2023-06-29 23:11:33 ET
Summary
- Since my last update on BEV vehicle developer Workhorse Group, shares have lost 90% of their value, mostly due to an ugly combination of execution issues and ongoing shareholder dilution.
- Given the company's stated intent to fund elevated cash outflows from additional equity sales, substantial near-term dilution appears likely.
- Further dilution will be experienced due to the requirement to issue a substantial amount of shares as part of a legal settlement.
- Last month, Workhorse reported another set of disappointing quarterly results with deliveries of Class 4 BEV trucks well below expectations, but management nevertheless affirmed aggressive full-year targets.
- Given aggressive sales targets and the high likelihood of substantial near-term dilution, investors should avoid the shares or consider selling existing positions.
Note: I have covered Workhorse Group Inc. ( WKHS ) previously, so investors should view this as an update to my earlier articles on the company.
It's been almost two years since my last update on embattled battery-electric ("BEV") vehicle developer and producer Workhorse Group Inc. ("Workhorse").
Since the article was published, shares have lost more than 90% of their value, mostly due to an ugly combination of execution issues and ongoing shareholder dilution.
Between August 2021 and May 2023, outstanding common shares have increased by 50% to approximately 185 million.
Even worse, the company expects to issue additional equity to fund substantial cash burn from operations, as disclosed in the company's most recent quarterly report on form 10-Q (emphasis added by author):
The Company had sales of $1.7 million, incurred a net loss of $25.0 million and used $32.7 million of cash in operating activities during the three months ended March 31, 2023. As of March 31, 2023, the Company had $79.1 million of cash and cash equivalents , working capital of $67.7 million and an accumulated deficit of $652.6 million. (...)
We currently intend to raise additional funds through issuance of equity, including through the continued use of the At-The-Market Program. If we are unable to maintain sufficient financial resources, its business, financial condition and results of operations will be materially and adversely affected. This could affect future vehicle program production and sales. Failure to obtain additional equity financing will have a material, adverse impact on our business operations. There can be no assurance that we will be able to obtain the needed financing on acceptable terms or at all. Additionally, any equity financings would likely have a dilutive effect on the holdings of our existing stockholders. (...)
On March 10, 2022, we entered into an At-The-Market Sales Agreement, which established an at-the-market equity program (the “ATM Program”). Under the ATM Program, we may offer and sell shares of our common stock having an aggregate sales price of up to $175.0 million.
During the three months ended March 31, 2023, we issued 14.4 million shares under the ATM Program for net proceeds of $18.6 million. The remaining aggregate sales available under the ATM Program is $142.9 million as of March 31, 2023.
Assuming aggregate cash burn of $150 million this year, the company would have to raise more than $70 million in new equity just to make it into 2024.
In addition, Workhorse recently agreed to settle a class action lawsuit with $20 million payable in shares of the company's common stock. Final court approval is expected for next month.
At prevailing trading prices, the company would be required to issue almost 26 million new common shares under the settlement agreement.
Last month, Workhorse reported another set of disappointing quarterly results with deliveries of Class 4 BEV trucks well below expectations as also stated by management on the Q1 conference call (emphasis added by author):
(...) I want to provide some additional details on the important progress we are making on our commercial vehicle product road maps, starting with our Class 4 offerings, the W4 CC and the W750.
After receiving the Green Power chassis units at the end of December 2022, Workhorse worked hard to modify and upgrade these base units to fully meet Workhorse quality standards in Q1.
These upgrades took longer than expected to work through as we experienced delivery issues on a few key components - type primarily tooling and production ramp up of a handful of parts, specifically related to light bezels, cab heaters, back panel covers and liners. As a result of these specific parts issues, we were only able to deliver 10 trucks during the first quarter.
As a result, Workhorse recorded sales of just $1.7 million for the quarter, while negative free cash flow of $38.2 million represented a new all-time high for the company.
Despite ongoing delays, management reaffirmed full-year revenue guidance of between $75 million and $125 million, which looks aggressive given an apparent lack of firm purchase orders on hand.
The company plans to offset the issue by establishing a nationwide certified dealer network with sales generated from initial stocking orders.
That said, even when assuming some success in stuffing the sales channel, Workhorse would likely be required to deliver at least 400 vehicles to meet the very low end of its guidance this year, which I don't view as realistic.
But as already evidenced by Nikola Corporation's ( NKLA ) issues with selling BEV trucks, Workhorse will likely be challenged to generate significant end user demand due to required substantial customer investment in charging infrastructure.
On the conference call, management also touted the company's drone segment, but achieving commercial scale is unlikely to happen anytime soon, particularly with beyond-visual-line-of-sight ("BVLOS") operations still requiring individual waivers by the Federal Aviation Administration ("FAA").
Bottom Line
Despite an apparent lack of firm purchase orders and ongoing production delays related to the company's Class 4 EV truck offerings, Workhorse Group Inc.'s management affirmed its ambitious revenue targets for the year, thus potentially paving the way for further disappointments down the road.
In addition, the company expects to fund elevated cash outflows from operations from additional equity sales.
Particularly open market sales under the company's ATM program are likely to put more pressure on the company's ailing stock price.
Considering the upcoming share issuance related to the recent class action lawsuit settlement agreement and assuming $70 million from additional open market sales at prevailing prices being raised until year-end, outstanding shares would increase by more than 60% to almost 300 million.
Given aggressive sales targets and the high likelihood of substantial near-term dilution, investors should avoid the shares or consider selling existing positions.
For further details see:
Workhorse Group: Sell On Aggressive Sales Targets And Near-Term Dilution Risk