Workhorse Group Isn’t Moving Fast Enough

• New management is trying to turn Workhorse around after the company lost the USPS contract
• But a weak balance sheet means time is running out
• Workhorse is making some progress — but simply not enough

On its face, there seems to be a reasonable, if high-risk, case for buying Workhorse Group (NASDAQ:WKHS). After all, this isn’t the same Workhorse that overpromised and underdelivered for years. The entire management team has been swapped out, and chief executive officer Rick Dauch is just one of many experienced, serious managers in the top ranks.

Under Dauch, the strategy here has some logic. Workhorse serves a potentially large commercial market and is developing several vehicles to target that market. The HorseFly drone project has potential. If Workhorse can get its products out on the roads, there’s a scenario in which a share price under $2 provides a massive upside.

The problem, however, is the balance sheet. EV manufacturing is a capital-intensive business, and Workhorse is running out of capital. The dwindling cash price creates a path to prosperity that is exceptionally narrow — and, at this point, probably too narrow.

Running Out of Cash

At the end of the third quarter, Workhorse had $120.1 million in cash on the books. Its convertible debt has been erased through a series of transactions, which is good news.

The bad news is that cash is not going to last very long at the current rate. Through the first nine months of the year, Workhorse has burned $75 million in cash or $25 million per quarter.

At that burn rate, the company can only make it until the end of 2023.

It’s not just a backward-looking problem. In its Form 10-Q filed with the SEC for the third quarter, Workhorse wrote that it had enough cash for the following twelve months, but at that point, “additional funding may be required.” At its Investor Day this week, the company said its cash burn in 2023 would be similar to the rate this year.

Workhorse does plan to get vehicles to market in 2023. The now-scrapped C-1000 program hopefully will generate some revenue, as Workhorse plans to sell what it can make from existing inventory. Production of Class 4 vehicles began last quarter, and the more important W56 should start rolling off the lines in Q3 of next year.

But, according to the company itself, those revenues aren’t changing the cash flow trajectory over the next twelve months. That’s not a surprise or a sign that the vehicles are being sold at a loss. It simply takes time for the company’s sales force to get production levels to the point where production is profitable.

The problem, of course, is that Workhorse doesn’t have enough time to get to that point without raising more capital.

Vicious and Virtuous Cycles

That leaves the Workhorse business completely reliant on the Workhorse stock price.

No financial institution is going to lend Workhorse much, if any, capital at this point. The only potential source of cash is selling Workhorse stock.

Workhorse has a $175 million “at the market” offering in place, through which it can sell shares directly into the market (as opposed to a directly negotiated secondary offering) at the current price. It’s barely used the ATM to this point, but no doubt it will. The concern is how effective the program can really be.

After all, Workhorse only has a market capitalization of about $320 million at the moment. Over time, selling even $50 million worth of stock — still not nearly enough to get the company to profitability — can add downside pressure to a stock price already at a 32-month low.

And so there’s a vicious cycle here. The stock price is low, which makes it hard for the company to raise capital without significant dilution. That, in turn, provides an impediment to buying the stock now, ahead of that dilution, which suggests an even lower price going forward and a greater roadblock to investors willing to bet on the turnaround. As the share price falls, the problem gets even worse.

Of course, if somehow this cycle can reverse, it works the other way. A higher WKHS stock price means more cash from the ATM program with the same amount of dilution. That then increases the company’s odds of survival, which should raise the stock price, which provides access to more capital at a better cost of equity.

Even in this scenario, Workhorse still has to execute. News in Q3 of yet another failure in getting the C-1000 to market — the company redesigned the front suspension to fix performance problems, only to wind up with a substandard rear suspension — doesn’t provide much confidence on that front.

Execution aside, however, any chance of success here rests on the company finding substantial incremental cash to bridge the gap from 2023 production to positive free cash flow a few years from that point. The only way to get that cash is to get the stock higher — and right now, that seems like a Herculean task.

Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.