☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| Nevada | 26-1394771 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
844-937-9547
offices, including zip code)
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
Indicate
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, | WKHS | The NASDAQ Capital Market | ||||||||||||
| Common Stock, $0.001 par value per share | ||||||||
| (Class) | (Outstanding at | |||||||
TABLE OF CONTENTS
i
ii
March 31,Unaudited(Unaudited) and December 31, 2018 March 31,
2019 December 31,
2018 Assets Current assets: Cash and cash equivalents $ 2,847,936 $ 1,512,750 Accounts receivable, less allowance for doubtful accounts of $0 at March 31, 2019 and December 31, 2018 362,350 - Lease receivable 41,375 48,271 Inventory 2,490,798 2,533,616 Prepaid expenses and deposits 2,048,834 2,274,595 7,791,293 6,369,232 Noncurrent assets: Property, plant and equipment, net 5,140,764 5,237,451 Lease receivable 193,774 198,090 $ 13,125,831 $ 11,804,773 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 3,639,233 $ 4,340,463 Accrued liabilities 3,900,388 3,946,386 Warranty liability 6,911,167 7,058,769 Warrant liability 2,390,884 1,822,819 Customer deposits 394,000 406,000 Duke financing obligation 1,340,700 1,340,700 Revolving loan 4,104,140 - 22,680,512 18,915,137 Long-term debt 8,441,129 8,312,079 Stockholders’ equity (deficit): Series A preferred stock, par value of $.001 per share 75,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2019 and December 31, 2018 - - Common stock, par value of $.001 per share 100,000,000 shares authorized, 61,496,990 shares issued and outstanding at March 31, 2019 and 58,270,934 shares issued and outstanding at December 31, 2018 61,497 58,271 Additional paid-in capital 129,764,361 126,076,782 Accumulated deficit (147,821,668 ) (141,557,496 ) (17,995,810 ) (15,422,443 ) $ 13,125,831 $ 11,804,773 September 30,
2019December 31,
2018Assets Current assets: Cash and cash equivalents $ 9,261,151 $ 1,512,750 Restricted cash 900,000 — Lease receivable 42,860 48,271 Inventory, net 2,388,988 2,533,616 Prepaid expenses and deposits 6,355,690 2,274,595 Total current assets 18,948,689 6,369,232 Property, plant and equipment, net of accumulated depreciation of $2,588,647 and $2,407,477 at September 30, 2019 and December 31, 2018 8,923,635 5,237,451 Lease receivable 169,638 198,090 Total Assets $ 28,041,962 $ 11,804,773 Liabilities and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable $ 995,510 $ 4,340,463 Accrued liabilities 3,996,365 3,946,386 Warranty liability 6,506,971 7,058,769 Warrant liability 19,901,139 1,822,819 Customer deposits 334,000 406,000 Duke financing obligation 1,340,700 1,340,700 Current portion of long-term debt 6,354,140 — Total current liabilities 39,428,825 18,915,137 Long-term debt 8,205,270 8,312,079 Mandatory redeemable series B preferred stock 18,772,628 — Commitments and contingencies Stockholders’ equity (deficit): Series A preferred stock, par value $0.001 per share, 75,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2019 and December 31, 2018 — — Common stock, par value $0.001 per share,,250,000,000 shares authorized, 66,189,613 shares issued and outstanding at September 30, 2019 and 58,270,934 at December 31, 2018 66,190 58,271 Additional paid-in capital 141,030,711 126,076,782 Accumulated deficit (179,461,662) (141,557,496) Total stockholders' equity (deficit) (38,364,761) (15,422,443) Total Liabilities and Stockholders' Equity (Deficit) $ 28,041,962 $ 11,804,773
| Three Months Ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Net sales | $ | 364,182 | $ | 560,229 | ||||
| Cost of sales | 1,397,606 | 1,698,280 | ||||||
| Warranty expense | - | 16,090 | ||||||
| Gross loss | (1,033,424 | ) | (1,154,141 | ) | ||||
| Operating expenses | ||||||||
| Selling, general and administrative | 2,090,890 | 2,400,147 | ||||||
| Research and development | 1,362,275 | 2,337,631 | ||||||
