Electric vehicle startup Workhorse Group is hemorrhaging money. During the company's third-quarter earnings call, Workhorse reported an $81 million loss, blaming an increase in operating costs and a suspension of production due to recalls. Revenue is also in the negative to the tune of $576,600, which is largely related to refunds issued to customers who had their C-1000 cargo delivery vans recalled due to safety issues.
Workhorse sold 41 vans this year before it had finished ensuring the design was in compliance with federal safety standards set by the National Highway Transportation and Safety Administration (NHTSA). The company was forced to suspend sales in order to complete testing, recall all of the vehicles and slow production to two trucks per week.
Workhorse CEO Rick Dauch admitted on Tuesday that, aside from federal safety issues, the C-1000 just might not be up to the task of heavy duty deliveries. The company is performing additional testing of the current truck design, which Dauch said is presently "not robust nor is it profitable." What's more likely to happen is that Workhorse will scrap it and reconfigure the van's design altogether, something the company said it might do back in August. Workhorse said it expects to provide a production forecast early next year, even going so far as to promise delivery of "best-in-class vehicles for the commercial electric vehicle market starting in 2023."
That might be hard to do without raising more money from investors who are likely wary of empty promises. Dauch took the helm of Workhorse in July when the company was chaotically trying to ship its non-compliant vehicles that were built with parts bought via online auctions from Asia. Dauch acknowledged that he inherited a company plagued by poor leadership and a lack of communication, with a cash burn rate that was not only unsustainable, but also downright detrimental. Workhorse's supply chain was, and remains, not yet Tier 1 qualified and it lacks a range of systems for production, which in all fairness is common for a startup, says Dauch.
Workhorse is also currently under investigation by both the Securities and Exchange Commission and the Justice Department, the company said in a regulatory filing on Monday. The SEC probe is related to trading in the company's securities before the award of a United States Postal Service contract to build the agency's next-generation mail truck — Workhorse ended up not winning that bid, which caused its shares to plummet. The Justice Department's investigation is "related" to the SEC probe, according to the New York Times.
Despite powerful headwinds, Dauch thinks Workhorse is still poised for success in large part due to macroeconomic trends and regulatory factors that are driving future growth. The pandemic only solidified the importance in e-commerce that the entire world is experiencing. With tightening government emissions regulations and the passing of the U.S. infrastructure bill, the need for electric delivery vans will only grow. No one has yet cornered this market, so Workhorse thinks it still has time to get itself together and take a slice of that pie.
"We have near-term financial flexibility based on our improved balance sheet and reduced monthly cash consumption rate," said Dauch during the conference call, also noting Workhorse's "solid purchase orders" and "strong customer support."
In the third quarter of 2021, Workhorse's selling, general and administrative expenses — which include "higher compensation-related costs due to increased headcount, severance pay, stock-based compensation, legal costs and insurance costs" — increased to $10.6 million compared to $6 million in the same period last year.
In June, Workhorse filed suit in the U.S. Court of Federal Claims against the USPS for awarding its contract to defense contractor Oshkosh Defense. Workhorse had been fighting for this coveted spot since 2015. The startup dropped the lawsuit in September, probably after it had a look at its balance sheet and realized it couldn't afford to take USPS to court. Indeed, during the earnings call, Workhorse CFO Greg Ackerson pointed to dropping the lawsuit as one of the key actions taken to reduce spending.
Workhorse also converted $172.5 million of debt into equity, slowed inbound material, eliminated air freight and reduced consulting by adding in-house expertise, according to Ackerson. That said, the startup's R&D expenses increased to $2.8 million compared to $1.6 million in Q3 of 2020, which was related mainly to increased headcount and higher consulting costs. Presumably, Workhorse needs to spend a little more on talent in order to get a functioning, and safe, electric van that's ready for production before the company loses its "loyal" customer base.
Workhorse’s stock was down 3.6% at the close on Tuesday afternoon and trading at $6.64. Shares have fallen more than 80% since February.