SEC Confirms Probe of EV Van Maker Workhorse Group; Adds to Company’s List of Concerns

On September 1, a short seller, Fuzzy Panda Research, reported that it received a letter dated June 30 from the enforcement division of the U.S. Securities and Exchange Commission (SEC) saying that is still “actively” investigating Workhorse Group Inc. (NASDAQ: WKHS). Confirmation of the investigation adds to the challenges faced by Workhorse which produces drone-integrated electric vehicles (EVs) for the last-mile delivery sector.

The June 2021 quarter marked its fourth consecutive quarter of sequentially increasing operating losses and its fifth successive quarter of larger operating cash flow shortfalls. Workhorse’s revenue over the last twelve months totaled just US$3 million.

Workhorse in the past partnered with Lordstown Motors Corp. (NASDAQ: RIDE), which is likewise being probed by the SEC, on a three-year license agreement that gives Lordstown access to some of Workhorse’s intellectual property. In exchange, Workhorse received a 10% stake in Lordstown. (In July and early August, Workhorse sold 11.9 million of its Lordstown shares, about three quarters of its stake, for US$78.8 million.)

Workhorse’s Appeal of Lost Postal Service Contract Progresses

The biggest recent event affecting Workhorse was the U.S. Postal Service’s (USPS’s) February 2021 decision to award a ten-year contract to design and build its next generation of delivery vehicles to Oshkosh Corporation (NYSE: OSK), passing over a proposal by Workhorse. Workhorse claims that the USPS removed its prototype from consideration over a “safety incident” caused by a USPS driver’s error.

On June 16, Workhorse filed a formal complaint protesting the contract award to Oshkosh with the U.S. Federal Court of Claims. Oral arguments on the company’s complaint are set for September 15.

If Workhorse were to succeed in its appeal, a recent action by a U.S. House committee, the House Oversight and Reform Committee, could translate into incremental revenue for the company. The committee approved US$12 billion for electric federal vehicles as part of the US$3.5 trillion overall budget reconciliation package proposed by President Biden. About US$7 billion and US$5 billion would be allocated to the USPS and the General Services Administration, respectively.

Heavy Cash Burn Over the Last Three Quarters

In 2Q 2021, Workhorse’s cash burn rate (operating cash flow shortfall plus capital expenditures) reached US$49 million, up from US$36 million in 1Q 2021 and US$34 million in 4Q 2020. In turn, the company’s cash balance fell nearly US$50 million in 2Q 2021 to US$157 million as of June 30, 2021.

Given Workhorse’s cash outflows, and even factoring in the proceeds from the Lordstown share sales, the company seem likely to raise equity in the public or private markets in 2H 2021 or early next year.

(in thousands of US $, except for shares outstanding)	2Q 2021	1Q 2021	4Q 2020	3Q 2020	2Q 2020
Net Sales	$1,203	$521	$652	$565	$92
Operating Income	($22,723)	($16,454)	($15,049)	($9,815)	($6,985)
Operating Cash Flow	($46,364)	($34,904)	($32,637)	($19,888)	($9,931)
Capital Expenditures	($3,281)	($1,265)	($1,665)	($2,640)	($510)
Cash – Period End	$156,611	$205,075	$46,818	$80,223	$26,198
Debt – Period End (A)	$200,900	$182,200	$199,111	$123,228	$116,647
Shares Outstanding (Millions)	123.4	123.3	121.9	115.0	89.3

If investors were to adopt a bullish stance toward virtually all players in the EV sector as they did in the fall of 2020 and early 2021, Workhorse shares could benefit. Also, if the courts were to rule constructively on the company’s USPS award complaint, Workhorse’s prospects would likely significantly improve. Another factor could come into play if retail investors were to decide that Workhorse is a potential meme stock: about 35% of its float is sold short.

The SEC’s investigation adds further uncertainty to the Workhorse story. The company’s cash burn rate is worsening, and the company’s decision to redesign its flagship EV delivery van could exacerbate that problem. It is possible that the company could at some point receive positive news in its complaint regarding the USPS’s awarding its delivery van contract to a competitor. But given the issues it faces, Workhorse’s enterprise value level of around US$1.15 billion looks quite high.

Workhorse Group Inc. last traded at US$9.17 on the NASDAQ.

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Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.