| Total operating expenses | 3,453,165 | 4,737,778 | ||||||
| Interest expense, net | 1,777,583 | 525,887 | ||||||
| Net loss | $ | (6,264,172 | ) | $ | (6,417,806 | ) | ||
| Basic and diluted loss per share | $ | (0.11 | ) | $ | (0.16 | ) | ||
| Weighted average number of common shares outstanding | 55,260,519 | 40,258,234 | ||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 4,258 | $ | 10,997 | $ | 373,948 | $ | 741,910 | |||||||||||||||||||||||||||
| Cost of sales | 1,423,904 | 1,476,822 | 3,751,674 | 4,847,097 | |||||||||||||||||||||||||||||||
| Gross loss | (1,419,646) | (1,465,825) | (3,377,726) | (4,105,187) | |||||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 2,551,406 | 3,363,103 | 6,638,350 | 8,766,452 | |||||||||||||||||||||||||||||||
| Research and development | 1,640,454 | 1,449,497 | 4,219,456 | 5,681,840 | |||||||||||||||||||||||||||||||
| Total operating expenses | 4,191,860 | 4,812,600 | 10,857,806 | 14,448,292 | |||||||||||||||||||||||||||||||
| Loss from operations | (5,611,506) | (6,278,425) | (14,235,532) | (18,553,479) | |||||||||||||||||||||||||||||||
| Interest expense, net | 5,882,081 | (792,872) | 23,582,427 | 259,177 | |||||||||||||||||||||||||||||||
| Net loss | $ | (11,493,587) | $ | (5,485,553) | $ | (37,817,959) | $ | (18,812,656) | |||||||||||||||||||||||||||
| Net loss attributable to common stockholders per share - basic and diluted | $ | (0.17) | $ | (0.12) | $ | (0.60) | $ | (0.42) | |||||||||||||||||||||||||||
| Weighted average number of common shares outstanding | 66,176,921 | 46,192,471 | 63,566,295 | 46,192,471 | |||||||||||||||||||||||||||||||
3,511,565 126,076,782 (15,422,443 statements. 2014-09. Performance obligations are satisfied within one year from a given reporting date, consequently we omit disclosure of the transaction price apportioned to remaining performance obligations on open orders. The Tranche One Loan requires principal payments of $0.5 million on June 30, 2020, December 31, 2020 and June 30, 2021 with the remaining balance due on December 31, 2021. The Tranche Two Loan matures on December 31, 2021. liability for the Initial Warrants was $19,901,139 and $965,747, respectively. Any additional warrants issued in connection with Credit Agreement have been classified as equity instruments and are not required to be marked-to-market at each balance sheet date. diluted earnings per share: $1.5 million and $3.7 million, respectively. This agreement was canceled in the first quarter of 2019. participated in this offering. 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. The Workhorse N-GEN electric cargo van platform will be available in multiple size configurations, 450, platform. sale is contingent on receiving approval from the Lenders of the Credit Agreement. costs. loan 2018, except as follows: As previously disclosed in our Annual Report on Form 10-K for the 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. Management of the Company believes this lawsuit is baseless and intends to defend itself vigorously. Private PlacementStockholdersStockholders’ Equity (Deficit)March 31, 2019 and December 31, 2018 Common Stock Series A
Preferred Stock Additional Total
Stockholders’ Number
of Shares Amount Number
of Shares Amount Paid-in
Capital Accumulated
Deficit Equity
(Deficit) Balance as of December 31, 2017 41,529,181 $ 41,529 $ - $ - $ 107,760,036 $ (104,290,000 ) $ Issuance of common stock 395,226 395 - - 1,187,020 - 1,187,415 Stock options and warrants exercised 42,143 42 - - 87,273 - 87,315 Share based compensation for the period ended March 31, 2018 - - - - 72,178 - 72,178 Net loss from operations, the year ended December 31, 2018 - - - - - (6,417,808 ) (6,417,808 ) Balance as of March 31, 2018 41,966,550 $ 41,966 $ - $ - $ 109,106,507 $ (110,707,808 ) $ (1,559,335 ) Common Stock Series A
Preferred Stock Additional Total
Stockholders’ Number
of Shares Amount Number
