Key risks include continued cash burn and financing availability, customer concentration, scaling production, dependence on Panasonic battery cells and other suppliers, subsidy changes, and competition. The company also disclosed an approximately $2.10 million contract/unjust-enrichment claim by Autokinetics, which it is contesting, and a separate wage-and-commission suit for which no claim value is provided.
• The financial statement audit opinion was unqualified, with a going-concern emphasis paragraph. The auditor issued an adverse opinion on internal control over financial reporting, citing material weaknesses in reporting oversight and monitoring and reliance on manual processes; management said disclosure controls were not effective.

Important facts for investors to verify

• Current cash runway, subsequent financing, note repayment or refinancing, and the timing and terms of any additional capital raises.
• UPS order fulfillment, subsequent purchase orders, customer concentration, and whether reported letters of intent convert into binding W-15 orders.
• Actual vehicle unit economics, progress on cost reduction, gross margins, and production capacity and supply-chain readiness.
• USPS prototype test outcomes and procurement timetable; N-GEN and W-15 launch status; and whether the SureFly spin-off closes.
• Progress remediating material weaknesses and developments in the disclosed legal proceedings.