UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192021
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission file number: 000-53704001-37673
WORKHORSE GROUP INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
| Nevada | | 26-1394771 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | | | | | | | |
| 100 Commerce Drive | | |
| Loveland, Ohio 45140 | | (513) 360-4704 |
| (Address of principal executive offices) | | (Registrant’s telephone number)number, including area code) |
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | | | | | | | |
| Title of each Class: | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | | WKHS | | The NASDAQ Capital Market |
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None.
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ☐☒ | | Accelerated filer | ☒☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☒☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2019,2021, the last business day of the Registrant’s most recently completed second fiscal quarter, the market value of our common stock held by non-affiliates was $167,973,000.$2,006,248,890.
The number of shares of the Registrant’s common stock, $0.001 par value per share, outstanding as of February 28, 2020,January 31, 2022, was 70,671,139.151,342,549.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Forward-Looking Statements
The discussions in this Annual Report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. When used in this Report, the words “anticipate”, expect”“expect”, “plan”, “believe”, “seek”, “estimate” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements about the features, benefits and performance of our products, our ability to introduce new product offerings and increase revenue from existing products, expected expenses including those related to selling and marketing, product development and general and administrative, our beliefs regarding the health and growth of the market for our products, anticipated increase in our customer base, expansion of our products functionalities, expected revenue levels and sources of revenue, expected impact, if any, of legal proceedings, the adequacy of liquidity and capital resource, and expected growth in business. Forward-looking statements are statements that are not historical facts. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from the forward-looking statements contained in this Report. Factors that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to: our ability to market acceptance fordevelop and manufacture our products,new product portfolio, including the recently announced W750, W56 and W34 platforms; our ability to attract and retain customers for our existing and new products; risks associated with obtaining orders and executing upon such orders; supply chain disruptions, including constraints on steel and semiconductors and resulting increases in costs impacting our company, our customers, our suppliers or the industry; our ability to implement modifications to vehicles to achieve compliance with FMVSS and to meet customer demands with respect to the C-1000s; the results of our ongoing review of the Company’s business and go-forward operating and commercial plans; our ability to capitalize on opportunities to deliver products to meet customer requirements; our limited operations and need to expand and enhance elements of our production process to fulfill product orders; the ability to protect our intellectual property; negative impacts stemming from the continuing COVID-19 pandemic; market acceptance for our products; our ability to control our expenses, our ability to recruit and retain employees, legislation and government regulation,expenses; potential competition, including without limitation shifts in technology,technology; global and local business conditions, our ability to effectively maintain and update our product and service portfolio, the strength of competitive offerings,conditions; the prices being charged by those competitors and the risks discussed elsewhere herein and our abilitycompetitors; our inability to retain key members of our management team; our inability to raise additional capital under acceptable terms. These forward-lookingto fund our operations and business plan; our inability to satisfy covenants in our financing agreements; our inability to maintain our listing of our securities on the Nasdaq Capital Market; our inability to satisfy our customer warranty claims; the outcome of any regulatory proceedings; our liquidity and other risks and uncertainties and other factors discussed from time to time in our filings with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K filed with the SEC. Forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.based, except as required by law.
All references in this Form 10-KReport that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc. and unless otherwise differentiated, its wholly-owned subsidiaries.
PART I
ITEM 1. BUSINESS
Overview
We are a technology company focused on providingwith a vision to pioneer the transition to zero-emission commercial vehicles. Our primary focus is to provide sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, weWe design and build high performance electricmanufacture all-electric delivery trucks and drone systems, including the technology that optimizes the way these vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of our solution, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency.operate. We are currently focused on our core competency of bringing the C-Seriesour electric delivery truckvehicle platforms to market and fulfilling our existing backlog of orders.market.
Automotive
We are an American-based Original Equipment Manufacturer (“OEM”) of Class 3-6 commercial-grade, medium-duty trucks, to be, and our products are marketed under the Workhorse® brand. All Workhorse last milelast-mile delivery trucks are assembled in theour Union City, assemblyIndiana production facility. We will be expanding our product portfolio with the C-Series electric delivery truck in 2020.
We believe our battery-electric and range-extended electricall-electric commercial vehicles offer fleet operators significant benefits, which include:
•Low Total Cost-of-OwnershipLower total cost-of-ownership as compared to conventional gas/diesel vehicles;
•Competitive advantage to increase brand loyalty and last mile delivery market share;
•Improved profitability through lower maintenance costs and reduced fuel expenses;
•Increased package deliveries per day through use of more efficient delivery methods;
•Decreased vehicle emissions and reduction in carbon footprint; and
•Improved vehicle safety and driver experience.
Electric Delivery Truck Platforms
Product Roadmap
Workhorse has developed a revised strategic product roadmap for our electric vehicle delivery offerings. The foundation of this plan is the development of two new truck chassis platforms, the W56 and W34. The W56, based on long-standing Company sells itsknow-how in the Class 5 and 6 truck chassis market, is expected to begin production in 2023. The W34 platform will be our second generation, low floor, advanced content offering for the Class 3 and 4 truck chassis market and is expected to begin production in 2024.
In order to accelerate time-to-market for customers seeking delivery of electric vehicles during 2022, we entered into a strategic supply agreement (the “Supply Agreement”) with GreenPower Motor Company Inc. (“GreenPower”). Under the agreement, we will have exclusive rights to sell Class 4 step vans based on the GreenPower supplied base vehicle. The finished Class 4 step vans will be available for sale in the United States and Canada, under the Workhorse brand and with Workhorse after sales and support service. The van, known as the W750, will have approximately 750 cubic foot capacity and will feature up to 150 miles of all-electric range, with a payload capacity of five thousand pounds. We expect the first deliveries of the W750 will occur later in 2022.
C-Series Electric Delivery Truck
We announced the development of the C-Series electric delivery truck in 2017, a vehicle aimed at the Class 3 truck market which leverages an ultra-low floor delivery vehicle platform. We utilized our extensive customer experience gained from working with our E-Series customers to design this product. In September 2021, we announced a number of enhancements to the design of the C-1000 to address customer feedback, primarily related to vehicle dynamics that increase the vehicles’ payload capacity. As part of these efforts, we suspended deliveries and recalled all of the C-1000 vehicles due to additional testing and modifications required to certify the C-1000 vehicles under FMVSS. In connection with the recall, we agreed to refund our customers for the purchase price of the C-1000 vehicles previously delivered.
The certification and testing process was completed in February 2022. Upon completion of this review, the C-1000 platform was determined to be eligible for certification and reintroduction as a limited production vehicle with constrained cargo capacity. Accordingly, we do not plan to focus our manufacturing efforts on the C-1000 in the future. Instead, we expect to transition our manufacturing focus to the W56 and W34 platforms in the near future.
Further modifications to the vehicle will be made during the required FMVSS rework process, including a redesigned front suspension as well as supplier corrective actions related to certain components. The entire fleet of currently manufactured
C-1000’s will have the required corrective actions applied during 2022. We intend to repair and resell the majority of the returned vehicles to fleet customers directly and through its primary distributor, Ryder System, Inc. ("Ryder"). Ryder also is a maintenance provider for Workhorse, which provides fleet operators with access to Ryder’s network of 800 maintenance facilities and nearly 6,000 trained service technicians across North America.the original customers.
E-Series Electric Delivery Trucks for Last Mile Delivery and Commercial Work UseVans
Workhorse E-100 battery-electric and E-GEN range-extended delivery trucksvans are produced at our Union City, Indiana plant and are in useused by our customers on daily routes across the United States. To date, weWe have built and delivered approximately 360 electric and range extendedrange-extended medium-duty delivery trucks to our customers. To our knowledge, we are the only American commercial electric vehicle OEM to achieve suchcustomers with a milestone.combined mileage total of more than 8 million miles. Our delivery customers include companies such as UPS,Alpha Baking, FedEx Express, Alpha Baking,Ryder, the United Parcel Service, and W.B. MasonMason.
Aerospace
HorseFly™
As part of our growing technology portfolio, the Company has been developing small Unmanned Aerial Systems (“UAS”) for several years. We hold, or have filed for, patents on several elements of UAS intellectual property.
Our HorseFly UAS includes a custom-designed, purpose-built, all-electric Unmanned Aerial Vehicle (“UAV”), a proprietary Ground Control Station (“GCS”), and Ryder.equipment that supports integrating the UAS with our delivery trucks and other applications. The HorseFly UAV is an airborne work truck, that can carry a significant payload for 10 miles. Our rugged components are designed to support the high volumes, long duty days and ease of maintenance demanded by the commercial package delivery industry.
In addition2020, Workhorse began the Federal Aviation Administration’s (“FAA”) Type Certification (“TC”) process for our Horsefly UAS. Compliance with FAA regulations governing TC helps set a very high bar for system performance and we believe it is important to improved fuel economy,have a TC system in our product offerings. Safety, reliability and capability are the primary points of value in a commercial UAS. Presently, the FAA allows some exceptions for commercial operations to use non-certificated drone systems. As the industry matures, we anticipate thatexpect the FAA will require certificated aircraft in most commercial operations.
We have developed subsystems and many discrete functions to improve the safety, reliability and performance of our vehicles on-route will reduce long-term vehicle maintenance expense by approximately 60% as comparedsystems. One subsystem is a proprietary winch that can lower and raise significant payloads from safe altitudes. Another is a truck integration system that allows continuous operations from a truck in the field. Our GCS software allows Remote Pilots in Command to fossil-fueled trucks. Over a 20-year vehicle life, we estimate that our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings. Due to this positive return-on-investment, we charge a premium price for our vehicles. We expect that fleet operators will be able to achieve a three-year or better total cost of ownership break even (without government incentives), which we believe justifies the higher acquisition cost of our vehicles.
Our goal is to increase sales and continue development of our existing vehicle portfolio, while executing on a cost-down strategy in order to achieve sustained gross margin profitability of the last mile delivery truck platform. It is our intention that this strategy, which includes several delivery and utility truck platforms that target high-volume market segments, will further drive costs down across our supply chain.control more than one aircraft simultaneously.
U.S. Post Office Replenishment Program / Next Generation Delivery Vehicle Project
Workhorse was one of the five participants that the United States Postal Service (“USPS”) selected to build prototype vehicles for the USPS Next Generation Delivery Vehicle (“NGDV”) project. The USPS has publicly stated that approximately 165,000 vehicles are to be replaced. In September 2017, Workhorse delivered six vehicles for prototype testing under the NGDV Acquisition Program in compliance with the terms set forth in their USPS prototype contract. In 2019, the vehicles completed the required testing protocol as specified by the USPS. The USPS published a Request for Proposals in December 2019 for the Production Program.
C-Series Electric Delivery Truck
In 2017, Workhorse announced the development of its C-Series electric delivery truck, which leverages the existing ultra-low floor, long-life commercial delivery vehicle platform, as well as our extensive customer experience gained from working with our E-GEN and E-100 customers. The C-Series incorporates lightweight materials, all-wheel drive, best in class turning radius, 360° cameras, collision avoidance systems and an optional roof mounted HorseFly™ delivery drone. These trucks weigh 7,000 pounds, compared to current 11,000 pound gasoline and diesel delivery trucks.
The Workhorse C-Series electric delivery truck platform will be available in 450, 650 and 1,000 cubic feet configurations. We intend to initially launch the 650 cubic foot and 1,000 cubic foot configurations with the goal of competing with conventional market leaders, including the Mercedes Sprinter, Ford Transit and Dodge ProMaster gasoline/diesel vans for both last mile delivery and other service-oriented applications such as telecommunications. We expect these vehicles to achieve a fuel economy of approximately 53 miles per gallon equivalent (“MPGe”) and offer fleet operators the most favorable total cost-of-ownership of any comparable conventional truck utilizing an internal combustion engine that is available today.
Package Delivery Aircraft
HorseFly
Our HorseFly Unmanned Aerial System ("UAS") is a custom-designed, purpose-built system that safely and efficiently delivers packages. Workhorse was granted a patent on our UAS, with the description “Package Delivery by Means of an Automated Multi-Copter UAS/UAV Dispatched From A Conventional Delivery Vehicle.” Thoughand though initially designed to deliveras a complimentary system delivering packages from our electric trucks, the latest iteration of our systemUAS supports package delivery point-to-point, enabling deliveries to and from almost anywhere.anywhere, allowing it to serve a broader customer base. As part of the divestiture of SureFly™ Multicopter, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.
In tests and demonstrations, over the past two years, Workhorse has flown over 100thousands of missions in the National Airspace System, demonstrating package deliverydeliveries for large multi-national companies including UPS.
In a 2017 press release, UPS estimated that a reduction of just one mile per driver per day could save UPS up to $50 million on an annualized basis. Rural delivery routes are the most expensive routes for companies like UPS to serve because of the time it takes to cover long, thin routes, and because of the increased maintenance costs that come with driving extra miles. During our tests and demonstrations, the HorseFly aircraft dispatches from the delivery vehicle to deliver a rural package while the driver continues on his route to make another. The HorseFly then returns to the truck at its new location and is ready for another delivery. This is an example of the significant cost savings available to delivery fleets, and we believe we are the first to offer a complete system to the market.
We have flown demonstrations in Ohio, Michigan, Florida and California,California. Our aircraft has proven to be safe, reliable, and capable. In addition, we have successfully demonstrated the drone’s enhanced functionality working with local, state and federal government agencies to validate other, new cases. For example, in January 2022 we received a grant from the US Department of Agriculture in support of enhanced mapping and data analysis of farmland in underserved communities in the State of Mississippi.
Locations and Facilities
Our company headquarters, research and development facilities and warehouse are continuously improvinglocated in the Greater Cincinnati area in Ohio.We manufacture and test our systems.electric delivery trucks at our manufacturing facility located in Union City, Indiana. We plan to open an engineering and technical design center in Wixom, Michigan during 2022.
Marketing
There are over 350,000 last-mile delivery trucks replaced annually and is the fastest growing vehicle market in an $18.0 billion market space. Our sales team is focused on building our market share in this space by targeting commercial transportation companies and developing a dealer network through our relationships with Mitsubishi, Ryder and Pritchard Companies (“Pritchard)”.
We have established the commercial delivery vehicles as our core business and intend to be the best choice for a vehicle in this segment. Our sales plan is to meet with the top potential customers and obtain purchase orders for new electric vehicles to be manufactured in our production facility.
Strategic Relationships
GreenPower Motor Company Inc.: On February 28, 2022, Workhorse entered into a strategic vehicle purchase and supply agreement with GreenPower Motor Company, Inc. to purchase base vehicles in the Class 4, medium-duty vehicle class. The knowledge we’ve gained in these real-world tests shows us we can safely and reliably save the last mile delivery market a significant amount of money with our HorseFly system.
Certus
To accelerate our developmentterm of the HorseFly system,agreement is two years and will provide Workhorse with base vehicles for completion at our Union City, Indiana manufacturing facility. Workhorse will begin accepting deliveries of the base vehicles in November 2019,the second half of 2022. Workhorse has exclusive rights to sell step vans using the base vehicle in the United States and Moog Inc ("Moog") formed Certus Unmanned Arial Systems LLC ("Certus"). Moog is a worldwide designer, manufacturer, and integrator of precision control components and systems. Moog’s high-performance systems control military and commercial aircraft, satellites and space vehicles, launch vehicles, missiles, automated industrial machinery, marine and medical equipment.Canada.
Mitsubishi HC Capital Inc: Mitsubishi (formerly Hitachi Capital America) continues to be our primary financing partner to market and distribute our electric vehicles through an existing and well-established commercial vehicle dealer network throughout North America. Mitsubishi enables Workhorse to have our vehicles sold and financed from the moment they roll off the production line, into a shared pool of vehicles, where they become visible and available to every Mitsubishi connected dealer. The dealer can configure additional equipment, schedule upfit integration and delivery in a seamless manner. Other strategic relationships come into play here, such as Pritchard, which supports installation of the requested upfits and transportation of those vehicles from Workhorse manufacturing in Union City, IN, to upfit install locations and then to the final delivery site.
Amerit Fleet Solutions (“Amerit”): Workhorse has signed a strategic agreement with Amerit to provide maintenance and repair services for Workhorse vehicles, utilizing their mobile maintenance units and technicians. This provides Workhorse with on ground maintenance and warranty service capabilities in a great majority of locations across the United States.
Ryder System, Inc: The Company has an agreement with Ryder to serve as a distributor. Under the agreement, Ryder also has the ability to be a provider of certain repair services and distributor of certain vehicle parts in the United States, Canada and Mexico.
Moog Inc:The Company and Moog entered into a joint venture agreement for the development of the Company's HorseflyHorsefly truck based electrically powered unmanned aerial systems (the "Horsefly Assets"“Horsefly Assets”) and the related business (the “Horsefly Agreement”). Under the Horsefly Agreement, the Company contributed the Horsefly Assets and Moog contributed certain complementary assets to Certus Unmanned Aerial Systems LLC, (“Certus”) that is 50% owned by both the Company and Moog. Certus will
license the Horsefly Assets to the Company and Moog so that each party may use the Horsefly Assets in their respective businesses. Through Certus, teams from Workhorse and Moog are improving HorseFly’s components and sub-systems with the goal of bringing the highest quality, most capable UAS to market. We believe combining the capabilities of the two companies brings significant value to the UAS marketplace, particularly in the area of high-reliability, safety-sensitive, certificated systems that require the highest levels of government approval for operations.
USOG
Workhorse successfully delivered two of its HorseFly systems for commercial use, selling the systems to the Unmanned Systems Operations Group ("USOG"). USOG is a logistics solutions company specializing in unmanned systems and secure transportation and delivery of drone flight missions by land, air or sea. Based in San Diego, California, USOG is using our HorseFly system and aircraft in commercial operations under Federal Aviation Administration ("FAA") regulations Part 107.
Technology,
In-House Software Research and Development is Essential
Our powertrains encompass the complete motor assemblies, computers, and software required for vehicle electrification. We use off-the-shelf proven components and combine them with our proprietary software.
Innovation is the Future
Additionally, we have developed a cloud-based, remote management system to manage and track the performance of all of the vehicles that we deploy in order to provide a 21st Century solution for fleet managers.
The telematics system and associated hardware installed in the Workhorse vehicles is designed to monitor the controller area network traffic for specific signals. These signals are uploaded along with GPS data to a Workhorse server facility where the data signals are tracked at ten second intervals while driving and during the electricity generating process and at sixty seconds during a plug-in charge. The real-time data is stored in a database as it arrives and delivers updates to clients connected through the web interface. We are moving to a ".Net" platform for more robust back-end tools and web support.
As a parameter-based system, we can set route-specific parameters to better manage the battery-provided power with the additional power generated through the regenerative braking process. In an upcoming release, we will add the ability to integrate Metron Telematics with the client’s internal telematics system and automatically update the parameters each day with information about the route. This enhancement will result in a “SMART-GEN” vehicle that will maximize efficiency by automating the process to determine the ideal times and locations to use the C-Series to add electricity to the batteries.
Locations and Facilities
Our company headquarters and 45,000 sq. ft. research and development facility is located at 100 Commerce Drive, Loveland, Ohio, a Cincinnati suburb.
Our truck assembly facility is located in Union City, Indiana. This facility consists of three buildings with 250,000 square feet of manufacturing and office space on 47 acres. This plant has capacity to build up to 60,000 trucks per year.
Marketing
There are over 300,000 last mile delivery trucks replaced annually in an $18.0 billion market space. Our sales team is focused on securing purchase orders from commercial transportation companies, in this space. These purchases will give us additional data on demand related to electric and extended range electric vehicles.
Our priority is to establish the commercial delivery truck as our core business. We intend to be the best choice for a vehicle in this segment regardless of the fuel type that the customer chooses. Our sales plan is to meet with the top potential customers and obtain purchase orders for new electric vehicles to be delivered through our production facility.
As the last mile delivery service space expands and non-traditional customers enter, Workhorse is reaching out to those potential new customers to gain product acceptance as their last mile delivery partner. This market is comprised of a higher quantity of smaller delivery vehicles, such as the new Workhorse C650, a 650-cu. ft. platform.
Finally, we believe that our competitive advantage in the marketplace is our ability to provide purpose-built solutions to customers that have unique requirements at relatively low volume. To broaden our sales funnel, we have submitted proposals to companies for purpose-built vehicle applications.
Strategic Relationships
EnerDel, Inc.: EnderDel, Inc. ("EnerDel") is a designer and manufacturer of lithium-ion battery systems, focusing on heavy-duty transportation. EnerDel's advanced cell technology features a low-profile modular pack design that supports Workhorse's lightweight C-Series vehicles, enabling fleet customers to customize the pack size for each vehicle based on its duty cycle. Workhorse's selection of EnerDel as its latest battery supplier of choice complements the Company's existing utility partnership agreement, which seeks to generate second-life uses for its batteries.
Ryder: The Company has an agreement with Ryder to serve as the primary distributor, except with respect to certain exclusive accounts, in the United States, Mexico and Canada. Ryder also serves as a provider of certain repair services and distributor of certain vehicle parts in the United States, Canada and Mexico.
Prefix: Michigan-based Prefix Corporation began in 1979 developing innovative design and engineering solutions for the automotive industry. Workhorse relies on Prefix’s complementary capabilities in the areas of complete prototype design, build and finishing to more rapidly advance product development.
Duke Energy Corp.: Workhorse continues working in partnership with Duke Energy Corp ("Duke") in creating an innovative battery leasing program designed to provide customers a cost competitive electric vehicle product alternative. Duke intends to explore further development of eFleet solutions to Workhorse customers which may include single-point management and financing of all the Behind the Meter infrastructure necessary to support depot wide electrification, vehicle/battery leasing and distributed energy resources. Duke and Workhorse believe a seamless/integrated solution will help reduce the overall costs of converting fleets to electric power enabling faster adoption of electric vehicles into commercial fleets.
Research and Development
The majority of our research and development is conducted in-house at our facilities near Cincinnati, Ohio.Ohio and is centered on drive train, telematics and related electric vehicle (“EV”) centric feature sets. During 2022, we plan to expand our research and development footprint to include the addition of new staff in Wixom, MI. The Wixom facility is intended to focus additional resources for product development and validation activities for existing and future programs. Additionally, we contract with engineering firms to assist with validation and certification requirements as well as specific development and vehicle integration tasks.
Competition
The commercial vehicle market, specifically in Our research and development activity over the last mile delivery segment, is highly competitivepast year has focused on the development of the W56 and the W34 platforms. Additionally, we expect it to become even more so in the future as additional companies launch competing vehicle offerings. However, the commercial alternative fueled vehicle market is less developedfocused on enhancements and less competitive. There are two primary competitors in the medium-duty vehicle segment in the US market: Ford and Freightliner. Neither has disclosed any plans to offer 100% electric vehicles or electric range extended vehicles in this segment. Ford is a vertically integrated company building a complete vehicle or chassis. They provide a chassis as a strip-chassis (which is similar to the Workhorse Truck chassis that was produced until 2018) or they provide it with a cab. Freightliner provides a chassis as a strip-chassis, which is similar to the Workhorse Truck chassis that was produced until 2018. Further, there have been a few start-ups that have announced their intention to produce electric vehicles in this segment.
Chanje is a California-based, privately held electric vehicle and energy solutions company that specializes in the last mile industry. Chanje introduced its first vehicle in 2017.
Motiv Power Systems is a manufacturer of all-electric powertrain control systems for commercial vehicles, based in Foster City, California. They also produce softwarerequired improvements for the systemsC-1000 product line, including corrective action needed to support production assembly efficiency, material component availability, cost reduction and install them in vehicles that have already been manufactured.customer feedback.
Metron / Metron - Air
We believecontinue to develop our Metron remote data management system that tracks the most dramatic difference between Workhorseperformance of all the vehicles we deploy. We are currently focused on adding the ability to integrate Metron Telematics with the internal telematics and the other competitors in the medium-duty truck market isdata management systems of our clients, as well as expanding our ability to offer customers purpose-built solutions that meet the needs of their unique requirements atpresent and manipulate data within a competitive price. While there are many electric car companies from abroad, there are only a few foreign companies that have vehicles in the category of medium-duty trucks.proprietary Workhorse interface.
We believe that the primary competitive factors within the medium-duty commercial vehicle market are:
Competition
•the difference in the initial purchase prices of electric vehicles and comparable vehicles powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
Traditional OEMs
•the total cost of vehicle ownership over the vehicle’s expected life, which includes the initial purchase price and ongoing operational and maintenance costs;
•vehicle quality, performanceMost, if not all, traditional OEM's have made announcements about their electrification efforts, which have primarily been highly focused on consumer-based vehicles. In 2021, due in part to a shift in consumer behavior stemming from the COVID-19 pandemic, there has been an increased focus on the commercial space. To date, plans have primarily been focused on lighter and safety;smaller last mile vehicles, such as Ford with their Transit Connect and larger Transit models, and General Motors with their recent unveiling of the Brightdrop company and EV600 product. All of these vehicles have 600 cubic foot or less of cargo capacity. In contrast, Workhorse is focused on the 650 - 1200 cubic foot category. Our market research and direct customer engagements have helped us provide value to some of the largest and most efficient last mile delivery companies in North America, through deployment of our E-Series, which was produced until 2018. Current competition in this segment from traditional chassis manufacturers include a recently released EV strip chassis product from Freightliner Custom Chassis, integrated with components from third party suppliers.
Non-Traditional OEMs
•
government regulations
As a result of the COVID-19 pandemic, there has been a rapid global shift towards home delivery, with many companies seeking to provide delivery solutions aimed at a sub-600 cubic foot cargo area. It is our expectation that these non-traditional OEMs will compete head-to-head with the likes of GM, Daimler and economic incentives promoting fuel efficiencyFord. We believe one of the main reasons for this race towards smaller vehicles is to provide a sub-10,000 pound gross vehicle weight (“GVW”) offering, as vehicles above 10,000 pound GVW require a more expensive, commercially licensed and alternate forms of energy;trained driver pool.
•the environmental impact of electric vehicles, which are less harmful to the environment than internal combustion engines; andRegulatory
•
the quality and availability of service for the vehicle, including the availability of replacement parts.
Government Regulation
Our electric vehicles are designed to comply with a significant number of governmentalrequired government regulations and industry standards, some of which are changing as new technologies are deployed.standards. Government regulations regarding the manufacture, sale and implementation of products and systems similar to our electric vehicles are subject to future change. We cannot predict what impact, if any, such changes may have uponon our business.
Emission and fuel economy standards
Government regulation related to climate change is in effect at the U.S. federal and state levels. The U.S. Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (“NHTSA”) issued a final rule for greenhouse gas emissions and fuel economy requirements for trucks and heavy-duty engines on August 9, 2011, which is applicable infor model years 2018 through 2020. NHTSAEPA and EPANHTSA also issued a final rule on August 16, 2016 increasing the stringency of these standards for model years 2021 through 2027.
The rules provide emission standards for CO2 and fuel consumption standards for three main categories of vehicles: (i) combination tractors; (ii) heavy-duty pickup trucks and vans; and (iii) vocational vehicles. We believe that the Workhorse vehicles would be considered “vocational vehicles” and “heavy-duty pickup trucks and vans” under the rules. According to the EPA and NHTSA, vocational vehicles consist of a wide variety of truck and bus types, including delivery, refuse, utility, dump, cement, transit bus, shuttle bus, school bus, emergency vehicles, motor homes and tow trucks, and are characterized by a complex build process, with an incomplete chassis often built with an engine and transmission purchased from other manufacturers, then sold to a body manufacturer.
The EPA and NHTSA rule also establishes multiple flexibility and incentive programs for manufacturers of alternatively fueled vehicles, such as the Workhorse vehicles, including an engine Averaging, Banking and Trading (“ABT”) program, a vehicle ABT program and additional credit programs for early adoption of standards or deployment of advanced or innovative technologies. The ABT programs will allow for emission and/or fuel consumption credits to be averaged, banked or traded within defined groupings of the regulatory subcategories. The additional credit programs will allow manufacturers of engines and vehicles to be eligible to generate credits if they demonstrate improvements in excess ofmore than the standards established in the rule prior to the model year the standards become effective or if they introduce advanced or innovative technology engines or vehicles.
The Clean Air Act requires that we obtain a Certificate of Conformity (“CoC”) issued by the EPA and a California Executive Order issued by the California Air Resource Board (“CARB”) requires we obtain a CoC with respect to emissions and mileage requirements for our vehicles. On February 14, 2020, Workhorse received its Certificate of ConformityCoC from the EPA.EPA for both model year (“MY”) 2020 and MY2021 C-Series. The Certificate of ConformityCoC is required for vehicles sold in states covered by the Clean Air Act’s standards and the Executive Order is required for vehicles sold in states that have sought and received a waiver from the EPA to utilize California standards. The
California standards for emissions control for certain regulated pollutants for new vehicles and engines sold in California are set by CARB. States that have adopted the California standards as approved by EPA also recognize the Executive Order for sales of vehicles. The testing program that leads to anWorkhorse received Executive Order from CARB is now underway.A-445-0003 for MY2020 vehicles and Executive Order A-445-0004 for MY2021 vehicles.
Manufacturers who sell vehicles in states covered by federal requirements under the Clean Air Act without a Certificate of Conformity may be subject to penalties of up to $44,539 per violation and be required to recall and remedy any vehicles sold with emissions in excess of Clean Air Act standards.
Vehicle safety and testing
The National Traffic and Motor Vehicle Safety Act of 1966 (the “Safety Act”) regulates motor vehicles and motor vehicle equipment in the United States in two primary ways. First, the Safety Act prohibits the sale in the United States of any new vehicle or equipment that does not conform to applicable motor vehicle safety standards established by NHTSA. Meeting or exceeding many safety standards is costly, in part because the standards tend to conflict with the need to reduce vehicle weight in order to meet emissions and fuel economy standards. Second, the Safety Act requires that defects related to motor vehicle safety be remedied through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines that the vehicles do not comply with a safety standard. Should we or NHTSA determine that either a safety defect or noncompliance exists with respect to any of our vehicles, the cost of such recall campaigns could be substantial.
Battery
In the United States, the Federal Aviation Administration (“FAA”) substantially regulates our aerospace vehicles. Those regulations govern two important areas: operating rules and aircraft certification rules. The FAA’s operating rules govern all operations of all aerial vehicles in the National Airspace System of the United States. The FAA’s certification rules help define the safety and testingreliability requirements of certain aircraft and systems. Not every aircraft and system are required to be FAA certificated, though typically certification is required for commercial operations like package delivery.
Workhorse is applying for FAA Type Certification for its small unmanned aerial system. We believe it is important to achieve FAA certification of our products. Though we believe our design and execution comply with FAA requirements for certification, should we or the FAA determine either a safety defect or noncompliance exist with respect to our aircraft or its systems, it could add substantially to the time and expense of certification. Should the FAA change its rules for either certification or operations, it could render our designs non-competitive in the marketplace.
Available Information
We file or furnish periodic reports and amendments thereto, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”). In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our website is located at www.workhorse.com, and our reports, amendments thereto, proxy statements and other information are also made available on our investor relations website, free of charge, at ir.workhorse.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC.
Intellectual Property
Our battery pack configurationssuccess depends in part upon our ability to protect our core technology and intellectual property. We protect our intellectual property rights, both in the U.S. and abroad, through a combination of patent, trademark, copyright and trade secret protection, as well as confidentiality agreements with our employees and consultants. We seek to control access to, and distribution of, our proprietary information through non-disclosure agreements with our vendors and business partners. Unpatented research, development, know-how, and engineering skills make a vital contribution to our business, and we pursue patent protection when we believe it is possible and consistent with our overall strategy for safeguarding intellectual property.
We are designednot aware of any infringing uses or any prior claims of ownership of our trademarks that could materially affect our business. It is our policy to conformpursue registration of our primary trademarks whenever possible and to mandatory regulations that govern transport of “dangerous goods,” which includes lithium-ion batteries, which may present a risk in transportation. The governing regulations, which are issued byvigorously defend our patents, trademarks and other proprietary marks against infringement or other threats to the Pipelineextent practical under applicable laws.
Environmental, Social, and Hazardous Safety Administration and areGovernance (“ESG”)
Workhorse’s mission is based on the United Nations Recommendationsfoundation of the commercial vehicle transition to zero emissions. To do this, we embrace a world with reduced carbon emissions in both energy generation and consumption. We are designing and manufacturing a key ingredient of the transportation ecosystem evolution to achieve this goal - last mile electric delivery vehicles.
We are investing to make our factory more efficient and sustainably designed and are also driving a continuous safety mindset by focusing on worker engagement. In addition, we are focused on reducing the Safe Transportcarbon footprint throughout our supply chain. We are committed to sourcing responsibly produced materials from suppliers who have social, environmental and sustainability best practices in their own operations.
Finally, we believe that sound corporate governance is essential to helping us achieve our goal, including with respect to ESG. We continue to evolve a governance framework that exercises appropriate oversight of Dangerous Goods Model Regulations,responsibilities at all levels throughout the company. During 2022, we will create our first ESG Council, made up of leaders from across our company, and they will begin regular presentations on our related United Nations Manualinitiatives to our Board of TestsDirectors, which guides our ESG impacts, initiatives and Criteria. The requirements for shipmentspriorities.
Human Capital
As of these goods vary by mode of transportation, such as ocean vessel, rail, truck and air.
Our battery suppliers have completed the applicable transportation testDecember 31, 2021, our full-time headcount for our prototypeemployees was 221. None of our U.S. employees are represented by a labor organization or are party to any collective bargaining arrangement. We have never experienced a strike or similar work stoppage, and production battery packs demonstratingwe consider our compliancerelations with the United Nations Manual of Tests and Criteria, including:
•altitude simulation, which involves simulating air transport;
•thermal cycling, which involves assessing cell and battery seal integrity;
•vibration, which involves simulating vibration during transport;
•shock, which involves simulating possible impacts during transport;
•external short circuit, which involves simulating an external short circuit; and
•overcharge, which involves evaluating the ability of a rechargeable battery to withstand overcharging.
Vehicle dealer and distribution regulation
Certain states’ laws require motor vehicle manufacturers and dealersour employees to be licensedgood.
We understand that our innovation leadership is ultimately rooted in such statespeople. Competition for qualified personnel in order to conduct manufacturingour space is intense, and sales activities. To date, we are registered as a motor vehicle manufacturerour success depends in Indiana and Ohio and as a dealer in California, New York and Chicago. We have not yet sought formal clarification oflarge part on our ability to manufacturerecruit, develop and retain a productive and engaged workforce. Accordingly, investing in our employees and their well-being, offering competitive compensation and benefits, promoting diversity and inclusion, adopting progressive human capital management practices and community outreach constitute core elements of our corporate strategy.
Governance. Our Board of Directors and its committees provide important oversight on certain human capital matters. The Compensation Committee maintains responsibility to review, discuss and set strategic direction for various people-related business strategies, including compensation and benefit programs. Our collective recommendations to the Board of Directors and its committees are how we proactively manage our human capital and care for our employees in a manner that aligns with our core values.
Our management team administers all employment matters, such as recruiting and hiring, onboarding and training, compensation and rewards, performance management and professional development. We continuously evaluate and enhance our internal policies, process and practices to increase employee engagement and productivity.
Support Employee Well-being and Engagement. We support the overall well-being of our employees from a physical, emotional, financial, and social perspective. Our well-being program includes a long-standing practice of flexible paid time off, life planning benefits, wellness platforms and employee assistance programs.
Offer Competitive Compensation and Benefits. We strive to ensure that our employees receive competitive and fair compensation and innovative benefits offerings, tying incentive compensation to both business and individual performance, offering competitive maternal/paternal leave policies, providing meaningful retirement and health benefits, and maintaining an employee stock incentive plan.
Promote Sense of Belonging through Diversity and Inclusion Initiatives. We promote an inclusive and diverse workplace, where all individuals are respected and feel they belong regardless of their age, race, national origin, gender, religion, disability, sexual orientation, or sellgender identity.
Provide Programs for Employee Recognition. We also offer rewards and recognition programs to our vehicles in any other states.employees, including awards to recognize employees who best exemplify our values and spot awards to recognize employee contributions. We believe that these recognition programs help drive strong employee performance. We conduct annual employee performance reviews, where each employee is evaluated by their personal manager and also conducts a self-assessment, a process which empowers our employees. Employee performance is assessed based on a variety of key performance metrics, including the achievement of objectives specific to the employee’s department or role.
Intellectual Property
We have four pending trademark applicationsCreate Opportunities for Growth and 12 issued trademark registrations (US and foreign)Development. We also intendfocus on creating opportunities for employee growth, development, training, and education, including opportunities to pursue additional trademark registrations. We have four pending (one non-provisional, one designcultivate talent and two provisional) U.S.identify candidates for new roles from within the Company and foreign patent applications,management and eight existing patents, two of which are design patents. We also plan to pursue appropriate foreign patent protection on those inventions, if available as well pursue additional inventions. The following is a summary of our patents:leadership development programs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Country | | Serial Number | | Application Date | | Patent Number | | Issue/Grant Date | | Expiration Date | | Title |
| United States | | 13/283,663 | | 10/28/2011 | | 8,541,915 | | | 9/24/2013 | | 12/16/2031 | | Drive module and manifold for electric motor drive assembly |
| Canada | | 2,523,653 | | | 10/17/2005 | | 2,523,653 | | | 12/22/2009 | | 10/17/2025 | | Vehicle chassis assembly |
| United States | | 11/252,220 | | 10/17/2005 | | 7,717,464 | | | 5/18/2010 | | 9/6/2026 | | Vehicle chassis assembly |
| United States | | 11/252,219 | | 10/17/2005 | | 7,559,578 | | | 7/14/2009 | | 9/6/2026 | | Vehicle chassis assembly |
| United States | | 29/243,074 | | 11/18/2005 | | D561,078 | | 2/5/2008 | | 2/5/2022 | | Vehicle header |
| United States | | 29/243,129 | | 11/18/2005 | | D561,079 | | 2/5/2008 | | 2/5/2022 | | Vehicle header |
| United States | | 14/606,497 | | 1/27/2015 | | 9,481,256 | | | 11/1/2016 | | 5/3/2035 | | Onboard generator drive system for electric vehicles |
| United States | | 14/989,870 | | 1/7/2016 | | 9,915,956 | | | 3/13/2018 | | 6/24/2036 | | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle |
| United States | | 15/915,144 | | 3/8/2018 | | | | | | | | Package delivery by means of an automated multicopter UAS/UAV dispatched from a conventional delivery vehicle (1) |
| United States | | 62/957,577 | | 1/6/2020 | | | | | | | | Systems and Methods for Manufacturing Land Vehicles |
| United States | | 62/959,548 | | 1/10/2020 | | | | | | | | Electric Delivery Truck Control System for Electric Power Management |
| United States | | 29/719,591 | | 1/6/2020 | | | | | | | | Design Application that covering the electric delivery truck |
(1) AssignedResponse to Certus, a joint venture, thatthe COVID-19 Pandemic. The health and safety of our colleagues and anyone who enters our workplace around the world is 50% owned byof paramount importance to Workhorse. We have remained open throughout COVID-19, but we have allowed employees at certain points during the pandemic to work from home. Additionally, in order to maximize the health and safety of our workforce, we provided periodic communication from senior leaders regarding the impacts of COVID-19 on the workforce and the Company and 50% owned by Moog Inc.
Employees
We currently have 81 full-time employees.
ITEM 1A. RISK FACTORS
Operational Risks
We need accessmay elect to raise additional financing in 20202022 and beyond, which may not be available to us on acceptable terms or at all. If we cannot access additional financing when we need it and on acceptable terms, our business may fail.
Our business planWe believe our existing capital resources, including proceeds received in connection with the $200.0 million senior secured convertible note issued in October 2020, will be sufficient to design, produce, sellsupport our current and service commercial electric vehiclesprojected funding requirements through our Union City facility will require continued capital investment2022. If the opportunity arises, we may elect to raise additional financing in 2020. Our research and development activities will also require continued investment. For the year ended December 31, 2019, our independent registered public accounting firm issued a report on our 2019 financial statements that contained2022, including through an explanatory paragraph stating that the lack of sales, negative working capital and stockholders’ deficit, raise substantial doubt about our ability to continue as a going concern. We expect to have adequate capital to continue operations through the second quarter 2020. UnlessAt-the-Market offering. However, unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. We do not currently have any committed future funding for operating costs or for confirmed purchase orders.our cash on hand. If we are not ableelect to obtainor need to raise additional financing when needed in 2020 and/or substantially increase revenue from sales,capital, we will be unable to continue as a going concern or satisfy the delivery of our orders. As a result, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our consolidated financial statements, and investors will likely lose a substantial part or all of their investment. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. Further,In such circumstances, if there remains doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding on acceptable terms or at all. If we cannot obtainraise additional financing when we need itcapital, our financial condition, results of operations, business and on terms acceptable to us,prospects could be materially and adversely affected.
We cannot assure you that we will notbe successful in executing our business plan, which envisions the development of two new truck chassis platforms for production in 2023 and 2024 and the provision of a new delivery van to customers commencing in late 2022. Our failure to execute our business plan would have a material adverse effect on the Company’s business, financial position, results of operations, cash flows and liquidity.
We have developed a revised strategic product roadmap for our electric vehicle delivery offerings. This roadmap contemplates the development of two new truck chassis platforms, the W56 and W34, which are targeted for production in 2023 and 2024, respectively, with limited future sales of our C-Series delivery trucks. Product development involves numerous risks and uncertainties. We cannot assure you that we will be able to continuedevelop these new truck platforms on a timely basis or at all or that, if developed, these new truck platforms will meet applicable regulatory requirements (including Federal Motor Vehicle Safety Standards). Also, in order to accelerate time-to-market for customers seeking delivery of electric vehicles during 2022, we announced a strategic supply agreement with GreenPower pursuant to which we expect to offer our customers a Class 4 delivery van beginning in the second half of 2022. Even if we are able to make new truck platforms that meet regulatory requirements and offer the Class 4 delivery van, we may be unable to launch and ramp up production as necessary, we may experience unexpected costs, delays or service burdens, we may be unable to deliver such vehicles on an economical basis and our customers may not find our vehicles are acceptable for their use. Any of the foregoing would have a going concern.material adverse effect on our business, financial position, results of operations, cash flows and liquidity.