of Shares Amount Paid-in
Capital Accumulated
Deficit Equity
(Deficit) Balance as of December 31, 2018 58,270,934 58,271 - - (141,557,496 ) ) Issuance of common stock 3,226,056 3,226 - - 2,996,509 - 2,999,735 Share based compensation - - - - 691,070 - 691,070 Net loss from operations, the three months ended March 31, 2019 - - - - - (6,264,172 ) (6,264,172 ) Balance as of March 31, 2019 61,496,990 $ 61,497 - - $ 129,764,361 $ (147,821,668 ) $ (17,995,810 ) Common Stock Series A
Preferred StockAdditional
Paid-in
CapitalAccumulated
DeficitTotal
Stockholders’
Equity
(Deficit)Number
of SharesAmount Number
of SharesAmount Balance, June 30, 2018 45,003,219 $ 45,003 — $ — $ 113,181,411 $ (118,382,283) $ (5,155,869) Issuance of common stock 11,267,715 11,268 — — 12,366,053 — 12,377,321 Stock-based compensation — — — — 254,963 — 254,963 Net loss — — — — — (5,485,553) (5,485,553) Balance, September 30, 2018 56,270,934 $ 56,271 — $ — $ 125,802,427 $ (123,867,836) $ 1,990,862 Common Stock Series A
Preferred StockAdditional
Paid-in
CapitalAccumulated
DeficitTotal
Stockholders’
Equity
(Deficit)Number
of SharesAmount Number
of SharesAmount Balance, December 31, 2017 41,529,181 $ 41,529 — $ — $ 107,760,036 $ (104,290,001) $ 3,511,564 Issuance of common stock 14,697,110 12,728 — — 16,385,934 — 16,398,662 Stock options and warrants exercised 44,643 45 — — 90,020 — 90,065 Warrant exchange — 1,969 — — (1,969) — — Deemed dividend — — — — 765,179 (765,179) — Stock-based compensation — — — — 803,227 — 803,227 Net loss — — — — — (18,812,656) (18,812,656) Balance, September 30, 2018 56,270,934 $ 56,271 — $ — $ 125,802,427 $ (123,867,836) $ 1,990,862 Common Stock Series A
Preferred StockAdditional
Paid-in
CapitalAccumulated
DeficitTotal
Stockholders’
Equity
(Deficit)Number
of SharesAmount Number
of SharesAmount Balance, June 30, 2019 66,081,812 $ 66,082 — $ — $ 140,527,364 $ (167,968,075) $ (27,374,629) Stock options and warrants exercised 6,330 6 — — 1,967 — 1,973 Stock-based compensation — — — — 334,711 — 334,711 Common stock issued for payment of Series B Preferred Stock dividend 101,471 102 — — 166,669 — 166,771 Net loss — — — — — (11,493,587) (11,493,587) Balance, September 30, 2019 66,189,613 $ 66,190 — $ — $ 141,030,711 $ (179,461,662) $ (38,364,761) Common Stock Series A
Preferred StockAdditional
Paid-in
CapitalAccumulated
DeficitTotal
Stockholders’
Equity
(Deficit)Number
of SharesAmount Number
of SharesAmount Balance,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 517,224 517 — — 1,456 — 1,973 Deemed dividend 116,496 116 86,091 (86,207) — Stock-based compensation — — — — 1,211,629 — 1,211,629 Effect of reclassification of warrants — — — — 857,072 — 857,072 Value of warrants issued with Series B Preferred Stock — — — — 6,709,961 — 6,709,961 Common stock issued for payment of Series B Preferred Stock dividend 101,471 102 — — 166,669 166,771 Net loss — — — — — (37,817,959) (37,817,959) Balance, September 30, 2019 66,189,613 $ 66,190 — $ — $ 141,030,711 $ (179,461,662) $ (38,364,761) 3ThreeNine Months Ended March 31,September 30, 2019 and 2018 2019 2018 Cash flows from operating activities: Net loss $ (6,264,172 ) $ (6,417,806 ) Adjustments to reconcile net loss from operations to cash used by operations: Depreciation 96,687 48,359 Amortization of Marathon loan issuance costs 129,050 - Amortized discount and debt issuance costs on Senior Secured Notes - 493,750 Stock based compensation 691,070 72,178 Change in fair value - warrants 568,066 - Effects of changes in operating assets and liabilities: Accounts receivable and lease receivable (351,138 ) 693,278 Inventory 42,818 (405,627 ) Prepaid expenses and deposits 225,761 730,365 Accounts payable and accrued liabilities (747,229 ) (70,024 ) Warranty (147,602 ) 61,312 Customer deposits (12,000 ) 212,595 Net cash used by operations (5,768,689 ) (4,581,620 ) Cash flows from investing activities: Capital expenditures - - Net cash provided by investing activities - - Cash flows from financing activities: Payments on long-term debt - (9,024 ) Proceeds from revolving loans 4,104,140 - Issuance of common stock 2,999,735 1,187,415 Exercise of warrants and options - 87,315 Net cash provided by financing activities 7,103,875 1,265,706 Change in cash and cash equivalents 1,335,186 (3,315,914 ) Cash at the beginning of the period 1,512,750 4,069,477 Cash at the end of the period $ 2,847,936 $ 753,563 2019 2018 Cash flows from operating activities: Net loss $ (37,817,959) $ (18,812,656) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 291,287 251,886 Amortization of discount and debt issuance costs on long-term debt 850,800 1,576,005 Amortization of discount on Series B preferred stock 482,589 — Stock-based compensation 1,213,602 803,226 Other 41,588 28,645 Change in fair value of warrants 18,935,392 (1,527,414) Effects of changes in operating assets and liabilities: Lease receivable 33,863 1,016,631 Inventory, net 122,407 (316,411) Prepaid expenses and deposits (4,538,704) 409,723 Accounts payable and accrued liabilities (3,128,203) (1,065,124) Warranty liability (551,798) — Customer deposits (72,000) 309,595 Net cash used in operating activities (24,137,136) (17,325,894) Cash flows from investing activities: Capital expenditures (4,001,838) (131,318) Proceeds on disposition of property, plant and equipment 5,000 4,800 Net cash used in investing activities (3,996,838) (126,518) Cash flows from financing activities: Payments on long-term debt — (7,841,378) Proceeds from long-term debt 5,854,140 7,800,000 Payment of loan issuance costs — (70,047) Proceeds from issuance of series B preferred stock 25,000,000 — Issuance of common stock 5,928,235 16,398,662 Exercise of warrants and options — 90,066 Net cash provided by financing activities 36,782,375 16,377,303 Change in cash, cash equivalents and restricted cash 8,648,401 (1,075,109) Cash, cash equivalents and restricted cash, beginning of the period 1,512,750 4,069,477 Cash, cash equivalents and restricted cash, end of the period $ 10,161,151 $ 2,994,368 September 30, 2019 2018 Cash and cash equivalents $ 9,261,151 $ 2,994,368 Restricted cash 900,000 — Total cash, cash equivalents and restricted cash $ 10,161,151 $ 2,994,368 1.SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLESdatainformation presented in the condensed consolidated financial statements: and its predecessor companies (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. As an American manufacturer, we design and build high performance battery-electric 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. Although we operate as a single unit through our subsidiaries, we approach our development through two divisions, Automotive and Aviation. We are currently focused on our core competency of bringing the N-GEN electric cargo van 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.The Company’s wholly owned subsidiaries include Workhorse Technologies Inc., Workhorse Motor Works Inc. and Workhorse Properties Inc.willare expected to be insufficientsufficient to fund our operations through the first halfend of 2019. Unless and until we are able to generate a sufficient amount of revenue, reduce our costs and/or enter a strategic relationship, we expect to finance future cash needs through public and/or private offerings of equity securities and /orand/or debt financings. If we are not able to obtain additional financing and/or substantially increase revenue from sales, we will be unable to continue as a going concern. These conditions raise substantial doubt about the ability of the Company to continue as a going concern. respective financial conditions, results of operations and cash flows for the interim periods presented. Such adjustments are of a normal, recurring nature. Intercompany balances and transactions are eliminated in