WORKHORSE GROUP INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Annual Report on Form 10-K
Overview and 2015 Highlights
We are a
U.S.
-based developer of medium-duty, battery-electric delivery vehicles and unmanned aerial systems (UAS) delivery drones that are fully integrated with Workhorse electric vehicles. We recently received an initial order from United Parcel Service for 125 E-GEN trucks and, as a result, we are in the process of implementing operations as an original equipment manufacturer. We are also a developer of a cloud-based, real-time telematics performance monitoring system that tracks and displays the performance analytics and location of each Workhorse vehicle. We believe our vehicles, engineering expertise, innovation and operational structure differentiate us from traditional truck manufacturers.
We have filed a patent application for a new system that extends the range of electric vehicles while reducing the overall cost of the typical battery-electric power train. The new system, E-GEN Drive(TM), is designed specifically for the package delivery vehicle market, in which the diesel and/or gasoline-powered vehicles in use now are required to stop and restart hundreds of times a day. We believe that battery-electric technology is an ideal fit for urban and suburban delivery routes, despite the typical fleet owner's concerns about range and cost. Our E-GEN Drive system will enable our customers to keep their batteries charged to a consistent state of charge throughout the day and, since we are able to use smaller battery packs, we can reduce the cost of the entire system. Our E-GEN Drive trucks offer a three-year payback, making them price competitive with gasoline-powered trucks. When the ignition is shut off, the engine automatically turns on and recharges the battery pack. When the ignition is turned back on, the engine turns off and the vehicle reverts to all-electric power. The engine and the battery-powered motor are never in use at the same time. It is not a traditional hybrid, but an extended-range electric vehicle. As a result, we believe our new design has many benefits, including:
? Fleet management flexibility: Depending on our customer's driving patterns and
fuel cost goals, our E-GEN drive train can be remotely adjusted to use more
electric power or more internal combustion engine (ICE) power, at their
choice.
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? Energy efficiency and cost of ownership: We believe our trucks offer customers
an attractive cost of ownership profile compared to similar products. Using a
single electric power train with a small ICE enables us to create a lighter,
more energy efficient vehicle that is mechanically simple. Since we are able
to use smaller battery packs, we can reduce the cost of the entire system.
Additionally, government incentives can further reduce the cost of ownership.
? High performance: We believe our trucks deliver an unparalleled driving
experience, with powerful acceleration for the most demanding applications
while also providing the added benefit of an extremely quiet operation.
We believe the benefits of our new design also provide customers additional benefits, which include:
? Gaining a competitive edge to increase market share
? Improving profitability created by
? Decrease maintenance costs
? Reduced fuel expenses
? Increasing the number of deliveries per day through more efficient delivery
methods
? Strengthening sustainability programs
? Improving driver safety
? Reducing total cost of ownership for each vehicle
We have developed our second generation, full-electric truck, "E-100", which is a significant improvement over our first generation vehicle. The second-generation vehicle includes a single powerful electric motor with no transmission and new lighter, high-density Lithium-ion batteries, giving the vehicle a range of up to 100 miles.
In March of 2013, we purchased the former Workhorse Custom Chassis assembly plant in
Union City, Indiana
from Navistar International (NAV:
NYSE). With this acquisition, we acquired the capability to be an Original Equipment Manufacturer (OEM) of Class 3-6 commercial-grade, medium-duty truck chassis, to be marketed under the Workhorse® brand.
Ownership and operation of this plant enables us to build new chassis with gross vehicle weight capacities of between 10,000 and 26,000 pounds. These chassis are our new 88"-track (W88) and include either of our two second-generation, battery-electric drive trains, both powered by Panasonic 18650 Li-ion cells. The W88 truck chassis will be offered to fleet purchasing managers at price points that are both attractive and cost competitive.
At the same time, we intend to partner with engine suppliers and body fabricators to offer fleet-specific, custom, purpose-built chassis that provide total cost of ownership solutions that are superior to the competition.
In addition to having the ability to build our own chassis, we design and produce battery-electric power trains that can be installed in new Workhorse chassis or installed as repower packages to convert used Class 3-6 medium-duty vehicles from diesel or gasoline power to electric power. Our approach is to provide battery-electric power trains utilizing proven, automotive-grade, mass-produced parts in their architectures, coupled with in-house control software that we have developed over the last five years.
The Company is also seeking to re-design the future of parcel delivery aviation: HorseFly™, an Unmanned Aerial Vehicle (UAV) that is designed for the package delivery market as well as other commercial applications. Our UAV works in tandem with our electric trucks to bring a practical low cost solution to making the last mile more efficient and cost effective for our parcel customers. HorseFly™ is designed to further improve package delivery efficiencies and has been developed in conjunction with the University of Cincinnati, one of the country's foremost educational institutions for drone research, and the FAA. Although the FAA rules governing the use of drones have not been finalized, we believe that HorseFly™ is built to comply with the nature of the FAA proposed rules.