We may experience delays in launching and ramping up production or we may be unable to control our manufacturing costs.
We have previously experienced and may in the future experience launch and production ramp-up delays. In addition, we may introduce in the future new or unique manufacturing processes and design features for our products including enhancements under development relating to production assembly efficiency, material component availability, cost reduction and customer feedback. There is no guarantee we will be able to successfully and timely introduce and scale such processes or features. We have relatively limited experience to date in manufacturing electric vehicles at high volumes. To be successful, we will need to implement, maintain, and ramp-up efficient and cost-effective manufacturing capabilities, processes and supply chains and achieve the design tolerances, high quality and output rates planned at Union City. We also need to hire, train, and compensate skilled employees for operations. Bottlenecks and other unexpected challenges such as those experienced in the past may arise during our production ramps, and we must address them promptly while continuing to improve manufacturing processes and reducing costs. If we are not successful in achieving these goals, we could face delays in establishing and/or sustaining our vehicle production ramp-ups or be unable to meet our related cost and profitability targets. Any delay or other complication in ramping up the production of our current products or the development, manufacture, launch and production ramp-ups of our future products, features and services, or in doing so cost-effectively and with high quality, may harm our brand, business, prospects, financial condition, and operating results.
Our results of operations have not resulted in profitability and we may not be able to achieve profitability going forward.
We have an accumulated deficit of $178.8$510.4 million as of December 31, 2019. We2021. Except for the year ended December 31, 2020, we have had net losses in eachevery year since our inception. We may continue to incur net losses in 2020.2022. We may incur significant losses in the future for a number of reasons, including the other risks described in "Risk Factors", and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability. Our management is developing plans to alleviate the negative trends and conditions described above and there is no guarantee that such plans will be successfully implemented. Our business plan is focused on providing sustainable
and cost-effective solutions to the commercial transportation sector but is still unproven. There is no assurance that even if we successfully implement our business plan, that we will be able to curtail our losses or ever achieve profitable operations. If we incur additional significant operating losses, our stock price may significantly decline.
We have yet to achieve positive cash flow and, given our projected funding needs, our ability to generate positive cash flow is uncertain.
We have had negative cash flow from operating activities of $36.9$132.6 million and $21.8$70.3 million for the years ended December 31, 20192021 and 2018,2020, respectively. We may continue to have negative cash flow from operating and investing activities for 20202022 as we expect to incur research and development, sales and marketing, and general and administrative expenses and make capital expenditures in our efforts to increase sales and ramp up operations at our Union City facility. Our business also will at times require significant amounts of working capital to support our growth of additional platforms. An inability to generate positive cash flow for the near term may adversely affect our ability to raise needed capital for our business on reasonable terms, diminish supplier or customer willingness to enter into transactions with us, and have other adverse effects that may decrease our long-term viability. There can be no assurance that the Company will achieve positive cash flow in the near future or at all.
We currently have a limited number of customers and prospective customers, we do not have long-term agreements with existing customers, and we expect that a significant portion of our future sales will be from a limited number of customers. The developmentloss of any of these customers could materially harm our business.
A significant portion of our projected future revenue is expected to be generated from a limited number of fleet customers. Additionally, much of our business model is focused on building relationships with a few large fleet customers. Currently, we have no contracts with customers that include long-term commitments or minimum volumes to ensure future sales of vehicles. As such, a customer may take actions that negatively affect us for reasons we cannot anticipate or control, such as a customer’s financial condition, changes in the customer’s business strategy or operations, or the perceived performance or cost-effectiveness of our vehicles. In addition, as described above, we may not be able to meet customer requirements with the new truck chassis platforms we are developing and plan to offer to them. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material adverse effect on our business, prospects, financial condition and operating results.
Regulatory requirements may have a negative impact upon our business.
Our vehicles are subject to substantial regulation under federal, state, and local laws. In addition, these laws are subject to change. To the extent the laws change, or if we introduce new vehicles in the future (including, without limitation, the new truck chassis platforms we are developing), some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with these regulations could be burdensome, time consuming, and expensive.
For example, on September 22, 2021, we announced the Company decided to suspend deliveries of C-1000 vehicles and recall the 41 vehicles we had already delivered to customers. Our new leadership team determined that additional testing and modifications to existing vehicles are required to bring the C-1000 vehicles into full compliance with FMVSS. We further announced we filed a report with the National Highway Traffic Safety Administration (“NHTSA”) regarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into full compliance with FMVSS. We indicated our previous statements related to the C-1000’s compliance with NHTSA standards cannot be relied upon and also notified the Securities and Exchange Commission. The certification testing was completed in February 2022. In addition, further modifications to the vehicle will be made during the required FMVSS rework process, including a redesigned front suspension as well as supplier corrective action in certain components. Upon completion of this testing, the C-1000 platform was determined to be a low-volume, limited cargo capacity vehicle. We expect to transition manufacturing to a new platform in the near futurefuture.
Our products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the Environmental Protection Agency, NHTSA, FAA and various state boards, and compliance certification is contingent uponrequired for each new model year. NHTSA is active in requesting information from vehicle manufactures regarding potential product defects and safety measures. The cost of these compliance activities and the implementation of orders from UPSrisks, delays, and other key customers for the purchase of Workhorse vehicles and if we are unable to perform under these orders, our business may fail.expenses incurred in connection with such compliance could be substantial.
On June 4, 2014, the Company entered into a Vehicle Purchase Agreement with United Parcel Service Inc. (“UPS”) which outlined the relationship by which the Company would sell vehicles to UPS. To date, we have received six separate orders totaling up to 1,405 vehicles from UPS. The sixth and most recent order is from the first quarter of 2018. There is no guarantee that the Company will be able to perform under these orders and if it does perform, that UPS will purchase additional vehicles from the Company. Also, there is no assurance that UPS will not terminate its agreement with the Company pursuant to the termination provisions therein. Further, if the Company is not able to raise the required capital to purchase required parts and
pay certain vendors, the CompanyWe may not be ableincur costs, expenses and penalties related to comply with UPS’s deadlines. Accordingly, despite the receipt of the orders from UPS, there is no assurance, due to the Company’s financial constraintsregulatory matters, governmental investigations, legal proceedings and status as a development stage company, that the Company will be able to deliver such vehicles or that it will receive additional orders whether from UPS or other potential customers.
If we are unable to perform under our orders with UPS, the Company business will be negatively impacted.
The Covid-19 novel coronavirus, or other epidemics,claims, which could have a material adverse effect on the Company's business, financial position, results of operations, cash flows or liquidity.
We are subject to extensive government regulations. Federal, state and local laws and regulations may change from time to time and our compliance with new or amended laws and regulations in the future may materially increase our costs and could adversely affect our results of operations and competitive position. In addition, violations of the laws and regulations to which we are subject could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, as well as prohibitions on the conduct of our business, and could also materially affect our reputation, business and results of operations.
As noted above, in September 2021 we filed a report with NHTSA regarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into full compliance with FMVSS. We are cooperating with NHTSA with respect to the recall of the outstanding vehicles; however, we cannot assure you NHTSA or other government authorities will not attempt to impose potentially significant fines and penalties in response to the recall.
At this point, we cannot estimate the ultimate impact on our company relating to this matter. In light of the uncertainties and many variables involved in NHTSA matters, we cannot assure you that the ultimate resolution of this matter will not have a material adverse effect on our business, financial position, results of operations, cash flows or liquidity.
Also as noted above, in September 2021, we disclosed our previous statements related to the C-1000’s compliance with NHTSA standards cannot be relied upon and we had so notified the Securities and Exchange Commission (“SEC”). On October 19 and November 1, 2021, we received letters from the SEC requesting we voluntarily provide information relating to (a) the events and trading in our securities leading up to the announcement of the award of a contract by the U.S. Postal Service for the manufacture of a postal service vehicle fleet and (b) recognition of revenue, if any, related to purchases of vehicles by certain of our customers. On November 5, 2021, the Department of Justice (“DOJ”) orally informed us it has a related open investigation covering the Company. We have not received any subpoena or other request for documents from the DOJ with respect to this investigation. We are cooperating with the SEC and DOJ investigations. At this point, we cannot predict the eventual scope, duration, or outcome of these matters. We cannot assure you the SEC, DOJ or another governmental agency will not pursue enforcement against us related to the circumstances surrounding such notification and, if there is such an enforcement action, in light of the uncertainties and many variables involved in such matters, we cannot assure you the ultimate resolution will not have a material adverse effect on our business, financial condition.position, results of operations, cash flows or liquidity.
As described in Note 18, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Current Report on Form 10-K, we are party to litigation alleging violation of the securities laws. The Company believes these claims are without merit and intends to vigorously defend itself. However, we cannot assure you the ultimate resolution of these claims will not have a material adverse effect on our business, financial position, results of operations, cash flows or liquidity.
Any of the foregoing factors could cause the price of the Company’s equity securities to decline, thereby exposing the Company to new securities class action and/or shareholder derivative litigation. New securities class action and/or shareholder derivative suits against us and/or our officers and directors (in addition to those currently pending and reported herein) could result in substantial additional costs to the Company and divert our management’s time and attention, which would otherwise be used to benefit our business.
The COVID-19 pandemic may disrupt our business and operations, which could materially adversely impact our business, financial condition, liquidity and results of operations.
Pandemics, epidemics, or disease outbreaks in the U.S. or globally may disrupt our business, which could materially affect our business, financial condition, liquidity, and results of operations as well as future expectations. The COVID-19 pandemic and associated variants, including changes in consumer and business behavior, pandemic fears, market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. However, the full extent to which the COVID-19 pandemic and associated variants impact our business, prospects, financial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be predicted with confidence. In December 2019,particular, if the COVID-19 beganpandemic continues to impactspread or re-emerges, resulting in a prolonged period of travel, commercial, social and other similar restrictions, we could experience among other things labor disruptions, an inability to manufacture, an inability to sell to our customers and an impaired ability to access credit and the population of Wuhan, China. Wecapital markets. Further, we rely upon third-party manufacturers to provide certain parts that are incorporated into our vehicles. The outbreak has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on manufacturing and the movement of employees in many regions of the country. As a result of the COVID-19 pandemic and the measures designed to contain the spread of the virus, our third-party manufacturers may not have the materials, capacity, or capability to manufacture such parts according to our schedule and specifications. If
our third-party manufacturers’ operations are curtailed, we may need to seek alternate manufacturing sources, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. While the ongoing disruptions and restrictions on the ability to travel, quarantines, and temporary closures of the facilities of our third-party manufacturers and suppliers, as well as general limitations on movement in the region are expected to be periodic and temporary, the duration and severity of the production and supply chain disruption,disruptions, and the related financial impact,impacts, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in the United States, China and globally, this could have a material adverse effect on our results of operations and cash flows.
Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.
As we begin to fully implement our manufacturing capabilities, it is difficult, if not impossible, to forecast our future results based upon our historical data. Because of the uncertainties related to our lack of historical operations in a highly regulated and rapidly evolving industry, we may be hindered in our ability to anticipate and adapt to increases or decreases in revenues or expenses. If we make poor budgetary decisions as a result of limited historical data, we could be less profitable or incur losses.
We offer no financing on our vehicles. As such, our business is dependent on cash sales, which may adversely affect our growth prospects.
While most of our current customers are well-established companies with significant purchasing power, many of our potential smaller and medium-sized customers may need to rely on credit or leasing arrangements to gain access to our vehicles. Unlike some of our competitors who provide credit or leasing services for the purchase of their vehicles, we do not provide, and currently do not have commercial arrangements with a third party that provides, such financial services. We believe the current limited availability of credit or leasing solutions for our vehicles could adversely affect our revenues and market share in the commercial electric vehicle market.
We do not receive progress payments on orders of our vehicles, and if a purchaser fails to pay upon delivery, we may not be able to recoup the costs we incurred in producing such vehicles.
Our arrangements with existing customers do not provide for progress payments as we begin to fulfill orders. Customers are only required to pay us upon delivery of vehicles. If a customer fails to take delivery of an ordered vehicle or fails to pay for such vehicle, we may not receive cash to offset the production expenses of such vehicle, which could adversely affect our cash flows.
Our business, prospects, financial condition and operating results will be adversely affected if we cannot reduce and adequately control the costs and expenses associated with operating our business, including our material and production costs.
We incur significant costs and expenses related to procuring the materials, components and services required to develop and produce our electric vehicles. We have secured supply agreements for our critical components including our batteries. However, these are dependent on volume to ensure that they are available at a competitive price. We continually work on cost-down initiatives to reduce our cost structure so that we may effectively compete. If we do not reduce our costs and expenses, our net losses will continue.
Increases in costs, disruption of supply or shortage of lithium-ion cells could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of lithium-ion cells. Any such increase, supply interruption or shortage could materially and negatively impact our business, prospects, financial condition and operating results. The prices for these lithium-ion cells can fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. We are exposed to multiple risks relating to lithium-ion cells including:
•the inability or unwillingness of current battery manufacturers to build or operate battery cell manufacturing plants to supply the numbers of lithium-ion cells we may require going forward;
•disruption in the supply of cells due to quality issues or recalls by battery cell manufacturers;
•an increase in the cost of raw materials used in the cells; and
•fluctuations in the value of the Japanese yen against the U.S. dollar in the event our purchasers of lithium-ion cells are denominated in Japanese yen.
Our business is dependent on the continued supply of battery cells for the battery packs used in our vehicles. While we believe several sources of the battery cells are available for such battery cells, we have fully qualified EnerDel for the supply of the cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any disruption in the supply of battery cells could disrupt production of our vehicles until such time as a different supplier is fully qualified. Furthermore, fluctuations or shortages in petroleum, tariff or trade issues and other economic or tax conditions may cause us to experience significant increases in freight charges. Substantial increases in the prices for the battery cells or prices charged to us, would increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase vehicle prices in response to increased costs in our battery cells could result in cancellations of vehicle orders and therefore materially and adversely affect our brand, image, business, prospects and operating results.
The demand for commercial electric vehicles depends, in part, on the continuation of current trends resulting from dependence on fossil fuels. Extended periods of low diesel or other petroleum-based fuel prices could adversely affect demand for our vehicles, which would adversely affect our business, prospects, financial condition, and operating results.
We believe that much of the present and projected demand for commercial electric vehicles results from concerns about volatility in the cost of petroleum-based fuel, the dependency of the United States on oil from unstable or hostile countries, government regulations and economic incentives promoting fuel efficiency and alternative forms of energy, as well as the belief that climate change results in part from the burning of fossil fuels. If the cost of petroleum-based fuel decreased significantly, the outlook for the long-term supply of oil to the United States improved, the government eliminated or modified its regulations or economic incentives related to fuel efficiency and alternative forms of energy, or if there is a change in the perception that the burning of fossil fuels negatively impacts the environment, the demand for commercial electric vehicles could be reduced, and our business and revenue may be harmed.
Diesel and other petroleum-based fuel prices have been extremely volatile, and we believe this continuing volatility will persist. Lower diesel or other petroleum-based fuel prices over extended periods of time may lower the perception in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. If diesel or other petroleum-based fuel prices remain at deflated levels for extended periods of time, the demand for commercial electric vehicles may decrease, which would have an adverse effect on our business, prospects, financial condition, and operating results.
Our future growth is dependent upon the willingness of operators of commercial vehicle fleets to adopt electric vehicles and on our ability to produce, sell and service vehicles that meet their needs. This often depends upon the cost for an operator adopting electric vehicle technology as compared to the cost of traditional internal combustion technology.
Our growth is dependent upon the adoption of electric vehicles by operators of commercial vehicle fleets and on our ability to produce, sell and service vehicles that meet their needs. The entry of commercial electric vehicles into the medium-duty
commercial vehicle market is a relatively new development, particularly in the United States, and is characterized by rapidly changing technologies and evolving government regulation, industry standards and customer views of the merits of using electric vehicles in their businesses. This process has been slow as without including the impact of government or other subsidies and incentives, the purchase prices for our commercial electric vehicles currently is higher than the purchase prices for diesel-fueled vehicles. Our growth has also been negatively impacted by the relatively low price of oil over the last few years.
If the market for commercial electric vehicles does not develop as we expect or develops more slowly than we expect, our business, prospects, financial condition and operating results will be adversely affected.
As part of our sales efforts, we must educate fleet managers as to the economical savings we believe they will benefit from duringachieve over the life of the vehicle. As such, we believe that operators of commercial vehicle fleets should consider a number of factors when deciding whether to purchase our commercial electric vehicles (or commercial electric vehicles generally) or vehicles powered by internal combustion engines, particularly diesel-fueled or natural gas-fueled vehicles. We believe these factors include:
•the difference in the initial purchase prices of commercial electric vehicles and vehicles with comparable gross vehicle weight powered by internal combustion engines, both including and excluding the impact of government and other subsidies and incentives designed to promote the purchase of electric vehicles;
•the total cost of ownership of the vehicle over its expected life, which includes the initial purchase price and ongoing operating and maintenance costs;
•the availability and terms of financing options for purchases of vehicles and, for commercial electric vehicles, financing options for battery systems;
•the availability of tax and other governmental incentives to purchase and operate electric vehicles and future regulations requiring increased use of nonpolluting vehicles;
•government regulations and economic incentives promoting fuel efficiency and alternate forms of energy;
•fuel prices, including volatility in the cost of diesel;
•the cost and availability of other alternatives to diesel fueled vehicles, such as vehicles powered by natural gas;
•corporate sustainability initiatives;
•commercial electric vehicle quality, performance and safety (particularly with respect to lithium-ion battery packs);
•the quality and availability of service for the vehicle, including the availability of replacement parts;
•the range over which commercial electric vehicles may be driven on a single battery charge;
•access to charging stations and related infrastructure costs, and standardization of electric vehicle charging systems;
•electric grid capacity and reliability; and
•macroeconomic factors.
If, in weighing these factors, operators of commercial vehicle fleets determine that there is not a compelling business justification for purchasing commercial electric vehicles, particularly those that we produce and sell, then the market for commercial electric vehicles may not develop as we expect or may develop more slowly than we expect, which would adversely affect our business, prospects, financial condition and operating results.
We currently do not have and do not expect to have a significant number of long-term supply contracts with guaranteed pricing which exposes and will expose us to fluctuations in component, materials and equipment prices. Substantial increases in these prices would increase our operating costs and could adversely affect our business, prospects, financial condition and operating results.position, results of operations, cash flows or liquidity.
Because we currently do not have and do not expect to have long-term supply contracts with guaranteed pricing, we are and will be subject to fluctuations in the prices of the raw materials, parts and components and equipment we use in the production of our vehicles. Substantial increases in the prices for such raw materials, components and equipment would increase our operating costs and could reduce our margins if we cannot recoup the increased costs through increased vehicle prices. Any attempts to increase the announced or expected prices of our vehicles in response to increased costs could be viewed negatively by our customers and could adversely affect our business, prospects, financial condition and operating results.position, results of operations, cash flows or liquidity.
If we are unable to scale our operations at our Union City facility in an expedited manner from our limited low volume production to high volume production, our business, prospects, financial conditionposition, results of operations, cash flows and operating resultsliquidity will be adversely affected.
We are assembling our orders at our Union City facility which has been acceptable for our historical orders. To satisfy increased demand, we will need to quickly scale operations in our Union City facility as well as scale our supply chain including access to batteries. Such a substantial and rapid increase in operations may strain our management capabilities. Our business, prospects, financial conditionposition, results of operations, cash flows and operating resultsliquidity could be adversely affected if we experience disruptions in our supply chain, if we cannot obtain materials of sufficient quality at reasonable prices or if we are unable to scale our Union City facility.
We depend upon key personnel and need additional personnel. The loss of key personnel or the inability to attract additional personnel may adversely affect our business and results of operations.
Our success depends on the continuing services of our CEO, Duane Hughesexecutive leadership team and top management. On November 6, 2019, Mr. Hughes and the Company entered into an Amended and Restated Employment Agreement. Further, we entered into an amended and restated employment agreement with Mr. Robert Willison, our Chief Operating Officer. The loss of any of these individuals could have a material and adverse effect on our business operations. Additionally, the success of our operations will largely depend upon our ability to successfully attract and maintain other competent and qualified key management personnel. As with any company with limited resources, there can be no guarantee that we will be able to attract such individuals or that the presence of such individuals will necessarily translate into profitability for our company. Our inability to attract and retain key personnel may materially and adversely affect our business operations. Any failure by our management to effectively anticipate, implement, and manage the changes required to sustain our growth would have a material adverse effect on our business financial condition, and results of operations.
We face intense competition. Some of our competitors have substantially greater financial or other resources, longer operating histories and greater name recognition than we do and could use their greater resources and/or name recognition to gain market share at our expense or could make it very difficult for us to establish market share.
Companies currently competing in the fleet logistics market offering alternative fuel medium-duty trucks include General Motors, Ford Motor Company and Freightliner. There are also a number of new, well capitalized entrants into the market place. Ford and Freightliner are currently selling alternative fuel fleet vehicles including hybrids.hybrids and General Motors' subsidiary Brightdrop has recently brought a medium duty electric delivery van to market. General Motors, Ford and Freightliner have substantially more financial resources, established market positions, long-standing relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, financial and other resources than we do. Although we believe that HorseFly™,HorseFly, our unmanned aerial system (“UAS”), is unique in the marketplace in that it currently does not have any competitors when it comes to a UAS that works in combination with a truck, there are better-financed competitors in this emerging industry, including Google and Amazon. While we are seeking to partner with existing delivery companies to improve their efficiencies in the last mile of delivery, our competitors are seeking to redefine the delivery model using drones from a central location requiring extended flight patterns. Our competitors’ new aerial delivery model would essentially eliminate traditional package delivery companies. Our model is focused on coupling our delivery drone with delivery trucks supplementing the existing model and providing shorter-term flight patterns. Google and Amazon have significantly more significant financial resources, established market positions, long-standing relationships with customers, more significant name recognition and a larger scope of resources including technical, marketing and sales than we do.
The resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to us. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period than we can. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop a market position. Each of these competitors has the potential to capture significant market share in our target markets, which could have an adverse effect on our position in our industry and on our business and operating results.
Our electric vehicles compete for market share with vehicles powered by other vehicle technologies that may prove to be more attractive than ours.
Our target market currently is serviced by manufacturers with existing customers and suppliers using proven and widely accepted fossil fuel technologies. Additionally, our competitors are working on developing technologies that may be introduced in our target market. If any of these alternative technology vehicles can provide lower fuel costs, greater efficiencies, greater reliability or otherwise benefit from other factors resulting in an overall lower total cost of ownership, this may negatively affect the commercial success of our vehicles or make our vehicles uncompetitive or obsolete.
We currently have a limited number of customers, with whom we do not have long-term agreements, and expect that a significant portion of our future sales will be from a limited number of customers. The loss of any of these customers could materially harm our business.
A significant portion of our projected future revenue is expected to be generated from a limited number of fleet customers. Additionally, much of our business model is focused on building relationships with a few large fleet customers. Currently, we have no contracts with customers that include long-term commitments or minimum volumes that ensure future sales of vehicles. As such, a customer may take actions that negatively affect us for reasons that we cannot anticipate or control, such as reasons related to the customer’s financial condition, changes in the customer’s business strategy or operations or as the result of the perceived performance or cost-effectiveness of our vehicles. The loss of or a reduction in sales or anticipated sales to our most significant customers would have a material adverse effect on our business, prospects, financial condition and operating results.
Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.
The modern electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To date, although there has been a recent surge in the electric vehicle industry, demand for electric vehicles has been slower than forecasted by industry experts. As a result, growth in the electric vehicle industry depends on many factors outside our control, including, but not limited to:
•continued development of product technology, especially batteries;
•perceptions about electric vehicle quality, safety, design, performance and cost;
•perceptions about the total cost of ownership of electric vehicles, including the initial purchase price and operating and maintenance costs;
•the environmental consciousness of customers;
•the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines;
•the availability of other alternative fuel vehicles, including plug-in hybrid electric vehicles; and
•whetheravailability of tax and other governmental incentives to purchase and operate electric vehicles or future regulation and legislation requiring increased use of non-polluting vehicles is enacted.nonpolluting vehicles.
We cannot assume that growth in the electric vehicle industry will continue. Our business will suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands.
President Trump’s administration may create regulatory uncertainty for the alternative energy sector and may materially harm our business, financial condition and operating results.
President Trump’s administration may create regulatory uncertainty in the alternative energy sector. During the election campaign, President Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. Since taking office, President Trump has released his America First Energy Plan which relies on fossil fuels, canceled U.S. participation in the Paris Climate Agreement and signed several executive orders relating to oil pipelines. It remains unclear what specifically President Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential changes to such legislative programs and initiatives in the Unites States Congress. If President Trump and/or the United States Congress take action or publicly speak out about the need to eliminate or further reduce legislation, regulations and incentives supporting alternative energy or take action to further support the use of fossil fuels, such actions may result in a decrease in demand for alternative energy in the United States and may materially harm our business, financial condition and operating results.
The unavailability, reduction, elimination or adverse application of government subsidies, incentives and regulations could have an adverse effect on our business, prospects, financial condition and operating results.
We believe that, currently, the availability of government subsidies and incentives, including those available in California and other areas, is an important factor considered by our customers when purchasing our vehicles, and that our growth depends in part on the availability and amounts of these subsidies and incentives. Any reduction, elimination or discriminatory application of government subsidies and incentives because of budgetary challenges, policy changes, the reduced need for such subsidies and incentives due to the perceived success of electric vehicles or other reasons may result in the diminished price competitiveness of the alternative fuel vehicle industry.
We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our business and competitive position.
Our current products and the new products we are developing under our strategic roadmap are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products to continue to provide products with the latest technology. However, our
products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or to create the necessary technology. Thus, our potential inability to adapt and develop the necessary technology may harm our business and competitive position.
The failure of certain key suppliers to provide us with the necessary components of our products according to our schedule and at price, quality levels and volumes acceptable to us could have a severe and negative impact upon our business.
We have secured supply agreements for ourrely and will rely on various suppliers to provide critical components and materials used in our vehicles, including our batteries.battery packs. However, the agreements are dependent on volume to ensure that they are available at a competitive price. If these suppliers become unwilling or unable to provide components or if we are unable to meet certain volume requirements in our existing supply agreements, there arehave a limited number of alternative suppliers who could provide them and the price for them could be substantially higher.definitive supply agreements. Changes in business conditions, pandemics, wars, including the Russian invasion of Ukraine and world sanctions on Russia, Belarus, and related parties, governmental changes, and other factors beyond our control or which we do not presently anticipate could negatively affect our ability to receive components. If component suppliers become unwilling or unable to provide components, from our suppliers. Further, itthere are a limited number of alternative suppliers who could provide them and the price for them could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products.substantially higher. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion.
Continued disruption of supply, shortage of materials or increases in costs, in particular for battery packs or microchips, could harm our business.
Our ability to manufacture our vehicles depends on the continued supply of battery packs, including the competent battery cells, used in our products. We have in the past experienced a battery pack supply chain constraint as a result of our existing supplier's inability to keep up with volume requirements. We continue to work with our current supplier to overcome these
supply constraints and have also begun collaborating with an additional supplier, subject to appropriate testing, to further expand our battery pack options.
Furthermore, due to the COVID-19 pandemic and increased demand for consumer products, a global shortage of microchips has been reported since early 2021, and the impact to us is yet unknown. As a result, our ability to source semiconductor chips may be adversely affected. Impacts of the shortage may result in increased chip delivery lead times, delays in the production of our vehicles, and increased costs to source available semiconductor chips.
Product liability or other claims could have a material adverse affecteffect on our business.
The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although we have product liability insurance for certain of our consumer and commercial products, that insurance may be inadequate to cover all potential product claims. We also carry liability insurance on our products. Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall, such as the one initiated by the Company in 2021, could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates. We cannot provide assurance that such claims and/or recalls will not be made in the future.
Regulatory requirements may have a negative impact upon our business.
While our vehicles are subject to substantial regulation under federal, state, and local laws, we believe that our vehicles are in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new vehicles in the future, some or all of our vehicles may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with these regulations could be burdensome, time consuming, and expensive.
Our products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, FAA and various state boards, and compliance certification is required for each new model year. The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. The risks, delays, and expenses incurred in connection with such compliance could be substantial.
Our success may be dependent on protecting our intellectual property rights.
We rely on trade secret protections to protect our proprietary technology as well as several registered patents and five patent applications. Our patents and patent applications relate to the vehicle chassis assembly, vehicle header and drive module, and manifold for electric motor drive assembly. Our existing patent applications relates to theassembly, onboard generator drive system for electric vehicles and the delivery drone. Our success will, in part, depend on our ability to obtain additional trademarks and patents. We are working on registering additional patents and trademarks with the United States Patent and Trademark Office but have not finalized any as of this date.Office. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and technologies or otherwise gain access to our trade secrets. We do not maintain proprietary rights agreements with our employees, which agreements would further protect our intellectual property rights against claims by our employees. Therefore we may be subject to disputes with our employees over ownership of any new technologies or enhancements that such employees help to develop.
Our business may be adversely affected by union activities.
Although none of our employees are currently represented by a labor union, it is common throughout the automotive industry for many employees at automotive companies to belong to a union, which can result in higher employee costs and increased risk of work stoppages. Our employees may join or seek recognition to form a labor union, or we may be required to become a union signatory. Our production facility in Union City, Indiana was purchased from Navistar. Prior employees of Navistar were union members and our future work force at this facility may be inclined to vote in favor of forming a labor union. Furthermore, we are directly or indirectly dependent upon companies with unionized work forces, such as parts suppliers and trucking and freight companies, and work stoppages or strikes organized by such unions could have a material adverse impact on our business, financial condition or operating results. If a work stoppage occurs, it could delay the manufacture and sale of our trucks and have a material adverse effect on our business, prospects, operating results or financial condition. The mere fact that our labor force could be unionized may harm our reputation in the eyes of some investors. Consequently, the unionization of our labor force could negatively impact our company’s health.company.
We may be exposed to liability for infringing upon the intellectual property rights of other companies.
Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost and negative publicity, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party. In the event that a claim relating to intellectual property is asserted against us, we may need to seek licenses to such intellectual property which could result in significant costs, including substantial licensing fees or royalties.
Our electric vehicles make use of lithium-ion battery cells, which, if not appropriately managed and controlled, have occasionally been observed to catch fire or vent smoke and flames. If such events occur in our electric vehicles, we could face liability associated with our warranty, for damage or injury, adverse publicity and a potential safety recall, any of which would adversely affect our business, prospects, financial condition and operating results.
The battery packs in our electric vehicles use lithium-ion cells, which have been used for years in laptop computers and cell phones. On occasion, if not appropriately managed and controlled,or subject to environmental stresses, lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. These events also have raised questions about the suitability of these lithium-ion cells for automotive applications. There can be no assurance that a field failure of our battery packs will not occur, which would damage the vehicle or lead to personal injury or death and may subject us to lawsuits. Furthermore, there is some risk of electrocution if individuals who attempt to repair battery packs on our vehicles do not follow applicable maintenance and repair protocols. Any such damage or injury would likely lead to adverse publicity and potentially a safety recall. Any such adverse publicity related to the suitability of lithium-ion cells for automotive applications, the social and environmental impacts of mineral mining or procurement associated with the constituents of lithium-ion cells, or any future incident involving lithium-ion cells, such as a vehicle or other fire could adversely affect our reputation, business, prospects, financial condition and operating results. Warranty expense for the years ended December 31, 2019 and 2018 was $0.1 million and $8.0 million, respectively.
We are subject to significant corporate regulation as a public company and failure to comply with all applicable regulations could subject us to liability or negatively affect our stock price.
As a publicly traded company, we are subject to a significant body of regulation, including the Sarbanes-Oxley Act of 2002. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices in corporate governance and continue to update this program in response to newly implemented or changing regulatory requirements, we cannot provide assurance that we are or will be in compliance with all potentially applicable corporate regulations. If we fail to comply with any of these regulations, we could be subject to a range of regulatory actions, fines or other sanctions or litigation. If we disclose any material weakness in our internal control over financial reporting, our stock price could decline.
Any impairment of our investment in Lordstown Motor Corp. could negatively impact our financial results.
Our investment in Lordstown Motor Corp. ("LMC") is recorded at fair value. For the year ended December 31, 2019, the carrying value of our investment is $12.2 million. In the event there are future events or circumstances that are likely to have a significant adverse effect on LMC, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to LMC available to us, including valuations based on recent third-party equity investments in LMC. If the fair value of the investment is less than its carrying value, we will recognize an impairment loss which will negatively impact our financial position and results of operations.
Cyber-attacks could adversely affect the Company.
The Company faces a risk of cyber-attack. Cyber-attacks may include hacking, viruses, malware, denial of service attacks, ransomware or other data security breaches. The Company’s business requires the continued operation of information systems and network infrastructure. In the event of a cyber-attack that the Company was unable to defend against or mitigate, the Company could have its operations and the operations of its customers and others disrupted. The Company could also have their financial and other information systems and network infrastructure impaired, property damaged and customer and employee information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation, penalties and damage to their reputation. While we maintain cyber insurance providing coverages, such insurance may not cover all costs associated with the consequences of personal and confidential proprietary information being compromised. As a result, in the event of a material cyber security breach, our results of operations could be materially, adversely affected.
Risks Related to Owning Our Warrants or Common Stock
There is no public market for the Warrants to purchase shares of our common stock.
There is no public trading market for Warrants to purchase shares of our common stock, and we do not expect a market to develop. In addition, we do not intend to apply to list the Warrants on any national securities exchange or other nationally recognized trading system, including the Nasdaq Capital Market. Without an active market, the liquidity of the Warrants will be limited, and warrant holders may not be able to resell the Warrants. If the Warrants cannot be resold, a holder will have to depend upon any appreciation in the value of our common stock over the exercise price of the Warrants in order to realize a return on investment in the Warrants.
Except as otherwise provided in the Warrants, holders of our Warrants will not have the rights or privileges of a holder of our common stock, including any voting rights, until such holders exercise their Warrants and acquire our common stock.
Except as otherwise provided in the Warrants, holders of our Warrants will not have the rights or privileges of a holder of our common stock, including any voting rights, until such holders exercise their Warrants and acquire our common stock. As a result, absent exercise of the Warrants, holders of the Warrants will not have the ability to vote their shares underlying the Warrants, which may limit the influence that investors in our offering may have over the outcome of matters submitted to our stockholders for a vote.
Our stock price and trading volume may be volatile, which could result in substantial losses for our stockholders.
The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock. In addition, the stock markets in general can experience considerable price and volume fluctuations. Moreover, fluctuations in our stock price could have the effect of increasing our interest expense, through a change in fair value of our convertible notes, which may have a material and adverse effect on our financial results.
We have not paid cash dividends in the past and have no immediate plans to pay cash dividends.
We plan to reinvest all of our earnings, to the extent we have earnings, in order to develop our products, deliver on our orders and cover operating costs and to otherwise become and remain competitive. We do not plan to pay any cash dividends with respect to our securities in the foreseeable future. We cannot assure common stockholders that we would, at any time, generate
sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, common stockholders should not expect to receive cash dividends on our common stock.
Stockholders may experience future dilution as a result of future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock at prices that may not be the same as the price per share in our prior offerings. We may sell shares or other securities in any future offering at a price per share that is lower than the price per share paid by historical investors, which would result in those newly issued shares being dilutive. In addition, investors purchasing shares or other securities could have rights superior to existing stockholders, which could impair the value of existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid by our historical investors.
Our charter documents and Nevada law may inhibit a takeover that stockholders consider favorable.
Provisions of our certificate of incorporation and bylaws and applicable provisions of Nevada law may delay or discourage transactions involving an actual or potential change in control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. The provisions in our certificate of incorporation and bylaws:
•limit who may call stockholder meetings;
•do not provide for cumulative voting rights; and
•provide that all vacancies may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.
There are limitations on director/officer liability.
As permitted by Nevada law, our certificate of incorporation limits the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Nevada law, shareholdersstockholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our certificate of incorporation provides that we shall indemnify our directors and officers to the fullest extent permitted by law.
Risks Related to Owning Our Convertible Note
In the event we do not redeem our debt in shares of common stock, servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our obligations under the 4.5%remaining 4.0% Senior Secured Convertible Note (the "Note").
Our ability to make scheduled payments of principal or to pay interest on or to refinance the Note depends on our future performance, which is subject to economic, financial, competitive and other factors, some of which are beyond our control. As of December 31, 2019,2021, our outstanding indebtedness is approximately $58.2$24.7 million (including $27.5 million principal amount under the Note), and the terms of the Note requires us to repay or redeem the full principal amount of the Note at maturity or any other time. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the Note. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Note will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the Note.
Some significant restructuring transactions may not constitute a fundamental change as defined in the Note, in which case we would not be obligated to offer to purchase the Note.
Upon the occurrence of a fundamental change, note holders have the right to require us to purchase the Note. However, the fundamental change provisions will not afford protection to holderthe holders of the Note in the event of other transactions that could adversely affect the Note. For example, transactions such as leveraged recapitalizations, refinancings, restructurings, or acquisitions initiated by us may not constitute a fundamental change requiring us to purchase the Note. In the event of any such transaction, the holders would not have the right to require us to purchase the Note, even though each of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the holder of the Note.
Conversion of the Note maywill dilute the ownership interest of existing stockholders orand may otherwise depress the price of our common stock.
Conversion of the Note will dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of the Note. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Note may encourage short selling by market participants because the conversion of the Note could be used to satisfy short positions, or anticipated conversion of the Note into shares of our common stock could depress the price of our common stock.
Upon conversion of the Note, note holders may receive less valuable consideration than expected because the value of our common stock may decline after youthey exercise yourtheir conversion right but before we settle our conversion obligation.
Under the Note, a converting holder will be exposed to fluctuations in the value of our common stock during the period from the date such holder surrenders the Note for conversion until the date we settle our conversion obligation. We will deliver the consideration due in respect of conversion on the second business day immediately following the relevant conversion date. Accordingly, if the price of our common stock decreases during this period, the amount and/or value of consideration a note holder will receive will be adversely affected.
The fundamental change repurchase feature of the Note may delay or prevent an otherwise beneficial attempt to take over our Company.
The terms of the Note require us to repurchase the Note in the event of a fundamental change. A takeover of our Company would trigger an option of the holder of the Note to require us to repurchase the Note. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to investors in the Note.
The holder of the Note will not be entitled to certain rights with respect to our common stock, but will be subject to all changes made with respect to them.
The holder of the Note will not be entitled to certain rights with respect to our common stock (including, without limitation, voting rights) but to the extent the conversion consideration includes shares of our common stock, the holder of the Note will be subject to all changes affecting our common stock.
We cannot assure that an active trading market will develop for the Note.
There has been no trading market for the Note, and we do not intend to apply to list the Note on any securities exchange or to arrange for quotation on any automated dealer quotation system. As a result, we cannot assure note holders that an active trading market will develop for the Note. If an active trading market does not develop or is not maintained, the market price and liquidity of the Note may be adversely affected. In that case note holders may not be able to sell the Note at a particular time or note holders may not be able to sell their Note at a favorable price.
We are subject to certain covenants set forth in the Note.Notes. Upon an event of default, including a breach of a covenant, or the failure to obtain shareholder approval to increase our authorized shares of common stock, we may not be able to make such accelerated payments under the Note.Notes.
The NoteNotes contains customary events of default, including for non-payment, misrepresentation, breach of covenants, defaults under other material indebtedness, material adverse change, bankruptcy, change of control and material judgments. Among other things, we will be required to maintain a minimum liquidity of at least $8.0 million at all times. We do not expect that we will be able to maintain compliance with this covenant unless we obtain further financing in addition to the proceeds of this offering.
Upon an event of default, the outstanding principal amount of the loan plus any other amounts owed under the Note will become immediately due and payable and the holder of the Note could foreclose on our assets. A default would also likely significantly diminish the market price of our common stock.
Note holders may be subject to tax if we make or fail to make certain adjustments to the applicable conversion rate of the Note even though note holders did not receive a corresponding cash distribution.
The conversion rate is subject to adjustment in certain circumstances, including the payment of cash dividends. If the applicable conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, note holders may be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the applicable conversion rate after an event that increases a note holders' proportionate interest in us could be treated as a deemed taxable dividend to a note holder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table sets forth the location, approximate sizeWe operate facilities in Ohio, Indiana and Michigan. Our corporate headquarters and research and development facility is located in Southwest Ohio and our primary use of our principal owned, leased and licensed facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Location | | Approximate Size (Building) in
Square Feet | | Primary Use | | Owned, Lease or Licensed | | Lease/License
Expiration
Date (if
applicable) |
Loveland, Ohio | | 45,000 | | | Administration, Research and Development, Manufacturing | | Owned | | N/A |
| | | | | | | | |
Union City, Indiana | | 250,000 | | | Manufacturing | | Owned | | N/A |
| | | | | | | | |
Loveland, Ohio | | 5,810 | | | Administration | | Lease | | Monthly |
manufacturing facility is located in Union City, Indiana.We believe our facilities are in good operating condition and that our facilities are adequate for all present and near term uses.
ITEM 3. LEGAL PROCEEDINGS
In May 2018, Precision Manufacturing Company, Inc. (“PMC”) filedFor a complaint against the Company in the Common Pleas Courtdescription of Montgomery, Ohio, which complaint was amended July 26, 2018. PMC, a former vendor, is claiming Breach of Contract, Unjust Enrichment, Action on Accountcertain material legal proceedings, please see Note 18, Commitments and Fraud and is seeking approximately $132,000 in damages plus attorney fees and costs. On June 10, 2019, the Company and PMC settled all claims whereby the Company paid PMC $75,000 in consideration of PMC releasing the Company.
