Workhorse Group Inc. quarterly report, Q1 FY2016

Workhorse Group Inc. — Q1 2016 Form 10-Q

Reporting period: Three months ended March 31, 2016; unaudited. Workhorse designs, develops and manufactures medium-duty commercial vehicles, including electric and range-extended trucks, and is developing delivery-drone technology. The quarter marked early production activity and initial vehicle deliveries.

Financial results and liquidity

• Cash and cash equivalents were $5.22 million at March 31, down from $7.68 million at year-end 2015. Investing activities used $28,899; financing activities provided $963,000.
• Total assets were $9.88 million. Current assets of $6.21 million exceeded current liabilities of $4.33 million by approximately $1.88 million. The balance sheet reported $50,000 of current long-term debt and no long-term debt.
• Stockholders’ equity was $5.56 million, compared with a $3.78 million deficit at December 31, 2015. The company reports that notes payable and related payables, net of deferred offering costs, were converted to equity during the quarter. Common shares outstanding rose from 18.20 million to 22.62 million; 23.11 million were outstanding May 16.

Material changes and business developments

• Q1 sales of $236,000 related to delivery of the first production vehicles for UPS. The filing describes an UPS Prime Order for 125 E-GEN range-extended trucks and a separate purchase agreement for 18 E-100 electric vans.
• Management said E-100 deliveries were continuing, with completion expected by the beginning of Q3 2016. The E-GEN delivery schedule was expected to be coordinated with UPS operating personnel and could evolve.
• Operating expenses increased 115% year over year, primarily reflecting increased R&D activity, employee costs and vehicle design and production coordination. R&D more than tripled. Management attributed lower interest expense to early payment of the Navistar note.
• The company entered an agreement with BMW to supply a two-cylinder gasoline generator for the E-GEN range extender. It also reported progress on its Metron fleet-management system and HorseFly drone testing.
• Workhorse and a partner submitted a proposal for the USPS Next Generation Delivery Vehicle program and provided requested revisions. The USPS anticipated a single award in 2017; the filing does not report an award to Workhorse.

Outlook, risks and unusual items

• No specific revenue or earnings guidance was provided. Management expected continuing operating losses and negative operating and investing cash flows, with increased spending to support R&D, production, sales and growth.
• The filing says approximately $15 million of additional capital would be needed to fund operations through December 31, 2016. Additional financing was not assured; management identified debt or equity financing as possible sources.
• The financial statements were prepared on a going-concern basis. The filing states that limited revenue and financing needs raise substantial doubt about the company’s ability to continue as a going concern, and that additional funding is not assured. Notably, the balance sheet itself reports positive working capital and positive equity at March 31, 2016, unlike the going-concern narrative’s reference to negative working capital and stockholders’ deficit; investors should reconcile this inconsistency.
• Key risks include executing the UPS order on schedule, securing working capital and supplier terms, scaling Union City production, controlling production costs, customer concentration, market adoption of electric trucks, competition, and evolving vehicle and drone regulation. The filing also cites lithium-ion battery safety, product-liability and supply-chain risks.
• Shareholder advances were $1.69 million at quarter-end; the company said approximately $1.7 million in deposits had not yet been issued as common stock and expected issuance in Q2 2016, creating potential dilution. Separately, $2.11 million of cash came from warrant exercises.
• The City of Loveland loan had a $50,000 balance due in October 2016. The filing says the company had been notified it failed to meet requirements for forgiveness of a past-due 2012 principal and interest payment.
• The company reported effective disclosure controls, no material changes to internal control over financial reporting during the quarter, and no material pending legal proceedings.

Important facts for investors to verify

• Actual UPS delivery volumes, timing, acceptance and payment terms, and whether orders expand beyond the disclosed vehicles.
• Current liquidity and the timing, amount, terms and dilution impact of additional financing; reconcile the going-concern discussion with reported quarter-end working capital and equity.
• Whether the expected Q2 issuance of shares for shareholder deposits occurred, and the resulting share count and ownership dilution.
• Unit economics as production scales: Q1 cost of sales exceeded sales, and management said initial materials were purchased at low-volume pricing while negotiating higher-volume pricing and vendor credit.
• Progress on the USPS procurement and regulatory approvals, without treating either as assured future revenue.