Workhorse Group reported negative revenue and profits in Q3 as new CEO Rick Dauch grounded production of the C-1000 electric delivery van, jettisoned 25% of the hourly workforce, overhauled the executive leadership and dropped a lawsuit against the U.S. Postal Service over the company’s unsuccessful bid to build battery-powered mail trucks.
The Loveland, Ohio-based company also acknowledged Tuesday that it is being investigated by the Securities and Exchange Commission and the Department of Justice over stock sales leading up to the February awarding of the 10-year, $6 billion Postal Service contract for next-generation delivery vehicles.
“We are fully cooperating with both the SEC and DOJ investigations,” Dauch said on a call with analysts reviewing his actions since taking over as CEO in August. “At this point, we cannot predict the eventual scope, duration or outcome of these matters.”
The SEC asked Workhorse (NASDAQ: WKHS) to turn over documents related to the stock sales and information about how the company recognized revenue from early sales of electric vans. Retail traders betting on Workhorse winning the Postal Service contract drove its share price as high as $42.96. Shares closed Tuesday at $6.64.
The DOJ has not issued any subpoenas and only told Workhorse of its parallel investigation in a Friday phone call.
Both subjects were part of a research report by short seller Fuzzy Panda in September.
Workhorse is the latest electric vehicle company to come under government scrutiny. The founder of electric truck maker Nikola Corp. has been charged with three counts of fraud related to false statements the SEC alleged were intended to boost the price of Nikola stock.
Lordstown Motors Corp., founded by Workhorse founder and former CEO Steve Burns, is being investigated by both the DOJ and the SEC.
And electric SUV and van startup Canoo is subject of an SEC probe.
From the top down
Dauch replaced 80% of Workhorse’s leadership team over the last three months as he discovered weaknesses throughout Workhorse operations, from inexperienced leadership to poor communications and coordination, wasted resources, unqualified suppliers and a signature product that was neither robust nor profitable.
After he replaced CEO Duane Hughes on Aug. 1, Dauch soon sent COO Robert Willison and CFO Steve Schrader packing. He surrounded himself with executives he had worked with at the former Delphi Technologies and American Axle businesses that he either ran or helped lead.
Several actions during the quarter slowed the cash burn rate by more than 30% to about $11 million a month with a goal of reducing it to $8 million monthly in Q4, interim CFO Greg Ackerson said on the call.
“We slowed down material shipments and freight costs [and] reduced third-party consulting fees by replacing higher-cost external resources with in-house talent,” he said. “We withdrew from the costly USPS lawsuit, which reduces legal and related lobbying costs, and we have rightsized our plant staff by approximately 25% without losing key talent.”
Workhorse shed 85% of the debt Hughes had piled up through hedge fund borrowing, converting $172.5 million to equity. That reduced quarterly cash interest payouts by $1.7 million. Workhorse had about $230 million of cash and equivalents at the end of Q3.
“At our current projected burn rate we have enough cash to fund our ongoing operations for quite some time before we believe we will need additional funding,” Ackerson said.
Dauch’s review of the oft-delayed production of composite body electric vans led to a recall of 41 trucks the company had delivered because they failed to meet Federal Motor Vehicle Safety Standards for instrumentation, lighting, tires and braking.
Those shortfalls were largely due to a hodgepodge of parts ordering, including buying tires over the internet that lacked required government markings.
The company is now engaged with “about 70” recognized Tier 1 suppliers, including BorgWarner Inc., which purchased Delphi Technologies for $3.3 billion when Dauch was CEO.
Whether Workhorse will continue with the C-1000, or replace it with another product, is a question the company will answer in the first quarter next year. The company has enough inventory of parts at its Union City, Indiana, plant to build as many as 500 of the vans, which it might do if it can ensure they are safe.
Production is at a crawl of two vehicles a week while Workhorse engineers check an unsold inventory of about 170 vans for durability and reliability. The company delivered just six vans in Q3, when revenues were a negative $600,000 compared to a positive $600,000 a year ago. Workhorse recorded a $1.1 million refund liability related to the recall.
Workhorse reported a Q3 net loss of $81.1 million, compared to net loss of $84.1 million in the same period last year. The loss from operations was $25.5 million compared to $9.8 million in the same period last year.
The company is considering getting into the chassis-making business. Its Indiana plant formerly was Navistar International’s chassis works, which it purchased from General Motors.
“We are looking at multiple Class 3-Class 7 chassis options as part of the in-depth product portfolio review,” Dauch said.
Workhorse has “solid purchase orders and strong, loyal customer support,” he said. Some customers would like to buy C-1000 vans as demonstration units to get used to the transition from gasoline and diesel to electric vehicles. Dauch hopes to return to good graces with the federal government now that Workhorse is no longer suing the Postal Service.
“Across my three decades of industry experience, I’ve never seen a customer win an award or a contract when they are suing their customer,” Dauch said.
Still time on the clock
Workhorse’s fits and starts in recent years squandered a potential first-mover advantage, but Dauch said the company has time to get its act together and be a serious player when last-mile battery-electric vehicles begin to ramp in 2023.
“We are fortunate to have this convergence of favorable macroeconomic trends and regulatory factors driving our future growth,” he said. “We are competing in a fragmented industry. Some of our key competitors are just now building plants, hiring people and making prototypes. Here at Workhorse, we are a real company and not a PowerPoint EV company.”
Legacy automakers Ford Motor Co., which is making an electric version of its Transit van, and GM, which recently launched its BrightDrop electric van subsidiary, likely will get to market in significant volumes before Workhorse.
“We are in the very early innings of a generational industry-disrupting change in powertrain and infrastructure technologies,” Dauch said.
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