Contingencies
In August 2018, Workhorse Motor Works Inc was served with a Declaration of Forced Intervention and Application in Warranty in connection with an action in the Superior Court (Civil Division) located in the Province of Quebec, District of Montreal between Aviva Insurance Company of Canada v. Thor Motor Coach and Navistar Canada, Inc. pertaining, to the motor home destroyed by fire. The Company intends to vigorously defendconsolidated financial statements included elsewhere in this action. On October 22, 2019, the parties entered into a Settlement Agreement whereby the parties agreed to settle the matterCurrent Report on Form 10-K. See also Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview for a nominal cash payment in consideration of a full release.
On May 3, 2019, C.E.E., LLC, a California limited liability company filed an action entitled C.E.E., LLC, a California limited liability company, against the Company in the Central Justice Center of the Superior Court of California for the County of Orange, Case No. 30- 2019-01067928-CU-BC-CJC for breach of contract. In August 2019, the parties settled all claims whereby the Company paid C.E.E., LLC $75,000 in consideration of C.E.E., LLC releasing the Company.
On January 10, 2019, the Company was served with a Default Request, Affidavit, Entry and Judgment in the Circuit Court for the County of Oakland by a former service provider (“Vendor”) relating to a Verified Complaint by Pilot for Breach of Contract claim that the Company was not properly served. On February 14, 2019, the Company and Pilot entered into a Stipulated Order to Set Aside and Dismiss Lawsuit providing that the parties have entered into a Settlement Agreement whereby Workhorse agreed to make cash payments in the amount of $600,000 in several tranches in returndiscussion of certain property including two development chassis, the development vehicle and all intellectual property developed as well as a full release of all parties.
On July 18, 2019, All Cell Technologies, LLC and Illinois Institute of Technology filed a Complaint for Patent Infringement against the Company in the United States District Court for the Southern District of Indiana (Civil Action No. 1:19-cv-2975) claiming infringement of US Patent No. 6,468,689, 6,942,944 and, 8,273,474. On October 28, 2019, the Company filed its Answer, Affirmative Defenses and Counterclaims. On November 18, 2019, the Plaintiffs filed their Answer to Counterclaims.
On November 21, 2019, the Court entered a Scheduling Order with a trial date set for June 21, 2021. On February 28, 2020, the Court ordered a Settlement Conference between the parties for May 22, 2020 before the Magistrate Judge assigned to the case. Management of the Company believes this lawsuit is baseless and, in addition to defending itself vigorously, is also pursuing whether the lawsuit can be settled. Because the number of allegedly infringing products (battery bricks) is small and the accused products are no longer being used by the Company, Management believes that the lawsuit may be amenable to early resolution.
On October 15, 2019, Jennifer Johnson-Campbell, individually, and as administrator of the Estate of Cathy and Windham Johnson, deceased, and Jessica Tagney, Individually, filed a Complaint in the Superior Court of Dougherty County in the State of Georgia (Civil Action File No. 2019SUCV2019001345) against the Company in connection with the death of the plaintiff while operating a W-42 truck on October 19, 2017 claiming Strict Liability, Negligence and Punitive Damages. The Company does not believe it manufactured the W-42 that is the subject to the Complaint. On November 15, 2019, the Company removed this case to U.S. District Court for the Middle District of Georgia (Civil Action File No 1:19-cv-00209), and on December 6, 2019, timely filed a motion to dismiss for lack of personal jurisdiction and failure to state a claim, advising the court and the Plaintiffs that the Company was not the manufacturer of the subject W-42 truck and had insufficient contacts with the state of Georgia to justify the exercise of jurisdiction in Georgia. The Plaintiffs responded to the motion to dismiss on December 26, 2019 and subsequently filed a motion for leave to amend their complaint to add Workhorse Trucks, Inc., Navistar, and Workhorse Custom Chassis, LLC. The Company opposed the motion for leave to amend on the grounds that the proposed amendments would be futile, because Georgia courts do not have jurisdiction over either the Company or Workhorse Trucks. The motions are fully briefed and pending before the Court. In the event that the motion to dismiss is not granted, the Company will vigorously defend themselves and, among other things, move for summary judgment at the close of discovery on the grounds that these entities did not manufacture the subject truck.
ITEM 4. MINE SAFETY DISCLOSURES
None.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company'sOur common stock is traded on the NASDAQ Capital Market under the symbol “WKHS”.
Holders of our Common Stock
As of February 28, 2020, there were1, 2022, we had approximately 200 stockholdersshareholders of record of our common stock.record. This number does not include shares held by brokerage clearing houses, depositoriespersons whose stock is in nominee or others in unregistered form."street name" accounts through banks, brokers and other financial institutions.
DividendsDividend Policy
The Company hasWe have never declared or paid any cash dividends on itsour common stock. The CompanyWe currently intendsintend to retain future earnings, if any, to finance the expansion of itsour business. As a result, the Company doeswe do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”), or incorporated by reference into any filing of Workhorse Group Inc. under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The following graph shows a comparison, from January 1, 20142017 through December 31, 2019,2021, of the cumulative total return foron our common stock, theThe NASDAQ Composite Index and a peer group of peer group companies similarly situated.determined by us. Such returns are based on historical results and are not intended to suggest future performance. Data for The NASDAQ Composite Index and the peer group companies assumes an investment of $100 on January 1, 20142017 and reinvestment of dividends. We have never declared or paid cash dividends on our capitalcommon stock nor do we anticipate paying any such cash dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | |
| Plan | | Number of Securities to be
Issued upon Exercise of
Outstanding Options
and Rights | | Weighted Average Exercise
Price of Outstanding Options | | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities reflected
in first column) |
| | | | | | |
Equity Compensation Plans approved by security holders - 2015 Stock Incentive Plan | | 197,500 | | | $ | 4.41 | | | — | |
| | | | | | |
Equity Compensation Plans approved by security holders - 2016 Stock Incentive Plan | | 455,000 | | | $ | 6.59 | | | — | |
| | | | | | |
Equity Compensation Plans approved by security holders - 2017 Stock Incentive Plan | | 2,672,500 | | | $ | 1.64 | | | 2,235,000 | |
| | | | | | |
Equity Compensation Plans approved by security holders - 2019 Stock Incentive Plan | | 400,000 | | | $ | 0.93 | | | 5,794,778 | |
| | 3,725,000 | | | | | 8,029,778 | |
UnregisteredRecent Sales of EquityUnregistered Securities and Use of Proceeds
In February 2019,During the Company sold 1,616,683 shares of common stock to investors (the “February 2019 Investors”) for net proceeds of $1.5 million. Through July 2019, if the Company issued shares of its common stock for a lower price per share than the price paid by the February 2019 Investors (a “Down Round”), the Company was required to issue additional shares of common stock (for no additional consideration) resulting in the effective purchase price per share being equal to the purchase price per share paid in the Down Round. On May 1, 2019 the Down Round provision of the agreement was triggered and an additional 116,496 shares of common stock were issued to the February 2019 Investors. Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of the February 2019 offering at a price per share of $0.95, which was above the closing price the date prior to close. They did not receive the Down Round protection.
The Company entered into an employment agreement (the “Ackerson Employment Agreement”) with Mr. Ackerson, effective November 12, 2019. Pursuant to the Ackerson Employment Agreement, among other compensation, Mr. Ackerson was granted 104,166 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years.
On November 6, 2019, the Company entered into an amended and restated employment agreement (the “Hughes Employment Agreement”) with Duane Hughes, Chief Executive Officer, effective November 6, 2019. Pursuant to the Hughes Employment Agreement, among other compensation, the Company granted 239,044 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020. The stock options to acquire 1,000,000 shares of common stock issued earlier in 2019 immediately vested on the effective date of the Hughes Employment Agreement.
The Company entered into an amended and restated employment agreement (the “Willison Employment Agreement”) with Mr. Robert Willison, Chief Operating Officer, effective November 6, 2019. Pursuant to the Willison Employment Agreement, Mr.
Willison, among other compensation, was granted 119,522 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on January 1, 2020.
The Company entered into an employment agreement (the “Furey Employment Agreement”) with Mr. Anthony Furey, Vice President of Finance, effective November 6, 2019. Pursuant to the Furey Employment Agreement, Mr. Furey, among other compensation, was granted 338,648 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years. In addition, for services in relation to the sale of Surefly during the yearquarter ended December 31, 2019, Mr. Furey was granted 34,496 shares of restricted common stock which vested on November 27, 2019.
On November 6, 2019,2021, there were no sales by the Company appointed Mr. Stephen M. Fleming as General Counsel and Vice President of the Company. In connection with the appointment of Mr. Fleming, the Company entered into an employment agreement (the “Fleming Employment Agreement”) with Mr. Fleming effective November 6, 2019. Pursuant to the Fleming Employment Agreement, among other compensation, Mr. Fleming was granted 517,928 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan.
The Company granted Ray Chess, Chairman of the Board, 47,809 shares of restricted common stock for historical services rendered for which no director compensation was received. The restricted stock will vest over two years in semi-annual installments commencing May 6, 2020. In addition, for director services for the year ended December 31, 2019, Mr. Chess was granted 29,880 shares of common stock vesting May 6, 2020. Going forward, Mr. Chess will receive an annual grant of restricted stock in the amount of $75,000. In addition, Michael Clark, Gerald Budde, Benjamin Samuels and Harry DeMott were granted 47,809 restricted common stock in consideration for historical services. The restricted stock will vest over two years in semi-annual installments commencing on May 6, 2020. In addition, for director services for the year ended December 31, 2019, Messrs. Clark, Budde, Samuels and DeMott were granted 23,904 shares of restricted common stock vesting May 6, 2020. Going forward, Messrs. Clark, Budde, Samuels and DeMott will receive an annual grant of restricted stock in the amount of $60,000. All stock grants were issued under the Company’s 2019 Stock Incentive Plan.
Pursuant to the Credit Agreement entered between the Company and Marathon Asset Management, LP, on behalf of certain entities it manages (the “Marathon Lenders”), dated December 31, 2018 , the Company issued the Marathon Lenders warrants to acquire 358,450 shares of common stock exercisable at a price of $1.039 per share on March 27, 2019, 1,481,825 shares of common stock exercisable at a price of $1.4863 per share on June 30, 2019, 11,274 shares of common stock exercisable at a price of $1.782 per share on July 1, 2019, 34,293 shares of common stock exercisable at a price of $1.782 per share on October 1, 2019, 1,493,624 shares of common stock exercisable at a price of $3.355 per share on December 4, 2019 and 34,293 shares of common stock exercisable at a price of $1.782 per share on January 1, 2020.
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock is not convertible and does not have voting rights. The Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock is entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. Accrued dividends will be payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the year ended December 31, 2019, the Company issued 718,755 shares of common stock to the holders of the Preferred Stock.
The Company entered into an employment agreement (the “Schrader Employment Agreement”) with Mr. Schrader effective December 19, 2019. Pursuant to the Schrader Employment Agreement, Mr. Schrader, among other compensation, was granted Mr. Schrader 84,877 shares of restricted common stock under the Company’s 2019 Stock Incentive Plan. The restricted stock will vest over three years commencing on July 1, 2020.
The shares of common stock described aboveequity securities that have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and were issued and sold in reliance upon1933.
Purchases of Equity Securities by the exemption from registration contained in Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. Each of the parties is an accredited investor as defined by Rule 501 under the Securities Act.Issuer
During the quarter ended December 31, 2021, no shares of our common stock were repurchased by the Company.
ITEM 6. [RESERVED]
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | |
| YEARS ENDED DECEMBER 31, | | 2019 | | 2018 | | 2017 |
| OPERATING SUMMARY | | | | | | |
| Net sales | | $ | 376,562 | | | $ | 763,173 | | | $ | 10,038,460 | |
| Net loss | | $ | (37,162,827) | | | $ | (36,502,316) | | | $ | (41,216,788) | |
Net loss attributable to common stockholders per share –
basic and diluted | | $ | (0.58) | | | $ | (0.74) | | | $ | (1.06) | |
| Weighted average number of common shares outstanding | | 64,314,756 | | | 50,377,909 | | | 38,755,796 | |
| | | | | | |
| FINANCIAL POSITION SUMMARY | | | | | | |
| Total assets | | $ | 50,673,829 | | | $ | 11,804,773 | | | $ | 16,504,293 | |
| Long-term debt and mandatory redeemable Series B preferred stock | | $ | 19,142,908 | | | $ | 8,312,079 | | | $ | 1,709,881 | |
| Convertible Note, at fair value | | $ | 39,020,000 | | | $ | — | | | $ | — | |
| | | | | | |
| Cash dividends per common share | | $ | — | | | $ | — | | | $ | — | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with ourthe consolidated financial statements and the related notes that appearincluded elsewhere in this Annual Report on Form 10-K.For discussion related to changes in financial condition and the results of operations for fiscal year 2019-related items, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year 2020, which was filed with the Securities and Exchange Commission on March 1, 2021.
Overview and 20192021 Highlights
We are a technology company focused on providingwith a vision to pioneer the transition to zero-emission commercial vehicles. Our primary focus is to provide sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, weWe design and build high performance battery-electricmanufacture all-electric delivery trucks and drone systems, including the technology that optimizes the way these vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment. As part of our solution, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency.operate. We are currently focused on our core competency of bringing our electric delivery vehicle platforms to market.
During 2021, we were focused on bringing our existing C-1000 vehicles into full compliance with Federal Motor Safety Vehicle Standards (“FMVSS”), increasing our vehicle production and capacity, increasing the affordability of our vehicles, and developing and introducing our next generation of products. We continue to focus on product quality, manufacturing capacity and operational planning, and engineering and design to enable increased deliveries and deployments of our products and future revenue growth.
During the period, we began development of a revised strategic product roadmap for our electric vehicle delivery offerings. The foundation of this plan is the development of two new truck chassis platforms, the W56 and W34, which we intend to replace the C-1000 for most applications. The W56, based on long-standing Company know-how in the Class 5 and 6 truck chassis market is expected to begin production in 2023. The W34 platform will be our second generation, low floor, advanced feature set offering for the Class 3 and 4 truck chassis market and is expected to begin production in 2024.
We continue to seek out opportunities to grow the business organically, and by expanding relationships with existing customers and by seeking out new business. We believe we are well positioned to take advantage of long-term opportunities and continue our efforts to bring product innovations to-market. Some of our recent strategic developments include:
•The appointment of our new executive leadership team, which supports go-forward operating and commercial plans and executes on our plan to transition from an advanced technology start-up to an efficient manufacturing company.
•Our relationship with Amerit Fleet Solutions, a provider of customized fleet maintenance and repair programs nationwide, demonstrates our ability to provide maintenance service programs for electric and clean fuel technologies by integrating operational, maintenance and fleet data into an accessible portal, allowing for real-time tracking and expedited response times.
Management Opportunities, Challenges and Risks and 2022 Outlook
Commercial Vehicles
We announced the development of the C-Series electric delivery truck toin 2017, a vehicle aimed at the Class 3 truck market and fulfilling our existing backlog of orders. We have licensed some of our previously developed intellectual property to Lordstown Motors Corp. (“LMC”) and have sold our SureFly™ multicopter business which were assets that are outside of our core focus.
Workhorse electric delivery trucks are in use by our customers on U.S. roads. Our delivery customers include companies such as UPS, FedEx Express, Alpha Baking and W.B. Mason. Data from our in-house developed telematics system demonstrates our vehicles on the road are averaging approximately a 500% increase in fuel economy as compared to conventional gasoline-based trucks of the same size and duty cycle.
In addition to improved fuel economy, we anticipate that the performance of our vehicles on-route will reduce long-term vehicle maintenance expense by approximately 60% as compared to fossil-fueled trucks.
We areleverages an OEM capable of manufacturing Class 3-6 commercial-grade, medium-duty truck at our Union City, Indiana facility, marketed under the Workhorse® brand. Workhorse last mile delivery trucks are assembled in the Union City assembly facility.
From our development modeling and the existing performance of our electric vehicles on American roads, we estimate that our C-Series delivery trucks will save over $170,000 in fuel and maintenance savings over the 20-year life of the vehicle. We expect that fleet buyers will be able to achieve a three-year or better return-of-investment (without government incentives), which we believe justifies the higher acquisition cost of our vehicles.
Our goal is to continue to increase sales and production, while executing on our cost-down strategy to a point that will enable us to achieve gross margin profitability of the last mile delivery truck platform. As a key strategy, we have developed the Workhorse C-Series platform, which has been accelerated from our previous development efforts.
The Workhorse C-Series electric delivery truck platform will be available in multiple size configurations, 450, 650 and 1,000 cubic feet. This ultra-low floor platform incorporates state-of-the-art safety features, economy and performance.delivery vehicle platform. We expect these vehicles offer fleet operators the most favorable total cost-of-ownership of any comparable vehicle available today. We believe we are the first American OEMutilized our extensive customer experience gained from working with our E-Series customers to market a U.S. built electric delivery truck, and early indications of fleet interest are significant. We expect the C-Series trucks will be supported by our Ryder Systems partnership. Using C-Series light duty prototypes, we delivered over 100,000 packages in San Francisco and Ohio during our testing. During the testing period we achieved 50 MPGe and successfully demonstrated the role the vehicle can have in last mile delivery.
Our HorseFly™ delivery drone is a custom designed, purpose-built drone that is fully integrated in our electric trucks. HorseFly is designed with a maximum gross weight of 30 lbs., a 10 lb. payload and a maximum air speed of 50 mph. It is designed and built to be rugged and consisting of redundant systems to further meet the FAA’s required rules and regulations. As part of the divestiture of SureFly, the Company formed a 50/50 joint venture to which we contributed our HorseFly technology.
SureFly
On November 27, 2019, the Company completed the sale of SureFly for $4.0 million.
Hackney
On October 31, 2019, the Company and ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement (the "Purchase Agreement") to purchase certain assets of Seller (the "Acquired Assets") and assume certain liabilities of Seller. The closing under the Purchase Agreement provides that the Company will be required to deliver shares of its common stock to the Seller if it does not make the Second Payment (as defined below) on a timely basis. Accordingly, upon execution of the Purchase Agreement, the Company deposited $1.0 million in cash and shares of its common stock having an aggregate value of $6.6 million based on the closing price as of the day immediately preceding the date of the Purchase Agreement (the "Escrow Shares") into an escrow account (the "Escrow Account"). The number of Escrow Shares shall be subject to adjustment if the aggregate value of the Escrow Shares is less than $5.28 million or greater than $7.92 million on certain dates.
The Company agreed to pay $7.0 million for the purchase of the Acquired Assets, $1.0 million of which was paid from the Escrow Account in January 2020 after satisfaction of certain conditions, and the remaining $6.0 million which (the “Second Payment”) is payable in cash within 45 days if certain additional conditions are attained. The Purchase Agreement provides that the Company shall make additional payments to Seller in the event the Second Payment is not made within 45 days of when such payment is due. In the event the Second Payment is not made to Seller within 105 days after such payment is due, Seller may, at its option, require that the Escrow Agent release to Seller Escrow Shares with a value (based on the then-current market price of the shares) equal to $6,000,000 in satisfaction of the Second Payment.design this product.
LMC
On November 7, 2019,During the third quarter of 2021, we announced our decision to suspend deliveries of our C-1000 vehicles and recall the 41 vehicles we have already delivered to customers when management determined that additional testing and modifications to existing vehicles are required to bring the C-1000 vehicles into full compliance with Federal Motor Vehicle Safety Standards (“FMVSS”). We further announced the Company enteredfiled a report with the National Highway Traffic Safety Administration (“NHTSA”) regarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into a transactionfull compliance with LMC pursuant to which the Company agreed to grant LMC a perpetual and worldwide license to certain intellectual property relatingFMVSS. We indicated our previous statements related to the Company’s W-15 electric pickup truck platformC-1000’s compliance with NHTSA standards cannot be relied upon and its related technology (the “Licensed Intellectual Property”)so notified the Securities and Exchange Commission. For further discussion on this matter, please see Note 18, Commitments and Contingencies, to the consolidated financial statements included elsewhere in exchange for royalties, equity interests in LMC, and other consideration (the “LMC Transaction”). LMC was founded by Stephen S. Burns, a current stockholder and former Chief Executive Officer and Director of the Company.this Current Report on Form 10-K.
In connection with the LMC Transaction, the following agreements (collectively, the “Agreements”) were entered into:
•Intellectual Property License Agreement between the Company and LMC (the “License Agreement”);
•Subscription Agreement between the Company and LMC (the “Subscription Agreement”);
•Voting and Registration Rights Agreement among the Company, LMC, and certain LMC stockholders (the “Voting Agreement”); and
•Consent and Waiver to Credit Agreement among the Company, Wilmington Trust, as agent, and the lenders under the Credit Agreement (defined below) (the “Consent and Waiver”).
LMC will endeavor to, among other things, raise sufficient third-party capitalrecall, we recorded a $2.4 million refund liability in our consolidated balance sheets for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, of which are expected to be significant (the “Capital Raise”). The Agreements provide that LMC would manufacture electric pickup trucks or similar vehicles under 10,001 gross vehicle weight (“GVW”) using the Licensed Intellectual Property (the “Vehicles”).
Under the Agreements, LMC has exclusive rights to the Licensed Intellectual Property from the date of the License Agreement until the earliest of: (i) June 30, 2020, if the Capital Raise has not occurred; (ii) the second anniversary of the LMC Transaction, if LMC has not started regularly manufacturing Vehicles; (iii) the third anniversary of the LMC Transaction; and (iv) the date that any third-party automotive manufacturer acquires more than ten percent of LMC’s outstanding common stock. The Licensed Intellectual Property excludes the Company’s intellectual property relating to delivery trucks for last mile delivery or commercial use. LMC will have the right, with limited exceptions, to match the best competing offer as a subcontractor for the Company should need to engage a subcontractor in connection with larger potential production contracts to assemble such vehicles utilizing its existing capabilities and technologies. The limited exceptions include the event in which the Company elects to award a subcontract for the manufacturing or assembly to a strategic partner owning in excess of 19% of the Company.
LMC must pay the Company one percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the “Royalty Advance”). LMC must also pay a one percent royalty on the gross salespurchase price of the first 200,000 Vehicles sold, but onlyvehicles to the extent that the aggregate amountbe refunded to customers as of such royalty fees exceed the amount paid as the Royalty Advance. Upon completionDecember 31, 2021. As of the Capital Raise, the Company intends to transfer its approximately 6,000 existing orders for Vehicles to LMC, subject to customer consent. LMC will pay the CompanyDecember 31, 2021, we also recorded a four percent commission on the gross sales price of any transferred existing orders fulfilled by LMC. The success of the Capital Raise is not within the Company’s control, and it therefore cannot provide assurance that it will receive the Royalty Advance or receive the projected underlying royalty from the production of Vehicles.
Under the Subscription Agreement, LMC issued ten percent of its common stock to the Company in exchange for the Company’s obligations under the License Agreement. The Subscription Agreement grants the Company anti-dilution rights for$1.6
million asset for recovery, the value of which was determined by adjusting the former carrying amount of the vehicles being returned for expected costs to recover and complete necessary repairs and modifications.
We also began extensive testing on the C-1000 vehicles during the fourth quarter of 2021, which included brake testing, analytical load testing, durability, and review of the field data on our electric powertrain. The goal of this testing was to determine the viability of the C-Series product line. Upon completion of this testing in the first quarter of 2022, the C-1000 platform was determined to be a low-volume, limited cargo capacity vehicle. We expect to transition manufacturing to the W56 and W34 platforms in the near future, as described below.
In connection with our decision to limit future production of the C-Series vehicles, we recorded reserves for any excess or obsolete inventories exceeding our planned production volume. We also recorded reserves for inventories that had net realizable values less than their carrying value. The total inventory reserve as of December 31, 2021 was $77.0 million, as compared to $2.0 as of December 31, 2020.
Additionally, we recorded an impairment of approximately $6.8 million for certain assets such as tooling and machinery related to the production of the C-Series vehicles that are no longer intended to be used.
We also recorded a reserve for prepaid purchases of approximately $23.9 million related to deposits made on planned future purchases of inventory used in the production of the C-Series vehicles.
Product Roadmap
Workhorse has developed a revised strategic product roadmap for our electric vehicle delivery offerings. The foundation of this plan is the development of two new truck chassis platforms, the W56 and W34. The W56, based on long-standing Company know-how in the Class 5 and 6 truck chassis market, is expected to begin production in 2023. The W34 platform will be our second generation, low floor, advanced content offering for the Class 3 and 4 truck chassis market and is expected to begin production in 2024.
In order to accelerate time-to-market for customers seeking delivery of electric vehicles during 2022, we entered into a strategic supply agreement (the “Supply Agreement”) with GreenPower Motor Company Inc. (“GreenPower”). Under the agreement, we will have exclusive rights to sell Class 4 step vans based on the GreenPower supplied base vehicle. The finished Class 4 step vans will be available for sale in the United States and Canada, under the Workhorse brand and with Workhorse after sales and support service. The van, known as the W750, will have approximately 750 cubic foot capacity and will feature up to 150 miles of all-electric range, with a payload capacity of five thousand pounds. We expect the first deliveries of the W750 will occur later in 2022.
U.S. Post Office Replenishment Program / Next Generation Delivery Vehicle Project
Workhorse was one of the five participants that the United States Postal Service (“USPS”) selected to build prototype vehicles for the USPS Next Generation Delivery Vehicle (“NGDV”) project to replace approximately 165,000 vehicles in its existing fleet. Workhorse delivered six vehicles for prototype testing under the NGDV Acquisition Program and on February 23, 2021, the USPS announced it awarded a contract to Oshkosh Defense, LLC (“Oshkosh”) to manufacture a new generation of U.S.-built postal delivery vehicles and assemble 50,000 to 165,000 vehicles over the next ten years.
On June 16, 2021, the Company filed a bid protest against the United States in the United States Court of Federal Claims in connection with the USPS award of the contract for its Next Generation Delivery Vehicle to Oshkosh. On September 15, 2021, the Company withdrew its bid protest filed in the United States Court of Federal Claims.
Aerospace
HorseFly™
Our HorseFly (“HorseFly”) Unmanned Aerial Vehicle (“UAV”) is the first in a family of custom-built, high-efficiency delivery UAVs being designed to be integrated with our line of electric delivery trucks. The Horsefly is a 4 rotor UAV that can fly fully autonomously and is designed for safety, efficiency, and the rigors of day-to-day delivery service. The HorseFly system is designed such that a driver or driver’s assistant can maintain line-of-sight operation of the UAV delivery process and to conform to the Federal Aviation Administration (“FAA”) guidelines for UAV operation in the U.S.
Our Metron - Air delivery application is a custom HorseFly user control center. We built this technology to allow users a variety of planning, control and monitoring options, including monitoring locations of the truck, package and drone, and real-time onboard video of the HorseFly drone.
We recently announced that we entered into a pilot program with the U.S. Department of Agriculture’s Natural Resources Conservation Service (“NRCS”) to demonstrate our ability to provide small UAS as a service to support NRCS efforts in Mississippi. As part of the pilot program, we will offer small UAS services, including monitoring via drone, data procurement and analytics. Automating the daily audits with the small UAS will allow the NRCS to expedite information delivery, increase safety for auditors on the ground, be more cost-effective, increase fidelity of the data gathered, and ultimately create a more efficient procedure. The first phase of the program involves the Company collaborating with NRCS agents to gain a field-level understanding of the program’s deliverables before implementing it’s UAS technology to gather actionable data and insights.
Certus Unmanned Aerial Systems LLC
Upon completion of the sale of our SureFly™ Multicopter in 2019, we entered into a joint venture agreement with Moog Inc. (“Moog”) for the development of our HorseFly UAV and the related business. Under the agreement, Workhorse and Moog contributed certain complimentary assets to Certus Unmanned Aerial Systems LLC (“Certus”), which is 50% owned by both the Company and Moog. Through Certus, teams from Workhorse and Moog are improving HorseFly’s components and subsystems with the goal of bringing the highest quality UAV to-market.
Impact of COVID-19 Pandemic
There continues to be worldwide impact from the COVID-19 pandemic. During 2021, there has been a trend in many parts of the world of increasing availability and administration of the vaccine against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. However, infection rates and regulations continue to fluctuate and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains, such as increased port congestion, and intermittent supplier delays. While we have been relatively successful in navigating the impact from the COVID-19 pandemic, we have previously been affected by temporary manufacturing closures. As of December 31, 2021, our locations and primary suppliers continue to operate and we continue to work through supplier constraints caused by the COVID-19 outbreak, as well as the supply chain difficulties. The Company is subjecttaking a variety of measures to certain restrictionsmaintain operations with as minimal an impact as possible to promote the safety and security of our associates, including increased frequency of cleaning and disinfecting of facilities, social distancing, remote working when possible and limitations on transferring LMC’s equityvisitor access to facilities.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for this two-year period. Under the Voting Agreement,qualified improvement property. As a result, the Company hasmade provision to defer the rightemployer side social security payments for the last three quarters of 2020, to designate one director to LMC’s boardbe paid in two equal installments of directors, subject to certain limitations.
$0.2 million each in 2021 and 2022.
Additionally, we entered into a Paycheck Protection Program Term Note (“PPP Note”) with PNC Bank, N.A. under the Paycheck Protection Program of the CARES Act. The Company received total proceeds of $1.4 million from the PPP Note and used the proceeds primarily to cover payroll costs. The outstanding principal and accrued interest on the PPP Note were forgiven in January 2021.
We cannot predict the duration or direction of current global trends from this pandemic, the sustained impact of which is largely unknown, is rapidly evolving and has varied across geographic regions. Ultimately, we continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and we will have to accurately project demand and infrastructure requirements globally and deploy our production, workforce and other resources accordingly. For more detailed descriptions of the impact and risks to our business, please see certain risk factors described in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K.
Results of Operations
Our Consolidated Statements of Operations financial information is as follows: | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Sales, net of returns and allowances | $ | (851,922) | | | $ | 1,392,519 | | | $ | 376,562 | |
| Cost of sales | 132,492,110 | | | 13,067,108 | | | 5,844,891 | |
| | | | | |
| Gross loss | (133,344,032) | | | (11,674,589) | | | (5,468,329) | |
| Operating expenses | | | | | |
| Selling, general and administrative | 40,160,795 | | | 20,157,658 | | | 10,199,534 | |
| Research and development | 11,610,027 | | | 9,148,931 | | | 8,199,074 | |
| Total operating expenses | 51,770,822 | | | 29,306,589 | | | 18,398,608 | |
| Loss from operations | (185,114,854) | | | (40,981,178) | | | (23,866,937) | |
| Interest expense, net | 12,644,164 | | | 190,520,337 | | | 29,145,690 | |
| Other loss (income) | 225,432,884 | | | (323,111,944) | | | (15,849,800) | |
| (Loss) income before (benefit) provision for income taxes | (423,191,902) | | | 91,610,429 | | | (37,162,827) | |
| (Benefit) provision for income taxes | (21,847,089) | | | 21,833,930 | | | — | |
| Net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,162,827) | |
| | | | | | | | | | | |
| Years Ended
December 31, | | |
| 2019 | | 2018 |
| | | |
| Net sales | $ | 376,562 | | | 763,173 | |
| | | |
| Cost of sales | 5,752,700 | | | 7,981,413 | |
| Warranty expense | 92,191 | | | 7,972,152 | |
| Gross loss | (5,468,329) | | | (15,190,392) | |
| | | |
| Operating expenses | | | |
| Selling, general and administrative | 10,199,534 | | | | 11,485,482 | |
| Research and development | 8,199,074 | | | | 7,391,693 | |
| Total operating expenses | 18,398,608 | | | 18,877,175 | |
| | | |
| Other income | 15,849,800 | | | — | |
| | | |
| Loss from operations | (8,017,137) | | | | (34,067,567) | |
| | | |
| Interest expense, net | 29,145,690 | | | 2,434,749 | |
| | | |
| Loss before provision for income taxes | (37,162,827) | | | | (36,502,316) | |
| Provision for income taxes | — | | | — | |
| | | |
| Net loss | $ | (37,162,827) | | | | $ | (36,502,316) | |
Revenue
Net sales forSales decreased $2.2 million in the yearsyear ended December 31, 2019 and 2018 were $0.4 million and $0.8 million, respectively. The decrease in net sales was2021 as compared to the year ended December 31, 2020, primarily due to a strategic shift to developmentan increase in sales returns and allowances in connection with the recall of our C-1000 vehicles announced in the C-Series, which resulted in a decrease in volumethird quarter of trucks sold.2021.
Cost of Sales
Cost of sales includes direct and indirect materials, labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistics costs, and reserves for estimated warranty expenses. Cost of sales also includes charges to write down the yearscarrying amount of tooling and machinery when it exceeds the fair value of the asset or asset group, charges to write down the carrying value of our inventory when it exceeds its estimated net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand.
Cost of sales increased $119.4 million in the year ended December 31, 2019 and 2018 were $5.8 million and $8.0 million, respectively.2021 as compared to the year ended December 31, 2020. The cost of sales decreaseincrease was primarily due to a decrease$75.0 million increase in the inventory reserve, a $23.9 million increase in the prepaid purchases reserve, and a $6.8 million impairment charge to adjust the carrying amount of tooling and other assets related to the C-Series electric delivery truck. The year over year increases described above were primarily driven by the Company's decision to produce the C-1000 platform at low-volume and transition to a new all-electric delivery truck platform in the near future. This decision was based on results of extensive testing performed on the C-1000 vehicles, which concluded in early 2022.
Additionally, there was an increase of $5.0 million in employee and labor related expenses from increased headcount, a $4.9 million increase in manufacturing overhead attributable to an increase in volume of trucks sold duerelated to strategic shift to developmentour production of the C-Series platform. In addition, cost of sales included an inventory reserve of $0.7electric delivery truck, and a $3.4 million and $2.5 million for the years ended December 31, 2019 and 2018, respectively.
Warranty Expense
Warranty expense for the years ended December 31, 2019 and 2018 was $0.1 million and $8.0 million, respectively. The expenseincrease in 2018 relates to issues with certain battery packs in our 2016 and 2017 E-Series trucks. During the fourth quarter of 2018, the battery pack monitoring software indicated that some of the battery packs were not performing at expected levels. In 2019, some vehicles have undergone replacement of battery pack components. The expense includes estimated costs for labor and transportation and excludes any contribution from vendors.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses generally consist of personnel and facilities costs related to our sales, marketing, executive, finance, human resources, information technology and legal organizations as well as fees for professional and contract services and litigation settlements.
SG&A expenses increased $20.0 million in the year ended December 31, 2019 were $10.2 million, a decrease from $11.5 million for2021 as compared to the year ended December 31, 2018.2020. The decrease isincrease was primarily due to lower spendingan increase of $7.9 million in areas such asemployee and labor related expenses from increased headcount and the appointments of our new executive leadership team during the year. Additionally, there was an increase of $7.0 million in professional services related to litigation and settlements, marketing programs, investor relations services and
general consulting fees, a $3.1 million increase in selling related fees, and employee-related costs.a $1.4 million increase in corporate insurance premiums.
Research and Development Expenses
Research and development (“R&D”) expenses consist primarily of personnel costs for our teams in engineering and research, manufacturing engineering and manufacturing test organizations, prototyping expense, and contract and professional services.
R&D expenses increased $2.5 million in the year ended December 31, 2019 were $8.2 million, an increase from $7.4 million for2021 as compared to the year ended December 31, 2018.2020. The increase in R&D expenses iswas primarily due to thean increase in prototypeemployee and labor related expenses due to an increase in headcount to support our expanding product design expenses forroadmap such as the new W56 and W34 truck chassis platforms and continuing development of our bid for the United States Postal Service and for the C-Series design.HorseFly UAV.
Other IncomeLoss (Income)
Other income is comprisedloss (income) consists primarily of the following:
| | | | | | | | | | | |
| Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Technology licensing income | $ | 12,194,800 | | | $ | — | |
| Gain on divestiture | 3,655,000 | | | — | |
| Total other income | $ | 15,849,800 | | | | $ | — | |
LMC
On November 7, 2019, the Company entered into a transaction with LMCgains and granted LMC a perpetual licenselosses related to certain intellectual property.
Consideration for the License Agreement is as follows:
◦A ten percent ownership interestchanges in the common stock of LMC in exchange for the Company’s obligations under the License Agreement. The LMC common stock received provides the Company with anti-dilution rights for two years. Under the Voting Agreement, the Company has the right to designate one director to LMC’s board of directors, subject to certain limitations.
◦One percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the “Minimum Royalty”). Any amount paid to the Company from the Capital Raise is non refundable.
◦A one percent royalty on the gross sales price of the first 200,000 Vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
◦Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing Vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC. The success of the Capital Raise is not within the Company’s control, and it therefore cannot provide assurance that it will receive the Royalty Advance or receive the projected underlying royalty from the production of Vehicles.
The consideration for the License Agreement includes a fixed and variable component:
•The fixed component consists of the ten percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value and sales of our Investment in Lordstown Motors Corp. (“LMC”), which was sold during the LMC ownership interest received was $12.2third quarter of 2021.
Other (loss) income changed unfavorably by $548.5 million and was recorded in Other Income for the year ended December 31, 2019.
•The variable component consists2021 as compared to the year ended December 31, 2020. During the year ended December 31, 2021, we recognized a loss of the four percent commission$225.4 million, primarily attributable to unfavorable changes in fair value and the one percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owed is sold.
SureFly divestiture
On November 27, 2019, the Company completed the sale of SureFly™ for $4.0 million. The gain on divestiture was $3.7our Investment in LMC. During the year ended December 31, 2020, we recognized income of $323.1 million, netprimarily attributable to favorable changes in fair value of selling costs of $0.3 million. SureFly was the Company's hybrid electrically powered vertical takeoff and landing aircraft project. The Company had no revenues associated with SureFlyour Investment in 2019 or 2018. Operating expenses associated with the development of Surefly were $1.4 million and $2.5 million in 2019 and 2018, respectively.
Interest Expense, Net
InterestNet interest expense net is comprisedconsisted of the following:
| | | Years Ended
December 31, | | | For the Years Ended December 31, |
| | 2019 | | 2018 | | 2021 | | 2020 | | 2019 |
| | | | |
| Change in fair value of convertible notes and loss on exchange for common stock | | Change in fair value of convertible notes and loss on exchange for common stock | $ | 7,324,035 | | | $ | 160,749,118 | | | $ | 981,728 | |
| Contractual interest expense | Contractual interest expense | $ | 4,673,979 | | | $ | 520,130 | | Contractual interest expense | 6,737,902 | | | 4,832,128 | | | 4,673,979 | |
| (Gain) loss on extinguishment of debt | | (Gain) loss on extinguishment of debt | (1,411,000) | | | — | | | 6,079,000 | |
| Other | | Other | (6,772) | | | 355,096 | | | 119,566 | |
| Change in fair value of warrant liability | | Change in fair value of warrant liability | — | | | 12,176,690 | | | 15,369,253 | |
| Amortization of discount and debt issuance costs | Amortization of discount and debt issuance costs | 1,922,164 | | | 2,348,289 | | Amortization of discount and debt issuance costs | — | | | 7,696,671 | | | 1,922,164 | |
| Loss on extinguishment of debt | 6,079,000 | | | 2,249,800 | | |
| Change in fair value of warrant liability | 15,369,253 | | | (2,683,470) | | |
| Change in fair value of Convertible Note | 981,728 | | | — | | |
| Other | 119,566 | | | — | | |
| Loss on extinguishment of mandatorily redeemable Series B preferred stock | | Loss on extinguishment of mandatorily redeemable Series B preferred stock | — | | | 4,710,634 | | | — | |
| Total interest expense, net | Total interest expense, net | $ | 29,145,690 | | | $ | 2,434,749 | | Total interest expense, net | $ | 12,644,165 | | | $ | 190,520,337 | | | $ | 29,145,690 | |
Contractual interestInterest expense increaseddecreased $177.9 million in the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to higher loan balances year-over-year. The dividendsa reduction of $153.4 million related to fair value adjustments and losses on conversion of our convertible notes. Additionally, there was a decrease of $12.2 million related to mark-to-market adjustments and losses on exercises of warrants issued to lenders, a $7.7 million decrease in costs related to the issuance of our convertible notes, and a $4.7 million decrease in losses recognized on the mandatory redeemableredemption of Series B preferred stock are classified as interest expense. The loss on extinguishment of debt in 2019 includes a $2.4 million write-off of deferred loan fees and a $3.4 million premium payable on the early payoff of the Marathon Loans. The loss on extinguishment of debt in 2018 includes a $2.2 million write-off of deferred loan fees on the payoff of the Arosa Loans. Warrants issued under certain of our loan agreements have been classified as liabilities and are marked-to-market at each balance sheet date until terms of the respective warrant agreements change and no longer meet the criteria to be classified as liabilities. Our 4.5% Convertible Note issued in December 2019 (the "Convertible Note") is accounted for at fair value and changes in fair value are classified in interest expense.Preferred Stock.
Provision for Income Tax
For the years ended December 31, 20192021 and 2018,2020, the Company has nettaxable losses primarily due to operations and stock compensation related deductions and thus has no current tax expense or benefit was recorded. TheAs of December 31, 2021, the Company has recorded a fullincreased the valuation allowance onrecorded against its deferred tax assets fordue to the years endedsale of LMC shares during the year and the uncertainty about our ability to utilize our remaining deferred tax assets in future years. As of December 31, 20192020, the Company released the valuation allowance with the exception of certain tax credits and 2018 and nonet operating losses that will not be realizable due to IRC Section 382 Ownership Change limitations. As a result, the deferred tax expense has been recorded.recorded in 2020 was reversed and the Company recognized a deferred tax benefit in 2021 to reinstate the valuation allowance.
Liquidity and Capital Resources
Cash Requirements
From inception, we have financed our operations primarily through sales of equity securities and issuance of debt. We have utilized this capital for research and development and to fund designing, building and delivering vehicles to customers and for working capital purposes.
