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Will this action of Electric Vehicles finally take off or should we definitely forget about it?

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Workhorse Group (NASDAQ:) was early in the electric vehicle revolution. However, the execution has been so poor that 16 years after it was founded as AMP. Electric Vehicles, the maker of zero-emission commercial vehicles is wasting its time.

To be fair, the new management has tackled the company’s problems head-on. The strategy now seems coherent and the outlook for the company is much more reasonable. There’s still a chance that Workhorse will finally realize some of its potential.

But luck is no guarantee – and the road ahead for Workhorse continues to be rocky. The management still has a lot of work to do and, above all, they don’t have a lot of money to do it.

How we got here

Workhorse’s initial business model was to convert ICE internal combustion engine passenger vehicles to electric powertrains. In 2013, thanks to the (no pun intended) blockages of this model, the company pivoted to designing electric delivery vans. Workhorse even got a stroke of luck when Navistar – now part of Munich-based Traton Group (ETR:), which makes commercial vehicles – decided to sell its Workforce subsidiary that made chassis and its factory in Indiana. .

Workhorse got to work building its flagship van, the C-1000. It has promised 2,000 deliveries in 2018, but is far from having achieved this goal; total sales to date are less than 500 units, and the C-1000 is now discontinued.

Famous, she was also aiming to win a multi-billion dollar contract with the United States Postal Service (USPS). Short sellers have warned that the company simply does not have the capacity to provide the necessary vehicles. Eventually, the USPS agreed, awarding the contract to Oshkosh (NYSE:), which sent Workhorse shares plummeting.

Incidentally, management also talked about Workhorse’s HorseFly drone system. That, too, did nothing.

Incredibly, Workhorse posted a negative in 2021, due to the returns of the C-1000s (all of which were recalled). But the company had only generated $1.3 million in sales the previous year.

To be frank, this is a company that has done nothing successfully except raise capital. With WKHS stock hovering around $3, its ability to do so is in question.

WKHS stock is a bet on a turnaround

To be fair, Workhorse finally figured this out. In July last year, the board replaced former chief executive Duane Hughes with Rick Dauch, the former director of auto parts supplier Delphi Technologies.

Dauch brought a decidedly more restrained tone to Workhorse’s comments – and an ax to its management team and strategy. The entire management of the company has been renewed. And following the fourth quarter results earlier this year, the company detailed a multi-year product roadmap. As noted, the C-1000 was discontinued (although Workhorse is repairing and selling current stock, while building an additional 50-75 units, mostly from available parts).

A new model, the W750, will be supplied by the chassis of the Canadian company GreenPower (NASDAQ:). From there, Workhorse plans to launch two exclusive models. The W34 is expected to go into production in the second half of next year, while the W56 will be launched in 2024.

Workhorse hopes to sell these models to customers originally interested in the C-1000. Talks are continuing, potentially including UPS (NYSE:), a customer that former Workhorse management has repeatedly touted. (Dauch refrained from giving further details on these discussions).

Between the C-1000 and the W750, Workhorse expects to sell “at least 250 vehicles” this year, generating revenue of more than $25 million. From there, the company still believes there is market demand for the W34 and W56.

And while there’s no shortage of competitors, Dauch argued on the first-quarter earnings conference call that Workhorse still has a chance to stand out. He said he attended a trade show and thought that in the electric vehicle industry, “half of the companies there weren’t real companies…So I’m confident that if we go through with our plans… .we can still be first to market in our segment.”

On the part of the old management, this kind of statement would have deserved unreserved skepticism. But when Dauch says so, investors should at least listen. Indeed, the very fact that Workhorse reiterated its full-year guidance after the first quarter results last month is a step in the right direction.

Workhorse was the epitome of a company that overpromised and (literally) underdelivered. The main reason to buy WKHS stock at $3 is that under Dauch’s leadership, Workhorse is no longer that kind of company.

The capital problem

However, there is a problem. Workhorse has a cash flow problem. At the end of the first quarter, the company had $167 million in cash. A deal reached in early April saw Workhorse’s last debt converted into equity, but the company continues to spend its reserves at a rapid pace.

In the first quarter, free cash flow was negative $34 million. About $6 million came from a deposit with GreenPower; this deposit will limit cash outflows as the W750s are delivered. Revenue from the C-1000s is expected to free up about an additional $20 million (given that the remaining cash costs for these vehicles will be minimal).

Still, Workhorse burned through $138 million in cash last year, a quarterly rate of more than $34 million. Excluding the deposit, cash usage in the first quarter was $28 million. Including cash from the C-1000, Workhorse is left with seven quarters worth of cash.

Workhorse’s track record suggests that’s not enough. It only allows the company to arrive at the end of 2023, even before the launch of the W56. The absorption rate does not take into account the arrival of new employees to direct production or sell vehicles. Launches will cost money. Workhorse will need cash to pay for parts needed to build inventory of W34 and W56.

During the fourth quarter conference call, CFO Robert Ginnan admitted as much, saying the company’s cash (which then stood at around $200 million) was “adequate for the short term.” But he added that “we will look in the longer term to raise capital”.

And that’s the rub. Workhorse cannot fundraise without income. But with a market capitalization of just $460 million, selling stocks isn’t easy either. All buyers of a secondary offer would demand a huge discount from the current price. Workhorse would likely dilute current shareholders by 30-50% just to raise an additional $150 million.

If WKHS stock manages to recover, the company may be able to do a little better than that. But even in the best-case scenario, dilution is yet to come. That alone seems likely to provide an overhang for the action.

And that’s one more reason why even investors bullish on Dauch and Workhorse should consider being patient. Workhorse itself may not have a lot of time, but that doesn’t mean investors should rush.

Disclaimer: As of this writing, Vince Martin has no position in any of the stocks mentioned.

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