Workhorse Reports $81M Loss, Announces C-1000 Van Redesign

Workhorse Group Faces Significant Financial Challenges

Electric vehicle manufacturer Workhorse Group is currently experiencing substantial financial difficulties. The company’s third-quarter earnings report revealed a loss of $81 million, attributed to rising operational expenses and a temporary halt in production stemming from vehicle recalls.

Furthermore, revenue figures are negative, totaling a deficit of $576,600, primarily due to reimbursements issued to customers following the recall of C-1000 cargo vans over safety concerns.

Production Issues and Design Concerns

Prior to the identification of safety compliance issues, Workhorse had delivered 41 vans this year. However, the company was compelled to suspend sales to facilitate comprehensive testing and address the recall of all existing vehicles, subsequently reducing production to just two trucks weekly.

CEO Rick Dauch acknowledged on Tuesday that, beyond regulatory hurdles, the C-1000 model may not be adequately suited for demanding delivery applications. Current testing indicates the truck design is “not robust” and lacks profitability.

A potential redesign of the van is being considered, a possibility previously discussed in August, with Workhorse anticipating a revised production forecast early in the coming year. The company aims to deliver “best-in-class vehicles” to the commercial electric vehicle sector starting in 2023.

Leadership Changes and Operational Deficiencies

Securing further investment may prove challenging given investor skepticism. Dauch assumed leadership in July, inheriting a company struggling to ship vehicles that did not meet federal standards and were assembled using components sourced from online auctions in Asia.

He identified a history of ineffective leadership and communication breakdowns, coupled with an unsustainable and damaging rate of cash expenditure. Workhorse’s supply chain has not yet achieved Tier 1 qualification, a common challenge for emerging companies, according to Dauch.

Legal Investigations

Workhorse is currently subject to investigations by both the Securities and Exchange Commission (SEC) and the Department of Justice. This was disclosed in a recent regulatory filing.

The SEC investigation centers on trading activity related to the company’s securities prior to the announcement of the United States Postal Service (USPS) contract award – a bid Workhorse ultimately did not win, resulting in a significant decline in share value.

The Justice Department’s inquiry is reportedly connected to the SEC’s investigation, as reported by the New York Times.

Future Outlook and Market Opportunities

Despite these obstacles, Dauch remains optimistic about Workhorse’s potential, citing favorable macroeconomic trends and evolving regulations. The surge in e-commerce, accelerated by the pandemic, has underscored the need for efficient delivery solutions.

Tightening emissions standards and the recent U.S. infrastructure bill are expected to further drive demand for electric delivery vans. Workhorse believes it can still establish a significant presence in this largely untapped market.

“We have near-term financial flexibility based on our improved balance sheet and reduced monthly cash consumption rate,” Dauch stated during the earnings call, also highlighting the company’s “solid purchase orders” and “strong customer support.”

Increased Expenses and Cost-Cutting Measures

In the third quarter of 2021, Workhorse’s selling, general, and administrative expenses rose to $10.6 million, compared to $6 million during the same period last year. This increase was driven by higher compensation costs, severance payments, stock-based compensation, legal fees, and insurance expenses.

Workhorse initiated legal action against the USPS in June, contesting the contract award to Oshkosh Defense, a pursuit dating back to 2015. However, the lawsuit was dropped in September, likely due to financial constraints.

CFO Greg Ackerson noted the dismissal of the lawsuit as a key component of the company’s cost reduction strategy.

Debt Restructuring and Research & Development

Workhorse converted $172.5 million of debt into equity, reduced material inflows, eliminated air freight, and bolstered internal expertise by decreasing reliance on external consultants, according to Ackerson.

However, research and development (R&D) expenses increased to $2.8 million in Q3 2021, up from $1.6 million in Q3 2020, primarily due to increased staffing and consulting costs. This investment is intended to facilitate the development of a functional and safe electric van, crucial for retaining its customer base.