consolidation. The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results. It is suggested that theseThese condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Workhorse contained in its Annual Report on Form 10-K for the year ended December 31, 2018.equity.equity (deficit).2.INVENTORYAs of March 31, 2019, and December 31, 2018, our inventory consisted 2019 2018 Raw materials $ 4,276,819 $ 4,319,637 Work in process 702,079 702,079 Finished goods - - 4,978,898 5,021,716 Less: Inventory reserve 2,488,100 2,488,100 $ 2,490,798 $ 2,533,616 3.REVENUESeptember 30, 2019 December 31, 2018 Raw materials $ 4,478,201 $ 4,319,637 Work in process 422,176 702,079 Finished goods — — 4,900,377 5,021,716 Less: Inventory reserve 2,511,389 2,488,100 Total inventory, net $ 2,388,988 $ 2,533,616 expedientsexpedient allowed under ASU 2014-09:·Performance obligations are satisfied within one year from a given reporting date, consequently we omit disclosure of the transaction price apportioned to remaining performance obligations on open ordersfollows for the periods ended March 31: Three Months Ended 2019 2018 Automotive $ 240,000 $ 404,854 Aviation - - Other 124,182 155,375 Total revenues $ 364,182 $ 560,229 Three Months Ended September 30, Nine Months Ended
September 30,2019 2018 2019 2018 Automotive $ — $ — $ 240,000 $ 523,252 Aviation — — — — Other 4,258 10,997 133,948 218,658 Total revenues $ 4,258 $ 10,997 $ 373,948 $ 741,910 4.DEBTDebt March 31,
2019 December 31,
2018 Marathon Tranche One Loan, due December 31, 2021, interest only quarterly payments, variable interest rate of 10.4% as of March 31, 2019 (discount is based on warrant valuation of approximately 9.7%) $ 10,000,000 $ 10,000,000 Marathon Tranche Two Loan, due December 31, 2021, interest only quarterly payments, variable interest rate of 10.4% as of March 31, 2019 (discount is based on warrant valuation of approximately 9.7%) 4,104,140 - Marathon Credit Agreement unamortized discount and issuance costs (1,558,871 ) (1,687,921 ) Net Marathon Credit Agreement 12,545,269 8,312,079 Less current portion 4,104,140 - Long-term debt $ 8,441,129 $ 8,312,079 September 30, 2019 December 31, 2018 Marathon Tranche One Loan, due December 31, 2021, interest payable quarterly, variable interest rate of 10.0% as of September 30, 2019 $ 10,000,000 $ 10,000,000 Marathon Tranche Two Loan, due December 31, 2021, interest payable quarterly, variable interest rate of 10.0% as of September 30, 2019 5,854,140 — Unamortized discount and issuance costs (1,294,730) (1,687,921) Net Marathon Credit Agreement 14,559,410 8,312,079 Less current portion 6,354,140 — Long-term debt $ 8,205,270 $ 8,312,079 among the Company, as borrower,with Marathon Asset Management, LP, on behalf of certain entities it manages, as lenders (collectively, with their permitted successors and assignees, the “Lenders”), and Wilmington Trust, National Association, as the agent (“Wilmington”). The Credit Agreement providedprovides the Company with a $10 million tranche of term loansloan (the “Tranche One Loans”Loan”) which may not be re-borrowed following repayment and (ii) a $25 million tranche of revolving loansloan which may be re-borrowed following repayment (the “Tranche Two Loans”Loan” together with the Tranche One Loans,Loan, the “Loans”).accordanceconjunction with entering into the Credit Agreement, the Company issued each Lender a Common Stock Purchase WarrantWarrants (“Initial Warrants”) to purchase in the aggregate, 8,053,390 shares of common stock of the Company at an exercise price of $1.25 per shareshare. The Initial Warrants are exercisable infor cash only for a period of three yearsthrough December 31, 2021 and then for cash or cashless thereafter (collectively, the “Initial Warrants”).thereafter. Until the later of the repayment of all obligations owed toamounts outstanding under the LendersCredit Agreement or two years from the closing date,December 31, 