As of December 31, 2019,2021, we had approximately $23.9$201.6 million in cash and cash equivalents, compared to approximately $1.5$46.8 million as of December 31, 2018,2020, an increase of $22.4$154.8 million. The increase in cash and cash equivalents was primarily attributable to the issuanceJanuary 2021 release of debt$194.4 million of restricted cash held in escrow from the convertible notes net proceeds issued in October 2020, in addition to proceeds of $105.1 million received in connection with the sale of our investment in LMC. The increase in cash and other financings during the yearcash equivalents was offset by cash used in operations.operations related to ramp-up of production of our C-Series vehicles, consulting and professional fees, and compensation related expenses.
We believe our existing capital resources will be sufficient to support our current and projected funding requirements throughfor at least the second quarter of 2020next twelve months, after which time additional funding willmay be required. However, if the opportunity arises, we may elect to raise additional capital in 2022 through an At-the-Market program or similar instrument.
Our operations will require significant additional fundingCash Requirements
From time to time in the ordinary course of business, we enter into agreements with vendors for the foreseeable future. Unlesspurchase of components and raw materials to be used in the manufacture of our products. However, due to contractual terms, variability in the precise growth curves of our development and production ramps, and opportunities to renegotiate pricing, we are ablegenerally do not have binding and enforceable purchase orders under such contracts beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to generate a sufficientaccurately project.
We currently expect our capital expenditures to upgrade our facilities in Indiana, Ohio and Michigan to be between $25.0 and $35.0 million in 2022.
As of December 31, 2021, we had outstanding $27.5 million in aggregate principal amount of revenueindebtedness and reduce our costs, we expecttotal minimum lease payments are $5.9 million. For details regarding our indebtedness and lease obligations, refer to finance future cash needs through public and/or private offeringsNote 8, Debt, and Note 9, Leases, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Sources and Condition of equity securities and/or debt financings. Liquidity
With the exception of contingent and royalty payments that we may receive under our existing collaborations, we do not currently have any committed future funding. To the extent we raise additional capital by issuing equity securities, our stockholders could at that time experience substantial dilution. Any debt financing that we are able tocan obtain may involve operating covenants that restrict our business.
Our future funding requirements will depend upon many factors, including, but not limited to:
•our ability to acquire or license other technologies that we may seek to pursue;
•our ability to manage our growth;
•competing technological and market developments;
•the costs and timing of obtaining, enforcing and defending our patent and other intellectual property rights; and
•expenses associated with any unforeseen litigation.
For the years ended December 31, 20192021 and 2018,2020, we maintained an investment in a bank money market fund. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of concentration and degrees of risk. We will continue to monitor the impact of the changes in the conditions of the credit and financial markets to our investment portfolio and assess if future changes in our investment strategy are necessary.
Summary of Cash Flows | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net cash used in operating activities | $ | (132,577,103) | | | $ | (70,278,949) | | | $ | (36,871,677) | |
| Net cash provided by (used in) investing activities | 99,812,549 | | | (5,728,130) | | | 1,654,502 | |
| Net cash (used in) provided by financing activities | (6,817,119) | | | 292,367,730 | | | 58,572,841 | |
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Net cash used in operating activities | $ | (36,871,677) | | | $ | (21,754,133) | |
| Net cash provided by (used in) investing activities | 1,654,502 | | | | (18,422) | |
| Net cash provided by financing activities | 58,572,841 | | | | 19,215,828 | |
Cash Flows from Operating Activities
Our cash flows from operating activities are affected by our cash investments to support the business in research and development, manufacturing, selling, general and administration. Our operating cash flows are also affected by our working capital needs to support fluctuations in inventory, personnel expenses, accounts payable and other current assets and liabilities.
During the years ended December 31, 20192021 and 2018,2020, cash used in operating activities was $36.9$132.6 million and $21.8$70.3 million, respectively. The increase in net cash used in operations in 20192021 as compared to 2018 is mainly due2020 was primarily attributable to spend related to our initial production of the net loss for the year, payments for prepaid purchases during the yearC-Series electric delivery truck, including inventory build and the reduction of accounts payableemployee and accrued expense balances.labor related costs.
Cash Flows from Investing Activities
During the yearyears ended December 31, 20192021 and 2020, cash provided by (used in) investing activities was $1.7$99.8 million whileand $(5.7) million, respectively. The increase in 2018 itnet cash provided from investing activities was negligible. The Company receivedprimarily attributable to net proceeds fromof approximately $105.1 million received in connection with the divestituresale of SureFly of $3.7 million and had capital expenditures of $2.0 million for tooling for the production of the C-Series truck.our investment in LMC.
Cash Flows from Financing Activities
During the yearsyear ended December 31, 2019 and 2018,2021, net cash used in financing activities was $6.8 million compared to net cash provided by financing activities was $58.6of $292.4 million and $19.2 million, respectively.in 2020.
The significant financing activities that occurred in 20192021 and 20182020 include:
20192021
•$4.4 million for the exercise of stock options and warrants, and vesting of restricted shares.
2020
•Issuance of Convertible Noteconvertible notes with net proceeds of $39.0 million.approximately $262.4 million;
•IssuanceExercise of Series B Preferred Stockstock options and warrants with net proceeds of $25.0 million.
•Sale of common stock with net proceeds of $5.9 million.approximately $53.6 million;
•$5.81.4 million drawn onof net proceeds from the Marathon Tranche Two loan, paid off at the end of 2019.Paycheck Protection Plan Term Note; and
•$10.025.0 million for the pay offredemption of the Marathon Tranche One loan.mandatorily redeemable Series B Preferred Stock.
2018
•$17.8 million net proceeds from long-term debt.
•Sale of common stock with net proceeds of $16.4 million.
•$9.9 million of payments on long-term debt.
•$5.8 million payment on notes payable.
The Company may seek to raise additional capital through public or private debt or equity financings in order to fund its operations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting PoliciesEstimates
We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and Estimates(2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
There are other items within our financial statements that require estimation but are not deemed critical as defined above.
The following accounting principles and practices of the Company are set forth to facilitate the understanding of data presented in the consolidated financial statements:
Use of estimates
The preparation of financial statements are prepared in conformityaccordance with accounting principles generally accepted in the United StatesU.S. (“GAAP”). The preparation of Americathe consolidated financial statements in conformity with GAAP requires managementus to make estimates and assumptions that affect certain reported amounts and disclosures. We base our estimates on historical experience, as appropriate, and an various other assumptions that we believe to be reasonable under the circumstances. Accordingly, actual results could differ from those estimates. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows may be affected.
InvestmentDue to the COVID-19 pandemic, there has been uncertainty and disruption in LMC
the global economy and financial markets. We have assessed the impact of the pandemic and are not aware of any specific events or circumstances that required an investmentupdate to our estimates and assumptions or materially affected the carrying value of our assets or liabilities as of the date of this Annual Report on Form 10-K. These estimates may change as new events occur and additional information is obtained. Actual results could differ from these estimates under different assumptions and conditions.
Inventory Valuation
Nature of Valuation: Inventories are stated at the lower of cost or net realizable value. We write-down inventory for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value.
Assumptions and Approach Used: We review our inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our inventory based on market conditions. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in LMC,facts and circumstances do not result in the restoration or increase in that newly established cost basis.
The following are key assumptions we used in establishing inventory reserves:
•Business projections: We make assumptions about the demand for our products in the marketplace. These assumptions drive our planning assumptions for volume, mix, and pricing. A change in our planned production volumes can materially impact the estimate of excess and obsolete inventories.
•Economic projections: Assumptions regarding general economic conditions are included in and affect our assumptions regarding sales and pricing estimates for our vehicles. Additionally, these assumptions affect our ability to sell inventories on hand in the open market. These assumptions include sales volume, inflation, and prices of raw materials. A change in economic conditions can materially impact the estimate of the net realizable value of inventories.
•FMVSS certification and vehicle repairs: Assumptions regarding the cost to recover and complete necessary modifications to address customer feedback and bring our vehicles into full compliance with FMVSS. These assumptions include cost of transportation, labor, raw materials and manufacturing overhead. A change in these assumptions can materially impact the estimate of the net realizable value of inventories.
During 2022, we completed our review of the C-1000 platform and determined it is eligible for certification and reintroduction as a limited production vehicle. In addition, we expect to transition our manufacturing focus to the W56 and W34 platforms in the near future. Accordingly, we determined that there was significant excess and obsolete inventory on-hand that would not be used in the limited production of the C-1000 platform, or for production of future vehicle platforms. Additionally, due to the recall of the C-1000 platform and estimated cost to complete necessary repairs and modifications, we reduced our estimated net realizable value of our inventory to a lower cost basis.
Should our estimates of future inventory usage or selling prices change, additional and potentially material increases to this reserve may be required. A small change in our estimates may result in a material charge to our reported financial results. Refer to Note 2, Inventory, to the consolidated financial statements for information regarding inventory valuation.
Warranty Liability
Nature of Estimates Required: We provide base warranties on the products we sell for specific periods of time and/or mileage, which vary depending upon the type of product. Separately, we also periodically perform field service actions related to safety recalls and other product campaigns. Pursuant to these warranties and field service actions, we will repair, replace, or adjust parts on a vehicle that are defective in factory-supplied materials or workmanship. We accrue the estimated cost of both base warranty coverages and field service actions at the time of sale. In addition, from time to time, we issue extended warranties at our expense, the estimated cost of which is a private company with no readily determinable fair value. We have electedaccrued at the measurement alternative for valuing our investment in LMC. Under the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment made in LMC.time of issuance.
Warranty liability
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty termsAssumptions and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers. As of December 31, 2019 and 2018 the warranty liability was $6.0 million and $7.1 million, respectively.
Approach Used:Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of units involved and the extent of features/components included in product models. Also, each quarter, the Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Warrant liability
We account for certain outstanding common stock warrants as liabilities recorded at fair value which are marked-to-market at the end of each reporting period. As of December 31, 2019 and 2018 the warrant liability was $16.3 million and $1.8 million, respectively. The warrant liability is remeasured at each balance sheet date until the warrants are exercised, expire or there is a change in their terms that changes their classification to an equity instrument. Any change in fair value is recognized as an adjustment to current period interest expense. The fair value of the warrants is measured using a Black-Scholes valuation model which includes various inputs, including the market price of our common stock on the balance sheet date and estimated
Field service actions may occur in periods beyond the base warranty coverage period. We use historical information regarding the nature, frequency, severity, and average cost of claims for each model year to establish our estimates. We assess our obligation for field service actions on a regular basis using actual claims experience and update our estimates as necessary.
volatility of our common stock. If factors change
Due to the uncertainty and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Generally, as the market price of our common stock increases, the fair value of the warrant increases, and conversely, as the market price of our common stock decreases, the fair value of the warrant decreases. Also, a significant increase in thepotential volatility of the market pricefactors used in establishing our estimates, changes in our assumptions could materially affect our financial condition and results of operations. Refer to Note 1, Summary of Business and Significant Accounting Principles, to the Company’s common stock, in isolation, would result in a significantly higher fair value measurement;consolidated financial statements for information regarding warranty and a significant decrease in volatility would result in a significantly lower fair value measurement. Changes in the fair value of the warrants are reflected in the Consolidated Statements of Operations as Interest Expense.field service action costs.
Fair Value Option forof Convertible Notes
Nature of Estimates Required: As permitted under ASC 825, Financial Instruments, (“ASC 825”), the Company has elected the fair value option to account for its Convertible Note that was issued during 2019. As of December 31, 2019 theconvertible notes. The Company records changes in fair value of the Convertible Note was $39.0 million. In accordance with ASC 825, the Company records its Convertible Note at fair value with changesconvertible notes in fair value recordedInterest Expense in the Consolidated Statement of Operations, and changes in Interest Expense.fair value of the convertible notes attributable to credit risk in Other Comprehensive Loss. The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Noteconvertible notes (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives.
Assumptions and Approach Used: The fair value is determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are as follows:
•Probability of a fundamental change: If a fundamental change event occurs as defined under the credit spread and2024 Notes, the volatilityholder shall have the right to require the Company to repurchase the notes at an amount equal to the Fundamental Change Base Repurchase Price, which is the greater of (x) 150% of the Company's common stock. If different assumptions are used,principal amount to be repurchased, plus accrued and unpaid interest and (y) 115% of the fairas-converted value of the convertible notesrepurchased amount, plus any accrued and unpaid interest. The probability of a fundamental change was considered de minimis as of December 31, 2021.
•Volatility: The volatility used in the binomial lattice valuation model was estimated based on historical prices for the Company’s common stock with a look-back period commensurate to the term of the 2024 Notes and the change in estimated fair value could be materially different. Generally, as the credit spread increases, the fair value decreases, and conversely, as the credit spread decreases, the fair value of the convertible notes increases. Also, aobserved equity volatility for similar companies. A significant increase in the volatility of the market price of the Company’s common stock, in isolation, would result in a significantly higher fair value; and a significant decrease in volatility would result in a significantly lower fair value.
•Credit spread: The credit spread used in the binomial lattice model was estimated based on a synthetic credit rating assessed for the Company in the valuation as of the issuance date. Generally, as the credit spread increases, the fair value decreases, and conversely, as the credit spread decreases, the fair value of the convertible notes increases.
A change in assumptions used to estimate the fair value of the convertible notes could materially affect our financial condition and results of operations. Refer to Note 8, Debt, and Note 12, Fair Value Measurements, to the consolidated financial statements for information regarding the 2024 Notes.
Income taxesTaxes
The Company has had no taxable
Nature of Estimates Required: We must make estimates and apply judgment in determining the provision for income taxes for financial reporting purposes. We make these estimates and judgments primarily in the last three yearsfollowing areas: (i) the calculation of tax credits, (ii) the calculation of differences in the timing of recognition of revenue and expense for tax reporting and financial statement purposes, as well as (iii) the calculation of interest and penalties related to uncertain tax positions. Changes in these estimates and judgments may result in a material increase or decrease to our tax provision, which would be recorded in the period in which the change occurs.
Assumptions and Approach Used: We are subject to the income tax laws and regulations of state and local jurisdictions in which we operate. We account for income taxes under the asset and liability method. These tax laws and regulations are complex and involve uncertainties in the application to our facts and circumstances that may be open to interpretation. We recognize benefits for these uncertain tax positions based upon a process that requires judgment regarding the technical application of the laws, regulations, and various related judicial opinions. If, in our judgment, it is more likely than not (defined as a likelihood of more than 50%) that the uncertain tax position will be settled favorably for us, we estimate an amount that ultimately will be realized. This process is inherently subjective since it requires our assessment of the probability of future outcomes. We evaluate these uncertain tax positions on a quarterly basis, including consideration of changes in facts and circumstances, such as new regulations or recent judicial opinions, as well as the status of audit activities by taxing authorities. Changes to our estimate of the amount to be realized are recorded in our provision for income taxes during the period in which the change occurred.
We must also assess the likelihood that we will be able to recover our deferred tax assets against future sources of $33.4 million at December 31, 2019 are fully reserved. No provisiontaxable income and reduce the carrying amount of deferred tax assets by recording a valuation allowance if, based on all available evidence, it is more likely than not that all or benefit for federal or state income taxes has been included ina portion of such assets will not be realized. Refer to Note 11, Income Taxes, to the consolidated financial statements.statements for information regarding the income tax provision.
Research and development costsRecent Accounting Pronouncements
Research and development costs are expensed as they are incurred. Research and development expense was $8.2 million and $7.4 million forSee Note 14, Recent Pronouncements, to the years ended December 31, 2019 and 2018, respectively, consisting of consulting, payroll and payroll taxes, engineering, supplies, legal fees, parts and small tools.consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the fair value amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value amount of our investment will decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including money market funds and government and non-government debt securities and the maturities of each of these instruments is less than one year. In 2019,2021, we maintained an investment portfolio primarily in money market funds. Due to the primarily short-term nature and low interest rate yields of these investments, we believe we do not have a material exposure to interest rate risk and market risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.
We have operatedtransact business primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate fluctuations.
For further information about our equity investments, please refer to Note 4 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
| | | | | |
| |
| Consolidated Financial Statements: | |
| |
| |
| |
| |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Workhorse Group Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 2019,2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019,2021, and our report dated March 13, 20201, 2022 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
March 13, 20201, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Workhorse Group Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Workhorse Group Inc. (a Nevada corporation) and subsidiaries (the “Company”) as of December 31, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity (deficit), and cash flows for each of the twothree years in the period ended December 31, 2019,2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2019,2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019,2021, based on criteria established in the 2013 Internal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 13, 20201, 2022 expressed an unqualified opinion.
Going concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company incurred a net loss of $37,162,827 during the year ended December 31, 2019, and as of that date, the Company’s current liabilities exceeded its current assets by $15,524,360 and its total liabilities exceeded its total assets by $34,913,110. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Convertible Notes Fair Value Determination
As described further in Note 8 and Note 12 of the consolidated financial statements, the Company issued $200.0 million in convertible notes in October 2020. The outstanding principal balance and fair value of the convertible notes is $27.5 million and $24.7 million as of December 31, 2021, respectively. The Company elected to account for the convertible notes using the fair value option, which allows for valuing the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The valuation of the Convertible Note at fair value utilizes inputs that are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company’s common stock. We identified the fair value determination for this convertible note transaction as a critical audit matter.
The principal consideration for our determination that the fair value determination for the convertible note transaction as a critical audit matter is that the fair value is sensitive to changes in the key inputs and assumptions, and therefore required judgement in evaluating their reasonableness. Significant assumptions used by management to estimate the fair value of the convertible notes included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock.
Our audit procedures related to the critical audit matter included the following, among others:
•We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over estimating the fair value of the convertible notes.
•We involved our valuation specialists to evaluate the Company’s determination of the fair value of the convertible notes, including testing the appropriateness of the methodology and underlying assumptions used, evaluating the sensitivity of management’s key estimates, independent sourcing of key inputs and assumptions, and developing independent estimates. The significant assumptions used by management to estimate the fair value of the convertible notes included estimates of the redemption dates, credit spreads and the market price and volatility of the Company’s common stock.
Inventory reserves
As described further in Note 1 to the consolidated financial statements, adjustments are made to inventory for any excess or obsolete inventories or when the net realizable value of inventories is less than the carrying value. The Company reviews inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires the Company to determine the estimated selling price of inventory based on market conditions. We identified the inventory reserves as a critical audit matter.
The principal considerations for our determination that inventory reserves represent a critical audit matter are that the assessment of the valuation of inventory is complex and includes an estimate of inventory that can be used in production and estimated selling prices of finished goods. The estimates are subjective and requires the Company to consider significant assumptions such as estimated selling prices of vehicles, production plans and value of inventory on-hand to support those plans, and reserve percentages applied, all of which are subject to significant uncertainty and therefore require significant auditor judgment.
Our audit procedures related to inventory reserves included the following, among others:
•We obtained management’s analysis of raw materials and expected use of on-hand products, recalculated inputs into the analysis, and tested for completeness and accuracy. This included, among other inputs, bills of materials and general ledger balances.
•We evaluated the appropriateness of reserve percentages applied to categories of on-hand raw materials and performed recalculations of management’s analysis, including testing the completeness and accuracy of those inventory categories being reserved against.
•We made inquiries of management and evaluated the appropriateness of judgments, assumptions and documentation supporting adjustments to the net realizable value of inventory.
•We evaluated the appropriateness of the estimated selling prices of finished goods, less cost to sell, and recalculated management’s calculation to write down work in process balances to estimated selling price, less cost to complete and sell.
•We tested the design and operating effectiveness of controls related to inventory reserves.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2018.
Cincinnati, Ohio
March 13, 2020
1, 2022
Workhorse Group Inc.
Consolidated Balance Sheets
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 23,868,416 | | | $ | 1,512,750 | |
| Restricted cash held in escrow | 1,000,000 | | | | — | |
| Accounts receivable, less allowance for doubtful accounts of $0 at December 31, 2019 and 2018 | 7,921 | | | — | |
| Lease receivable, current | 33,100 | | | 48,271 | |
| Inventory, net | 1,798,146 | | | 2,533,616 | |
| Prepaid expenses and deposits | 4,812,088 | | | 2,274,595 | |
| Total current assets | 31,519,671 | | | 6,369,232 | |
| | | |
| Property, plant and equipment, net | 6,830,181 | | | 5,237,451 | |
| Investment in LMC | 12,194,800 | | | — | |
| Lease receivable, long-term | 129,177 | | | 198,090 | |
| | | |
| Total Assets | $ | 50,673,829 | | | | $ | 11,804,773 | |
| | | |
| Liabilities and Stockholders’ Deficit | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 1,678,983 | | | $ | 4,340,463 | |
| Accrued liabilities | 3,105,184 | | | 3,946,386 | |
| Warranty liability | 6,001,864 | | | 7,058,769 | |
| Warrant liability | 16,335,000 | | | 1,822,819 | |
| Customer deposits | 303,000 | | | 406,000 | |
| Duke financing obligation | — | | | 1,340,700 | |
| Current portion of Convertible Note, at fair value | 19,620,000 | | | — | |
| Total current liabilities | 47,044,031 | | | 18,915,137 | |
| | | |
| Long-term debt | — | | | 8,312,079 | |
| Convertible Note, at fair value | 19,400,000 | | | — | |
| Mandatory redeemable Series B preferred stock | 19,142,908 | | | — | |
| | | |
| Commitments and contingencies | | | |
| | | |
| Stockholders’ deficit: | | | |
| Series A preferred stock, par value of $0.001 per share 75,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2019 and 2018 | — | | | — | |
| Common stock, par value of $0.001 per share 250,000,000 shares authorized, 67,105,000 shares issued and outstanding at December 31, 2019 and 58,270,934 shares issued and outstanding at December 31, 2018 | 67,105 | | | 58,271 | |
| Additional paid-in capital | 143,826,315 | | | 126,076,782 | |
| Accumulated deficit | (178,806,530) | | | (141,557,496) | |
| Total stockholders' deficit | (34,913,110) | | | (15,422,443) | |
| | | |
| Total Liabilities and Stockholders' Deficit | $ | 50,673,829 | | | | $ | 11,804,773 | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 201,647,394 | | | $ | 46,817,825 | |
| Restricted cash held in escrow | — | | | 194,411,242 | |
| Accounts receivable, less allowance for credit losses of $0 at December 31, 2021 and 2020 | 149,776 | | | 1,037,466 | |
| Inventory, net | 10,067,367 | | | 15,467,012 | |
| Prepaid expenses and other current assets | 4,357,829 | | | 32,759,216 | |
| Total current assets | 216,222,366 | | | 290,492,761 | |
| Property, plant and equipment, net | 7,897,807 | | | 11,398,166 | |
| Operating lease right-of-use assets | 1,538,852 | | | — | |
| Other assets | 2,479,865 | | | 94,698 | |
| Investment in LMC | — | | | 330,556,744 | |
| | | |
| Total Assets | $ | 228,138,890 | | | $ | 632,542,369 | |
| Liabilities | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 7,849,607 | | | $ | 4,790,763 | |
| Accrued liabilities and other | 14,752,827 | | | 5,995,302 | |
| Warranty liability | 4,583,916 | | | 5,400,000 | |
| | | |
| Current portion of lease liability | 363,714 | | | — | |
| | | |
| PPP Term Note | — | | | 1,411,000 | |
| Total current liabilities | 27,550,064 | | | 17,597,065 | |
| Other long-term liabilities | — | | | 207,040 | |
| Lease liability, long-term | 1,191,053 | | | — | |
| Deferred tax liability | — | | | 21,833,930 | |
| Convertible notes, at fair value | 24,705,000 | | | 197,700,000 | |
| | | |
| Total Liabilities | 53,446,117 | | | 237,338,035 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ Equity: | | | |
| Series A preferred stock, par value of $0.001 per share, 75,000,000 shares authorized, zero shares issued and outstanding at December 31, 2021 and 2020 | — | | | — | |
| Common stock, par value of $0.001 per share, 250,000,000 shares authorized, 151,915,455 and 121,922,532 shares issued and outstanding at December 31, 2021 and 2020, respectively | 151,916 | | | 121,923 | |
| Additional paid-in capital | 686,318,201 | | | 504,112,442 | |
| Accumulated deficit | (510,374,844) | | | (109,030,031) | |
| Accumulated other comprehensive loss | (1,402,500) | | | — | |
| Total stockholders' equity | 174,692,773 | | | 395,204,334 | |
| Total Liabilities and Stockholders' Equity | $ | 228,138,890 | | | $ | 632,542,369 | |
See accompanying notes to the consolidated financial statements.
F-4
Workhorse Group Inc.
Consolidated Statements of Operations
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Net sales | $ | 376,562 | | | $ | 763,173 | |
| | | |
| Cost of sales | 5,752,700 | | | 7,981,413 | |
| Warranty expense | 92,191 | | | 7,972,152 | |
| Gross loss | (5,468,329) | | | | (15,190,392) | |
| | | |
| Operating expenses | | | |
| Selling, general and administrative | 10,199,534 | | | 11,485,482 | |
| Research and development | 8,199,074 | | | 7,391,693 | |
| | | |
| Total operating expenses | 18,398,608 | | | 18,877,175 | |
| | | |
| Other income | 15,849,800 | | | — | |
| | | |
| Loss from operations | (8,017,137) | | | | (34,067,567) | |
| | | |
| Interest expense, net | 29,145,690 | | | 2,434,749 | |
| | | |
| Loss before provision for income taxes | (37,162,827) | | | | (36,502,316) | |
| Provision for income taxes | — | | | | — | |
| | | |
| Net loss | $ | (37,162,827) | | | | $ | (36,502,316) | |
| | | |
| Net loss attributable to common stockholders per share - basic and diluted | $ | (0.58) | | | $ | (0.74) | |
| | | |
| Weighted average number of common shares outstanding | 64,314,756 | | | 50,377,909 | |
See accompanying notes to the consolidated financial statements.
F-5
Workhorse Group Inc.
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Sales, net of returns and allowances | $ | (851,922) | | | $ | 1,392,519 | | | $ | 376,562 | |
| Cost of sales | 132,492,110 | | | 13,067,108 | | | 5,844,891 | |
| | | | | |
| Gross loss | (133,344,032) | | | (11,674,589) | | | (5,468,329) | |
| Operating expenses | | | | | |
| Selling, general and administrative | 40,160,795 | | | 20,157,658 | | | 10,199,534 | |
| Research and development | 11,610,027 | | | 9,148,931 | | | 8,199,074 | |
| Total operating expenses | 51,770,822 | | | 29,306,589 | | | 18,398,608 | |
| Loss from operations | (185,114,854) | | | (40,981,178) | | | (23,866,937) | |
| Interest expense, net | 12,644,164 | | | 190,520,337 | | | 29,145,690 | |
| Other loss (income) | 225,432,884 | | | (323,111,944) | | | (15,849,800) | |
| (Loss) income before (benefit) provision for income taxes | (423,191,902) | | | 91,610,429 | | | (37,162,827) | |
| (Benefit) provision for income taxes | (21,847,089) | | | 21,833,930 | | | — | |
| Net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,162,827) | |
| | | | | |
| Net (loss) income attributable to common stockholders per share - basic | $ | (3.12) | | | $ | 0.75 | | | $ | (0.58) | |
| Net (loss) income attributable to common stockholders per share - diluted | $ | (3.12) | | | $ | 0.70 | | | $ | (0.58) | |
| | | | | |
| Weighted average number of common shares outstanding - basic | 128,676,131 | | | 92,871,936 | | | 64,314,756 | |
| Weighted average number of common shares outstanding - diluted | 128,676,131 | | | 99,949,868 | | | 64,314,756 | |
See accompanying notes to the consolidated financial statements.
F-6
Workhorse Group Inc.
Consolidated Statements of Comprehensive (Loss) Income
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | |
| Net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,162,827) | | | |
| Other comprehensive loss | | | | | | | |
| Change in fair value of convertible notes attributable to credit spread | (1,402,500) | | | — | | | — | | | |
| Comprehensive (loss) income | $ | (402,747,313) | | | $ | 69,776,499 | | | $ | (37,162,827) | | | |
See accompanying notes to the consolidated financial statements.
F-7
Workhorse Group Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Years Ended December 31, 20192021, 2020 and 20182019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Series A
Preferred Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Total
Stockholders’
Equity
(Deficit) |
| Number
of Shares | | Amount | | Number
of Shares | | Amount | | | | |
| Balance as of December 31, 2018 | 58,270,934 | | | $ | 58,271 | | | — | | | $ | — | | | $ | 126,076,782 | | | $ | (141,557,496) | | | $ | — | | | $ | (15,422,443) | |
| Issuance of common stock | 7,183,488 | | | 7,184 | | | — | | | — | | | 5,921,051 | | | — | | | — | | | 5,928,235 | |
| Stock options and warrants exercised, and vesting of restricted shares | 630,141 | | | 630 | | | — | | | — | | | 34,676 | | | — | | | — | | | 35,306 | |
| Reclassification of warrants to equity | — | | | — | | | — | | | — | | | 857,072 | | | — | | | — | | | 857,072 | |
| Deemed dividend | 116,496 | | | 116 | | | — | | | — | | | 86,091 | | | (86,207) | | | — | | | — | |
| Value of warrants issued with Series B Preferred Stock | — | | | — | | | — | | | — | | | 6,709,961 | | | — | | | — | | | 6,709,961 | |
| Value of warrants issued with convertible notes | — | | | — | | | — | | | — | | | 430,000 | | | — | | | — | | | 430,000 | |
| Common stock issued for preferred stock dividends | 718,755 | | | 719 | | | — | | | — | | | 1,166,052 | | | — | | | — | | | 1,166,771 | |
| Conversion of convertible notes | 185,186 | | | 185 | | | — | | | — | | | 564,632 | | | — | | | — | | | 564,817 | |
| Stock-based compensation | — | | | | | — | | | — | | | 1,979,998 | | | — | | | — | | | 1,979,998 | |
| Net loss for the year ended December 31, 2019 | — | | | | | — | | | — | | | — | | | (37,162,827) | | | — | | | (37,162,827) | |
| Balance as of December 31, 2019 | 67,105,000 | | | 67,105 | | | — | | | — | | | 143,826,315 | | | (178,806,530) | | | — | | | (34,913,110) | |
| Stock options and warrants exercised, and vesting of restricted shares* | 33,932,827 | | | 33,933 | | | — | | | — | | | 82,059,699 | | | — | | | — | | | 82,093,632 | |
| Common stock issued for preferred stock dividends | 920,901 | | | 922 | | | — | | | — | | | 1,490,938 | | | — | | | — | | | 1,491,860 | |
| Conversion of convertible notes | 19,605,013 | | | 19,605 | | | — | | | — | | | 270,775,079 | | | — | | | — | | | 270,794,684 | |
| Common stock issued for interest on convertible notes | 358,791 | | | 358 | | | — | | | — | | | 1,939,606 | | | — | | | — | | | 1,939,964 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,020,805 | | | — | | | — | | | 4,020,805 | |
| Net income for the year ended December 31, 2020 | — | | | — | | | — | | | — | | | — | | | 69,776,499 | | | — | | | 69,776,499 | |
| Balance as of December 31, 2020 | 121,922,532 | | | 121,923 | | | — | | | — | | | 504,112,442 | | | (109,030,031) | | | — | | | 395,204,334 | |
| | | | | | | | | | | | | | | |
| Stock options and warrants exercised, and vesting of restricted shares * | 2,281,393 | | | 2,281 | | | — | | | — | | | (4,431,444) | | | — | | | — | | | (4,429,163) | |
| Conversion of convertible notes | 27,711,530 | | | 27,712 | | | — | | | — | | | 181,693,823 | | | — | | | — | | | 181,721,535 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 4,943,380 | | | — | | | — | | | 4,943,380 | |
| Net loss for the year ended December 31, 2021 | — | | | — | | | — | | | — | | | — | | | (401,344,813) | | | — | | | (401,344,813) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1,402,500) | | | (1,402,500) | |
| | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | 151,915,455 | | | $ | 151,916 | | | — | | | $ | — | | | $ | 686,318,201 | | | $ | (510,374,844) | | | $ | (1,402,500) | | | $ | 174,692,773 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Series A
Preferred Stock | | | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Total
Stockholders’
Equity
(Deficit) |
| Number
of Shares | | Amount | | Number
of Shares | | Amount | | | | | | |
| Balance as of December 31, 2017 | 41,529,181 | | | $ | 41,529 | | | — | | | $ | — | | | $ | 107,760,036 | | | $ | (104,290,001) | | | $ | 3,511,564 | |
| Issuance of common stock | 14,614,500 | | | 14,614 | | | — | | | — | | | 16,105,698 | | | — | | | 16,120,312 | |
| Stock options and warrants exercised | 44,643 | | | 45 | | | — | | | — | | | 90,020 | | | — | | | 90,065 | |
| Exchange offer - 2017 Warrants deemed dividend | — | | | | — | | | | — | | | | — | | | 765,179 | | | (765,179) | | | — | |
| Exchange offer - 2017 Warrants | 1,968,736 | | | 1,969 | | | — | | | — | | | (1,969) | | | — | | | — | |
| Conversion of accounts payable | 113,874 | | | 114 | | | — | | | — | | | 298,236 | | | — | | | 298,350 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,059,582 | | | — | | | 1,059,582 | |
| Net loss for the year ended December 31, 2018 | — | | | — | | | — | | | — | | | — | | | (36,502,316) | | | (36,502,316) | |
| Balance as of December 31, 2018 | 58,270,934 | | | 58,271 | | | — | | | — | | | 126,076,782 | | | (141,557,496) | | | (15,422,443) | |
| Issuance of common stock | 7,183,488 | | | 7,184 | | | — | | | — | | | 5,921,051 | | | — | | | 5,928,235 | |
| Stock options and warrants exercised, and vesting of restricted shares | 630,141 | | | 630 | | | — | | | — | | | 34,676 | | | — | | | 35,306 | |
| Reclassification of warrants to equity | — | | | | — | | | | — | | | | — | | | | 857,072 | | | | — | | | 857,072 | |
| Deemed dividend | 116,496 | | | 116 | | | — | | | — | | | 86,091 | | | (86,207) | | | — | |
| Value of warrants issued with Series B Preferred Stock | — | | | — | | | — | | | — | | | 6,709,961 | | | — | | | 6,709,961 | |
| Value of warrants issued with Convertible Note | — | | | — | | | — | | | — | | | 430,000 | | | — | | | 430,000 | |
| Common stock issued for preferred stock dividends | 718,755 | | | 719 | | | — | | | — | | | 1,166,052 | | | — | | | 1,166,771 | |
| Conversion of Convertible Note | 185,186 | | | 185 | | | — | | | — | | | 564,632 | | | — | | | 564,817 | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 1,979,998 | | | — | | | 1,979,998 | |
| Net loss for the year ended December 31, 2019 | — | | | — | | | — | | | — | | | — | | | (37,162,827) | | | (37,162,827) | |
| Balance as of December 31, 2019 | 67,105,000 | | | $ | 67,105 | | | — | | | $ | — | | | $ | 143,826,315 | | | $ | (178,806,530) | | | $ | (34,913,110) | |
See accompanying notes to the consolidated financial statements.
F-6F-8
Workhorse Group Inc.
Consolidated Statements of Cash Flows
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Cash flows from operating activities: | | | |
| Net loss | $ | (37,162,827) | | | $ | (36,502,316) | |
| Adjustments to reconcile net loss to net cash used in operations: | | | |
| Depreciation | 388,401 | | | 348,339 | |
| Amortization of discount and debt issuance costs on long-term debt | 3,518,356 | | | 4,598,089 | |
| Amortization of discount on mandatory redeemable Series B preferred stock | 852,869 | | | — | |
| Change in fair value of Convertible Note and loss on conversion to common stock | 1,064,817 | | | — | |
| Change in fair value of warrant liability | 15,369,253 | | | (2,683,470) | |
| Dividends for mandatory redeemable Series B preferred stock paid in common stock | 1,166,771 | | | — | |
| Stock-based compensation | 1,979,998 | | | 1,059,582 | |
| Write down of inventory | 694,448 | | | 2,488,100 | |
| Gain on divestiture | (3,655,000) | | | — | |
| Investment received from license of intellectual property | (12,194,800) | | | — | |
| Loss on sale of fixed assets | 19,367 | | | 28,645 | |
| Effects of changes in operating assets and liabilities: | | | |
| Accounts and lease receivable | 76,163 | | | 1,024,366 | |
| Inventory | 41,022 | | | (399,774) | |
| Prepaid expenses and deposits | (4,367,928) | | | (1,328,461) | |
| Accounts payable and accrued liabilities | (3,502,682) | | | 2,399,877 | |
| Warranty liability | (1,056,905) | | | 6,916,209 | |
| Accounts payable, related parties | — | | | (54,914) | |
| Customer deposits | (103,000) | | | 351,595 | |
| | | |
| Net cash used in operating activities | (36,871,677) | | | | (21,754,133) | |
| | | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (2,005,498) | | | (23,222) | |
| Net proceeds received on divestiture | 3,655,000 | | | — | |
| Proceeds from sale of fixed assets | 5,000 | | | 4,800 | |
| | | |
| Net cash provided by (used in) investing activities | 1,654,502 | | | (18,422) | |
| | | |
| Cash flows from financing activities: | | | |
| Proceeds from notes payable | 5,854,140 | | | — | |
| Payments on notes payable | (5,854,140) | | | (5,750,000) | |
| Proceeds from issuance of mandatory redeemable Series B preferred stock | 25,000,000 | | | — | |
| Proceeds from issuance of Convertible Note | 38,950,000 | | | — | |
| (Repayment) proceeds, Duke financing obligation | (1,340,700) | | | 1,340,700 | |
| Proceeds from long-term debt | — | | | 17,800,000 | |
| Payments on long-term debt | (10,000,000) | | | (9,891,378) | |
| Loan issuance costs | — | | | (792,221) | |
| Proceeds from issuance of common stock | 5,928,235 | | | 16,418,662 | |
| Proceeds from exercise of warrants and options | 35,306 | | | 90,065 | |
| | | |
| Net cash provided by financing activities | 58,572,841 | | | | 19,215,828 | |
| | | |
| Change in cash, cash equivalents and restricted cash | 23,355,666 | | | | (2,556,727) | |
| | | |
| Cash, cash equivalents and restricted cash, beginning of the year | 1,512,750 | | | 4,069,477 | |
| Cash, cash equivalents and restricted cash, end of the year | $ | 24,868,416 | | | $ | 1,512,750 | |
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 | | |
| Cash flows from operating activities: | | | | | | | |
| Net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,162,827) | | | |
| Adjustments to reconcile net (loss) income to net cash used in operations: | | | | | | | |
| Depreciation | 1,908,419 | | | 809,645 | | | 388,401 | | | |
| Amortization of discount and debt issuance costs on convertible notes and long-term debt | — | | | 6,550,212 | | | 3,518,356 | | | |
| Amortization of discount and loss on redemption of mandatorily redeemable Series B preferred stock | — | | | 5,857,092 | | | 852,869 | | | |
| Change in fair value of convertible notes and loss on conversion to common stock | 7,324,035 | | | 160,749,118 | | | 1,064,817 | | | |
| Change in fair value of warrant liability | — | | | 12,176,690 | | | 15,369,253 | | | |
| Change in fair value of investment in LMC | 225,429,997 | | | (318,361,944) | | | — | | | |
| Dividends for mandatorily redeemable Series B preferred stock paid in common stock | — | | | 1,491,860 | | | 1,166,771 | | | |
| Interest on convertible notes paid in common stock | — | | | 1,939,964 | | | — | | | |
| Stock-based compensation | 4,943,380 | | | 4,020,805 | | | 1,979,998 | | | |
| Reserve of inventory and prepaid purchases | 98,918,102 | | | — | | | 694,448 | | | |
| Impairment of property, plant and equipment | 6,803,280 | | | — | | | — | | | |
| Forgiveness of PPP Term Note | (1,411,000) | | | — | | | — | | | |
| Deferred tax (benefit) expense | (21,833,930) | | | 21,833,930 | | | — | | | |
| Gain on divestiture | — | | | — | | | (3,655,000) | | | |
| Investment received from license of intellectual property | — | | | — | | | (12,194,800) | | | |
| Other non-cash items | 102,858 | | | 350,500 | | | 19,367 | | | |
| Effects of changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | 982,388 | | | (961,966) | | | 76,163 | | | |
| Inventory | (69,606,432) | | | (13,668,866) | | | 41,022 | | | |
| Prepaid expenses and other current assets | 4,489,362 | | | (27,947,128) | | | (4,367,928) | | | |
| Other assets | (91,909) | | | — | | | — | | | |
| Accounts payable and accrued liabilities | 11,832,284 | | | 5,499,464 | | | (3,605,682) | | | |
| Warranty liability | (816,084) | | | (601,864) | | | (1,056,905) | | | |
| Other long-term liabilities | (207,040) | | | 207,040 | | | — | | | |
| Net cash used in operating activities | (132,577,103) | | | (70,278,949) | | | (36,871,677) | | | |
| Cash flows from investing activities: | | | | | | | |
| Capital expenditures | (5,314,198) | | | (5,728,130) | | | (2,000,498) | | | |
| Net proceeds received on divestiture | — | | | — | | | 3,655,000 | | | |
| Proceeds from sale of Investment in LMC | 105,126,747 | | | — | | | — | | | |
| | | | | | | |
| Net cash provided by (used in) investing activities | 99,812,549 | | | (5,728,130) | | | 1,654,502 | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from notes payable and debt | — | | | 1,411,000 | | | 5,854,140 | | | |
| Payments on notes payable and long-term debt | — | | | — | | | (17,194,840) | | | |
| (Redemption of), proceeds from issuance of mandatorily redeemable Series B preferred stock | — | | | (25,000,000) | | | 25,000,000 | | | |
| Proceeds from issuance of convertible notes | — | | | 262,374,788 | | | 38,950,000 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Proceeds from issuance of common stock | — | | | — | | | 5,928,235 | | | |
| Exercise of warrants and options and restricted share award activity | (4,429,163) | | | 53,581,942 | | | 35,306 | | | |
| Other | (2,387,956) | | | — | | | — | | | |
| Net cash (used in) provided by financing activities | (6,817,119) | | | 292,367,730 | | | 58,572,841 | | | |
| Change in cash, cash equivalents and restricted cash | (39,581,673) | | | 216,360,651 | | | 23,355,666 | | | |
| Cash, cash equivalents and restricted cash, beginning of the year | 241,229,067 | | | 24,868,416 | | | 1,512,750 | | | |
| Cash, cash equivalents and restricted cash, end of the year | $ | 201,647,394 | | | $ | 241,229,067 | | | $ | 24,868,416 | | | |
Cash
See accompanying notes to the consolidated financial statements.