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Recent Developments
On August 7, 2015, the Company entered into a Prime Order under the Vehicle Purchase Agreement with UPS, pursuant to which UPS agreed to purchase 125 E-GEN trucks. In addition, Workhorse also received orders for two E-Gen vehicles from UPS for testing, which have been delivered.
Workhorse had previously entered into a purchase agreement with UPS to supply 18 all-electric Workhorse E-100 Walk-In Vans to be deployed in the
Houston
-
Galveston, Texas
area. The
U.S. Department of Energy selected this project to improve local air quality in the
Houston
-
Galveston
area, which is currently designated as a National Ambient Air Quality Non-Attainment Area. The purchase agreement requires an initial vehicle to be approved by
UPS prior to delivering additional vehicles. After approval of the initial vehicle, we are scheduled to deliver five vehicles per month over a period of three to four months. As of the date hereof, Workhorse has delivered one
E-100 All Electric vehicle and, pending receipt of approval, is in the process of finalizing the manufacture of one additional vehicle.
Currently, the schedule agreed to with UPS for the Prime Order requires that we deliver 20 vehicles per month, beginning in February 2016. However, these deadlines are expected to evolve as UPS operations personnel from seven states will be involved in the scheduling. There is no guarantee that the Company will be able to perform under the Prime Order or the E-100 order and, if it does perform, that UPS will purchase additional vehicles from the Company. Further, if the Company is not able to raise the required capital, including to purchase required parts and pay certain vendors, the Company may not be able to comply with UPS's deadlines.
The Company responded on March 6, 2015 to a Request for Information and Prequalification (RFI) from the United States Postal Service (USPS) for its Next Generation Delivery Vehicle (NGDV) Acquisition Program. The USPS anticipates making a single award in 2017 to a supplier for up to 180,000 NGDVs to replace its current fleet of mail delivery vehicles. Delivery of the NGDVs to the USPS is expected to begin no later than January 2018. On April 14, 2015, the USPS notified the Company that it has advanced in the NGDV Acquisition Program as a prequalified supplier. The Company is now required to submit detailed specifications and build several prototypes for testing. The Company was expected to submit its specifications in early October 2015. However, on August 10, 2015, USPS advised that it is continuing to review its objectives and refine its requirements under the program to ensure design flexibility and maximum opportunity for innovation. The USPS advised that it expected to provide further guidance prior to September 25, 2015. As of the date hereof, the USPS has not provided the further guidance. Upon receipt of such guidance, the Company will submit its specifications.
The Federal Aviation Administration (FAA) granted a Certificate of Authorization (COA) to the Ohio/Indiana UAS Center and Test Complex, allowing Workhorse and the University of Cincinnati (UC) to continue their joint development of Workhorse Group's HorseFly™ UAS, which is designed to fly to and from a standard delivery vehicle. Testing of HorseFly will take place at the Wilmington Air Park in
Wilmington, OH
. Collaboration between the
UC's College of Engineering and Applied Science and the
Ohio
/Indiana UAS Center led to sponsorship for the two-year FAA authorization from the
Ohio State Department of Transportation in addition to priority access to Wilmington Air Park.
Results of Operations
Our condensed consolidated statement of operations data for the period presented
follows:
2015 2014 2013
Sales $ 139,980 $ 177,500 $ 177,500
Operating Expenses
Selling, general and administrative 3,860,618 2,950,467 3,137,288
Research and development 4,740,331 3,436,751 2,892,505
Total operating expenses 8,600,949 6,387,218 6,029,793
Interest expense, net 965,884 398,963 258,261
Net loss $ (9,426,853 ) $ (6,608,680 ) $ (6,110,554 )
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Revenue
Revenue for the year ended December 31, 2015 were related to delivery of EGEN and E100 prototypes for UPS. Revenue for the year ended in December 31, 2014 were related to delivery of conversion of an all-electric Para-transit 12 passenger bus to BARTA (Berks County Regional Transit Authority) of
Pennsylvania
.
We have received several orders from fleets which we are in the process of filling.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of personnel and facilities costs related to our development including, marketing, sales, executive, finance, human resources, information technology and professional, legal and contract services.
SG&A expenses during year ended December 31, 2015 were $3.9 million, an increase from $3.0 million for the year ended December 30, 2014. The increase in our SG&A expenses consisted primarily in employee compensation expenses related to higher headcount to support the sales and technical activities as well as additional employee expenses, and consulting expenses as a result of our production and sales efforts and focus on marketing of our new technologies.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of personnel costs for our teams in engineering and research, prototyping expense, and contract and professional services.
Union City
plant expenses prior to the start of production are also included in research and development expenses.
