Workhorse Group Inc. annual report, FY2013

Business context and reporting period

This is AMP Holding Inc.’s Form 10-K for the fiscal year ended December 31, 2013, filed April 15, 2014. Although the request identifies Workhorse Group Inc., the filing names AMP Holding Inc. as the registrant; it reports that AMP acquired Workhorse Custom Chassis operating assets in March 2013 and began operating as a medium-duty truck chassis OEM under the Workhorse brand.

The company was a development-stage business focused on electric and alternative-fuel medium-duty trucks. Its 2013 strategic shift included acquiring the Union City, Indiana plant and developing E-GEN extended-range electric and E-100 all-electric vehicles.

Key financial metrics

• Revenue was primarily from a para-transit bus project; the filing reports $177,500 recognized in 2013 for one delivered vehicle. Total revenue expected from the two-vehicle project was $355,000.
• Expenses were approximately $6.29 million in 2013, versus $4.54 million in 2012. The filing reports no clear gross profit or gross margin value.
• At December 31, 2013, cash was $7,019; current assets were $443,736 and current liabilities were $4,464,578, producing a working-capital deficit of about $4.02 million. Total assets were $4.85 million and stockholders’ deficit was $1.91 million.
• Total debt disclosed in the debt note was $2,631,115, including a $2.25 million secured debenture bearing 10% interest, due March 2016 and secured by the plant. Shareholder advances totaled $1,934,300 and are reported separately from debt.
• Operating cash use increased about 24% year over year. Financing inflows included $4.29 million from stock issuance and $1.38 million in net shareholder advances.

Material changes versus the prior period

• Revenue declined about 35% from 2012, while net loss increased about 43%.
• Operating expenses rose about 38%, with higher stock-based compensation, consulting, plant-related costs, and development spending cited among the drivers. Research and development expense was approximately $2.89 million, up from $2.08 million.
• The Workhorse asset acquisition added the Union City plant and related assets. The stated $5 million purchase consideration comprised $2.75 million cash and a $2.25 million secured debenture.
• Common shares outstanding at year-end rose to 82,711,524 from 55,955,463 a year earlier.

Outlook, risks and unusual items

• Management provided no numerical revenue or earnings guidance. It described E-GEN as a proposed extended-range electric system and cited an anticipated three-year payback and two-to-four-times fuel economy versus conventional vehicles; these are company claims, not reported results. E-GEN regulatory approvals and qualification for incentives were still being pursued.
• The company said it was significantly undercapitalized and warned that failure to raise capital could force it to cease operations. The auditor’s report highlighted substantial doubt about the company’s ability to continue as a going concern.
• Post-period disclosures report cash of $2.7 million at the end of March 2014. On March 18, 2014, an existing shareholder agreed to invest $3 million for 30 million shares and warrants for 15 million additional shares. The filing does not establish that this agreement alone resolves the company’s ongoing funding needs.
• Accounts payable were materially delinquent; management said obligations were being prioritized as funds became available. The company also disclosed delayed employee salary payments and layoffs. A covenant requiring repayment of certain shareholder notes after financing above $2 million was reported as breached in 2013.
• The City of Loveland notified the company that it did not meet conditions for forgiveness of a 2012 loan payment, which was past due. The 10-K also reports no revolving credit facility.
• Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to weaknesses including limited segregation of duties, reliance on outside advisers, and no formal audit committee.
• The company reported no material pending legal proceedings. The audited financial statements received an unqualified opinion, with a going-concern emphasis.

Most important facts to verify

• Confirm the issuer and reporting entity: the filing is for AMP Holding Inc., not a registrant named Workhorse Group Inc.
• Reconcile share-count disclosures: the filing cover reports 76,622,130 shares outstanding as of April 15, 2014, while the beneficial-ownership section uses 98,216,014 shares outstanding as of March 29, 2014.
• Verify the funding status and terms of the March 2014 $3 million subscription, including the associated share and warrant dilution, and subsequent liquidity.
• Confirm progress on chassis production, customer orders, E-GEN testing and approvals, and conversion of customer deposits into completed sales.
• Assess repayment, maturity, and covenant status for shareholder advances, delinquent payables, the secured Workhorse debenture, and the past-due City of Loveland obligation.
• Track remediation of the disclosed control weaknesses and whether the company can fund operations without continued high-cost or dilutive financing.