2023-08-17 15:00:08 ET
Summary
- Last week, embattled battery-electric vehicle developer and producer Workhorse Group reported another set of disappointing quarterly results, with sales well below expectations and substantial cash usage.
- In addition, the company lowered full-year sales projections by 25% at the mid-point of the provided range.
- During the quarter, the company continued to dilute existing equity holders by selling 24.3 million newly issued shares into the open market for net proceeds of $21.7 million.
- Workhorse is seeking shareholder approval for increasing the number of authorized shares in a special meeting on August 28. Securing sufficient votes won't be an easy task as a majority of all shares will be required to be in favor of the proposal.
- Given the company's disappointing operating performance and high likelihood of ongoing 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.
Last week, embattled battery-electric vehicle developer and producer Workhorse Group Inc. ("Workhorse") reported another set of disappointing quarterly results, with sales well below expectations and substantial cash usage.
In addition, the company lowered full-year sales projections by 25% at the mid-point of the provided range (emphasis added by author):
Based on improved clarity gained from the emerging commercial EV market experience in the first half of the year, Workhorse now expects to generate between $65-85 million in revenue for calendar year 2023 due primarily to two factors: the availability of HVIP vouchers through GreenPower? Motor Company for the W4 CC and W750 vehicles in the California market as well as longer than expected certification testing which may delay the W56 production launch by approximately 45 days.
Moreover, customer concerns regarding the lack of charging infrastructure continue to impact BEV delivery van adoption.
Furthermore, customers are requiring the company to provide " production level quality " vehicles for extensive field testing before considering orders.
Workhorse recorded a negative cash flow of $38.1 million for the quarter, essentially in line with Q1 as the company prepares for ramping up production in the second half.
On the conference call , management projected cash usage to come down over the balance of 2023 despite anticipated increases in working capital requirements and research and development expenses.
The company continued to dilute existing equity holders in Q2 by selling 24.3 million newly issued shares into the open market for net proceeds of $21.7 million, thus increasing outstanding shares by approximately 13.5% on a quarter-over-quarter basis with no let-up in sight, according to statements made in the company's quarterly report on form 10-Q (emphasis added by author):
We currently intend to raise additional funds through issuance of equity, including through the continued use of our at-the-market offering program (the "ATM Program"). If we are unable to maintain sufficient financial resources, our 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.
As of June 30, remaining cash and cash equivalents amounted to $62.4 million, down from $79.1 million at the end of Q1.
Adding insult to injury, the company will be running out of authorized shares soon (emphasis added by author):
We are currently authorized to issue 250 million shares of common stock under our articles of incorporation. As of July 10, 2023, we had approximately 210 million shares outstanding and we expect to issue $20.0 million of common stock in connection with the Stipulation of Settlement we reached for our securities litigation. (...)
We need stockholder approval to increase the number of our authorized shares of our common stock. On July 25, 2023, we filed a definitive proxy statement with the SEC related to a Special Meeting of Stockholders to be held on August 28, 2023 . At the Special Meeting, our stockholders are being asked to approve an increase in the number of authorized shares of common stock from 250 million shares to 450 million shares .
Securing approval won't be an easy task as Nevada law requires the majority of all common shares to vote in favor of the proposal rather than the majority of shares represented on the special meeting.
While the company is desperately working on securing a sufficient number of votes, approval is not a given by any means as evidenced by Nikola Corporation's ( NKLA ) recent challenges .
That said, even without near-term approval, cash on hand should be sufficient for the company to make it into 2024.
Given the company's disappointing operating performance and the high likelihood of ongoing near-term dilution, investors should avoid the shares or consider selling existing positions.
Risks
Just like it has been the case with Nikola Corporation in recent weeks, a temporary lift of the ongoing ATM overhang might open up a potential opportunity for momentum traders to take the stock for a ride.
Bottom Line
Workhorse Group Inc. reported disappointing Q2/2023 results and lowered full-year expectations materially.
Until recently, the company has been able to partially replenish dwindling cash reserves by selling large amounts of newly issued shares into the open market, but with outstanding shares expected to approach the number of authorized shares in the near future, Workhorse is required to seek shareholder approval for materially increasing the number of authorized shares.
As a result, existing shareholders are stuck between a rock and a hard place as voting in favor of the proposal would likely result in ongoing, substantial dilution while declining approval would cause the company to run out of financing options.
In addition, the requirement for a majority of all shares approving the proposal might result in the special meeting being adjourned several times to provide more time for shareholders to vote.
Given the company's disappointing operating performance and the high likelihood of ongoing near-term dilution, investors should avoid the shares or consider selling existing positions.
For further details see:
Workhorse Group: Sell On Lowered Outlook And Unabated Dilution