F-9
During the year ended December 31, 2021, cash paid for interest was $7,193,613approximately $8.2 million, which consisted primarily of contractual interest on our convertible notes.
During the year ended December 31, 2020, cash paid for interest was approximately $12.7 million, which consisted of $7.6 million of direct costs incurred in connection with the issuance of our convertible notes, $4.7 million loss on redemption of our Series B Preferred Stock, and $1,128,470 for$0.4 million of financing fees.
During the yearsyear ended December 31, 2019, and 2018, respectively.cash paid for interest was approximately $7.2 million, which consisted primarily of contractual interest on long-term debt.
The following table provides a reconciliation of cash, cash equivalentsCash and restricted cashCash Equivalents, and Restricted Cash Held in Escrow to the amounts reported within the consolidated balance sheets:
| | | | | | | | | | | |
| December 31 | | |
| 2019 | | 2018 |
| Cash and cash equivalents | $ | 23,868,416 | | | $ | 1,512,750 | |
| Restricted cash held in escrow | 1,000,000 | | | — | |
| Total cash, cash equivalents and restricted cash | $ | 24,868,416 | | | $ | 1,512,750 | |
| | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | |
| Cash and cash equivalents | $ | 201,647,394 | | | $ | 46,817,825 | | | |
| Restricted cash held in escrow | — | | | 194,411,242 | | | |
| Total cash, cash equivalents and restricted cash held in escrow | $ | 201,647,394 | | | $ | 241,229,067 | | | |
Supplemental disclosure of non-cash activities:
During the year ended December 31, 2021, the Company issued approximately 27.7 million shares of common stock in connection with the conversion of convertible notes, which were valued at approximately $181.7 million. The Company recognized the conversion as an adjustment to Additional Paid-In Capital, with the offset as a reduction to the fair value of the convertible notes.
During the year ended December 31, 2020, the Company issued approximately 19.6 million shares of common stock in connection with the conversion of convertible notes, which were valued at approximately $270.8 million. The Company recognized the conversion as an adjustment to Additional Paid-In Capital, with the offset as a reduction to the fair value of the convertible notes.
During the year ended December 31, 2019, the Company issued warrants to purchase common stock in connection with the issuance of our Series B Preferred Stock, which were valued at $6,709,961.approximately $6.7 million. The Company recorded additional paid-in capitalAdditional Paid-In Capital, with the offset as a discount on the Series B Preferred Stock.
During the year ended December 31, 2018, the Company issued warrants to purchase common stock in connection with debt financing, which were valued at $965,747. The Company recorded a warrant liability with the offset as a debt discount for the Marathon Loan.
During the year ended December 31, 2018, the Company issued warrants to purchase common stock to Arosa in association with the Arosa Loan, which were valued at $3,540,542. The Company recorded a warrant liability with the offset recorded as a debt discount.
During the year ended December 31, 2018, the Company settled $298,350 of accounts payable by the issuance of common stock.
See accompanying notes to the consolidated financial statements.
F-7F-10
Workhorse Group Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Nature of operationsOverview
Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) isWe are a technology company focused on providingwith a vision to pioneer the transition to zero-emission commercial vehicles. Our primary focus is to provide sustainable and cost-effective solutions to the commercial transportation sector. We are an American manufacturer who designsdesign and builds high performance electric vehicles. As part of our solutions, we also develop cloud-based, real-time telematics performance monitoringmanufacture all-electric delivery trucks and drone systems, including the technology that enable fleet operators to optimize energy and route efficiency.optimizes the way these vehicles operate. We are currently focused on our core competency of bringing the C-Seriesour electric delivery truckvehicle platforms to market and fulfilling our existing backlog of orders. We are also exploring other opportunities in monetizing our intellectual property which could include a sale, license or other arrangement of assets that are outside of our core focus.market.
Principles of consolidationConsolidation
The accompanying consolidated financial statements include the financial statementshave been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and reflect our accounts and operations and those of the Company and itsour wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated inupon consolidation.
BasisUse of presentationEstimates
The preparation of financial statements have been prepared on a going concern basis, which contemplatesin conformity with GAAP requires management to make estimates and assumptions that affect the realizationreported amounts of assets, liabilities, revenues, costs and liquidation of liabilitiesexpenses and related disclosures in the normal courseaccompanying notes.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. We have assessed the impact of business. However, the Company has limited revenuepandemic and a history of negative working capital and stockholders’ deficits. Our existing capital resources will be insufficient to fund our operations through the 2020. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter into a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and/or debt financings. If we are not ableaware of any specific events or circumstances that required an update to obtain additional financing and/our estimates and assumptions or substantially increase revenue from sales, we will be unable to continuematerially affected the carrying value of our assets or liabilities as a going concern. These conditions raise substantial doubt about the ability of the Company to continuedate of this Annual Report on Form 10-K. These estimates may change as a going concern.
In view of these matters, continuation as a going concernnew events occur and additional information is dependent upon the continued operations of the Company, which, in turn, is dependent upon the Company’s ability to meet its financial requirements, raise additional capital, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the proceedsobtained. Actual results could differ from these offerings, future offerings,estimates under different assumptions and the Company’s anticipated revenue, provides an opportunity to continue as a going concern. If additional funding is required, the Company plans to obtain working capital from either debt or equity financing from the sale of common, preferred stock, and/or convertible debentures. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.conditions.
Reclassifications
Certain reclassifications were made to the prior year financial statementsperiod balances have been reclassified to conform to the current year presentation.presentation in the consolidated financial statements and the accompanying notes. These reclassifications hadhave no effect on previously reported results of operations or stockholders’ equity.
Cash and cash equivalentsCash Equivalents
Cash includes cash equivalents which areAll highly liquid investments that are readily convertible to cash. A cash equivalent is a highly liquid investment that at the time of acquisition has awith an original maturity of three months or less.less at the date of acquisition are considered cash equivalents.
Financial instrumentsRestricted Cash
As of December 31, 2020, we maintained certain cash balances restricted as to withdrawal or use. Our restricted cash consisted primarily of cash received through financing transactions that had not been released for use by us and cash held as collateral for certain payments. The carrying amountsrestricted cash was released for use during the first quarter of financial instruments including2021 reducing the restricted cash inventory, accounts payable and the Convertible Note approximate fair value becausebalance to zero as of the relatively short maturity of these instruments.
Accounts receivableReceivable and Allowance for Doubtful Accounts
Accounts receivable consistsprimarily include amounts related to sales of collectible amounts forour products and services rendered. The Company carries itsWe provide an allowance against accounts receivable at invoicefor the amount less an allowance for doubtful accounts. On a periodic basis, the Company evaluates itswe expect to be uncollectible. We write-off accounts receivable and establishes anagainst the allowance for doubtful accounts based on a history of past write-offs and collections and current credit conditions.when they are deemed uncollectible.
Inventory netValuation
Inventory isInventories are stated at the lower of cost or net realizable value. Manufactured inventories are valued at standard cost, which approximates actual costs on a first-in, first-out basis. We recordwrite-down inventory reserves for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value. We review our inventory to determine whether its carrying value exceeds the net amount realizable upon the ultimate sale of the inventory. This requires us to determine the estimated selling price of our inventory based upon assumptions abouton market conditions. Once inventory is written-down, a new, lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Should our currentestimates of future inventory usage or selling prices change, additional and future demand forecasts.potentially material increases to this reserve may be required. A small change in our estimates may result in a material charge to our reported financial results.
Property, plantPlant and equipment, netEquipment, Net
Property, plant and equipment, net, is statedincluding leasehold improvements, are recognized at cost less accumulated depreciation. Major renewals and improvements are capitalized while replacements, maintenance and repairs, which do not improve or extendDepreciation is computed using the straight-line method over the estimated useful lives of the respective assets, are expensed as incurred. When property, plant and equipment is retired or otherwise disposed of, a gain or loss is realized for the difference between the net book value of the asset and the proceeds realized thereon. Depreciation is calculated using the straight-line method, based upon the following estimated useful lives:follows:
| | | | | |
| Buildings and improvements | 15 - 39 years |
SoftwareLand improvements | 15 years |
| Equipment and vehicles | 3 - 6 years |
EquipmentTooling | 5 years |
Vehicles and prototypes | 3 - 5 years |
Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or the term of the related leases.
Upon the retirement or sale of our property, plant and equipment, the cost and associated accumulated depreciation are removed from the consolidated balance sheet, and the resulting gain or loss is reflected on the consolidated statement of operations. Maintenance and repair expenditures are expensed as incurred while major improvements that increase the functionality, output or expected life of an asset are capitalized and depreciated ratably over the identified useful life.
Impairment of long-lived assetsLong-Lived Assets
Long-lived assets, such as property, plant, and equipment are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group.
Valuation of investmentInvestment
We have elected the measurement alternative allowed under generally accepted accounting principles ("GAAP") for ourhad an investment in Class A Common Stock of Lordstown Motor Corp. ("LMC"(“LMC”), which does not have a readily determinable fair value. Underbegan trading on the measurement alternative, we measure this investment at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions in an identical or similar investment in LMC.
At each reporting period, we evaluateNasdaq Global Select market under the ticker symbol “RIDE” on October 26, 2020. We sold our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect onduring the fair valuethird quarter of the investment. Examples of such impairment indicators include, but are not limited to, a significant deterioration in earnings performance, recent financing rounds at reduced valuations, a significant adverse change in the regulatory, economic or technological environment of an investee or a significant doubt about an investee’s ability to continue as a going concern. If we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. Our estimation of fair value considers financial information related to the investee available to us, including valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and we recognize an impairment loss equal to the difference between an investment’s carrying value and its fair value measured under the measurement alternative.2021.
Warranty
We generally offer warranty coverage for our products. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Provisions for estimated assurance warranties are recorded at the time of sale and are periodically adjusted to reflect actual experience. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring Company obligations under the warranty plans. Historically, the cost of fulfilling the Company’s warranty obligations has principally involved replacement parts, towing and transportation costs, labor and sometimes travel for any field retrofit campaigns. The Company’s estimates are based on historical experience, the extent of pre-production testing, the number of units involved and the extent of features/components included in product models. Also, each quarter, theThe Company reviews actual warranty claims experience to determine if there are systemic defects that would require a field campaign.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Activity for the Company's warranty accrual is as follows: | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Balance, beginning of year | $ | 5,400,000 | | | $ | 6,001,864 | |
Accrual for warranty(1) | 1,045,578 | | | 2,115,762 | |
| Warranty costs incurred | (1,861,662) | | | (2,717,626) | |
| Balance, end of year | $ | 4,583,916 | | | $ | 5,400,000 | |
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Balance at beginning of year | $ | 7,058,769 | | | $ | 142,560 | |
| Accrual for warranty | 92,191 | | | 7,981,413 | |
| Warranty costs incurred | (1,149,096) | | | (1,065,204) | |
| Balance at end of year | $ | 6,001,864 | | | $ | 7,058,769 | |
Fair value optionValue Option
As permitted under ASC 825, Financial Instruments (“ASC 825”), the Company has elected the fair value option to account for its Convertible Note that was issued during 2019.convertible notes. In accordance with ASC 825, the Company records its Convertible Noteconvertible notes at fair value with changes in fair value recorded in Interest Expense in the Consolidated Statement of Operations in Interest Expense.Operations. As a result of applying the fair value option, direct costs and fees related to the Convertible Noteconvertible notes were recognized in earnings as incurred and were not deferred.
Common stock
On May 3, 2019, the Company filed an amendment to its Articles of Incorporation to increase the authorized number of shares of common stock from 100,000,000 to 250,000,000.
Income taxesTaxes
We file a consolidated U.S. federal income tax return and separate state and local income tax returns. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the Consolidated Financial Statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
Research and development costsRevenue Recognition
The Company expenses research and development costs as theyRevenue is recognized when obligations under the terms of a contract with our customer are incurred. Research and development costs consist primarily of personnel costs for engineering and research, prototyping costs, and contract and professional services.
Basic and diluted loss per share
Basic loss per share is computed by dividing net loss available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share are calculated using the treasury stock method, on the basis of the weighted average number of shares outstanding plus the dilutive effect, if any, of stock
options, unvested restricted stock and warrants. The if converted method is used for determining the impact of the Convertible Note. For all periods presented, due to the Company’s net losses, all of the common stock equivalents were anti-dilutive and excluded from the calculation of diluted loss per share.
The following table shows the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| | 2019 | | 2018 |
| Net loss | | | $ | (37,162,827) | | | | $ | (36,502,316) | |
| Deemed dividends | | 86,207 | | | 765,179 | |
| Net loss attributable to common stockholders | | $ | (37,249,034) | | | $ | (37,267,495) | |
| | | | |
| Basic weighted average shares outstanding | | 64,314,756 | | | 50,377,909 | |
| Dilutive effect of options and warrants | | — | | | — | |
| Dilutive effect of Convertible Note | | — | | | — | |
| Diluted weighted average shares outstanding | | | 64,314,756 | | | | 50,377,909 | |
| | | | | |
| Anti-dilutive options and warrants excluded from diluted average shares outstanding | | 36,021,502 | | | 21,686,465 | |
Excluded from the above table are the shares on the conversion of the Convertible Note, which are convertible into 13,278,689 shares of common stock at December 31, 2019.
Stock-based compensation
The Company recognizes in its Consolidated Statements of Operations the grant-date fair value of share based awards issued to employees and non-employees over the awards' vesting period which equals the service period. Forfeitures are recognized as they occur.
The fair value of restricted stock awards is the pricesatisfied; generally this occurs when we transfer control of our common stock on the date of the award.
The fair value for stock options is estimated on the grant date using a Black-Scholes valuation model that uses the assumptions of expected volatility, expected term, and the expected risk-free rate of return. The expected volatility was estimated by management as 50% based on results from other public companies in our industry. The expected term of the awards granted was assumed to be the contract life of the option as determined in the specific arrangement. The risk-free rate of return was based on market yields in effect on the date of each grant for United States Treasury debt securities with a maturity equal to the expected term of the award.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to warranty liability, warrant liability, fair value of the Convertible Note and litigation-related accruals. Actual results could differ from our estimates.
2. INVENTORY, NET
Inventory, net consists of the following:
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Raw materials | $ | 3,741,097 | | | $ | 4,319,637 | |
| Work in process | 422,176 | | | 702,079 | |
| Finished goods | — | | | — | |
| 4,163,273 | | | 5,021,716 | |
| Less: Inventory reserve | (2,365,127) | | | (2,488,100) | |
| Total Inventory, net | $ | 1,798,146 | | | $ | 2,533,616 | |
During the years ended December 31, 2019 and 2018, the Company recorded an increase in its inventory reserve of approximately $0.7 million and $2.5 million. In 2019, certain raw materials that were included in the inventory reserve as of December 31, 2018 were disposed of and reduced the reserve. The reserve relates to the Company’s strategic switch from the legacy E-GEN/E-100 platform to our C-Series platform. Certain raw materials and work in process were unique to the E-GEN/E-100 vehicles, and cannot be repurposed.
3. REVENUE
Revenue Recognition
Net sales include products and shipping and handling charges, net of estimates for customer allowances.parts, or accessories, or provide services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products. All revenue is recognized when we satisfy our performance obligations under the contract. We recognize revenue by transferring the promised products to the customer, withgoods or providing services. For the majority of sales, this occurs when products are shipped from our manufacturing facility. At the time of revenue recognized atrecognition, we reduce the point in time the customer obtains control of the products. We recognizetransaction price and record a sales return reserve against revenue for shipping and handling charges at the time the products are delivered to or picked up by the customer. The majority of our contracts have a single performance obligation and are short term in nature.
Revenuesestimated variable considerations related to repair and maintenance servicesfuture product returns. Such estimates are recognized over time as services are provided. Payment for used vehicles, services, and merchandise are typically received at the point when control transfers to the customer or in accordance with payment terms customary to the business.
Accounts Receivable
Credit is extended based upon an evaluation of the customer’s financial condition. Accounts receivable are stated at their estimated net realizable value. The allowance for doubtful accounts is based on an analysis of customer accountsknown pending returns and historical experience. We adjust our historical experienceestimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.
Sales and other taxes we collect concurrent with accounts receivable write-offs.
As performance obligationsrevenue-producing activities are satisfied within one yearexcluded from a given reporting date we omit disclosuresrevenue. Incidental items that are immaterial in the context of the transaction price apportioned to remaining performance obligations on open orders.contract are recognized as expense. The expected costs associated with our base warranties and field service actions are recognized as expense when the products are sold. We do not have any material significant payment terms as payment is received at or shortly after the point of sale.
Disaggregation of Revenue
Our revenuesRevenue related to extended service contracts are recognized over the following typesterm of business werethe agreement in proportion to the costs we expect to incur in satisfying the contract obligations.
We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories have transferred to the customer as follows:
| | | | | | | | | | | |
| Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Automotive | $ | 240,280 | | | $ | 498,000 | |
| Other | 136,282 | | | 265,173 | |
| Total revenues | $ | 376,562 | | | $ | 763,173 | |
Cost of Sales
Cost of sales include direct parts, material and labor costs, manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistics costs, and reserves for estimated warranty expenses. Cost of sales also includes charges to write down the carrying value of our inventory when it exceeds its estimated net realizable value and to provide for obsolete and on-hand inventory in excess of forecasted demand.
Research and development costs
Research and development costs are expensed as incurred.
Marketing, Promotional and Advertising Costs
Marketing, promotional and advertising costs are expensed as incurred and are included as an element of selling, general and administrative expense in the consolidated statement of operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) consists of adjustments to the fair value of our convertible notes due to changes in credit risk.
Stock-Based Compensation
We recognize compensation expense for costs related to all stock-based arrangements, including stock options, restricted stock awards (“RSA”) and performance-based share units (“PBSUs).” The fair value of stock option awards with only service conditions is estimated on the grant or offering date using the Black-Scholes option-pricing model. The fair value of RSAs is measured on the grant date based on the closing fair market value of our common stock. The fair value of PBSUs is estimated using a Monte-Carlo simulation model. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period, net of actual forfeitures in the period.
As we accumulate additional employee stock-based awards over time and as we incorporate market data related to our common stock, we may calculate significantly different volatilities and expected lives, which could materially impact the valuation of our stock-based awards and the stock-based compensation expense that we will recognize in future periods. Stock-based compensation expense is recorded in Selling, General and Administrative Expense in the Consolidated Statements of Operations.
Net Income (Loss) per Share of Common Stock
Basic income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average shares outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards and warrants using the treasury stock method, and convertible notes using the if-converted method, are included when calculating the diluted net loss per share of common stock when their effect is dilutive.
The following table presents the reconciliation of net (loss) income and reconciliation of basic and diluted weighted average shares outstanding used in computing diluted net loss per share of common stock:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,162,827) | |
| Interest on convertible notes | — | | | — | | | — | |
| Deemed dividends | — | | | — | | | 86,207 | |
| Adjusted net (loss) income | $ | (401,344,813) | | | $ | 69,776,499 | | | $ | (37,249,034) | |
| | | | | |
| Basic weighted average shares outstanding | 128,676,131 | | | 92,871,936 | | | $ | 64,314,756 | |
| Dilutive effect of options and warrants | — | | | 1,410,605 | | | — | |
| Dilutive effect of convertible notes | — | | | 5,667,327 | | | — | |
| Diluted weighted average shares outstanding | 128,676,131 | | | 99,949,868 | | | 64,314,756 | |
The following table presents the potentially dilutive shares that were excluded from the computation of diluted net (loss) income per share of common stock, because their effect was anti-dilutive:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Stock-based awards and warrants | 3,152,059 | | 1,041,531 | | 36,021,502 |
| Convertible notes | 779,258 | | | — | | | — | |
Approximately 13.3 million shares of common stock representing the conversion of the High Trail Convertible Note (as defined in Note 8) were excluded from basic and diluted weighted average shares outstanding in the table above for the year ended December 31, 2019. This note was converted to shares of common stock in 2020.
2. –INVENTORY
Our inventory consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Raw materials | $ | 66,238,615 | | | $ | 16,759,232 | |
| Work in process | 20,826,644 | | | 422,176 | |
| Finished goods | — | | | 277,419 | |
| 87,065,259 | | | 17,458,827 | |
| Less: inventory reserve | (76,997,892) | | | (1,991,815) | |
| Inventory, net | $ | 10,067,367 | | | $ | 15,467,012 | |
We reserve inventory for any excess or obsolete inventories or when we believe the net realizable value of inventories is less than the carrying value. The year over year increase to inventory reserves was primarily driven by the Company's decision to produce the C-1000 platform at low-volume and transition to a new all-electric delivery truck platform in the near future. This decision was based on results of extensive testing performed on the C-1000 vehicles, which concluded in early 2022.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Prepaid purchases | $ | 24,101,695 | | | $ | 31,836,147 | |
| Less: prepaid purchases reserve | (23,912,025) | | | — | |
| Prepaid purchases, net | 189,670 | | | 31,836,147 | |
| Prepaid insurance | 2,205,608 | | | 771,037 | |
| Right of return asset | 1,620,000 | | | — | |
| Other | 342,551 | | | 152,032 | |
| Prepaid expenses and other current assets | $ | 4,357,829 | | | $ | 32,759,216 | |
The Company's prepaid purchases balance consists of deposits made to our suppliers for non-recurring engineering costs and production parts. As of December 31, 2021 and 2020, the prepaid purchases balances primarily consisted of deposits made in connection with the production of our C-Series vehicles.
During the year ended December 31, 2021, we recorded reserves of $23.9 million in cost of sales, which were primarily driven by the Company's decision to produce the C-1000 platform at low-volume and transition to a new all-electric delivery truck
platform in the near future. This decision was based on results of extensive testing performed on the C-1000 vehicles, which concluded in early 2022. The write-downs represent our best estimate of deposits on orders that we do not expect to recover.
4. INVESTMENT IN LORDSTOWN MOTORS CORP. (“LMC”)
As of December 31, 2020, the Company owned approximately 16.5 million shares of LMC Class A Common Stock. During the third quarter of 2021, the Company sold its Investment in LMC at an average price of $6.42 per share. Proceeds from the sale, net of transaction expenses and broker commissions, were approximately $105.1 million. The Company recognized a loss of approximately $76.5 million in connection with the sale, which is recorded in other loss on the consolidated statements of operations.
The following table sets forth a reconciliation of our investment in LMC:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Balance, beginning of year | $ | 330,556,744 | | | $ | 12,194,800 | |
| Change in fair value | (225,429,997) | | | 317,497,044 | |
| Sales of investment | (105,126,747) | | | 0 |
| Fair value of anti-dilution shares | — | | | 864,900 | |
| Balance, end of year | $ | — | | | $ | 330,556,744 | |
LMC Merger
On August 1, 2020, LMC began trading its common stock on the Nasdaq Global Select market under the ticker symbol “RIDE” through its merger with DiamondPeak Holdings Corp. Following the closing of the merger, the Company owned approximately 16.5 million shares of LMC common stock and no longer had anti-dilution rights or similar protections. Additionally, the merger defined the amount of the Royalty Advance as $4.8 million, which was received and is recorded in Other Income in the Consolidated Statements of Operations for the year ended December 31, 2020.
LMC Transaction
On November 7, 2019, the Company entered into a transaction with LMC (the “LMC Transaction”) in which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology in exchange of consideration as described below:
•A 10 percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the Intellectual Property License Agreement and anti-dilution rights for two years. The Company no longer has anti-dilution rights following the LMC Merger and the Company's ten percent ownership interest in LMC was sold during the third quarter of 2021, as described above.
•NaN percent of the aggregate debt and equity commitments funded to LMC upon completion of a capital raise (the “Royalty Advance”).
•A 1 percent royalty on the gross sales price of the first 200,000 vehicles sold by LMC, to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
The consideration included fixed and variable components. The fixed components consisted of the 10 percent ownership interest in LMC and amounts received under the Royalty Advance. The variable component consists of the 1 percent royalty on the gross sales price of the first 200,000 vehicles sold by LMC. Variable consideration will be recognized when each vehicle for which a royalty is sold.
5. REVENUE
During the years ended December 31, 2021, 2020 and 2019, the Company recognized sales, net of returns and allowances, of approximately $(0.9) million, $1.4 million, and $0.4 million, respectively. The majority of sales recognized during the last three years relate to the Company's automotive business, consisting primarily of sales of anyC-1000 vehicles.
During the third quarter of 2021, the Company announced its decision to suspend deliveries of our truck platforms. We recognize revenueC-1000 vehicles and recall previously delivered vehicles when control transfers upon shipmentmanagement determined additional testing and modifications are required to bring the
C-1000 vehicles into full compliance with Federal Motor Vehicle Safety Standards. In connection with the customer.recall, the Company agreed to refund our customers for all C-1000 vehicles previously purchased by them.
Other – consistsThe Company determines its allowance for estimated returns based on known pending returns and historical trends in product returns. The refund liability as of December 31, 2021 and 2020, was $2.4 million and 0, respectively.
The Company also records an asset for our right to recover products from customers settling a refund liability. The Company measures the asset at the asset's former Delivery Service Protocol program, grant-related research workcarrying amount, less any expected costs to recover, and non-warranty after-sales vehicle services.updates the measurement of the asset arising from changes in expectations about products to be returned. The asset for recovery as of December 31, 2021 and 2020 was $1.6 million and zero, respectively.
4.6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following:
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| Land | $ | 700,000 | | | $ | 700,000 | |
| Buildings | 5,900,000 | | | 5,900,000 | |
| Leasehold Improvements | — | | | 19,236 | |
| Software | 28,352 | | | 102,367 | |
| Equipment | 860,104 | | | 836,646 | |
| Construction in progress | 1,925,500 | | | — | |
| Vehicles and prototypes | 65,529 | | | 86,679 | |
| 9,479,485 | | | 7,644,928 | |
| Less: accumulated depreciation | (2,649,304) | | | (2,407,477) | |
| Property, plant and equipment, net | $ | 6,830,181 | | | $ | 5,237,451 | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Land and improvements | $ | 861,175 | | | $ | 794,875 | |
| Buildings and improvements | 6,396,800 | | | 6,005,505 | |
| Equipment and vehicles | 3,603,655 | | | 1,847,696 | |
| Tooling | 1,467,712 | | | 2,079,471 | |
| Construction in progress | 927,537 | | | 4,129,568 | |
| 13,256,879 | | | 14,857,115 | |
| Less: accumulated depreciation | (5,359,072) | | | (3,458,949) | |
| Property, plant and equipment, net | $ | 7,897,807 | | | $ | 11,398,166 | |
Construction in progress is primarily comprised of equipment and tooling related to the manufacturing of our products. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use.
5.
During the year ended December 31, 2021, we recorded a $6.8 million impairment charge in cost of sales, which reduced the carrying value of certain assets such as tooling and machinery related to the production of the C-Series vehicles that are no longer intended to be used.
Depreciation expense during the years ended December 31, 2021, 2020 and 2019 was $1.9 million, $0.8 million, and $0.4 million respectively.
7. CONVERTIBLE NOTEACCRUED LIABILITIES AND LONG-TERM DEBTOTHER
Convertible NoteAccrued liabilities and long-term debt consistsother current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, | | |
| 2019 | | 2018 |
| | | |
| Convertible Note, at fair value | $ | 39,020,000 | | | $ | — | |
| | | |
| Marathon Tranche I Loan | — | | | 10,000,000 | |
| Marathon Credit Agreement unamortized debt discount and issuance costs | — | | | (1,687,921) | |
| Net Marathon Credit Agreement | — | | | 8,312,079 | |
| Total long-term debt | 39,020,000 | | | | 8,312,079 | |
| Less current portion | 19,620,000 | | | — | |
| Long-term debt, net of current portion | $ | 19,400,000 | | | $ | 8,312,079 | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Accrued commissions | $ | 4,000,000 | | | $ | — | |
| Compensation and related costs | 4,030,085 | | | 2,537,353 | |
| Refund liability | 2,410,000 | | | — | |
| Accrued interest | 232,222 | | | 1,711,111 | |
| Other | 4,080,520 | | | 1,746,838 | |
| Accrued liabilities and other | $ | 14,752,827 | | | $ | 5,995,302 | |
8. DEBT
A reconciliation of the Convertible Note arefair value of the convertible notes is as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Balance, beginning of year | $ | 197,700,000 | | | $ | 39,020,000 | |
| Fair value of convertible notes issued | — | | | 268,925,000 | |
Change in fair value of convertible notes (1) | (27,600,000) | | | 125,749,361 | |
Change in fair value of convertible notes attributable to credit risk (2) | 10,200,000 | | | (1,100,000) | |
| Fair value of convertible notes exchanged for common stock | $ | (155,595,000) | | | $ | (234,894,361) | |
| Fair value of convertible notes, end of year | $ | 24,705,000 | | | $ | 197,700,000 | |
(1) The Company recognizes changes in fair value of convertible notes for common stock in Interest Expense, Net in the Consolidated Statements of Operations.
(2) The Company recognizes changes in fair value of convertible notes attributable to credit risk in Other Comprehensive Loss. During the years ended December 31, 2021 and 2020, the Company reclassified $8.8 million and $(1.1) million, respectively, of the changes in fair value of convertible notes attributable to credit risk previously recognized in Other Comprehensive Loss to Interest Expense (Income). The net amount of changes to in fair value of convertible notes attributable to credit risk recognized in Other Comprehensive Loss (Income) for the years ended December 31, 2021 and 2020 was approximately $1.4 million and zero, respectively.
4.0% Senior Secured Convertible Notes Due 2024
On October 14, 2020 the Company issued $200.0 million par value convertible notes (the “2024 Notes”) due October 14, 2024. The 2024 Notes are a senior secured obligation of the Company, and rank senior to all unsecured debt of the Company. The 2024 Notes are guaranteed by all the Company’s current and future subsidiaries and are secured by substantially all the assets of the Company and its subsidiaries. Interest is payable quarterly beginning on January 15, 2021 at a rate of 4.0% per annum. The 2024 Notes are convertible at a rate of $35.29 per share, subject to change for anti-dilution adjustments and adjustments for certain corporate events. The 2024 Notes will generally not be redeemable at the Company's option prior to the third anniversary of their issue date and there are no required redemptions.
The 2024 Notes contain certain covenants, including limitations on liens, additional indebtedness, investments, dividends and other restricted payments, and customary events of default. The Company is also required to have a minimum sales backlog of at least $25.0 million as of March 31, 2022, $50.0 million as of June 30, 2022, $75.0 million as of September 30, 2022 and $100.0 million as of December 31, 2022. As of December 31, 2021, the Company is not aware of any default or breach of any covenant under the 2024 Notes. Due to the Company's decision to produce the C-1000 platform at low-volume and transition to a new all-electric delivery truck platform, we will seek to convert our previous purchase orders with certain customers to new orders for the modified C-1000 and W750 platforms in the near term, and the W56 and W34 platforms in the long term, to satisfy the covenant requirements in 2022. As such, we continue to classify the balance of the 2024 Notes as long-term on the Consolidated Balance Sheets as of December 31, 2021.
| | | | | |
| 2020 | $ | 19,500,000 | |
| 2021 | 18,000,000 | |
| 2022 | 3,000,000 | |
| |
| |
| |
| $ | 40,500,000 | |
The amountsCompany was required to hold the proceeds in escrow until it completed certain requirements. As of December 31, 2020, the proceeds were recorded in Restricted Cash on the Consolidated Balance Sheet. In January 2021, such requirements were met and the proceeds were released from escrow.
As of December 31, 2021 and 2020, the contractual principal balance of the 2024 Notes was $27.5 million and $200.0 million, respectively and the fair value was $24.7 million and $197.7 million, respectively. Fair value adjustments of $(27.6) million and $(2.3) million related to the 2024 Notes were recorded in Interest Expense, Net in the aggregate maturities table only includeConsolidated Statements of Operations during the paryears ended December 31, 2021 and 2020, respectively. Fair value ofadjustments related to the Convertible Note to be repaid and does not include the additional 12% premium described below. The 2019 year includes the remaining $4.5 million the Company is required to convert by April 2020 and all of the Redemption Payments (described below).2024 Notes attributable
The current portionto changes in credit risk of the Convertible Note includes the remaining $4.5$10.2 million required to be converted through April 1, 2020, as well as the Redemption Payment (described below) dueand zero, were recorded in 2020.
Amortization expense for debt issuance costs and unamortized discounts was $1,922,164 and $2,348,289 forOther Comprehensive Loss during the years ended December 31, 20192021 and 2018,2020, respectively.
In the fourth quarter of 2021, the Company entered into securities exchange agreements with certain holders of its 2024 Notes, to exchange $172.5 million in principal amount of the notes for approximately 27.7 million shares of common stock. In connection with the exchanges, the Company recognized a total loss on exchange of approximately $34.9 million, which included $8.8 million of the fair value adjustments attributable to changes in credit risk previously recorded in Other Comprehensive Loss. The loss on exchange was recorded in Interest Expense in the Consolidated Statements of Operations.
High Trail Convertible Note II
On July 16, 2020, the Company issued a $70.0 million par value convertible note (the “Note II”) due July 1, 2023. Interest was payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum.
The Company paid fees in connection with the issuance of Note II of approximately $1.1 million, reducing the proceeds to the Company to approximately $68.9 million. All direct costs related to the issuance were recognized in Interest Expense in the Consolidated Statements of Operations for the year ended December 31, 2020.
During the year ended December 31, 2020, the fair value of the Note II increased approximately $52.9 million, which is recorded in Interest Expense in the Consolidated Statements of Operations for the year ended December 31, 2020.
On October 14, 2020, the Company exchanged the entire $70.0 million outstanding principal balance of Note II at a premium for approximately 5.2 million shares of common stock. The settlement cost was approximately $121.8 million which was calculated as the number of shares issued in exchange for Note II multiplied by the closing price of the Company's common stock on October 13, 2020, which was $23.63 per share.
High Trail Convertible Note
On December 9, 2019, the Company issued a $41.0 million par value convertible note (“High Trail Convertible Note (the "Convertible Note"Note” or “the Note”) due November 2022, with2022. The fair value of the Note was $38.5 million upon issuance. Interest was payable quarterly beginning February 1, 2020, at a stated interest rate of 4.50% per annum. The Company has elected to account for the Convertible Note using the fair value option allowed under GAAP. The fair value of the Convertible Note was $38.5 million on December 9, 2019. The Convertible Note was issued at 95% of par. Interest is payable quarterly beginning February 1, 2020. The Convertible Note is initially convertible at a rate of $3.05 per share subject to change for anti-dilution adjustments or certain corporate events.
The Company is required to convert a minimum of $5.0 million of the Convertible Note for the period by April 1, 2020. During the year ended December 31, 2019, $0.5 million par value of the Convertible Note was converted into 185,186 shares of common stock resulting in a gain of $83,089, which is included in Interest Expense. Subsequent to December 31, 2019, an additional $4.5 million par value of the Convertible Note was converted into 1,546,889 shares of common stock.
As of December 31, 2019, the fair value of the Convertible Note was $39.0 million and the contractual principal balance was $40.5 million. In electing the fair value option, the Company recognizes changes in fair value related to changes in credit risk, if any, in Other Comprehensive Income and the remaining change in fair value in Interest Expense. For the year ended December 31, 2019, the fair value of the Convertible Note increased $1.0 million which is included in Interest Expense. No portion of the change in fair value was related to changes in credit risk for the period.
Any principal repayment of the Convertible Note is at 112% of the par value. Beginning March 1, 2020 the holder of the Convertible Note may require the Company to redeem up to $1.5 million par value ("Redemption Payment") of the Convertible Note monthly. Subject to certain limitations, the Company at its discretion can pay some or all of Redemption Payment in cash or shares of common stock.
The Convertible Note is a senior secured obligation of the Company secured by substantially all assets of the Company and rank senior to all unsecured debt of the Company. The Convertible Note contains certain covenants, including that we maintain at all times liquidity calculated as unrestricted, unencumbered cash and cash equivalents in a minimum amount of $8.0 million.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The significant inputs to the valuation of the Convertible Note at fair value are Level 3 inputs since they are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company's common stock.
The Convertible Note was issued with 15,459,016approximately 15.5 million warrants to purchase common stock of the Company. The exercise price is the greater of the conversion price of the Convertible Note on the day the warrants become exercisable or the weighted average 30 day price of our common stock. TheCompany at an initial exercise price wasof $3.05 per share. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately. The warrants arewere classified as equity instruments and the fair value has beenwas estimated to be approximately $0.4 million on December 9, 2019 and2019. The fair value of the warrants was recorded as an increase to Additional Paid-In Capital.
Marathon Credit AgreementFair value adjustments for the year ended December 31, 2020 and 2019 were approximately $74.1 million and $1.0 million, which were recorded in Interest Expense in the Consolidated Statements of Operations.
During the year ended December 31, 2020, the Company converted $40.5 million par value of the Note into approximately 14.4 million shares of common stock, resulting in a loss of approximately $35.9 million. During the year ended December 31, 2019, the Company converted $0.5 million par value of the Note into approximately 0.2 million shares of common stock, resulting in a gain of approximately $0.1 million. Gains and losses related to the conversions were recorded in Interest Expense in the Consolidated Statements of Operations.
PPP Term Note
On December 31, 2018,April 14, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”Paycheck Protection Program Term Note (“PPP Note”), with Marathon Asset Management, LP, on behalf under the Paycheck Protection Program of certain entities it manages (collectively, the “Lenders”Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Credit Agreement providedCompany received proceeds of $1.4 million from the PPP Note, which was due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company with $10used the proceeds primarily for payroll costs. Interest accrued on the PPP Note at the rate of 1.0% per annum. The Company elected to account for the PPP Term Note as debt and accrued interest over its term.
On January 15, 2021, the outstanding principal and interest accrued on the PPP Note was forgiven and the Company recognized a gain of $1.4 million of term loans (the “Tranche One Loans”) and $25 million of revolving term loans (the Tranche Two Loans together within Interest Income for the Tranche One Loans, the “Loans”).
The Loans bore interest at a rate per annum equal to LIBOR plus 7.625%. The interest rate atyear ended December 31, 2018,2021. Accordingly, the PPP Note was 10.4% per annum.classified as current in the Consolidated Balance Sheet as of December 31, 2020.
9. LEASES
We have entered into various operating and finance lease agreements for offices, manufacturing and warehouse facilities. We determine if an arrangement is a lease, or contains a lease, at inception and record the leases in our financial statements upon lease commencement, which is the date when the underlying asset is made available for our use by the lessor.
We have elected not to disclose in the Consolidated Balance Sheet leases with a lease term of 12 months or less at lease inception that do not contain purchase a option or renewal term provision we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Our leases may include options to extend the lease term for up to 5 years. Some of our leases also include options to terminate the lease prior to the end of the agreed upon lease term. For purposes of calculating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as cost of sales or operating expenses depending on the nature of the leased asset.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Short-term lease expense | $ | 599,129 | | | $ | 145,585 | | | $ | 78,513 | |
| Operating lease expense | 58,224 | | | — | | | — | |
| Total lease expense | $ | 657,353 | | | $ | 145,585 | | | $ | 78,513 | |
Other information related to leases is as follows:
| | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2020 | | 2019 |
| Weighted-average remaining lease term | | | | | |
| Operating leases | 4.0 years | | N/A | | N/A |
| | | | | |
| Weighted-average interest rate | | | | | |
| Operating leases | 10.0 | % | | N/A | | N/A |
| | | | | |
Supplemental cash flow information related to leases where we are the lessee is as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash outflows from operating leases | $ | 657,353 | | | $ | 145,585 | | | $ | 78,513 | |
| Operating cash outflows from finance leases (interest payments) | — | | | — | | | — | |
| Financing cash outflows from finance leases | — | | | — | | | — | |
| Leased assets obtained in exchange for finance lease liabilities | — | | | — | | | — | |
| Leased assets obtained in exchange for operating lease liabilities | 1,577,774 | | | — | | | — | |
In conjunction with entering into the Credit Agreement, the Company issued a Common Stock Purchase Warrant to purchase 8,053,390 shares of common stock at an exercise price of $1.25 per share (the “Initial Warrants”). Until December 31, 2020 even after the payoff of the Loans, the Company is required to issue additional Common Stock Purchase Warrants (the “Additional Warrants”) to the Lenders equal to 10%, in the aggregate, of any additional issuance. The initial exercise price is 110% of the issuance price of the applicable issuance.
The Marathon Credit Agreement and Initial Warrants were determined to be freestanding instruments and were accounted for separately. The Initial Warrants do not qualify for equity classification and have been classified as liability instruments. The value of the Initial Warrants on the date of the Credit Agreement was estimated to be $965,747 which was determined using the Black-Scholes valuation model and was recorded as a liability with the offset being recorded as a debt discount. The liability for the Initial Warrants are marked-to-market quarterly in accordance with liability accounting with a corresponding charge to Interest Expense.
The closing costs associated with the Marathon Credit Agreement were allocated based on proportional value to the Tranche One Loan, Tranche Two Loan and the Initial Warrants. Costs of $722,174 allocated to Tranche 1 were recorded as a debt discount; costs of $1,830,435 allocated to Tranche 2 were recorded as a prepaid asset and were amortized over the expected life of the loan; and costs of $69,744 allocated to the Initial Warrants were expensed in the year ended December 31, 2018.