R&D expenses during the year ended December 31, 2015 were $4.7 million, an increase from $3.4 million for the year ended December 31, 2014. The increase in our R&D expenses is the result of an increase of engineering employee and consulting expense, prototype component increase expense and vehicle testing.
Interest Expenses
Our interest expense is incurred primarily from our long term loan with Navistar in connection to the purchase of the
Union City
plant mentioned before in the Property, Plant and Equipment and Long Term Loan notes to the financial statements.
Interest expenses during the year ended December 31, 2015 were $965 thousand, an increase from $399 thousand for year ended December 31, 2014. The higher expense was due to an increase of principal resulting from the capitalization of interests to the Navistar loan and interest owed on loans and notes from investors.
Liquidity and Capital Resources
Summary of Cash Flows
2015 2014
Net cash used in operating activities (8,220,232 ) (4,466,588 ) Net cash used in investing activities
(65,226 ) (23,104 )
Net cash provided by financing activities 15,520,363 4,924,930
Cash Flows from Operating Activities
Our cash flows from operating activities are affected by our cash investments to support the business in research and development, manufacturing, selling, general and administration. Our operating cash flows are also affected by our working capital needs to support fluctuations in inventory, personnel expenses, accounts payable and other current assets and liabilities.
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During the year ended December 31, 2015 and 2014, cash used in operating activities was $8.2 million and $4.5 million. The decrease in operating cash flows in 2015 as compared to 2014 was due to an increase in operating activities related to the design and manufacturing of new customer orders and testing of new product designs and higher operating expenses in R&D and SG&A.
Cash Flows from Investing Activities
Cash flow from investing activities primarily relates to capital expenditures to support our future growth in operations.
We spent $65 thousand in new equipment during the year ended December 31, 2015.
Cash Flows from Financing Activities
During the year ended December 31, 2015 and 2014, net cash provided by financing activities was $15.5 million and $4.9 million. Cash flows from financing activities during the year ended December 31, 2015 consisted primarily of $12.2 million from proceeds from notes payable, and $3.2 million of issuance of common stock. In 2014 we had $4.3 million from issuance of common stock, offset by $326 thousand payment of long-term debt and 285 thousand of capitalization of shareholder advances.
Credit Facility
Presently we have no revolving Credit Facility established. There is no guarantee that we will be able to enter into an agreement to establish a line of credit or that if we do enter into such agreement that it will be on favorable terms.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Federal Tax Credit Qualification by the IRS
The Company has been qualified by the IRS for a vehicle federal tax credit of up to $7,500. The Company joins a list of plug-in electric drive motor vehicle manufacturers, including Ford Motor Company, General Motors Corporation, Tesla, Toyota, and 13 EV manufacturers in all, qualifying purchasers for up to a $7,500 tax credit when purchasing an electric vehicle.
Additionally, many states offer additional sales tax exemptions and zero emission tax credits of up to $5,000 that can also be applied to the purchase.
California Air Resources Board Approval
On February 20, 2013 the California Air Resource Board (CARB) approved the medium to heavy duty the Company's commercial truck for sale in the state of
California
. Most other states use this approval for sale of vehicles in their state.
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Critical Accounting Policies and Estimates
The following accounting principles and practices of the Company are set forth to facilitate the understanding of data presented in the consolidated financial statements:
Nature of operations
Workhorse is a technology company that is focused on last mile delivery systems. The Company designs, develops, manufactures and sells cost effective high-performance electric medium duty trucks and unmanned aerial delivery systems that are fully integrated with our electric vehicles as an original equipment manufacturer (OEM). Workhorse's vehicles, engineering expertise, and business model differentiates us from other truck and drone manufacturers.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Property and depreciation
Property and equipment is recorded at cost. Depreciation is provided on the straight-line and accelerated methods over the estimated useful lives of the respective assets.
Income taxes
With the consent of its shareholders, at the date of inception, the Company elected under the Internal Revenue Code to be taxed as an S corporation. Since shareholders of an S corporation are taxed on their proportionate share of the Company's taxable income, an S corporation is generally not subject to either federal or state income taxes at the corporate level. On December 28, 2009 pursuant to the merger transaction the company revoked its election to be taxed as an S-corporation.
As no taxable income has occurred from the date of this merger to December 31, 2015 cumulative deferred tax assets of approximately $11.6 million are fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements. Carryover amounts are:
Carryover to be used
Approximate net against taxable
operating loss income generated
($ millions) through year
3.6 2030
6.7 2031
3.9 2032
4.7 2033
6.1 2034
9.0 2035
Research and development costs
Research and development costs are expensed as they are incurred. Research and development expense incurred was approximately $4.7 million and $3.4 million for the years ended December 31, 2015 and 2014, respectively consisting of consulting, payroll and payroll taxes, engineering temporaries, purchased supplies, legal fees, parts and small tools.
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