Workhorse Group Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Workhorse designs and manufactures medium-duty commercial vehicles, including battery-electric and range-extended trucks, and develops delivery-drone and fleet-telemetry products. The company said it was shifting from research and development toward manufacturing and production.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 | Comparable 2015 |
|---|---|---|---|
| Sales | $1.235 million | $1.471 million | $67,980 for each period |
| Gross profit (loss) | ($1.060 million) | ($1.288 million) | $67,980 for each period |
| Operating expenses | $1.875 million | $5.987 million | $1.841 million; $3.756 million |
| Net loss | ($2.936 million) | ($7.316 million) | ($1.881 million); ($3.941 million) |
| Loss per share | ($0.14) | ($0.35) | ($0.12); ($0.25) |
Gross margins were negative in 2016: approximately (86%) for Q2 and (88%) for the six-month period. Management attributed production costs in part to low-volume pricing on initial vehicle materials and components; it was negotiating volume pricing and vendor credit terms as production increased.
Six-month operating cash use was $9.245 million, versus $2.821 million in 2015; investing cash use was $91,000, versus $36,000. Financing provided $5.320 million, principally from warrant and option exercises and shareholder advances. Cash fell from $7.677 million at year-end to $3.662 million at June 30.
At June 30, current assets were $6.700 million and current liabilities $3.488 million. Total assets were $10.337 million; stockholders’ equity was $6.849 million. Current debt was $50,000, and no long-term debt was reported. The $2.723 million secured Navistar debenture was paid in February. Notes payable and related amounts were converted to equity during the first half; the filing reports $11.375 million converted to common stock, net of deferred offering costs. Common shares outstanding rose from 18.205 million at year-end to 24.236 million at June 30.
Changes, outlook, and risks
- Revenue rose from a very low prior-year base, but production costs exceeded sales and the net loss widened. Six-month R&D expense increased to $3.199 million from $1.719 million; Q2 R&D declined year over year as resources shifted toward production.
- Workhorse had a UPS Prime Order for 125 E-GEN trucks scheduled for delivery during calendar 2016; the delivery schedule could change. The filing says 18 all-electric vehicles were delivered to UPS on July 16, 2016, after quarter-end.
- The company reported advancing in the USPS Next Generation Delivery Vehicle procurement process, with a potential award anticipated in 2017. No award or revenue was assured. It also described development and testing of HorseFly drones and its integration with delivery trucks.
- No formal financial guidance was provided. The filing says Workhorse expected to need approximately $15 million in additional capital to fund operations through December 31, 2016. Management said future financing and anticipated revenue could support continued operations, but obtaining additional funding was not assured.
- The financial statements identify substantial doubt about the company’s ability to continue as a going concern, citing limited revenue and a history of losses and negative working capital and equity. The company reported cumulative losses of $50.8 million through June 30, 2016 and expected continued losses and negative operating cash flow.
- Key risks include executing the UPS order, raising capital, scaling production and lowering unit costs, dependence on a limited customer base and key suppliers, adoption of commercial electric vehicles, competition, and regulatory requirements. The filing reported no material legal proceedings and stated disclosure controls were effective.
Investor verification points
- Check subsequent filings for UPS delivery progress, order changes, and collections from delivered vehicles.
- Verify whether the company raised the approximately $15 million it said it needed and how long available cash funded operations.
- Track production volumes, vehicle-level costs, gross margins, supplier pricing and credit terms, and inventory growth.
- Confirm issuance of the approximately $1.9 million in shareholder advances recorded as deposits pending common stock issuance, and assess resulting dilution.
- Monitor the USPS procurement outcome and the timing and regulatory feasibility of commercial HorseFly operations.