As of December 31, 20192021, the maturities of our operating and 2018,finance lease liabilities (excluding short-term leases) are as follows:
| | | | | | | | | | | |
| Operating
Leases | | Finance
Leases |
| 2022 | $ | 635,263 | | | $ | 857,516 | |
| 2023 | 861,623 | | | 879,444 | |
| 2024 | 1,052,365 | | | 2,752,862 | |
| 2025 | 827,802 | | | — | |
| 2026 | 851,634 | | | — | |
| Thereafter | 1,648,662 | | | — | |
| Total minimum lease payments | 5,877,349 | | | 4,489,822 | |
| Less: Interest | 381,660 | | | — | |
Less: Leases not yet commenced (1) | 3,940,922 | | | 4,489,822 | |
| Present value of lease obligations | 1,554,767 | | | — | |
| Less: Current portion | 363,714 | | | — | |
| Long-term portion of lease obligations | $ | 1,191,053 | | | $ | — | |
(1) As of December 31, 2021, we have certain leases that were executed, but where we did not have control of the liability forunderlying assets, therefore, the Initial Warrants was $16,335,000lease liabilities and $965,747, respectively. Any additional warrants issued in connection with the Credit Agreement are classified as equity instruments andright-of-use assets are not marked-to-market at each balance sheet date as they do not include the features of the Initial Warrants that required liability accounting.
A loss on extinguishment of approximately $6.1 million was recognized on the payoff of the Marathon Loans and is recorded within Interest Expense in the accompanying Consolidated Statements of Operationsbalance sheet. The finance lease is for the year endeda warehouse facility and includes a purchase option which is exercisable through December 31, 2019. The loss on extinguishment includes a $3.4 million premium which was payable on the early payoff of the Marathon Loans.
Arosa Loan Agreement
In 2018, the Company entered into a $7.8 million term loan with a fund managed by Arosa (the “Arosa Loan”). The interest rate for the Arosa Loan was 8% per annum. On December 31, 2018, proceeds from the Marathon Credit Agreement were utilized to repay all outstanding amounts under the Arosa Loan.
In conjunction with the Arosa Loan, the Company issued Arosa a warrant to purchase 5,000,358 shares of common stock of the Company at an exercise price of $2.00 per share exercisable in cash only for a period of five years. While the Arosa Loan remained outstanding, the Company was required to issue additional warrants to purchase common stock equal to 10% of any additional issuance of common stock.
The Arosa Loan and related warrants were considered freestanding instruments and were accounted for separately. The warrants did not qualify for equity accounting and liability treatment was applied. The fair value of the warrants on the date of the Arosa Loan was estimated to be $3,540,542, using the Black-Scholes valuation method and was recorded as a liability with the offset being recorded as a debt discount. Through and including December 31, 2018, the warrants held by Arosa were required to be marked-to-market as the warrants were classified as liabilities. On January 1, 2019, the warrants no longer included anti-dilution protection and no longer met the criteria for liability classification at which time they were reclassified to equity. As a result of the 2019 reclassification event, the $857,072 Arosa warrant liability was reclassified to Additional Paid-In Capital.
On August 14, 2018 the Company issued Arosa a warrant to acquire 1,143,200 shares of common stock at an exercise price of $1.21 following the closing of the Company's August 2018 public offering. On October 1, 2018, the Company issued Arosa a warrant to acquire 108,768 shares of common stock at an exercise price of $1.60 warrants, due to our third quarter At The Market (“ATM”) offerings. On the payoff of the Arosa Loan, the Company issued Arosa a Warrant to purchase 894,821 shares of common stock exercisable at $1.25 per share.
A loss on extinguishment of approximately $2.2 million was recognized on the payoff of the Arosa Loan which is recorded in Interest Expense in the accompanying Consolidated Statement of Operations for the year ended December 31, 2018.
6.10. DUKE FINANCING OBLIGATION
On November 28, 2018, the Company entered into a Sales Agreement to sell Duke Energy One, Inc. (“Duke”) 615,000 battery cells (the “ Cells”) for $1,340,700. Workhorse continued to use the Cells for the delivery of trucks.
The Duke transaction was accounted for as a financing obligation and a $1,340,700 liability was recorded. The Company exercised an option to purchase the Cells for a price of $2.18 per cell on December 11, 2019 at which time the financing obligation was repaid.
In consideration for consenting to the Company selling the Cells to Duke, which served as collateral for the Arosa Loan Agreement, the Company issued Arosa 2,000,000 shares of common stock and restruck the exercise price of previously issued warrants to $1.25 per share.
7. MANDATORYMANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one1 share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. All warrants issued in connection with the Preferred Stock were exercised during 2020. The Preferred Stock iswas not convertible and doesdid not have voting rights.
The Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon liquidation, winding-up or dissolution. The Preferred Stock iswas entitled to annual dividends at a rate equal to 8.0% per annum on the Stated Value. Accrued dividends will bewere payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. The Warrants have an exercise price of $1.62 per shareDuring the years ended December 31, 2020 and expire seven years from the date of issuance.
In June 2023,2019, the Company is requiredissued 0.9 million and 0.7 million shares of common stock to redeem all the outstanding sharesholders of the Preferred Stock, at the Stated Value, plus accrued and unpaidrespectively, for dividends. At any time prior to such date, the Company may redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid dividends.
The aggregate number of shares of common stock issued in payment of dividends on the Preferred Stock when added to the number of shares of common stock issued upon exercise of any warrants shall not exceed 19.9% of either (a) the total number of shares of common stock outstanding on the date hereof; or (b) the total voting power of the Company’s securities outstanding on the date hereof that are entitled to vote on a matter being voted on by holders of the common stock, unless and until the Company obtains stockholder approval permitting such issuances.
As the Preferred Stock iswas mandatorily redeemable, it iswas classified as a liability on the Consolidated Balance Sheets. All dividends payable on the Preferred Stock arewere classified as Interest Expense.Expense in the Consolidated Statements of Operations.
The Preferred Stock and Warrants arewere considered freestanding financial instruments and have beenwere accounted for separately. The Warrants arewere considered equity instruments and not marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the Warrants was recorded as an increase to Additional Paid-In Capital and a discount of the Preferred Stock. The discount is beingwas amortized to Interest Expense using the effective interest method through May 2023.method. Amortization of the discount was $1.1 million and $0.9 million for the yearyears ended December 31, 2019.2020 and December 31, 2019, respectively.
8.11. INCOME TAXES
For the years ended December 31, 2021, 2020 and 2019, with the exception of the impact from non-deductible inventory and 2018,prepaid purchases reserves, the Company has nettaxable losses primarily due to operations and 0stock compensation related deductions and thus has no current federal tax expense was recorded. The taxable income generated by non-deductible inventory and prepaid purchases reserves in the current year is fully offset by available net operating losses. As of December 31, 2021, the Company has recorded a fullincreased the valuation allowance onrecorded against its deferred tax assets fordue to the years endedsale of LMC shares during the year and the uncertainty about our ability to utilize our remaining deferred tax assets in future years. As of December 31, 20192020, the Company released the valuation allowance with the exception of certain tax credits and 2018 and 0net operating losses that will not be realizable due to IRC Section 382 Ownership Change limitations as discussed below. As a result, the deferred tax expense recorded in 2020 was recorded.reversed and the Company recognized a deferred tax benefit in 2021 to reinstate the valuation allowance.
The components of the (benefit) provision for income tax istaxes are as follows:
| | | | | | | | | | | |
| Years Ended December 31, | | |
| 2019 | | 2018 |
| Current | | | |
| Federal | $ | — | | | $ | — | |
| State and Local | — | | | — | |
| Total Current | — | | | — | |
| | | |
| Deferred | | | |
| Federal | — | | | — | |
| State and Local | — | | | — | |
| Total Deferred | — | | | — | |
| | | |
| Total provision for income taxes | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | — | | | $ | — | | | $ | — | |
| State and Local | (13,159) | | | — | | | — | |
| Total Current | (13,159) | | | — | | | — | |
| Deferred: | | | | | |
| Federal | (21,864,569) | | | 21,864,569 | | | — | |
| State and Local | 30,639 | | | (30,639) | | | — | |
| Total Deferred | (21,833,930) | | | 21,833,930 | | | — | |
| Total (benefit) provision for income taxes | $ | (21,847,089) | | | $ | 21,833,930 | | | $ | — | |
The reconciliation of taxes at the federal statutory federal income tax with therate to our provision for income taxes iswas as follows:
| | | Years Ended December 31, | | | Years Ended December 31, |
| | 2019 | | 2018 | | 2021 | | 2020 | | 2019 |
| Federal tax benefit at statutory rates | Federal tax benefit at statutory rates | 21.0 | % | | 21.0 | % | Federal tax benefit at statutory rates | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State and local taxes | (0.6) | % | | 0.8 | % | |
| Mark-to-market adjustment on stock warrants | (9.3) | % | | 1.5 | % | |
| State and local tax at statutory rates | | State and local tax at statutory rates | 0.1 | % | | (0.1) | % | | (0.6) | % |
| Fair value adjustments on warrant liability | | Fair value adjustments on warrant liability | — | % | | 37.1 | % | | (9.3) | % |
| Fair value adjustments on convertible notes | | Fair value adjustments on convertible notes | (0.4) | % | | 2.8 | % | | — | % |
| Tax gain on sale of investment | | Tax gain on sale of investment | (0.6) | % | | — | % | | — | % |
| Stock-based compensation deductions | | Stock-based compensation deductions | 0.2 | % | | (6.6) | % | | — | % |
| Research and development credits | | Research and development credits | 1.2 | % | | — | % | | — | % |
| Other permanent differences and credits | Other permanent differences and credits | (0.8) | % | | 0.0 | % | Other permanent differences and credits | (0.2) | % | | — | % | | (0.8) | % |
| Change in valuation allowance | Change in valuation allowance | (10.3) | % | | (23.3) | % | Change in valuation allowance | (16.1) | % | | (30.4) | % | | (10.3) | % |
| | Total tax benefit | Total tax benefit | 0.0 | % | | 0.0 | % | Total tax benefit | 5.2 | % | | 23.8 | % | | — | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided againstWhen realization of the deferred tax assets when, based on all available evidence, itasset is considered more likely than not to occur, the benefit related to the deductible temporary differences attributable to operations is recognized as a reduction of income tax expense. At each reporting date, management considers new evidence, both positive and negative, that some portion or allcould affect its view of the recordedfuture realization of deferred tax assets.
As of December 31, 2020, management determined there was sufficient positive evidence to conclude it was more likely than not deferred tax assets will not be realizedof approximately $27.8 million were realizable. Management's determination was based on the Company's achievement of three years of cumulative pretax income in future periods. The Company cannot be certain that future taxable income will be sufficientthe U.S. federal tax jurisdiction, which was primarily driven by the change in fair value of our investment in LMC. During the third quarter of 2021, we sold our investment in LMC and our ability to realize itsour net deferred tax assets, and accordingly a fullasset was no longer more likely than not to occur. Therefore, we adjusted our valuation allowance has been provided on itsto reduce the deferred tax assets. The valuation allowance increased by approximately $3.8 million and $8.5 million during the years endedasset to zero as of December 31, 2019 and 2018, respectively.
Components
Significant components of the Company’s deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| December 31 | | |
| 2019 | | 2018 |
| Deferred Tax Assets: | | | |
| Accrued expenses and reserves | $ | 802,526 | | | $ | 850,857 | |
| Warranty reserve | 1,275,047 | | | 1,539,765 | |
| Non-qualified stock options | 961,919 | | | 1,034,261 | |
| Property, plant and equipment | 202,755 | | | 183,917 | |
| Disallowed interest expense | — | | | 1,118,212 | |
| Other temporary differences | (88,200) | | | — | |
| Net operating losses | 30,213,192 | | | 24,818,785 | |
| Total Deferred Tax Assets | 33,367,239 | | | | 29,545,797 | |
| Valuation Allowance | (33,367,239) | | | (29,545,797) | |
| Total Deferred Tax Assets, net of valuation allowance | $ | — | | | $ | — | |
| | | | | | | | | | | |
| December 31 |
| 2021 | | 2020 |
| Deferred Tax (Liabilities) Assets: | | | |
| Accrued expenses and reserves | $ | 590,340 | | | $ | 428,710 | |
| Warranty reserve | 976,956 | | | 1,150,830 | |
| Inventory and prepaid purchase reserves | 21,506,626 | | | 424,489 | |
| Non-qualified stock options | (160,921) | | | 358,808 | |
| Property, plant and equipment | 54,556 | | | (319,632) | |
| Fair value adjustment of investment in LMC | — | | | (66,674,379) | |
| Issuance fees on convertible notes | 687,772 | | | 1,031,658 | |
| | | |
| Federal tax credits | 4,873,099 | | | — | |
| Net operating losses | 45,143,740 | | | 47,344,755 | |
| Total Deferred Tax (Liabilities) Assets | 73,672,168 | | | (16,254,761) | |
| Valuation Allowance | (73,672,168) | | | (5,579,169) | |
| Total Deferred Tax Assets (Liabilities), net of valuation allowance | $ | — | | | $ | (21,833,930) | |
AtAs of December 31, 2019,2021, the Company has approximately $90.6$81.7 million of federal net operating loss (“NOL”) carry-forwards which expire through 2037 and2037. Additionally, at December 31, 2021, the Company had approximately $49.7$128.9 million of federal NOLs that carry-forward indefinitely. Additionally, at December 31, 2019, the Company hasindefinitely, and approximately $0.8$0.9 million of state and local NOLsNOL carry-forwards, which expire through 2038.2037. The NOL carry-forwards may be limited in certain circumstances, including ownership changes.such as changes in ownership.
Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carry-forwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Certain tax attributes are subject to an annual limitation as a result of certain cumulative changes in ownership interest of significant shareholders which could constitute a change of ownership as defined under Internal Revenue Code Section 382. The Company has not yet analyzed whether it has experienced ancompleted a full analysis of historical ownership change for this purpose to determine if anychanges and determined that a portion of the net operating losses to dateNOLs to-date have a limitation on future deductibility. Approximately $8.4 million of NOLs incurred prior to 2014 will be unable to offset future taxable income and have been reserved via a valuation allowance to reduce the deferred tax asset to the expected realizable amount.
TabularThe following table presents a reconciliation of unrecognized tax benefitsbenefits:
| | | | | | | | | | | |
| 2019 | | 2018 |
| Unrecognized tax benefits - January 1 | $ | 1,163,282 | | | $ | 1,163,282 | |
| Gross increases - tax positions in prior period | — | | | — | |
| Gross decreases - tax positions in prior period | — | | | — | |
| Gross increases - tax positions in current period | — | | | — | |
| Settlement | — | | | — | |
| Lapse of statute of limitations | — | | | — | |
| Unrecognized tax benefits - December 31 | $ | 1,163,282 | | | $ | 1,163,282 | |
| | | | | | | | | | | |
| 2021 | | 2020 |
| Unrecognized tax benefits - January 1 | $ | 1,163,282 | | | $ | 1,163,282 | |
| Gross increases - tax positions in prior period | — | | | — | |
| Gross decreases - tax positions in prior period | (357,890) | | | — | |
| Gross increases - tax positions in current period | — | | | — | |
| Settlement | — | | | — | |
| Lapse of statute of limitations | — | | | — | |
| Unrecognized tax benefits - December 31 | $ | 805,392 | | | $ | 1,163,282 | |
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2019,2021, and 2018,2020, due to the Company’s continued losses, 0no amounts of interest and penalties have been recognized in the Company’s consolidated statementsConsolidated Statements of operations.Operations. If the unrecognized tax benefits were reversed, a deferred tax asset and corresponding valuation allowance would be recorded, and thus the reversal would have no impact on the effective rate.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and local jurisdictions. Generally, the Company’s 20162018 through 20182020 tax years remain open and subject to examination by federal, state and local taxing authorities. However, federal, state, and local net operating losses from 2009 through 20182020 are subject to review by taxing authorities in the year utilized.
9.12. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 — Quoted market prices in active markets for identical assets or liabilities.
Level 2 — Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3 — Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities measured at fair value and fair value measurement level were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | | | | | | | | |
| Investment in LMC | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 330,556,744 | | | $ | 330,556,744 | | | $ | — | | | $ | — | |
| Total assets at fair value | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 330,556,744 | | | $ | 330,556,744 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | |
| Convertible notes | $ | 24,705,000 | | | $ | — | | | $ | — | | | $ | 24,705,000 | | | $ | 197,700,000 | | | $ | — | | | $ | — | | | $ | 197,700,000 | |
| | | | | | | | | | | | | | | |
| Total liabilities at fair value | $ | 24,705,000 | | | $ | — | | | $ | — | | | $ | 24,705,000 | | | $ | 197,700,000 | | | $ | — | | | $ | — | | | $ | 197,700,000 | |
Investment in LMC
The Company's warrant liabilityInvestment in LMC was measured at fair value using Level 1 inputs using a quoted price in an active market. We recognized changes in fair value of the investment as Other Income (Loss) in the Consolidated Statements of Operations.
Convertible Notes
The Company's convertible notes are measured at fair value using Level 3 inputs on issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The following table sets forth a reconciliation of the warrant liability:
| | | | | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| | | | |
| Warrant liability, beginning of year | | $ | 1,822,819 | | | | $ | — | |
| Fair value for new warrants issued | | — | | | | 4,506,289 | |
| Change in fair value for the year | | 15,369,253 | | | (2,683,470) | |
| Reclassification to additional paid-in capital | | (857,072) | | | — | |
| Warrant liability, end of year | | $ | 16,335,000 | | | $ | 1,822,819 | |
The Company's Convertible Note was measured at fair value using Level 3 inputs onupon issuance and at each reporting date. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value model includes: theinclude estimates of the redemption dates;dates, credit spreads;spreads and the market price and volatility of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The following table sets forth a reconciliation of the Convertible Note:
| | | | | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| | | | | | | |
| Convertible Note, beginning of year | | $ | — | | | | $ | — | |
| Fair value of Convertible Note on issuance | | 38,520,000 | | | | — | |
| Conversion of Convertible Note into common stock | | (481,728) | | | — | |
| Change in fair value for the year | | 981,728 | | | — | |
| Convertible Note, end of year | | $ | 39,020,000 | | | $ | — | |
10.13. STOCK-BASED COMPENSATION
The Company maintains, as approved by the board of directors, the 2019 Stock Incentive Plan (the “Plan”) providing for the issuance of stock-based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the plans may be either vested or unvested options, or unvested restricted stock. The Plan has authorized 8,000,0008.0 million shares for issuance of stock-based awards. As of December 31, 2019,2021 there were 8,029,778approximately 4.8 million shares available for issuance of future stock awards which includes shares available under the 2019 and 2017 Incentiveincentive plans.
Stock-based compensation expense
The following table summarizes stock-based compensation expense:
| | | | | | | | | | | |
| Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Stock options | $ | 1,542,644 | | | $ | 1,059,582 | |
| Restricted stock | 437,354 | | | — | |
| Total stock-based compensation expense | $ | 1,979,998 | | | $ | 1,059,582 | |
In November 2019, the vesting for 1,000,000 stock options issued to an officer of the Company were accelerated, resulting in the remaining unvested compensation of $460,000 being recognized in the year ended December 31, 2019. | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Stock options | $ | 526,125 | | | $ | 792,055 | | | $ | 1,542,644 | |
| Restricted stock | 4,227,252 | | | 3,228,750 | | | 437,354 | |
| Performance-based share units | 190,003 | | | — | | | — | |
| Total stock-based compensation expense | $ | 4,943,380 | | | $ | 4,020,805 | | | $ | 1,979,998 | |
Stock options
The following table summarizesA summary of stock option activity:activity for the year ended December 31, 2021 is as follows:
| | | Number of Options | | Weighted
Average
Exercise Price
per Option | | Weighted
Average Grant
Date Fair Value
per Option | | Weighted
Average
Remaining Contractual Life (Years) | | Number of Options | | Weighted
Average
Exercise Price | | Weighted
Average Grant
Date Fair Value
per Option | | Weighted
Average
Remaining Contractual Life (Years) | |
| Balance December 31, 2017 | | 3,851,371 | | | $ | 3.11 | | | | | | | |
| | Options outstanding at December 31, 2020 | | Options outstanding at December 31, 2020 | | 2,351,240 | | | $ | 2.0 | | | | | 5.5 | |
| Granted | Granted | | 340,000 | | | 1.18 | | | 0.54 | | | | Granted | | 296,429 | | | 10.3 | | | $ | 10.1 | | | |
| Exercised | Exercised | | (52,500) | | | 1.24 | | | | | | | | Exercised | | (1,897,708) | | | 2.0 | | | |
| Forfeited | Forfeited | | — | | | — | | | Forfeited | | (198,125) | | | 1.0 | | | |
| Expired | Expired | | (271,250) | | | 3.22 | | | | | | | | Expired | | (56,000) | | | 6.1 | | | |
| Balance December 31, 2018 | | 3,867,621 | | | 4.05 | | | | | | |
| Granted | | 2,450,000 | | | 0.96 | | | 0.51 | | | | |
| Exercised | | (736,552) | | | 0.72 | | | | | | | | |
| Forfeited | | (907,500) | | | 4.49 | | | |
| Expired | | (948,569) | | | 5.01 | | | | | | | | |
| Balance December 31, 2019 | | 3,725,000 | | | $ | 2.32 | | | | | | |
| | Number of options exercisable at December 31, 2019 | | 3,069,000 | | | $ | 2.35 | | | 5.4 | |
| Options outstanding at December 31, 2021 | | Options outstanding at December 31, 2021 | | 495,836 | | | $ | 6.8 | | | 6.5 | |
| Options exercisable at December 31, 2021 | | Options exercisable at December 31, 2021 | | 175,532 | | | $ | 1.7 | | | 1.2 | |
As of December 31, 2019,2021, unrecognized compensation expense was $0.5$2.6 million for unvested options, which is expected to be recognized over the next 2.02.7 years.
The fair value for the stock option issued in 2021 was estimated on the grant date using a Black-Scholes valuation model that uses the assumptions of expected volatility, expected term, and the expected risk-free rate of return. The expected volatility was estimated by management as 135% based on our historical results adjusted for any expected future changes. The Company uses the simplified method in determining the expected term of the stock option grant awarded in 2021. The simplified method was used because the Company does not believe its historical data provides a reasonable basis for the expected term of the 2021 grant, due primarily to the limited number of grants of stock options awarded to date. The risk-free rate of return was based on market yields in effect on the date of each grant for United States Treasury debt securities with a maturity equal to the expected term of the award.
Restricted stock awards
Restricted stock awards generally vest in equal installment periods of six months to three years. Restricted stock awards are valued based on the closing price of the Company's common stock on the date prior of grant, and compensation cost is recorded on a straight-line basis over the share vesting period net of actual forfeitures in the period.
Restricted stock
The following table summarizesA summary of restricted stock activity:activity for the year ended December 31, 2021 is as follows:
| | | | | | | | | | | | | | |
| | Number of Unvested Shares | | Weighted Average Grant Date Fair Value per Share |
| Balance December 31, 2018 | | — | | | $ | — | |
| Granted | | 1,805,222 | | | 2.57 | |
| Vested | | (36,496) | | | 2.74 | |
| Forfeited | | — | | | — | |
| Balance December 31, 2019 | | 1,768,726 | | | $ | 2.57 | |
| | | | | | | | | | | | | | |
| | Number of Unvested Shares | | Weighted Average Grant Date Fair Value per Share |
| | | | |
| | | | |
| | | | |
| | | | |
| Unvested restricted stock at December 31, 2020 | | 1,377,889 | | | 2.7 | |
| Granted | | 1,740,261 | | | 10.2 | |
| Vested | | (896,139) | | | 3.8 | |
| Forfeited | | (604,819) | | | 5.1 | |
| Unvested restricted stock at December 31, 2021 | | 1,617,192 | | | $ | 9.3 | |
As of December 31, 2019,2021, unrecognized compensation expense was $4.2$13.3 million for unvested restricted stock, awards which is expected to be recognized over the next 2.32.7 years.
Performance-based restricted stock awards
On November 5, 2021, the Company issued 306,197 PBSUs that vest based on the Company's total shareholder return as compared to a group of peer companies over a three-year period. The number of units that will ultimately vest can range from 0% to 200% of the initial PBSUs grant. The PBSUs will vest on December 31, 2024 and will be settled through issuance of shares of the Company's common stock. The grant date fair value of $11.79 per PBSU was estimated using a Monte-Carlo simulation model using a volatility assumption of 117% and risk free interest rate of 0.69%. As of December 31, 2021, unrecognized compensation expense was $3.4 million, which is expected to be recognized over the next 2.8 years.
11.14. RECENT PRONOUNCEMENTS
Accounting GuidanceStandards Recently Adopted in 2019
In February 2016,December 2019, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases2019-12, Income Taxes (Topic 842), which requires740): Simplifying the Accounting for Income Taxes. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing an intra-period allocation, and calculating income taxes in interim periods. The ASU also adds guidance to simplify accounting for income taxes, such as recognizing deferred taxes for goodwill and allocating taxes to members of a lessee to recognize inconsolidated group. The Company adopted the Consolidated Balance Sheet a liability to make lease payments (“the lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present valueASU as of the lease payments. A lessee shall classify a lease as a finance lease or an operating lease.
Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases on a straight-line basis over the lease term. The amendments in this update were applied using the current period adjustment method on January 1, 2019.2021. The adoption of this standardguidance did not have a material impact on the Consolidated Financial Statements.Company’s financial condition and results of operations.
Accounting GuidanceStandards Not Yet Adopted
In June 2016,August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting standard update that revisesfor certain convertible instruments, amends the methodologyguidance on derivative scope exceptions for measuring credit losses on financialcontracts in an entity’s own equity and requires the use of the if-converted method for calculating diluted earnings per share. The ASU removes separation models for convertible debt with a cash conversion feature. Such convertible instruments and the timing of when such losses are recorded.will be accounted for as a single liability measured at amortized cost. The guidanceASU is effective for the Company on January 1, 2023, including interim and annual periods and shouldbeginning after December 15, 2021, with early adoption permitted after December 15, 2020, which can either be applied on a modified retrospective or full retrospective basis. The Company expects thatAdoption of the adoption of this guidance willASU is not expected to have a material impact on the Company's financial condition and results of operations.
12.15. STOCKHOLDERS' EQUITY
2018Preferred Stock Offerings
In 2017, theThe Company entered into an at the market issuance sales agreement (the “Cowen Agreement”) with Cowen and Company, LLC under which the Company soldhas authorized 75.0 million shares of its CommonSeries A Preferred Stock, having an aggregate offering pricepar value $0.001 per share. The Company's certificate of upincorporation provides that shares of preferred stock may be issued from time to $25.0 million. Fortime in one or more series. The Company's Board of Directors is authorized to fix the year endedvoting rights, if any, designations, powers, preferences, qualification, limitations and restrictions thereof, applicable to the shares of preferred stock. As of December 31, 2018, the Company issued 1,794,621 shares for proceeds of $3.7 million under the Cowen Agreement.
On April 26, 2018, the Company closed subscription agreements with accredited investors who purchased 531,0662021 and December 31, 2020, there were 0 shares of the Company’s common stock for a price of $1.4 million or $2.72 per share. Stephen Burns, Benjamin Samuels, Gerald Budde and Julio Rodriguez, executive officers and/or directors of the Company at the time of the offering, participated in this offering.
On June 4, 2018, the Company and holders of Warrants to Purchase CommonSeries A Preferred Stock issued on September 18, 2017 (the “Warrants”) entered into exchange agreements, pursuant to which the Company issued 1,968,736 shares of common stock in exchange for the Warrants. In the second quarter of 2018, the “Down Round” feature of the Warrants was triggered causing the strike price to decrease from $3.80 per share to $2.62 per share. As a result, the Company recorded a $765,179 deemedand outstanding.
dividend which representsCommon Stock
The Company has one class of common stock, par value$0.001 per share. Each share of the value transferredCompany's common stock is entitled to the Warrant holders from the Down Round feature. The deemed dividend was recorded as a reduction of Retained Earnings and increaseone vote on all matters submitted to stockholders.
Common Stock Held in Additional Paid-in-Capital and increased net loss to common stockholders by the same amount.Escrow
In August 2018,On October 31, 2019, the Company and ST Engineering Hackney, Inc. (“Hackney”) entered into an UnderwritingAsset Purchase Agreement with National Securities Corporationto purchase certain assets and assume certain liabilities of Hackney. The purchase price for the public offering of 10,288,800 shares of Common Stock at a price per share of $1.15 for net proceeds of $10.9 million.
2019 Stock Offerings
In February 2019,acquired assets was $7.0 million and the Company sold 1,616,683 sharesdeposited $1.0 million of common stock to investors (the “February 2019 Investors”) for net proceeds of $1.5 million. Through July 2019, if the Company issuedcash and approximately 2.3 million shares of its common stock for a lower price per share thanoriginally valued at $6.6 million into an escrow account as collateral. The $1.0 million of cash was paid to Hackney in January 2020, and the price paid by the February 2019 Investors (a “Down Round”), the Companyremaining $6.0 million was required to issue additionalpayable in cash within 45 days if certain conditions were met. The 2.3 million shares of common stock (for no additional consideration) resultingremained in escrow as of December 31, 2021. However, as we believe the effective purchase price per share being equalconditions were not met, we do not expect to make further payments to Hackney in connection with the purchase price per share paidAsset Purchase Agreement and we expect the shares to be released from escrow in the Down Round. On May 1, 2019 the Down Round provision of the agreement was triggered and an additional 116,496 shares of common stock were issued to the February 2019 Investors which was accounted for as a $86,207 deemed dividend. The deemed dividend was recorded as a reduction of Retained Earnings and increase in Additional Paid-in-Capital and increased the net loss to common stockholders by the same amount.
Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of the February 2019 offering at a price per share of $0.95, which was above the closing price the date prior to close. They did not receive the Down Round protection.
On May 1, 2019, the Company closed a registered public offering for the sale of 3,957,432 shares of common stock for a purchase price of $0.74 per share for net proceeds of approximately $2.9 million.
In 2019 the Company sold 1,609,373 shares of common stock under the Cowen Agreement for net proceeds of approximately $1.5 million. The Cowen Agreement was canceled in the first quarter of 2019.2022.
Warrants
In connection with the issuance of debt, common stock and preferred stock, the Company has issued warrants to purchase shares of the Company's common stock. The following table summarizes warrant activity:
| | | | | | | | | | | | | | |
| | Number of Warrants | | Weighted Average Exercise Price per Warrant |
| | | | |
| Balance December 31, 2017 | | 2,618,307 | | | $ | 5.28 | |
| Granted, Arosa Loan Agreement | | 7,147,147 | | | | |
| Granted, Marathon Credit Agreement | | 8,053,390 | | | | |
| Exercised | | — | | | | |
| Balance December 31, 2018 | | 17,818,844 | | | 1.84 | |
| Granted, Series B Preferred Stock | | 9,262,500 | | | | |
| Granted, Marathon Credit Agreement | | 3,379,466 | | | | |
| Granted, Other | | 66,966 | | | |
| Exercised | | — | | | | |
| Balance December 31, 2019 | | 30,527,776 | | | $ | 1.82 | |
The above table excludes 15,459,016 warrants issued with the Convertible Note. The warrants are only exercisable at the optionAs of December 31, 2021, the Company following the full or partial redemption of the Convertible Note.
has approximately 1.0 million warrants outstanding.13.16. RELATED PARTIES
The Company obtains itsWe obtain our general liability, property and casualty, and directors and officers liability insurance through Assured PartnersAssuredPartners NL, LLC ("Assured"(“Assured”), which one of our directors,. Gerald Budde, a Director of the Company, is Eastern Region Chief Financial Officercurrently a Vice President Corporate Finance of AssuredPartners, Inc., the parent company of AssuredPartners Capital, Inc. and its subsidiary, Assured. The placement of insurance was completed by an Assured agent outside of the Eastern Region and Mr. Budde did not participate in any decisions about insurance, nor was he paid any portion of the brokerage fee. Assured earned brokerage fees of approximately $86,000$234,000, $121,000 and $79,000$86,000 for the years ended December 31, 2021, 2020 and 2019, and 2018, respectively.
On June 7, 2018, the Company received a $550,000 unsecured short-term loan from Stephen S. Burns, H. Benjamin Samuels, Gerald Budde and Ray Chess, each an executive officer and/or director of the Company (collectively, the “Related Parties”) at the time of the loan. The loan was paid off in August 2019. Interest accrued on the Related Parties notes at the rate of 12.0% per annum.
14.17. SUBSEQUENT EVENTS DIVESTITURE OF SUREFLY
The Company has evaluated subsequent events for potential recognition and disclosures through the date the Consolidated Financial Statements were filed.
15. OTHER INCOME
The following summarizes other income:
| | | | | | | | | | | |
| For the Years Ended December 31, | | |
| 2019 | | 2018 |
| | | |
| Technology licensing income | $ | 12,194,800 | | | $ | — | |
| Gain on divestiture | 3,655,000 | | | — | |
| | | |
| Total other income | $ | 15,849,800 | | | | $ | — | |
LMC License Transaction
On November 7, 2019, the Company entered into a transaction with LMC pursuant to which the Company granted LMC a perpetual and worldwide license to certain intellectual property relating to the Company’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) for consideration as described below (the "LMC Transaction"). LMC was founded by Stephen S. Burns, a current stockholder and former Chief Executive Officer and Director of the Company.
In connection with the LMC Transaction, the following agreements (collectively, the “Agreements”) were entered into:
•Intellectual Property License Agreement between the Company and LMC (the “License Agreement”);
•Subscription Agreement between the Company and LMC (the “Subscription Agreement”);
•Voting and Registration Rights Agreement among the Company, LMC, and certain LMC stockholders (the “Voting Agreement”); and
•Consent and Waiver to Credit Agreement among the Company, Wilmington Trust, as agent, and the lenders under the Credit Agreement (defined below) (the “Consent and Waiver”).
LMC will endeavor to, among other things, raise sufficient third-party capital for the acquisition, retrofitting, and restart of the Lordstown Assembly Complex, and the ongoing operating costs, which amounts are expected to be significant (the “Capital Raise”). The Agreements provide that LMC would manufacture electric pickup trucks or similar vehicles under 10,001 gross vehicle weight using the Licensed Intellectual Property (the “Vehicles”).
LMC has exclusive rights to the Licensed Intellectual Property until the earliest of: (i) June 30, 2020, if the Capital Raise has not occurred; (ii) the second anniversary of the LMC Transaction, if LMC has not started regularly manufacturing Vehicles; (iii) the third anniversary of the LMC Transaction; and (iv) the date that any third-party automotive manufacturer acquires more
than 10 percent of LMC’s outstanding common stock. The Licensed Intellectual Property excludes the Company’s intellectual property relating to delivery trucks for last mile delivery or commercial use. LMC will have the right, with limited exceptions, to match the best competing offer as a subcontractor for the Company should need to engage a subcontractor in connection with larger potential production contracts to assemble such vehicles utilizing its existing capabilities and technologies. The limited exceptions include the event in which the Company elects to award a subcontract for the manufacturing or assembly to a strategic partner owning in excess of 19% of the Company.
Consideration for the License Agreement is as follows:
•A 10 percent ownership interest in the common stock of LMC in exchange for the Company’s obligations under the License Agreement. The LMC common stock received provides the Company with anti-dilution rights for two years. Under the Voting Agreement, the Company has the right to designate 1 director to LMC’s board of directors, subject to certain limitations.
•NaN percent of the aggregate debt and equity commitments funded to LMC upon completion of the Capital Raise (the “Minimum Royalty”). Any amount paid to the Company from the Capital Raise is non refundable.
•A one percent royalty on the gross sales price of the first 200,000 Vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
•Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing Vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC. The success of the Capital Raise is not within the Company’s control, and it therefore cannot provide assurance that it will receive the Royalty Advance or receive the projected underlying royalty from the production of Vehicles.
The consideration for the License Agreement includes a fixed and variable component:
•The fixed component consists of the 10 percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value of the LMC ownership interest received was $12.2 million and was recorded in Other Income for the year ended December 31, 2019.
•The variable component consists of the 4 percent commission and the 1 percent royalty. Variable consideration will be recognized when each vehicle for which a royalty or commission is owned is sold.
Gain on divestiture
On November 27, 2019, the Company completed the sale of SureFly™ for $4.0 million. The gain on divestiture was $3.7 million, net of selling costs of $0.3 million. SureFly was the Company's hybrid electrically powered vertical takeoff and landing aircraft project. The Company had 0no revenues associated with SureFly in 2019 or 2018. Operatingand operating expenses associated with the development of Surefly were $1.4 million and $2.5 million in 2019 and 2018, respectively.million.
18. COMMITMENTS AND CONTINGENCIES
The Company is party to various negotiations and legal proceedings arising in the normal course of business. The Company provides reserves for these matters when a loss is probable and reasonably estimable. The Company does not disclose a range of potential loss because the likelihood of such a loss is remote. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.
16. OTHER TRANSACTIONFederal Motor Vehicle Safety Standards Certification and Other Regulatory Matters
On October 31, 2019,September 22, 2021, we announced the Company decided to suspend deliveries of C-1000 vehicles and ST Engineering Hackney, Inc. ("Seller"recall the vehicles we have already delivered to customers. The new leadership team determined additional testing and modifications to existing vehicles are required to bring the C-1000 vehicles into full compliance with Federal Motor Vehicle Safety Standards. The Company further announced we filed a report with the National Highway Traffic Safety Administration (“NHTSA”) enteredregarding the need for additional testing and vehicle modifications to bring our C-1000 vehicles into an Asset Purchase Agreement ("Purchase Agreement")full compliance with FMVSS. We indicated our previous statements related to purchase certain assetsthe C-1000’s compliance with NHTSA standards cannot be relied upon and so notified the Securities and Exchange Commission. We also disclosed we identified a number of Seller ("Acquired Assets")enhancements to our production process and assume certain liabilities of Seller. Upon executionthe design of the Purchase Agreement, the Company deposited $1.0 million in cash and shares of its common stock having a value of $6.6 million ("Escrow Shares") into an escrow account ("Escrow Account") as collateral. The number of Escrow Shares is subjectC-1000 vehicles to adjustment if the value of the Escrow Shares is less than $5.28 million or greater than $7.92 million on certain dates.address customer feedback, primarily related to payload capacity.
The purchase pricecertification testing was completed in February 2022. Upon completion of this review, the C-1000 platform was determined to be eligible for certification and reintroduction as a limited production vehicle with constrained cargo capacity. In addition, further modifications to the Acquired Assets was $7.0 million, $1.0 million which was payable from the Escrow Account upon satisfaction of certain conditions, and the remaining $6.0 million (the “Second Payment”) is payable in cash within 45 days if additional conditions are met. The Purchase Agreement provides that the Company shall make additional payments to Seller in the event the Second Payment is not made within 45 days of when the payment is due. In the event the Second Payment is not made to Seller within 105 days the payment is due, the Seller may, at its option, require that the Escrow Agent release to Seller Escrow Shares with a value (based on the then-current market price of the shares) equal to $6.0 million in satisfaction of the Second Payment.
The transactionvehicles will be accounted for as customer acquisition costs asmade during the primary asset acquired is the right to bid onrequired FMVSS rework process, including a customer contract. As each payment is made the Company will determine if there is future benefit associated with the contract and if it is determined that there is, the payment will be capitalized as a customer acquisition cost and expensed over the period of benefit. In January 2020, the transaction closed and the initial payment of $1.0 million was released from the escrow and was expensed in 2020.
front suspension as well as supplier corrective action in certain components. The entire fleet of currently manufactured C-1000s will have the required corrected actions applied during 2022, with the majority of the recalled vehicles returned to the customers.
Due to the uncertainties and many variables involved in NHTSA matters, we cannot estimate the ultimate resolution of this matter and whether it will have a material adverse effect on the Company's financial position, results of operations, cash flows or liquidity. We are cooperating with NHTSA with respect to the recall of the outstanding vehicles, however, we cannot assure that NHTSA or other government authorities will not attempt to impose potentially significant fines and penalties in response to the recall.
On October 19 and November 1, 2021, the Company received letters from the SEC requesting that it voluntarily provide information relating to (a) the events and trading in its securities leading up to the announcement of the award of a contract by the U.S. Postal Service for the manufacture of a postal service vehicle fleet and (b) recognition of revenue, if any, related to purchases of vehicles by certain of the Company’s customers. On November 5, 2021, the Department of Justice (“DOJ”) orally informed the Company it has a related open investigation covering the Company. The Company has not received any subpoena or other request for documents from the DOJ with respect to this investigation. The Company is cooperating with the SEC and DOJ investigations. At this point, the Company cannot predict the eventual scope, duration, or outcome of these matters.
During the second quarter of 2021, the Company became aware of a regulatory compliance issue related to our E-Series vehicles that will require retrofitting of such vehicles. Management continues to work on remediation of this issue and does not expect it to have a material impact on the Company’s financial condition and operations. Due to the uncertainties and many variables involved in regulatory matters, we cannot estimate the ultimate resolution of this issue and actual results may differ.
Legal Proceedings
Securities Litigation
On March 8, 2021, Sam Farrar, individually and on behalf of other similarly situated purchasers of the Company’s securities, filed a putative class action complaint against the Company, Duane Hughes and Steve Schrader in the United States District Court for the Central District of California (Case 2:21-cv-02072) claiming violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On March 11, 2021, John Kinney, individually and on behalf of other similarly situated purchasers of the Company’s securities, filed a substantively identical putative class action complaint against the Company, Duane Hughes and Steve Schrader in the United States District Court for the Central District of California (Case 2:21-cv-02207) also claiming violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On May 18, 2021, the Court consolidated the 2 cases and appointed Timothy M. Weis as lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995. On July 16, 2021, lead plaintiff filed an Amended Complaint. The Amended Complaint is now brought against the Company, Duane Hughes, Steve Schrader, Robert Willison and Gregory Ackerson, on behalf of purchasers of the Company’s securities from March 10, 2020 through May 10, 2021. It alleges the defendants violated the federal securities laws by intentionally or recklessly making material misrepresentations and/or omissions regarding the Company’s participation in the bidding process to manufacture the new fleet of United States Postal Service (“USPS”) next generation delivery vehicles, the prospect of the USPS awarding the contract to Workhorse given alleged deficiencies in Workhorse’s proposal, the Company’s manufacturing abilities generally and the Company’s nonbinding “backlog” in its vehicles. Lead plaintiff seeks certification of a class and monetary damages in an indeterminate amount. The Company filed a motion to dismiss the Amended Complaint on September 3, 2021. On December 2, 2021, the Court denied in substantial part the Company's motion to dismiss, and, on January 18, 2022, the Company answered the remaining allegations in the Amended Complaint. On January 20, 2022, the Court issued a Scheduling Order setting the following dates: (1) June 12, 2023 as the deadline to file Motion for Class Certification; (2) December 9, 2023 as the deadline to complete all discovery; (3) January 8, 2024 as the deadline to have all other motions heard, including for summary judgment; (4) March 11, 2024 for a pre-trial conference; and (5) March 19, 2024 for the jury trial. The parties are now engaged in discovery. The Company believes the Securities Class Action is without merit and intends to vigorously pursue all legal avenues to fully defend itself.
Shareholder Derivative Litigation
On April 16, 2021, Romario St. Clair, derivatively on behalf of the Company, filed a stockholder derivative complaint in the Eighth Judicial District Court of the State of Nevada in and for Clark County (Case No. A-21-833050-B) for breach of fiduciary duty and unjust enrichment against Duane Hughes, Steve Schrader, Stephen Fleming, Robert Willison, Anthony Furey, H. Benjamin Samuels, Raymond J. Chess, Harry DeMott, Gerald B. Budde, Pamela S. Mader, Michael L. Clark and Jacqueline A. Dedo. In this action, the plaintiff alleges the defendants breached their fiduciary duties by allowing or causing the Company to
violate the federal securities laws as alleged in the Amended Complaint discussed above and by selling Company stock and receiving other compensation while allegedly in possession of material non-public information about the prospect of the USPS awarding the contract to an electric vehicle manufacturer given electrifying the USPS’s entire fleet allegedly would be impractical and expensive. The plaintiff seeks damages and disgorgement in an indeterminate amount. Several nearly identical derivative complaints have been filed: (1) on May 19, 2021, Caruso v. Hughes et al. (Case No. 2:21-cv-04202) was filed in the Central District of California; (2) on May 24, 2021, Kistenmacher v. Hughes et al. (Case No. 2:21-cv-04294) was filed in the Central District of California; (3) on May 27, 2021, Brown v. Hughes et al. (Case No. 2:21-cv-04412) was filed in the Central District of California; (4) on June 24, 2021 Everson v. Hughes et al. (Case No. A-21-836888-B) was filed in the Eighth Judicial District Court of the State of Nevada in and for Clark County; and (5) on September 21, 2021, Cohen v. Hughes et al. (Case No. 1:21-cv-00601) was filed in the United States District Court for the Southern District of Ohio. On June 21, 2021, the Court ordered the 3 cases filed in the Central District of California be consolidated and thereafter stayed the case pending the outcome in the Securities Class Action discussed above. On November 5, 2021, the Court granted the parties' stipulation transferring the Cohen case to the Central District of California, where it (which now bears Case No. 2:21-08734) was assigned to Judge Dolly M. Gee. On January 7, 2022, the Court ordered the 2 cases filed in Eight Judicial District Court of the State of Nevada in and for Clark County be consolidated under the St. Clair case and set the following schedule: (1) plaintiffs' consolidated complaint is to be filed on January 21, 2022; (2) defendants' response is to be filed March 7, 2022; (3) plaintiffs' opposition to any motion filed by defendants is to be filed on April 21, 2022; and (4) defendants' reply is to be filed on May 23, 2023. On January 13, 2022, the Cohen case was transferred internally to Judge Cormac J. Carney, who is also presiding over the Securities Class Action and the consolidated Central District of California case. On February 15, 2022, the Court in the Cohen case and the consolidated Central District of California case set the following schedule: (1) defendants are to respond to the complaint by March 7, 2022; (2) plaintiffs are to file any opposition or amended complaints in lieu of an opposition on April 21, 2022; (3) defendants are to reply to any oppositions on May 10, 2022. However, the parties have since stipulated to extend the briefing schedule in both cases as follows: (1) defendants are to respond to the respective complaints by March 18, 2022; (2) plaintiffs are to file any oppositions or amended complaints in lieu of an opposition on May 2, 2022; and (3) defendants are to reply to any oppositions on May 21, 2022. The Court has not yet issued a ruling on those stipulations. On January 24, 2021, the plaintiffs in the St. Clair case filed a consolidated complaint, which contains similar allegations to the prior complaints in that action.
Although these claims purport to seek recovery on behalf of the Company, the Company will incur certain expenses due to indemnification and advancement obligations with respect to the defendants. The Company understands that defendants believe this action is without merit and intends to support them as they pursue all legal avenues to defend themselves fully.
19. SUBSEQUENT EVENTS
The Company has evaluated subsequent events for potential recognition and disclosures through the date the accompanying consolidated financial statements were filed.
Supply Agreement
On February 28, 2022, Workhorse Group and GreenPower Motor Company Inc. entered into a multi-year supply agreement to facilitate the manufacturing and delivery of medium-duty Class 4 step vans into the North American market. Under the agreement, Workhorse has set an initial delivery schedule with deposits for 1,500 EV Star cab and chassis from GreenPower starting in July 2022 through to March 31, 2024. Working capital requirements over the life of the agreement will be approximately $20.0 million. Workhorse will complete the manufacturing process and deliver finished step vans to customers in the United States and Canada.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our PrincipalChief Executive Officer and PrincipalChief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)pursuant to Rule 13a-15 under the Securities Exchange Act),Act 1934, as ofamended (the “Exchange Ac”). In designing and evaluating the end of the period covered by this Annual Report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures, were effective.our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that our management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
OurBased on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, the Consolidated Financial Statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial positionas of the Company at December 31, 20192021, our disclosure controls and 2018procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance the consolidated results of operationsinformation we are required to disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and cash flows for each ofreported within the years presented hereintime periods specific in conformity with United States generally accepted accounting principles.the SEC rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management of the CompanyOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as required by Sarbanes-Oxley (“SOX”) Section 404(a). The Company’s internalreporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Principalour Chief Executive Officer and PrincipalChief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with United States generally accepted accounting principles.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management concluded our internal control over financial reporting was effective as of December 31, 2021.
Our independent registered public accounting firm, Grant Thornton LLP, has audited our internal control over financial reporting as of December 31, 2021, as stated in their report which is included herein.
Limitations on the Effectiveness of Controls
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projectionmisstatements and projections of any evaluation of effectiveness to future periods isare subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with management’s assessment of our internal control over financial reporting as required under SOX, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2018:
•The Company had not established adequate financial reporting monitoring activities to mitigate the risk of accounting errors.
•The lack of a fully implemented enterprise resource planning (“ERP”) system caused over reliance on manual entries.
Because of the material weaknesses noted above, management has concluded that it did not maintain effective internal control over financial reporting as of December 31, 2018, based on Internal Control over Financial Reporting - Guidance for Smaller Public Companies issued by COSO.
In 2019, we have implemented the following changes to our internal controls which have remediated the material weaknesses identified in 2018:
•Added resources to our accounting and finance function.
•Identified significant accounts, disclosures, and assertions present in 2019 having a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated. Designed and implemented controls to respond to risk factors relevant to the identified significant accounts, disclosures and assertions.
•Identified gaps in our internal controls over financial reporting and designed and implemented controls to remediate those gaps.
•Hired an international accounting firm to function as our internal audit group.
•Hired a director of Information Technology ("IT") to direct our IT operations, including overseeing information technology general controls ("ITGC's").
•Assessed and strengthened our ITGCs, including removing inappropriate access to our IT systems and improving change management controls.
•Completed implementation of the ERP module covering our purchase orders.
After implementing the changes in internal control and remediation efforts described above, the Company has concluded that internal controls were effective as of December 31, 2019.
The independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report has issued an attestation report on the Company’s internal control over financial reporting which appears herein.
(c) Changes in Internal Control over Financial Reporting
Except as noted above, thereThere were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the yearquarter ended December 31, 20192021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The officersinformation required by this Item 10 of Form 10-K will be included in our 2022 Proxy Statement to be filed with the Securities and directors of the Company are as follows:
| | | | | | | | | | | | | | |
Name | | Age | | Position |
Raymond J. Chess | | 62 | | | Director, Chairman |
Harry DeMott | | 53 | | | Director |
H. Benjamin Samuels | | 52 | | | Director |
Gerald B. Budde | | 58 | | | Director |
Michael L. Clark | | 48 | | | Director |
Duane A. Hughes | | 56 | | | President and Chief Executive Officer |
Robert Willison | | 58 | | | Chief Operating Officer |
Steve Schrader | | 57 | | | Chief Financial Officer |
Stephen Fleming | | 47 | | | General Counsel and Vice President |
Anthony Furey | | 47 | | | Vice President of Finance |
Gregory Ackerson | | 43 | | | Controller |
Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement) to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer dies, resigns or is removed by the Board.
Our officers and directors have not been the subject of any order, judgment, or decree of any court of competent jurisdiction, or any regulatory agency permanently or temporarily enjoining, barring, suspending or otherwise limiting them from acting as an investment advisor, underwriter, broker or dealer in the securities industry, or as an affiliated person, director or employee of an investment company, bank, savings and loan association, or insurance company or from engaging in or continuing any conduct or practice in connection with any such activity orExchange Commission in connection with the purchase or salesolicitation of any securities.
Our officersproxies for our 2022 Annual Meeting of Stockholders and directors have not been convicted in any criminal proceeding (excluding traffic violations) and are not the subject of any criminal proceedings which are currently pending.
Background of Directors and Executive Officers
Raymond J. Chess, Director, Chairman
Raymond Chess has 40+ years in the automotive industry. Mr. Chess joined General Motors in 1980, and during his 37 yearsis incorporated herein by reference. The 2022 Proxy Statement will be filed with the company, he held ever increasing rolesSecurities and responsibilities in both manufacturing and product development. While in manufacturing, Mr. Chess held key positions in both plant floor operations and manufacturing engineering such as Chief Manufacturing Engineer and Executive Director of Stamping and Assembly. While in product development, Ray was a Vehicle Line Executive, where he lead global cross functional responsibilities for GM’s commercial truck line from 2001 to 2009 and GM’s cross over segment from 2009 through 2012. Upon retirement from General Motors, he formed his own engineering consulting company. In 2014, Ray was elected ontoExchange Commission within 120 days after the Board of Directors of Rush Enterprises. Ray also sits on the advisory board of Productive Research LLC. He started working with Workhorse in 2014 on their advisory board, was then elected to their Board of Directors and subsequently became the Chairman.
H. Benjamin Samuels, Director
Mr. Samuels served as CEO of Victory Packaging from May 2007 through 2015, during which time he led an executive team managing more than 1,700 employees. In 2015, Mr. Samuels was appointed as Co-President after Victory Packaging was acquired by KapStone Paper and Packaging Corporation. From 1995 through 2007, Mr. Samuels served in multiple roles, including as Vice Chairman and leader of Victory Packaging’s national accounts group, real estate, finance and legal departments, achieving a period of unprecedented growth in sales and revenues. Mr. Samuels is an active member in the community, where he served as the Chairmanend of the Houston Food Bank and as a director of the Samuels Family Foundation. Samuels serves on the boards of and holds leadership positions with Teach For America, Children at Risk, Brighter Bites, Move For Hunger, American Jewish Committee, Leo Baeck Education Center Foundation, and Jewish Federation of Greater Houston.
Mr. Samuels received a Bachelor’s Degree in American studies and economics from Amherst College in Massachusetts as well as an MBA from the Harvard Graduate School of Business Administration.
Gerald B. Budde, Director
Mr. Budde is currently the Eastern Regions Chief Financial Officer of AssuredPartners, Inc. Mr. Budde started his career in public accounting with EY after graduating with a Bachelor of Science degree in Accounting from the University of Dayton. After almost eleven years with EY as a licensed CPA, Mr. Budde was hired in April 1994 by Cincinnati Milacron Inc. Mr. Budde was appointed as Machine Tool Group Controller in January 1995, became the Vice President of Finance for Cincinnati Machine, a successor company, in October 1998, and was subsequently appointed as Vice President of Finance and Administration for UNOVA Manufacturing Technologies in 2002. Mr. Budde left UNOVA in 2003 to become the Chief Financial Officer at Neace Lukens, who was acquired by AssuredPartners in 2011. Prior to his current role, Mr. Budde was the Chief Financial Officer of AssuredPartners NL, LLC overseeing multiple AssuredPartners entities. Mr. Budde was previously a member of the Board of Trustees and remains as an active member of the Finance Committee for Mount Notre Dame high school and is also a member of the Finance Commission for St Margaret of York parish and school. Mr. Budde’s business, management, and accounting knowledge and experience led to the conclusion he should serve on the Board of Directors, given the Company’s business and structure.
Harry DeMott, Director
Mr. DeMott, has more than 25 years of experience in the investment community, having worked as an analyst and portfolio manager at leading brokerage firms and investment management firms. He has also served on the boards of several companies. He is a long-time operator and investor in the media, sports and entertainment industries. He is the co-founder of Raptor Ventures I LP, where he has been a General Partner since February 2011. In addition, Mr. DeMott is a member of the Board of Directors of Proper (where he also serves as executive Chairman), Hi.Fi, SecurityPoint Media, Australis and Ticket Evolution.
He also serves as founder and managing partner for Hamerle Investments, a family investment company. Prior to co-founding Raptor Ventures, Mr. DeMott served on the Board of Directors of Pandora Media, Inc. from 2006 through 2011. Earlier, he served as senior analyst at Knighthead Capital Management, analyst at King Street Capital Management, portfolio manager at Bourgeon Capital Management and managing member and founder at Gothic Capital Management. During this 16-year period, Mr. DeMott focused on finding, fostering and investing in disruptive technology companies. He previously spent nine years at First Boston (now Credit Suisse), where he was a director in the equity research division specializing in radio, television, outdoor advertising and cell towers. He earned a Bachelor of Arts in economics from Princeton University in 1988 and a MBA in finance from New York University in 1991.
Michael L. Clark, Director
Mr. Clark is a Chartered Financial Analyst (CFA) Charterholder with close to twenty years of investing and capital markets experience. He also serves as a director of privately-held Laws Whiskey House, Denver-based award winning craft distillery. Mr. Clark has also served as a director of Halcón Resources from since September 2016 until October 2019 and as a director of Paragon Offshore Ltd., as Chairman of the Corporate Governance and Compensation Committee and a member of its Audit Committee from July 2017 until its sale to Borr Drilling Limited in March 2018. Mr. Clark was a Retired Partner of SIR Capital Management, LLC from 2014 until his departure in 2016 and from 2008 to 2013 served as a Portfolio Manager and Partner. Prior to that, Mr. Clark valued equities as a Portfolio Manager at Satellite Asset Management, LLC from 2005 to 2007 and as an Equity Research Analyst at SAC Capital Management, LLC from 2003 to 2005 and at Merrill Lynch from 1997 to 2002. Mr. Clark began his career at Deloitte & Touche, LLP, progressing to Senior Auditor. He is a Certified Public Accountant licensed in New York State and also holds the Accredited in Business Valuation (ABV) credential awarded by the American Institute of Certified Public Accountants. The National Association of Corporate Directors (NACD) recognized him as a NACD Governance Fellow in 2017. Mr. Clark graduated cum laude from the University of Pennsylvania with a Bachelor of Arts in Economics and earned a Masters of Business Administration in Finance and Economics with Distinction (top 10%) from New York University’s Stern School of Business. Mr. Clark’s qualifications to serve on the board include his public company board service and his wealth of accounting, valuation and capital markets experience.
Duane A. Hughes, President and Chief Executive Officer
Mr. Hughes is a senior-level executive with more than 20 years of experience including direct business relationships in the automotive, advertising, and technology segments and is currently serving as our President and Chief Executive Officer. Prior to that, Mr. Hughes was the President and Chief Operating Officer of Workhorse from 2015 to 2019. Prior to joining Workhorse, Duane served as Chief Operating Officer for Cumulus Interactive Technologies Group. As COO, Duane was
responsible for managing the company’s day-to-day sales and operations. He was responsible for all operations of the business unit. Prior to Cumulus ITG, Duane spent nearly fifteen years in senior management positions with Gannett Co., Inc., including his duties as Vice President of Sales and Operations for Gannett Media Technologies International.
Robert Willison, Chief Operating Officer
On February 19, 2019, the Company announced the appointment of Robert Willison as Chief Operating Officer effective February 18, 2019. Mr. Willison previously served as Director of Fleet Technology for Sysco Corporation. Prior to joining Sysco, Mr. Willison served as the Company’s Director of Research and Development from 2016 until 2018. Prior to joining the Company, Mr. Willison served as a Partner and Chief Technology Officer for Räv Technology LLC from 2014 until 2016. Prior to joining Räv Technology, Mr. Willison served as Director of International Operations and New Business Development for PDi Communication Systems.
Steve Schrader, Chief Financial Officer
Mr. Schrader has over sixteen years of experience in public and private companies in industries such as manufacturing, health care and utilities and is currently serving as our Chief Financial Officer. Prior to his appointment by the Company, from December 2015 to December 2019, Mr. Schrader was Chief Financial Officer of Fuyao Glass America Inc., a subsidiary of a Chinese-owned public company specializing in the manufacture of automobile glass. From October 2006 to May 2015, Mr. Schrader served as the Chief Financial Officer of Oncology Hematology Care (OHC), the largest oncology practice in the Cincinnati metro area. Mr. Schrader started his career working for utilities that are now part of Duke Energy. His last position there was Vice President and Chief Financial Officer of Cinergy’s Regulated Business prior to Duke’s acquisition in 2006. Mr. Schrader holds a B.S. in Finance and Accounting from Ball State and an MBA from Butler University. He also received an Advanced Management Program Certificate from Harvard Business School.
Stephen Fleming, General Counsel and Vice President
Mr. Fleming serves has our corporate general counsel. Prior to joining Workhorse in November 2019, Mr. Fleming served as outside corporate/securities counsel to Workhorse since 2010. Mr. Fleming has served as the Managing Member of Fleming PLLC, a boutique law firm specializing in corporate/securities law, since 2008. Mr. Fleming graduated from Catholic University of America in 1995 with a Bachelor of Arts in Political Science. In 1999, Mr. Fleming received his Juris Doctorate and Master of Science in Finance from the University of Denver.
Anthony Furey, Vice President of Finance
Mr. Furey is a senior-level finance executive with more than 25 years of experience in corporate finance and capital markets and is currently serving as our Vice President of Finance. Prior to that, Mr. Furey was the Director of Business Development for Workhorse and Director of Finance for SureFly a former subsidiary of Workhorse Group. Prior to joining Workhorse, Anthony owned and was president of Fastnet Advisors, LLC, an mergers and acquisition and corporate advisory practice. As President, Anthony led over $300 million in financing and uplisting transactions and was responsible for managing the company’s day-to-day growth and operations. Prior to Fastnet Advisors, LLC, Anthony spent fifteen years on both the buy and sell side in institutional sales and trading, holding Series 7,65 & 63 licenses.
Gregory Ackerson, Controller
Mr. Ackerson has been with the Company since April 2018. Prior to joining the Company, Mr. Ackerson was an Assurance Senior Manager with BDO USA LLP from December 2015 through March 2018, Assistant Vice President Accounting Risk and Policy at Fifth Third Corporation from June 2015 to December 2015 and Senior Manager Technical Accounting for NewPage Corporation from April 2011 through March 2015. Mr. Ackerson has also served as an Inspection Specialist for PCAOB and various progressive audit roles with PwC. Mr. Ackerson received his Master of Science in Accounting and Bachelor of Business Administration and Finance both in 2000.
Family Relationships
There are no family relationships among our directors and executive officers. There is no arrangement or understanding between or among our executive officers and directors pursuantfiscal year to which any director or officer was or is to be selected as a director or officer.
Involvement in Certain Legal Proceedings
To our knowledge, during the last ten years, none of our directors and executive officers has:
•Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
•Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
•Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
•Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
•Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
CORPORATE GOVERNANCE
Governance Policies of the Board of Directors
The Board of Directors has adopted Governance Policies of the Board of Directors to assist the Board in the exercise of its duties and responsibilities and to serve the best interests of the Company and its stockholders. These policies provide a framework for the conduct of the Board’s business.
Committees
Establishment of Board Committees and Adoption of Charters
The Company has a Nominating and Corporate Governance Committee, a Compensation Committee and an Audit Committee (collectively, the “Committees”) and approved and adopted charters to govern each of the Committees.
In connection with the establishment of the Nominating and Corporate Governance Committee, Compensation Committee and Audit Committee, the Board of Directors of the Company appointed members to each such committee. Currently, all three committees are comprised of at least three (3) directors meeting the requirements set forth in each applicable charter. The membership of these three standing committees of the Board of Directors of the Company is as follows:
| | | | | | | | | | | | | | |
Nominating and Corporate Governance Committee | | Compensation Committee | | Audit Committee |
| | | | |
Raymond J. Chess (Chairman) | | Harry DeMott (Chairman) | | Gerald B. Budde (Chairman) |
Gerald B. Budde | | Gerald B. Budde | | Raymond J. Chess |
Harry DeMott | | H. Benjamin Samuels | | H. Benjamin Samuels |
| | Michael L. Clark | | Michael L. Clark |
Nominating and Corporate Governance Committee.
Our board of directors has determined that each of the members of the Governance Committee is an “independent director” as defined by the rules of The NASDAQ Stock Market, Inc. The Governance Committee is generally responsible for recommending to our full board of directors’ policies, procedures, and practices designed to help ensure that our corporate governance policies, procedures, and practices continue to assist the board of directors and our management in effectively and efficiently promoting the best interests of our stockholders. The Governance Committee is also responsible for selecting and
recommending for approval by our board of directors and our stockholders a slate of director nominees for election at each of our annual meetings of stockholders, and otherwise for determining the board committee members and chairmen, subject to board of directors ratification, as well as recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees that may occur or be created from time to time, all in accordance with our bylaws and applicable law. The Governance Committee’s principal functions include:
•developing and maintaining our corporate governance policy guidelines;
•developing and maintaining our codes of conduct and ethics;
•overseeing the interpretation and enforcement of our Code of Conduct and our Code of Ethics for Chief Executive Officer and Senior Financial and Accounting Officers;
•evaluating the performance of our board of directors, its committees, and committee chairmen and our directors; and
•selecting and recommending a slate of director nominees for election at each of our annual meetings of the stockholders and recommending to the board director nominees to fill vacancies or new positions on the board of directors or its committees that may occur from time to time.
During 2019, the Governance Committee met one time. The Governance Committee is governed by a written charter approved by our board of directors. A copy of the Governance Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website. In identifying potential independent board of directors’ candidates with significant senior-level professional experience, the Governance Committee solicits candidates from the board of directors, senior management and others and may engage a search firm in the process. The Governance Committee reviews and narrows the list of candidates and interviews potential nominees. The final candidate is also introduced and interviewed by the board of directors and the lead director if one has been appointed. In general, in considering whether to recommend any particular candidate for inclusion in our board of directors’ slate of recommended director nominees, the Governance Committee will apply the criteria set forth in our corporate governance guidelines. These criteria include the candidate’s integrity, business acumen, commitment to understanding our business and industry, experience, conflicts of interest and the ability to act in the interests of our stockholders. Further, specific consideration is given to, among other things, diversity of background and experience that a candidate would bring to our board of directors. The Governance Committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow our board of directors to fulfill its responsibilities. Stockholders may recommend individuals to the Governance Committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials to our Governance Committee. Assuming that appropriate biographical and background material has been provided on a timely basis, the Governance Committee will evaluate stockholder recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.
Audit Committee.
We have a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our board of directors has determined that the members are all “independent directors” as defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of an audit committee and Rule 10A-3(b)(i) under the Exchange Act. In addition, Mr. Budde is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K and demonstrates “financial sophistication” as defined by the rules of The NASDAQ Stock Market, Inc. The Audit Committee is appointed by our board of directors to assist our board of directors in monitoring (1) the integrity of our financial statements, (2) our compliance with legal and regulatory requirements, and (3) the independence and performance of our internal and external auditors. The Audit Committee’s principal functions include:
•reviewing our annual audited financial statements with management and our independent auditors, including major issues regarding accounting principles, auditing practices and financial reporting that could significantly affect our financial statements;
•reviewing our quarterly financial statements with management and our independent auditor prior to the filing of our Quarterly Reports on Form 10-Q, including the results of the independent auditors’ reviews of the quarterly financial statements;
•recommending to the board of directors the appointment of, and continued evaluation of the performance of, our independent auditor;
•approving the fees to be paid to our independent auditor for audit services and approving the retention of our independent auditor for non-audit services and all fees for such services;
•reviewing periodic reports from our independent auditor regarding our auditor’s independence, including discussion of such reports with the auditor;
•reviewing the adequacy of our overall control environment, including internal financial controls and disclosure controls and procedures; and
•reviewing with our management and legal counsel legal matters that may have a material impact on our financial statements or our compliance policies and any material reports or inquiries received from regulators or governmental agencies.
During 2019, the audit committee met four times. A copy of the Audit Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website.
Meetings may be held from time to time to consider matters for which approval of our Board of Directors is desirable or is required by law.
Compensation Committee.
A full discussion of our compensation committee can be found under Item 11 – Executive Compensation.
Company Policies
The Company has established the following written policies that have been distributed and reviewed with all Company employees: Approval policy, Purchase Requisition policy, Conflict of Interest policy, “Do the Right Thing” (ethics) policy and a Travel and Expense policy.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers and persons who own more than 10% of the issued and outstanding shares of our common stock to file reports of initial ownership of common stock and other equity securities and subsequent changes in that ownership with the SEC. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the year ended December 31, 2019 all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS ("CD&A")
This CD&A is designed to provide our shareholders with an understanding of our compensation philosophy and objectives, as well as the analysis that we performed in setting executive compensation for 2019. It discusses the Compensation Committee’s (referred to as the Committee in this CD&A) determination of how and why, in addition to what, compensation actions were taken during 2019 for our Chief Executive Officer and our two next highest paid executive officers (the "Named Executive Officers" or "NEOs"). As a Smaller Reporting Company much of this disclosure is voluntary but allows us to showcase our adoption of many widely accepted compensation and governance “best practices.”
Overview
Many of our compensation decisions for the last year reflect our continued transition of our executive compensation program. Workhorse's historical compensation philosophy was to provide base salaries with equity based incentives, primarily in the form of stock options. However, in order to continue to attract high quality executives and employees, we recognized that we needed to be more competitive on cash compensation going forward by offering a more structured annual bonus program, and we also shifted to granting restricted stock awards mixed with options as part of our equity incentives to better align with market practices.
Highlights of key changes made as part of our transition include:
Salary increase for our CEO – our CEO received an increase in base salary in recognition of his transition from COO to President & CEO bringing it more in line with competitive pay levels and to more accurately reflect his duties and responsibilities.
Established annual incentive target opportunities – each NEO now has a target bonus opportunity expressed as a percentage of base salary. We see this as a step toward better alignment with peers and market best practices.
A formalized approach to funding annual incentives – the bonus funding for 2019 was formulaically determined based on a mix of financial and individual performance targets. Although we made substantial progress on our operating model in Fiscal 2019, both adjusted EBITDA and year end net debt balance were below threshold for 2019. Individual performance was assessed by the Compensation Committee to be at maximum performance levels resulting in overall annual incentive funding below target opportunity level.
Shifted to include restricted stock awards with time-based vesting – given our historical reliance on stock options, our executives had relatively little in-the-money unvested equity. As a result, the Compensation Committee determined that it was appropriate to use restricted stock awards as a primary vehicle for equity awards for 2019 in order to provide greater retention incentives, create more direct alignment with stockholders, and be more consistent with peers.
Increased allocation of CEO's at-risk / variable compensation - 78% of our CEO's compensation is at-risk or variable in nature. The graph below illustrates the allocation of our CEO's pay under our latest programs and awards.
Our Named Executive Officers
Our Named Executive Officers, along with other select members of the senior management team participate in the compensation plans and programs described in this CD&A. While different in some aspects of their operation, the compensation programs for the broader employee population at Workhorse are driven by consistent principles which seek to compete effectively in our industry with the ability to reward for strong corporate and individual performance.
The list below reflects our Principal Executive Officer and our two other highest paid executive officers in 2019:
| | | | | | | | | | | | | | |
Name | | Age | | Position |
Duane A. Hughes | | 56 | | | President and Chief Executive Officer |
Robert Willison | | 58 | | | Chief Operating Officer |
Stephen Fleming | | 47 | | | General Counsel and Vice President |
Workhorse's Executive Compensation Objections & Practices
In order to accomplish our goals and to ensure that the Company's executive compensation program is consistent with its direction and business strategy, the compensation program for our senior executive officers is based on the following objectives:
•to attract, motivate, retain and reward a knowledgeable and driven management team and to encourage them to attain and exceed performance expectations within a calculated risk framework; and
•to reward each executive based on individual and corporate performance and to incentivize such executives to drive the organization's current growth and sustainability objectives.
These objectives serve to assure our long-term success and are built on the following compensation principles:
•compensation is designed to align executives to the critical business issues facing the Company;
•compensation should be fair and reasonable to shareholders and be set with reference to the local market and similar positions in comparable companies;
•an appropriate portion of total compensation should be equity-based, aligning the interest of executives with shareholders; and
•compensation should be transparent to the Board of Directors, executives, and our shareholders.
All elements of compensation are compared to the total compensation packages of a peer group of companies, which includes both competitors and companies representing our industry broadly to reflect the markets in which we compete for business and people.
Compensation Best Practices
We have made significant effort to align our executive compensation programs and practices with stockholder interests, and to incorporate strong governance standards within our compensation program, such as:
†Annual Incentives Based on Performance - in 2019 we designed and implemented an annual incentive award program that is based on Company financial and operational performance and also includes an assessment of individual performance as determined by the Committee.
†Cap on Incentive Award Payouts - incentive award payouts are capped in our new program
†Balanced Mix of Variable & Performance Based Compensation - we provide our executives with a balanced mix of variable and performance based compensation designed to motivate our executives to improve both our financial performance and stock price over the short and long-term.
†Actively Engage with our Shareholders - throughout the year we actively engage with our largest shareholders and consider feedback and input on our programs and practices
†Anti-Hedging & Anti-Pledging Policies - we prohibit our executives and directors from hedging and pledging Company securities.
†"Double Trigger" Change of Control Payments - our change of control program provides for cash payments that are triggered only in a qualifying termination of employment occurs in connection with the change in control.
†Clawback Policy - our annual incentive awards and any future performance based awards are subject to a clawback policy which applies to all of our executive officers and provides for the forfeiture of these awards or the return of any related gain in the event of a restatement of our financial statements.
†No Excise Tax Gross-Ups - we do not provide gross-ups in any executive employment agreement or severance program.
†Engagement of Independent Compensation Consultant - our Committee retains an independent compensation consultant who reports directly to the Committee and does not provide any other services to management or the Company.
What We Don't Do
X No Guaranteed Annual Salary Increases or Bonuses.
X No Special Tax Gross Ups.
X No Repricing or Exchange of Underwater Stock Options.
X No Plans that Encourage Excessive Risk-Taking.
X No Hedging or Pledging of Workhorse Securities.
X No Excessive Perks.
Executive Compensation Recoupment Policy
The Board can recoup all or part of any compensation paid to an executive officer in the event of a material restatement of the company's financial results. The Board will consider:
•whether any executive officer received compensation based on the original consolidated financial statements because it appeared he or she achieved financial performance targets that in fact were not achieved based on the restatement; and
•the accountability of any executive officer whose acts or omissions were responsible, in whole or in part, for the events that led to the restatement and whether such actions or omissions constituted misconduct.
Role of the Compensation Committee in Setting Compensation & Overall Oversight of Our Programs
Our compensation committee consists of Harry DeMott, Gerald Budde, Michael Clark and Benjamin Samuels. Our board of directors has determined that each of the members are an “independent director” as defined by the rules of The NASDAQ Stock Market, Inc. applicable to members of a compensation committee. The Compensation Committee is responsible for establishing the compensation of our senior management, including salaries, bonuses, termination arrangements, and other executive officer benefits as well as director compensation. The Compensation Committee also administers our equity incentive plans. During 2019, the Compensation Committee met six times. The Compensation Committee is governed by a written charter approved by the board of directors. A copy of the Compensation Committee’s charter is posted on the Company’s website at www.workhorse.com in the “Investors” section of the website. The Compensation Committee works with the Chairman of the Board and Chief Executive Officer and reviews and approves compensation decisions regarding senior management including compensation levels and equity incentive awards. The Compensation Committee also approves employment and compensation agreements with our key personnel and directors. The Compensation Committee has the power and authority to conduct or authorize studies, retain independent consultants, accountants or others, and obtain unrestricted access to management, our internal auditors, human resources and accounting employees and all information relevant to its responsibilities.
The responsibilities of the Compensation Committee, as stated in its charter, include the following:
•review and approve the Company’s compensation guidelines and structure;
•review and approve on an annual basis the corporate goals and objectives with respect to compensation for the Chief Executive Officer;
•review and approve on an annual basis the evaluation process and compensation structure for the Company’s other officers, including salary, bonus, incentive and equity compensation; and
•periodically review and make recommendations to the Board of Directors regarding the compensation of non-management directors.
The Compensation Committee is responsible for developing the executive compensation philosophy and reviewing and recommending to the Board of Directors for approval all compensation policies and compensation programs for the executive team.
Role of Management in Setting Compensation
Our CEO is consulted in the Committee’s determination of compensation matters related to the executive officers reporting directly to the CEO. Each year, the CEO makes recommendations to the Committee regarding such components as salary adjustments, target annual incentive opportunities and the value of long-term incentive awards. In making his recommendations, the CEO considers such components as experience level, individual performance, overall contribution to Company performance and market data for similar positions. The Committee takes the CEO’s recommendations under advisement, but the Committee makes all final decisions regarding such individual compensation.
Our CEO’s compensation is reviewed and discussed by the Committee, which then makes recommendations regarding his compensation to the independent members of our board of directors. Our board of directors ultimately makes decisions regarding the CEO’s compensation.
Our CEO attends Committee meetings as necessary. He is excused from any meeting when the Committee deems it advisable to meet in executive session or when the Committee meets to discuss items that would impact the CEO’s compensation. The Committee may also consult other employees, including the remaining Named Executive Officers, when making compensation decisions, but the Committee is under no obligation to involve the Named Executive Officers in its decision-making process.
Role of the Compensation Consultant in Setting Compensation
The Compensation Committee has engaged the services of Compensation Advisory Partners, LLC (“CAP”) as its independent executive compensation consultant. Certain of our Board members have worked with CAP in the past and value the firm’s collective knowledge and capabilities, and its ability to help us develop compensation programs that incentivize our executives and align performance with company strategies and stockholders’ interests.
CAP’s current role is to advise the Committee on matters relating to executive compensation to help guide, develop, and implement our executive compensation programs. CAP reports directly to the Compensation Committee. The Committee regularly reviews the services provided by CAP and believe the firm to be independent in providing executive compensation consulting services to us. A review of CAP’s relationship did not raise any conflicts of interest, consistent with the guidelines provided under the Dodd-Frank Act and by the SEC and the NYSE. In making this determination, the Committee notes that during 2019:
•CAP did not provide any services to the Company or management other than services requested by or with the approval of the Committee, and its services were limited to executive and director compensation consulting;
•The Committee or members of the Committee meet regularly in executive session with CAP outside the presence of management;
•CAP maintains a conflicts policy, which was provided to the Committee with specific policies and procedures designed to ensure independence;
•Fees paid to CAP by Workhorse during 2019 were less than 1% of CAP's total revenue;
•None of the CAP consultants working on matters with us had any business or personal relationship with Committee members (other than in connection with working on matters with us);
•None of the CAP consultants working on matters with us (or any consultants at CAP) had any business or personal relationship with any of our executive officers; and
•None of the CAP consultants working on matters with us owns shares of our common stock.
The Committee continues to monitor the independence of its compensation consultant on a periodic basis.
Compensation Peer Group
We have developed a compensation peer group, which is composed of specific peer companies within our industry. Our peer group was developed with the assistance of CAP and is used to analyze our executive and director compensation levels and overall program design. This compensation peer group is used to determine market levels of the main elements of executive compensation (base salary, annual incentives/bonus, long-term incentives, as well as total direct compensation).
The peer group is also used to gauge industry practices regarding the structure and mechanics of annual and long-term incentive plans, employment agreements, severance and change in control policies and employee benefits. The composition of the peer group is reviewed by the Committee on an annual basis to ensure that we have and maintain an appropriate group of comparator companies.
In May 2019, with the assistance of CAP, the Committee developed and approved the peer group for use as a source of executive compensation and practices data. Criteria for selecting peer companies for compensation benchmarking is based on a number of factors. The peer companies selected should reflect an optimum mix of the criteria listed below in their relative order of importance:
Competitive market:
†Competing Talent—companies with executive talent similar to that valued by us;
†Competitors—companies in the same or similar industry sector; and
†Competing Industry—companies in the same general industry sector having similar talent pools.
Size and demographics:
†Companies that are generally similar in revenue and/or market cap size and whose median revenue for the group approximates our revenue;
†Firms with a competitive posture and comparable area of operations;
†Companies within our corporate headquarters region
The Committee, based on CAP’s analysis and our internal analysis, determined to use the following peer group of 14 companies to evaluate and compare our compensation practices in 2019:
Overview of Executive Compensation
The Company recognizes that people are our primary asset and our principal source of competitive advantage. In order to recruit, motivate and retain the most qualified individuals as senior executive officers, the Company strives to maintain an executive compensation program that is competitive in the commercial transportation industry, which is a competitive, global labor market.
The Compensation Committee’s compensation objective is designed to attract and retain the best available talent while efficiently utilizing available resources. The Compensation Committee compensates executive management primarily through base salary and equity compensation designed to be competitive with comparable companies, and to align management’s compensation with the long-term interests of shareholders. In determining executive management’s compensation, the Compensation Committee also takes into consideration the financial condition of the Company and discussions with the executive.
In order to accomplish our goals and to ensure that the Company’s executive compensation program is consistent with its direction and business strategy, the compensation program for our senior executive officers is based on the following objectives:
•to attract, motivate, retain and reward a knowledgeable and driven management team and to encourage them to attain and exceed performance expectations within a calculated risk framework; and
•to reward each executive based on individual and corporate performance and to incentivize such executives to drive the organization’s current growth and sustainability objectives.
The following key principles guide the Company’s overall compensation philosophy:
•compensation is designed to align executives to the critical business issues facing the Company;
•compensation should be fair and reasonable to shareholders and be set with reference to the local market and similar positions in comparable companies;
•an appropriate portion of total compensation should be equity-based, aligning the interests of executives with shareholders; and
•compensation should be transparent to the Board of Directors, executives and shareholders.
Compensation Elements and Rationale
There are three basic components to the Company’s executive compensation program: base salary, our new annual incentive program, and long-term incentive equity compensation. The Compensation Committee actively evaluates our executive compensation program design against best market practices as the Company experiences further growth.
Base Salary
Base salary is the foundation of the compensation program and is intended to compensate competitively relative to comparable companies within our industry and the marketplace where we compete for talent. Base salary is a fixed component of the compensation program and is used as the base to determine elements of incentive compensation and benefits.
As shown in the table below Mr. Hughes base salary increased by 36% in 2019 to $475,000. This increase was approved by the Board in connection with and in recognition of Mr. Hughes promotion to President and CEO. Mr. Hughes was also receiving a retainer for his service on the Board. Our Committee determined that it would be more appropriate for Mr. Hughes to no longer receive his Board retainer and that value be captured within his base salary. Mr. Willison and Mr. Fleming were hired in 2019. Their respective salaries were set in consideration of internal and external market considerations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive | | 2018 Position | | 2018
Base Salary | | 2019 Position | | 2019
Base Salary | | % Change |
| Duane A. Hughes | | Chief Operating Officer | | $275,000 | | President and Chief Executive Officer | | $475,000 | | 73% | |
| Robert Willison | | n/a | | n/a | | Chief Operating Officer | | $300,000 | | n/a |
| Stephen Fleming | | n/a | | n/a | | General Counsel and Vice President | | $300,000 | | n/a |
Annual Incentive Program (Bonus)
During the 1st quarter of 2019, the Committee established the 2019 annual cash incentive bonus program, pursuant to which our Named Executive Officers were eligible to receive performance-based cash bonuses based on certain quantitative and qualitative performance metrics. For 2019, our Named Executive Officers’ target bonus opportunities were set based on market norms and each executive's role within the Company. Our CEO bonus target is set at 100% of base salary, 75% for our COO, and 50% for our General Counsel. Our Named Executive Officers’ maximum bonus opportunities were 200% for our CEO, 100% of base salary for our COO, and 75% for our General Counsel.
| | | | | | | | |
| Bonus Target as Percent of Base | Maximum Bonus as Percent of Base |
| President & CEO | 100% | | 200% | |
| COO | 75% | | 100% | |
| General Counsel and VP | 50% | | 75% | |
The financial measures of adjusted EBITDA and Year End Net Debt Balance accounted for a total of 60% of the target bonus opportunity while personal performance goals accounted for the remaining 40% of target bonus opportunity, as detailed below:
Payout opportunities were established according to a threshold, target and maximum performance for each performance metric. For each financial performance metric, threshold performance is equal to 50% of target performance and maximum performance is equal to 200% of target performance. In addition, with respect to each financial performance metric, if threshold level performance is achieved, then a threshold level payout is triggered, and if the maximum performance is achieved then a maximum level payout occurs. The chart below shows our CEO payout curves for each performance metric under the 2019 annual cash incentive bonus program:
After the level of performance is determined by the Compensation Committee, the payout percentage for each individual metric is added together to calculate the total payout percentage for each Named Executive Officer. The final payout percentage is then multiplied by the participant’s target bonus opportunity in order to calculate the total bonus payable to each Named Executive Officer. On January 28, 2020, based on the Company’s achievement relative to the adjusted EBITDA, Year End Net Debt Balance, and each Named Executive Officer’s individual performance, our Compensation Committee approved payouts to be made to our Named Executive Officers under the 2019 annual cash incentive bonus program in the amounts set forth in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table.
2019 Payouts
Performance for both our adjusted EBITDA and Year End Net Debt Balance fell below threshold levels. As a result our executives did not receive a bonus payout related to these two financial measures which accounts for 60% of the target opportunity. For the individual performance component of our program the Compensation Committee determined that our executives performed at a very high level navigating through strained capital availability while developing a lightweight C-
Series and a next generation all-electric delivery vehicle among other accomplishments. The Committee also considered how well the stock performed in 2019 during our CEO's tenure and determined that the individual performance component should pay out at above target for time in the position. Fifty percent of the bonus earned was paid upon approval while the remaining fifty percent will be paid out at the Company's next capital raise.
Long-Term Incentive (Equity)
The Company’s long-term incentive program provides for the granting of stock options and restricted stock to executive officers to both motivate executive performance and retention, as well as to align executive officer performance to shareholder value creation. In awarding long-term incentives, the Company compares the long-term incentive program to that of comparable companies within our industry and evaluates such factors as the value of awards granted to each executive position within the market, the number of shares available under our Stock Incentive Plan, and the number of awarded shares outstanding relative to our total common shares outstanding. The Board of Directors fixes the exercise price of stock options at the time of the grant based on the market price of our stock on the NASDAQ.
Each long-term incentive grant is based on the level of the position held and overall market competitiveness. The Compensation Committee takes into consideration previous grants when it considers new grants of stock options and restricted stock.
2019 NEO Awards
In 2019 we awarded stock options to our CEO and COO. Our CEO, Mr. Hughes received a grant of 1,000,000 stock options with a grant date fair value of $634,300. Mr. Hughes also received a grant of 50,000 stock options with a grant date fair value of $31,715 for his role as a director. Mr. Willison, our COO, received a grant of 400,000 stock options with a grant date fair value of $170,600, which vest ratably over a four year period. We believe that awarding stock options provides a performance based element to our mix of long-term compensation by directly tying the interests of our executives to stock price appreciation. During the negotiation of Mr. Hughes' employment agreement entered into in 2019 it was determined that his February 2019 stock option grant would vest immediately upon execution of the agreement which occurred on November 6, 2019.
Each of our NEOs were awarded time based restricted shares in 2019 in connection with the execution of new employment agreements. We believe that granting full value restricted shares is an important vehicle for retaining long-term executive talent. Restricted stock grants deliver value and ownership to the executive upon vesting which provides strong linkage between our executive's interests and that of our shareholders. Mr. Hughes was awarded a grant of restricted stock with a grant date value of $600,000 while Mr. Willison and Fleming were each awarded $300,000 worth of restricted shares. These grants vest ratably over a 3 year period. Mr. Fleming was also granted a separate award as inducement to accept our offer of employment consisting of additional restricted shares with a grant date value of $1,000,000.
Non-Cash Compensation
The Company provides standard health benefits to its executives, including medical, dental and disability insurance.
The Company’s non-cash compensation is intended to provide a similar level of benefits as those provided by comparable companies within our industry.
Pension Benefits
None.
Non-Qualified Deferred Compensation
None.
Retirement, Resignation or Termination Plans
Each of the Company’s executive employment agreements with Messrs. Hughes, Willison and Fleming contemplates the case of termination due to various provisions whereby the named executive officers will receive severance payments, as described below.
Compensation and Risk
We do not believe that our compensation policies and practices are reasonably likely to have a material adverse effect on us. We have taken steps to ensure our executive compensation program does not incentivize risk outside the Company’s risk appetite. Some of the key ways that we currently manage compensation risk are as follows:
•appointed a Compensation Committee which is composed entirely of independent directors to oversee the executive compensation program;
•the use of deferred equity compensation in the form of stock options to encourage a focus on long-term corporate performance versus short-term results; and
•disclosure of executive compensation to stakeholders;
Consideration of Most Recent Shareholder Advisory Vote on Executive Compensation
As required by Section 14Athis Item 11 of the Exchange Act, at our 2018 Annual Meeting of Stockholders our stockholders voted, in an advisory manner, on a proposal to approve our named executive officer compensation. This was our most recent stockholder advisory vote to approve named executive officer compensation. The proposal was approved by our stockholders, receiving approximately 91% of the vote of the stockholders present in person or represented by proxy and voting at the meeting. We considered this vote to be a ratification of our current executive compensation policies and decisions and, therefore, did not make any significant changes to our executive compensation policies and decisions based on the vote.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of our Compensation Committee during Fiscal 2019 was a current or former officer or employee of our Company or engaged in certain transactions with our Company required to be disclosed by regulations of the SEC. Additionally, during Fiscal 2019 there were no Compensation Committee “interlocks,” which generally means that no executive officer of our Company served: (a) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; (b) as a director of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; or (c) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a director of our Company.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing compensation discussion and analysis with Company management. Based on that review and those discussions, the Compensation Committee recommended to the Board of Directors that the compensation discussion and analysisForm 10-K will be included in this Annual Report. This reportour 2022 Proxy Statement and is providedincorporated herein by the following independent directors, who comprise the Compensation Committee: Harry DeMott, Benjamin Samuels and Gerald Budde.
The following summary compensation table sets out details of compensation paid to (a) our principal executive officer; (b) each of our two most highly compensated executive officers who served as executive officers during the fiscal year ended December 31, 2019; and (c) up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the year ended December 31, 2018, except that no disclosure is provided for any named executive officer, other than our principal executive officer, whose total compensation did not exceed $100,000 for the fiscal year ended December 31, 2019:
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary
($) | | Bonus
($) | | Stock Awards
($)(1) | | Option Awards
($)(2) | | Non-equity Incentive
Plan Compensation | | Change in Pension Value
and Non Qualified
Preferred Compensation
Earnings
($) | | All Other Compensation
($) | | Total
($) |
| | | | | | | | | | | | | | | | | | |
| Duane A. Hughes (3) | | 2019 | | $ | 391,058 | | | $ | 50,000 | | | $ | 600,000 | | | $ | 666,015 | | | $ | 132,500 | | | | | | | $ | 1,839,573 | |
| President and Chief Executive Officer | | 2018 | | 275,000 | | | | | | | | | | | | | | | | 275,000 | |
| | 2017 | | 253,750 | | | | | | | 796,400 | | | | | | | | | 1,050,150 | |
| | | | | | | | | | | | | | | | | | |
| Robert Willison (4) | | 2019 | | 217,308 | | | | | 300,000 | | | 170,600 | | | 42,000 | | | | | | | | 729,908 | |
| Chief Operating Officer | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Stephen Fleming (5) | | 2019 | | 32,307 | | | | | 1,300,000 | | | | | | 45,000 | | | | | 295,000 | | | 1,672,307 | |
| General Counsel and Vice President | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
(1)Represents the restricted stock awards granted to Mr. Hughes, Mr. Willison, and Mr. Fleming in November.
(2)Represents the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic 718 to each of our Named Executive Officers. For 2019, these amounts include stock option awards granted to Mr. Hughes in February and to Mr. Willison in May.
(3)Mr. Hughes was appointed President & CEO on February 4, 2019. For his role as a Director he was paid a retainer of $30,000 which is included in the Salary column above. Upon the execution of Mr. Hughes' employment agreement he was entitled to receive a bonus of $25,000 and an additional $25,000 upon the successful closing a financing in excess of $10,000,000. This $50,000 is reflected in the Bonus column of 2019 for Mr. Hughes.
(4)Mr. Willison was appointed as our Chief Operating Officer on February 19, 2019.
(5)Mr. Fleming was appointed our General Counsel and Vice President on November 6, 2019. Mr. Fleming was paid $295,000 in 2019 for outside legal consultation and guidance which is reflected in the All Other Compensation column above.
Employment Agreements
On November 6, 2019, the Company entered into new employment agreements with our executive officers. These new agreements define the position held by each executive officer as well as base salary level and eligibility to participate in the Company's short and long term incentive programs.
Pursuant to the terms of the executive retention agreements in certain circumstances, the Company has agreed to provide specified severance and bonus amounts and to accelerate the vesting on their equity awards upon termination upon a change of control, as the term is defined in the agreements. In the event of a termination upon a change of control or an involuntary termination, our CEO is entitled to receive an amount equal to 24 months of his base salary plus two times the target annual bonus then in effect. Our COO is entitled to receive an amount equal to 18 months of his base salary plus 1.5 times his target bonus amount. Our General Counsel is entitled to receive 16 months of his base salary plus 1.25 times his target bonus amount. Executives are also entitled to receive payment equal to the target bonus then in effect for the executive officer for the year in which such termination occurs, such bonus payment to be pro-rated to reflect the full number of months the executive remained in the Company’s employ. In addition, the vesting on any equity award held by the executive officer will be accelerated in full upon a termination and change of control or an involuntary termination. In the event the executive is terminated for cause, then the vesting of all equity awards shall cease and such equity awards will be terminated. In the event the executive leaves for any reason that is not considered a good reason, then the vesting of equity award shall cease. At the election of the executive officer,
the Company will also continue to provide health related employee insurance coverage for nine-twelve months, at the Company’s expense upon termination upon a change of control or an involuntary termination.
If the Executive’s employment with the Company terminates by reason of an Involuntary Termination, then the Executive shall be entitled to receive an amount equal to nine-twelve months of base salary. Our CEO is entitled to receive 12 months of his base salary while our COO and General Counsel are entitled to receive 9 months of their then current base salaries. Executives are also entitled to receive the amount equal to the target Cash Bonus then in effect for the Executive for the year in which such termination occurs prorated to reflect the number of full or partial months the Executive was employed with the Company during such calendar year. Acceleration of vesting on outstanding equity awards in the event of an Involuntary Termination occurs only at the discretion of the Board.
Grants of Plan-Based Awards
The following table provides information regarding grants of share based awards to the Named Executive Officers in 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant date | | Threshold | | | Target | | | Maximum | | | All Other Stock Awards:
Number of Shares of
Stock or Units # | | All Other Stock Awards:
Number of Securities
Underlying (#) | | Exercise Price of
Options Awards ($/sh) | | | Grant Data Fair Value of
Stock and Options
Awards $ (1) | |
| | | | | | | | | | | | | | | | |
| Duane A. Hughes | | 02/4/2019 | | | | | | | | | | | | 1,000,000 | | | | | | | | | | | | $ | 634,300 | |
| President and Chief Executive Officer | | 02/4/2019 | | | | | | | | 50,000 | | | | | | | 31,715 | |
| | 11/6/2019 | | | | | | | | | 239,044 | | | | | | | 600,000 | |
| | | | | | | | | | | | | | | | |
| Rob Willison | | 5/2/2019 | | | | | | | | 400,000 | | | | | | | 170,600 | |
| Chief Operating Officer | | 11/06/2019 | | | | | | | | | 119,522 | | | | | | | 300,000 | |
| | | | | | | | | | | | | | | | |
| Stephen Fleming | | 11/6/2019 | | | | | | | | | 517,928 | | | | | | | | 1,300,000 | |
| General Counsel and Vice President | | | | | | | | | | | | | | | | | | |
(1)Represents the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic 718.
Outstanding Equity Awards
The following table sets forth information with respect to the outstanding equity awards of our principal executive officers and principal financial officer during 2019, and each person who served as an executive officer of the Company as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Equity Awards at Year-End | | | | | | | | | | | | | | | | | | |
| Option Awards | | | | | | | | | | | | Stock Awards | | | | | | |
| Name and Principal Position | | Number of Securities
underlying
unexercised
options (#)
Exercisable | | Number of securities
underlying
unexercised
options (#)
Unexercisable | | Equity incentive
plan awards:
number of
securities
underlying
unexercised
options (3) | | Options exercise
price ($) | | Option expiration date | | Number of shares
or units of stock
that have not
vested (#) | | Market value of
shares or units of
stock that have not
vested ($) | | Equity incentive
plan awards:
Number if
unearned shares
other rights that
have not vested (#) | | Equity incentive
awards: Market or
payout value of
unearned shares,
units or other
rights that have not
vested ($) (1) |
| | | | | | | | | | | | | | | | | | |
| Duane A. Hughes | | — | | | — | | | — | | | — | | | — | | | 239,044 | | | $ | 726,694 | | | — | | | — | |
| President and Chief Executive Officer | | 1,000,000 | | | | | | | | | 0.97 | | | 2/4/2029 | | — | | | | | | — | | | — | |
| | 18,000 | | | 32,000 | | | | | 0.97 | | | 2/4/2029 | | | | | | | | |
| | 275,000 | | | 125,000 | | | — | | | 5.28 | | | 5/19/2027 | | — | | | — | | | — | | | — | |
| | 22,000 | | | — | | | — | | | 7.21 | | | 8/15/2021 | | — | | | — | | | — | | | — | |
| | 25,000 | | | — | | | — | | | 4.99 | | | 2/1/2021 | | — | | | — | | | — | | | — | |
| | 20,000 | | | — | | | — | | | 1.75 | | | 8/11/2020 | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | |
| Robert Willison | | — | | | — | | | — | | | — | | | — | | | 119,522 | | | 363,347 | | | — | | | — | |
| Chief Operating Officer | | 75,000 | | | 325,000 | | | — | | | 0.93 | | | 5/2/2024 | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stephen Fleming | | | | | | | | | | | | | | | | | | |
| General Counsel and Vice President | | — | | | — | | | — | | | — | | | — | | | 517,928 | | | 1,574,501 | | | — | | | — | |
| | 46,875 | | | 103,125 | | | — | | | 1.19 | | | 8/14/2023 | | | | | | | | |
(1)The market value of unvested restricted stock is computed based on the $3.04 closing price per share of our common stock on December 31, 2019.
No Pension Benefits
The Company does not maintain any plan that provides for payments or other benefits to its executive officers at, following or in connection with retirement and including, without limitation, any tax-qualified defined benefit plans or supplemental executive retirement plans.
No Deferred Compensation
The Company does not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Director Compensation
Under the Non-Employee Director Compensation Program, our non-employee directors are generally eligible to receive compensation for services they provide to us consisting of retainers and equity compensation as described below. During 2019, each non-employee director was eligible to receive the following for their service on the Board pursuant to the Non-Employee Director Compensation Program:
•An annual Board retainer of $50,000
•An additional retainer of $10,000 for the Chairman of the Board
In addition to cash compensation, our non-employee directors are eligible to receive annual equity-based compensation consisting of restricted stock awards with an aggregate grant date value equal to $60,000 or, in the case of the Chairman of the Board, $75,000. Generally, the forfeiture restrictions applicable to the restricted stock awards lapse on the six month anniversary of the date of grant of such awards. The restricted stock awards granted to our non-employee directors are subject to the terms and conditions of the Stock Plan and the award agreements pursuant to which such awards are granted. Each non-employee director is also reimbursed for travel and miscellaneous expenses to attend meetings and activities of the Board or its committees.
| | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in
Cash $ (1) | | Stock
Awards $ (2) | | | Total $ |
| Raymond J. Chess | | $ | 43,330 | | | $ | 75,000 | | | | $ | 118,330 | |
| H. Benjamin Samuels | | 41,664 | | | 60,000 | | | | 101,664 | |
| Gerald B. Budde | | 41,664 | | | 60,000 | | | | 101,664 | |
| Harry DeMott | | 41,664 | | | 60,000 | | | | 101,664 | |
| Michael L. Clark | | 41,664 | | | 60,000 | | | | 101,664 | |
(1) Amounts reported in this column reflect annual cash retainer amounts received by our non-employee directors for service on our Board. As described above, in 2019, our directors received monthly retainer payments of $3,333 for board service January through October 2019. In November the monthly retainer payment was increased to $4,167. In addition, Mr. Chess received an additional monthly retainer of $833 for his service as Chairman of the Board (annual value of $10,000).
(2) In November 2019, our non-employee directors received restricted stock awards covering 23,904 shares of common stock with a grant date fair value equal to approximately $60,000 for their service on our Board. As discussed above, Mr. Chess received a restricted stock award covering 29,880 shares of common stock with a grant date fair value equal to approximately $75,000 for his service as Chairman of the Board. The amounts reflected in the “Stock awards” column represent the grant date fair value of restricted stock awards granted to our non-employee directors pursuant to the Stock Plan, as computed in accordance with FASB ASC Topic 718.
Directors’ and Officers’ Insurance
The Company has purchased directors and officer’s liability insurance (“D&O Insurance”) for the benefit of its directors and officers, and the directors and officers of its subsidiaries, against liability incurred by them in the performance of their duties as directors and officers of the Company, or its subsidiaries, as the case may be. The primary policy also provides coverage to the corporate entity for security claims.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information asrequired by this Item 12 of February 28, 2020 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
| | | | | | | | | | | | | | |
| Name of Beneficial Owner (1) | | Common Stock Beneficially
Owned | | Percentage of
Common stock (2) |
| Marathon Asset Management, L.P. | (3) | | 11,467,149 | | | 14.0 | % |
| Joseph T. Lukens | (4) | | 7,511,786 | | | 10.5 | % |
| Arosa Opportunistic Fund, L.P. | (5) | | 7,927,755 | | | 9.9 | % |
| Seaport Global Capital L.P. | (6) | | 6,370,775 | | | 8.3 | % |
| Stephen D. Baksa | (7) | | 3,833,174 | | | 5.4 | % |
| Benjamin Samuels † | (8) | | 2,133,441 | | | 3.0 | % |
| Duane Hughes † | (9) | | 1,624,044 | | | 2.3 | % |
| Stephen Fleming † | (10) | | 651,818 | | | * | |
| Gerald Budde † | (11) | | 247,405 | | | * | |
| Robert Willison † | (12) | | 219,522 | | | * | |
| Raymond Chess † | (13) | | 179,289 | | | * | |
| Harry DeMott † | (14) | | 109,713 | | | * | |
| Michael Clark † | (15) | | 89,713 | | | * | |
| All officers and directors as a group (11 people) | | | 5,878,324 | | | 8.1 | % |
* Less than one percent.
† Executive officer and/or director.
(1)Except as otherwise indicated, the address of each beneficial owner is c/o Workhorse Group Inc, 100 Commerce Drive, Loveland, Ohio 45140.
(2)Applicable percentage ownership is based on 70,671,139 shares of common stock outstanding as of February 28, 2020. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Stock options to purchase shares of common stock that are currently exercisable or exercisable within 60 days of February 28, 2020 are deemed toForm 10-K will be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(3)Represents (i) a common stock warrant to purchase 2,994,249 shares of common stock at $1.25 per share held by Marathon Centre Street Partnership, L.P. (“Marathon Centre”); (ii) a common stock warrant to purchase 2,300,969 shares of common stock at $1.25 per share held by Marathon Structured Products Strategies Fund, LP (“Marathon Structured”); (iii) a common stock warrant to purchase 1,514,498 shares of common stock at $1.25 per share held by TRS Credit Fund, LP (“TRS”); (iv) a common stock warrant to purchase 1,243,674 shares of common stock at $1.25 per share held by Marathon Blue Grass Credit Fund, LP (“Marathon Blue Grass”); (v) a common stock warrant to purchase 550,942 shares of common stock at $1.4863 per share held by Marathon Centre; (vi) a common stock warrant to purchase 423,379 shares of common stock at $1.4863 per share held by Marathon Structured; (vii) a common stock warrant to purchase 278,668 shares of common stock at $1.4863 per share held by Marathon Blue Grass; (viii) a common stock warrant to purchase 228,836 shares of common stock at $1.4863 per share held by TRS; (ix) a common stock warrant to purchase 133,272 shares of common stock at $1.039 per share held by Marathon Centre; (x) a common stock warrant to purchase 102,414 shares of common stock at $1.039 per share held by Marathon Structured; (xi) a common stock warrant to purchase 67,409 shares of common stock at $1.039 per share held by Marathon Blue Grass, (xii) a common stock warrant to purchase 55,355 shares of common stock at $1.039 per share held by TRS; (xiii) a common stock warrant to purchase 15,018 shares of common
stock at $1.7820 per share held by Marathon Blue Grass; (xiv) a common stock warrant to purchase 29,692 shares of common stock at $1.7820 per share held by Marathon Centre; (xv) a common stock warrant to purchase 22,817 shares of common stock at $1.7820 per share held by Marathon Structured; (xvi) a common stock warrant to purchase 12,333 shares of common stock at $1.7820 per share held by TRS; (xvii) a common stock warrant to purchase 280,887 shares of common stock at $3.3550 per share held by Marathon Blue Grass; (xviii) a common stock warrant to purchase 555,329 shares of common stock at $3.3550 per share held by Marathon Centre; (xix) a common stock warrant to purchase 426,750 shares of common stock at $3.3550 per share held by Marathon Structured; and (xx) a common stock warrant to purchase 230,658 shares of common stock at $3.3550 per share held by TRS. Marathon Asset Management, L.P. is the manager of Marathon Centre, Marathon Structured, TRS and Marathon Blue Grass. The general partner of Marathon Asset Management, L.P. is Marathon Asset Management GP, L.L.C. (the “General Partner”). Bruce Richards and Louis Hanover are the managing members of the General Partner. The business address is One Bryant Park, 38th Floor, New York, New York 10036.
(4)Represents (i) 7,040,847 shares of common stock held by Mr. Lukens fund, the New Era Capital Fund; (ii) 77,435 shares of common stock held by The Joe & Kim Lukens Foundation; (iii) 25,000 shares of common stock held by the Joseph T Lukens, Jr. and Gerald Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for Nathan J. Lukens U/T/A Dated 2/23/2016; (iv) 25,000 shares of common stock held by the Joseph T. Lukens, Jr. and Gerald Budde, Co-Trustee of the Joseph T. Lukens, Jr. Irrevocable Trust for Roman E. Lukens U/T/A Dated 2/23/2016; and (vi) a common stock purchase warrant to acquire 571,429 shares of common stock at $5.28 per share.
(5)Represents (i) a common stock warrant to purchase 5,000,358 shares of common stock at $1.25 per share; (ii) a common stock warrant to purchase 1,143,200 shares of common stock at $1.21 per share; (iii) a common stock warrant to purchase 894,821 shares of common stock at $1.25 per share; (iv) a common stock warrant to purchase 108,768 shares of common stock at $1.25 per share; (v) a common stock warrant to purchase 2,260,050 shares of common stock at $1.62 per shares; and (vi) 2,025,377 shares of common stock held by Arosa Capital Management LP. Pursuant to the warrants, Arosa may not exercise such warrant if such exercise would result in Arosa beneficially owning in excess of 9.99% of our then issued and outstanding common stock. The shares, including the shares of common stock issuable upon exercise of the warrants, are held by Arosa Opportunistic Fund LP, a Cayman Islands exempted limited partnership (“Arosa Opportunistic Fund”). Arosa Capital Management LP, a Delaware limited partnership (“Arosa Capital”), serves as the registered investment adviser of Arosa Opportunistic Fund, and Till Bechtolsheimer, the managing member of the general partner of Arosa Opportunistic Fund and Chief Executive Officer of Arosa Capital, may be deemed to beneficially own the shares reported herein. The business address of Arosa is 55 Hudson Yards, Suite 2800, NY, NY 10036.
(6)Represents (i) 518,675 shares of common stock held by Seaport Global Asset Management, LLC; (ii) a common stock warrant to purchase 3,241,910 shares of common stock at $1.62 per share held by Seaport Global Asset Management EV LLC; (iii) a common stock warrant to purchase 1,424,590 shares of common stock at $1.62 per share held by the Armory Fund, LLP; and (iv) a common stock warrant to purchase 1,185,600 shares of common stock at $1.62 per share held by AMFCO-4, LLC. Pursuant to the warrants, Seaport may not exercise such warrants if such exercise would result in Seaport beneficially owning in excess of 9.99% of our then issued and outstanding common stock. Seaport Global Asset Management, LLC (“SGAM”) is the manager of Seaport Global Asset Management EV LLC, Armory Fund, LP and AMFCO-4, LLC. Stephen C. Smith is the Chief Executive Officer of SGAM. The business address of the foregoing person is 319 Clematis Street, Suite 1000, West Palm Beach, FL 33401 and the business address of SGAM is 360 Madison Avenue, 20th Floor, New York, New York 10017.
(7)Represents 3,833,174 shares of common stock held directly by Mr. Baksa.
(8)Represents (i) 765,094 shares of common stock held by Samuel 2012 Children’s Trust UAD 10/28/12 (the “Trust”), (ii) a common stock purchase warrant to acquire 285,071 shares of common stock at an exercise price of $5.28 per share held by the Trust, (iii) a common stock purchase warrant to acquire 95,253 shares of common stock at an exercise price of $5.28 per share held by the Trust, and (iv) a stock option to acquire 50,000 shares of common stock at $7.01 per share; (v) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (vi) 439,346 shares of common stock held directly by Mr. Samuels; and (vii) 420,964 shares of common stock held by the Marci Rosenberg 2012 Family Trust, a trust managed by Mr. Samuels’ wife. Mr. Samuels is a trustee of the Children’s Trust.
(9)Represents (i) a stock option to acquire 20,000 shares of common stock at $1.75 per share; (ii) a stock option to acquire 25,000 shares of common stock at $4.99 per share; (iii) a stock option to acquire 22,000 shares of common stock at $7.21 per share; (iv) a common stock option to acquire 400,000 shares of common stock at $5.28 per share; (v) a common stock option to acquire 1,000,000 shares of common stock at $0.97 per share; and (vii) 239,044 shares of restricted stock.
(10)Represents (i) a stock option to acquire 150,000 shares of common stock at $1.19 per share; (ii) 517,928 shares of restricted stock; and (3) 77,640 shares of common stock held directly.
(11)Represents (i) a stock option to acquire 50,000 shares of common stock at $7.01 per share; (ii) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (iii) 119,692 shares of common stock owned by the Gerald B. Budde Living Trust, which Mr. Budde is the trustee; and (v) 71,713 shares of restricted stock.
(12)Represents a stock option to acquire 400,000 shares of common stock at $0.932 per share and 119,522 shares of restricted stock.
(13)Represents (i) a stock option to acquire 10,000 shares of common stock at $1.75 per share; (ii) a stock option to acquire 10,000 shares of common stock at $4.99 per share, (iii) a stock option to acquire 10,000 shares of common stock at $7.21 per share; (iv) 77,689 shares of restricted stock; and (v) 71,600 shares of common stock held directly.
(14)Represents (i) a stock option to acquire 50,000 shares of common stock at $8.20 per share; and (ii) 71,713 shares of restricted stock.
(15)Represents (i) a stock option to acquire 50,000 shares of common stock at $1.10 per share; and (ii) 71,713 shares of restricted stock.
Changes in Control
We have no knowledge of any arrangements, including any pledge by any person of our securities, the operation of which may, at a subsequent date, result in a changeincluded in our control.2022 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
The Company obtains its propertyinformation required by this Item 13 of Form 10-K will be included in our 2022 Proxy Statement and casualty insurance through Assured Partners NL, LLC ("Assured"), which one of our directors, Gerald Budde, is Eastern Region Chief Financial Officer of AssuredPartners, Inc. The placement of insurance was completedincorporated herein by an agent outside of the Eastern Region and Mr. Budde did not participate in any decisions about insurance, nor was he paid any portion of the brokerage fee. Assured Partners LP received revenue of approximately $86,000 on insurance policies totaling approximately $750,000 in premiums in 2019.
Other than noted above, at no other time during the last two fiscal years has any executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serves as a trustee or in a similar capacity or has a substantial beneficial interest been indebted to the Company or was involved in any transaction in which the amount exceeded $120,000 and such person had a direct or indirect material interest.
Procedures for Approval of Related Party Transactions
Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
Director Independence
The Board of Directors has determined that Ray Chess, Gerald Budde, H. Benjamin Samuels, Michael Clark and Harry DeMott each qualify as independent directors under the listing standards of the Nasdaq.
ITEM 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
Fees for professional services providedThe information required by our independent auditors, Grant Thornton LLP in eachthis Item 14 of the last two years, in each of the following categories including expenses are:
| | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| Audit fees | | $ | 285,170 | | | $ | 233,965 | |
| Audit-related fees | | 22,357 | | | 20,300 | |
| Tax fees | | — | | | — | |
| All other fees | | — | | | — | |
| | | | |
| Total fees | | $ | 307,527 | | | $ | 254,265 | |
Audit Fees
Audit fees include the audit of the Annual Report on Form 10-K including the audit of internal control over financial reportingwill be included in our 2022 Proxy Statement and reviews of the Quarterly Reports on Form 10-Q.
Audit related fees include work associated with registration statements and issuance of comfort letters.
The policy of the audit committee, is to approve the appointment of the principal auditing firm and any permissible audit-related services. Fees chargedincorporated herein by Grant Thornton LLP were approved by the Board with engagement letters signed by Gerald Budde, Audit Committee Chairman.
The Audit Committee is responsible for the pre-approval of audit and permitted non-audit services to be performed by the Company’s independent auditor. The Audit Committee will, on an annual basis, consider and, if appropriate, approve the provision of audit and non-audit services by the auditor. Thereafter, the Audit Committee will, as necessary, consider and, if appropriate, approve the provision of additional audit and non-audit services by the auditor which are not encompassed by the Audit Committee’s annual pre-approval and are not prohibited by law. The Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve, on a case-by-case basis, non-audit services to be performed by the auditor. The Audit Committee has approved all audit and permitted non-audit services performed by the auditor for the year ended December 31, 2019.
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.Financial statements (see Index to Consolidated Financial Statements in Part II, Item 15.8 of this report)
2.All financial statement schedules have been omitted since the required information was not applicable or was not present in amounts sufficient to require submission of the schedules, or because the information required is included in the consolidated financial statements or the accompanying notes.
3.The exhibits listed in the following Index to Exhibits are filed or incorporated by reference as part of this report.
| | | | | | | | | | | | | | | | | | | | |
| Exhibit No. | | Description | | Form Incorporated From | | Report Date |
| 3.1 | | | | | 8-K | | 1/4/2010 |
| 3.2 | | | | | 8-K | | 5/25/2010 |
| 3.3 | | | | | 8-K | | 5/25/2010 |
| 3.4 | | | | | 8-K | | 5/25/2010 |
| 3.5 | | | | | 8-K | | 5/25/2010 |
| 3.6 | | | | | 8-K | | 9/10/2010 |
| 3.7 | | | | | SB-2 | | 2/4/2008 |
| 3.8 | | | | | 8-K | | 4/16/2015 |
| 3.9 | | | | | 8-K | | 12/10/2015 |
| 3.10 | | | | | 10-Q | | 8/9/2017 |
| 3.11 | | | | | 10-Q | | 5/7/2019 |
| 3.12 | | | | | 8-K | | 6/6/2019 |
4.1 | 3.13 | | | | 8-K† | | 12/21/2015 |
4.2 | | | | | 8-K | | 12/21/2015 |
4.3 | | | | | 8-K | | 9/9/2016 |
4.4 | | | | | 8-K | | 9/14/2017 |
4.5 | | | | | 10-Q | | 8/6/2018 |
4.6 | | | | | 8-K | | 10/1/2018 |
4.7 | | | | | 8-K | | 12/3/2018 |
4.8 | | | | | 8-K | | 1/2/2019 |
4.9 | | | | | 8-K | | 2/11/2019 |
4.10 | | | | | 8-K | | 4/16/2019 |
4.11 | | | | | 8-K | | 4/16/2019 |
| 4.12 | | | | | †10-K | | 3/1/2021 |
| 10.1 | | | | | 8-K | | 3/4/2013 |
| 10.2 | | | | | 8-K | | 3/13/2013 |
| 10.3 | | | | | 8-K | | 10/30/2013 |
| 10.4 | | | | | 8-K | | 12/21/2015 |
| 10.5 | | | | | 8-K | | 12/21/2015 |
| 10.6 | | | | | 8-K | | 9/9/2016 |
| 10.7 | | | | | 8-K | | 5/3/2017 |
| | | | | | | | | | | | | | | | | | | | |
| 10.8 | | | | | 8-K | | 5/19/2017 |
10.9 | | | | | 8-K | | 8/11/2017 |
10.10 | | | | | 8-K10-K | | 5/19/20173/1/2021 |
10.11 | 10.9 | | | | 8-K | | 5/19/2017 |
10.12 | | | | | 8-K | | 7/10/2018 |
10.13 | | | | | 8-K | | 7/10/2018 |
10.14 | | | | | 8-K | | 7/10/2018 |
10.15 | | | | | 10-Q | | 8/6/2018 |
10.16 | 10.10 | | | | 8-K | | 10/1/2018 |
10.17 | 10.11 | | | | 8-K | | 12/3/2018 |
10.18 | | | | | 8-K | | 12/3/2018 |
10.19 | | | Credit Agreement among Workhorse Group Inc., as the Borrower, Marathon Structured Product Strategies Fund, LP, Marathon Blue Grass Credit Fund, LP, Marathon Centre Street Partnership, L.P. and TRS Credit Fund, LP, as the Lenders, and Wilmington Trust, National Association, as the Agent, dated December 31, 2018 | | 8-K | | 1/2/2019 |
10.20 | | | Security Agreement, dated December 31, 2018, among Workhorse Group Inc., a Nevada corporation, Workhorse Technologies Inc., an Ohio corporation, Workhorse Properties Inc., an Ohio corporation, Workhorse Motor Works Inc, an Indiana corporation, Surefly, Inc., a Delaware corporation, and Wilmington Trust, National Association, in its capacity as agent | | 8-K | | 1/2/2019 |
10.21 | | | Pledge Agreement, dated December 31, 2018, among Workhorse Group Inc., a Nevada corporation, Workhorse Technologies Inc., an Ohio corporation, Workhorse Properties Inc., an Ohio corporation, Workhorse Motor Works Inc, an Indiana corporation, Surefly, Inc., a Delaware corporation, Wilmington Trust, National Association, in its capacity as agent | | 8-K | | 1/2/2019 |
10.22 | | | Guarantee, dated December 31, 2018, by Workhorse Technologies Inc., an Ohio corporation, Workhorse Properties Inc., an Ohio corporation, Workhorse Motor Works Inc, an Indiana corporation, and Surefly, Inc., a Delaware corporation | | 8-K | | 1/2/2019 |
10.23 | | | Registration Rights Agreement, dated December 31, 2018, among Workhorse Group Inc., Marathon Structured Product Strategies Fund, LP, Marathon Blue Grass Credit Fund, LP, Marathon Centre Street Partnership, L.P. and TRS Credit Fund, LP | | 8-K | | 1/2/2019 |
10.24 | 10.12 | | | | 8-K | | 2/5/2019 |
10.25 | | | | | 8-K | | 2/5/2019 |
10.26 | | | | | 8-K | | 2/5/2019 |
10.27 | | | First Amendment, Waiver and Consent to Credit Agreement among Workhorse Group Inc., as the Borrower, Marathon Structured Product Strategies Fund, LP, Marathon Blue Grass Credit Fund, LP, Marathon Centre Street Partnership, L.P. and TRS Credit Fund, LP, as the Lenders, and Wilmington Trust, National Association, as the Agent, dated March 13, 2019 | | 10-K | | 3/18/2019 |
| | | | | | | | | | | | | | | | | | | | |
10.28 | 10.13 | | | | 8-K | | 4/30/2/5/2019 |
10.29 | | | Third Amendment to Credit Agreement, dated as of April 30, 2019, by and among Workhorse Group Inc., as borrower, Marathon Structured Product Strategies Fund, LP, Marathon Blue Grass Credit Fund, LP, Marathon Centre Street Partnership, L.P. and TRS Credit Fund, LP, as lenders, and Wilmington Trust, National Association, as the agent | | 8-K | | 4/30/2019 |
10.30 | | | | | 8-K | | 5/31/2019 |
10.31 | 10.14 | | | | 8-K | | 10/1/2019 |
10.32 | 10.15 | | | | 8-K | | 10/1/2019 |
10.33 | 10.16 | | | | 8-K | | 10/1/2019 |
10.34 | + 10.17 | | | | 8-K | | 11/6/2019 |
10.35 | + 10.18 | | | | 8-K | | 11/6/2019 |
10.36 | + 10.19 | | | | 8-K | | 11/6/2019 |
10.37 | + 10.20 | | | | 8-K | | 11/6/2019 |
10.38 | + 10.21 | | | | 8-K | | 11/6/2019 |
10.39 | + 10.22 | | | | 8-K | | 11/6/2019 |
10.4 + 10.23 | | | | 8-K | | 4/21/2021 |
| + 10.24 | | | | 8-K | | 4/26/2021 |
| + 10.25 | | | | † | | |
| + 10.26 | | | | † | | |
| + 10.27 | | | | 8-K | | 7/26/2021 |
| + 10.28 | | | | † | | |
| + 10.29 | | | | † | | |
| + 10.30 | | | | 10-Q | | 11/9/2021 |
| + 10.31 | | | | 8-K | | 10/18/2021 |
| + 10.32 | | | | 8-K | | 1/4/2022 |
| 10.33 | | | | 8-K | | 11/27/2019 |
10.41 | 10.34 | | | | 10-K | † | | 3/13/2020 |
10.42 | 10.35 | | | | 10-K | † | | 3/13/2020 |
10.43 | 10.36 | | | | 8-K | | 12/9/20198/4/2020 |
10.44 | 10.37 | | | | 8-K | | 12/9/201910/13/2020 |
10.45 | 10.38 | | | | 8-K | | 12/9/201910/13/2020 |
10.46 10.39 | | | | 8-K | | 10/16/2020 |
| 10.40 | | | | 8-K | | 10/16/2020 |
| 10.41 | | | | 8-K | | 12/9/201910/16/2020 |
10.47 10.42 | | | | 8-K | | 10/16/2020 |
| | | | | | | | | | | | | | | | | | | | |
| 10.43 | | | | 8-K | | 10/6/2021 |
| 10.44 | | | | 8-K | | 11/2/2021 |
| + 10.45 | | | | 10-K | | 3/13/2020 |
| + 10.46 | | | | 10-Q | | 11/9/2021 |
| + 10.47 | | | | † | | |
| + 10.48 | | | | † | | |
| 21.1 | | | | | † | | |
| 23.1 | | | | | † | | |
| 31.1 | | | | | † | | |
| 31.2 | | | | | † | | |
| 32.1 | | | | | † | | |
| 32.2 | | | | | † | | |
99.1 | | | | | 10-Q | | 8/9/2017 |
99.2 | | | | | 10-Q | | 8/9/2017 |
99.3 | | | | | 10-Q | | 8/9/2017 |
| 101.INS | | Inline XBRL INSTANCE DOCUMENT | | | | |
| | | | | | | | | | | | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Labels Linkbase Document | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
| 104 | | Inline XBRL Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | |
† Exhibits that are filed with this report.
* Portions of this exhibit have been redacted pursuant to+ Indicates a request for confidential treatment submitted to the Securities and Exchange Commission.management contract or compensatory arrangement.
ItemITEM 16. FormFORM 10-K Summary.SUMMARY
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | | | | | | | | | |
| | WORKHORSE GROUP INC. | |
| | | |
| Dated: | March 13, 20201, 2022 | By: | /s/ Duane A. HughesRichard Dauch |
| | Name: | Duane A. HughesRichard Dauch |
| | Title: | Chief Executive Officer, President and Director
(Principal Executive Officer) |
| | | |
Dated: | March 13, 2020 | By: | /s/ Steve Schrader |
| | Name: | Steve Schrader |
| | Title: | Chief Financial Officer
(Principal Financial Officer) |
Dated: | March 13, 2020 | By: | /s/ Gregory T. Ackerson |
| | Name: | Gregory T. Ackerson |
| | Title: | Controller
(Principal Accounting Officer) |
In accordance with the Exchange Act, this report has been signed below by the following persons on March 13, 2020,1, 2022, on behalf of the registrant and in the capacities indicated.
| | | | | | | | |
| Signature | | Title |
| | |
/s/ Duane A. HughesRichard Dauch | | Chief Executive Officer, President and Director
(Principal Executive Officer) |
Duane A. HughesRichard Dauch | | |
| | |
/s/ Steve SchraderRobert M. Ginnan | | Chief Financial Officer
(Principal Financial Officer) |
Steve SchraderRobert M. Ginnan | |
| | |
| /s/ Gregory T. Ackerson | | Chief Accounting Officer
(Principal Accounting Officer) |
| Gregory T. Ackerson | |
| | |
| /s/ Raymond Chess | | Director |
| Raymond Chess | | |
| | |
| /s/ Gerald B. Budde | | Director |
| Gerald B. Budde | | |
| | |
| /s/ H. Benjamin Samuels | | Director |
| H. Benjamin Samuels | | |
| | |
| /s/ Harry DeMott | | Director |
| Harry DeMott | | |
| | |
| /s/ Michael L. Clark | | Director |
| Michael L. Clark | | |
| | |
| /s/ Pamela Mader | | Director |
| Pamela Mader | | |
| | |
| /s/ Jacqueline Dedo | | Director |
| Jacqueline Dedo | | |
| | |
| /s/ William G. Quigley III | | Director |
| William G. Quigley III | | |