2021, the Company will be required tomust issue additional Common Stock Purchase Warrants (the “Additional Warrants”) to the Lenders equal to 10%, in the aggregate, of any additional equity issuances subject to certain exceptions, on substantially the same terms and conditions of the Initial Warrants, except that (i) the applicable expiration date thereof shall be five years from the issuance date, of the applicable warrant, (ii) the initial exercise price shall be a price equal to 110% of the issuance price per share of common stock used in the relevant issuance, multiplied by 110% and (iii) the holder shall be entitled to exercise the warrant on a cashless exercisebasis at any timetime.is exercisable.Principal amounts: At
March 31,
2019 Tranche One - Principal $ 10,000,000 Tranche Two – Current amount drawn 4,104,140 Unamortized debt discount and issuance costs (1) (1,558,871 ) Net debt carrying amount $ 12,545,269 Carrying amount of warrant the liability component (2) $ 1,295,637 (1)Includes the unamortized portion of the initial warrant liability of $965,747 and issuance costs of $722,174.(2)Includes marked to market liability of initial Marathon warrant liability and subsequent warrant issuances.5.DUKE FINANCING OBLIGATIONInc., a wholly-owned subsidiary of Duke Energy Corporation (NYSE: DUK)Inc (“Duke”), pursuant to which the Company sold Duke 615,000 battery cells (the “615,000 Cells”) in consideration offor $1,340,700. WorkhorseThe Company will continue to use the cells in the near term for the delivery of trucks to UPS and DHL.customers. Until May 1,October 15, 2019, the Company has the right and option to require Duke to sell the 615,000 Cells back to the Company and Duke has the right and option to require the Company to purchase the 615,000 Cells at price equal to the price the 615,000 Cells were sold.615,00615,000 Cells to Duke, which served as collateral for Arosa thefor their Loan Agreement, the Company entered into a Limited Consent, Waiver and Release with Arosa pursuant to which the Company issued Arosa 2,000,000 shares of common stock and restruck the exercise price of warrants previously issued to Arosa to $1.25 per share. In addition, whileArosa Loan remained outstanding,Company closed Subscription Agreements with institutional investors for the purchase 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 hold voting rights.Arosaclosing price of $1.60 on May 30, 2019. They are immediately exercisable and will expire seven years from the date of issuance.restruckamortized to equal the price of any equity issued by the Company, including the issuance of any common stock purchase warrants or other derivative convertible securities, if the issuing price of such securities is less than $1.25.On April 30, 2019, Duke and the Company entered into an agreement to amend the initial Sales Agreement to extend the expiration date frominterest expense through May 1, 2019 to October 15, 2019.The Duke transactions was accounted for as a financing obligation and as such, the Company has recorded a $1,340,700 liability related to the transaction.6.STOCK BASED COMPENSATIONOptions to directors, officers, consultants and employees20172019 Stock Incentive Plan the 2016 Stock Incentive Plan, the 2014 Stock Incentive Plan, the 2014 Stock Compensation Plan, 2013 Incentive Stock Plan, the 2012 Incentive Stock Plan, the 2011 Incentive Stock Plan and the 2010 Stock Incentive Planas well as previous years plans (the “Plans”) providing for the issuance of optionsequity based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options granted under the plans may only be granted with an exercise price equal to the fair market value of the Company’s common stock on the date of grant. Awards under the plans may be either vested or unvested options. The 2017 Stock Incentive Plan authorized 5,000,000 shares with vesting in sixteen equal quarterly tranches. Outstanding Stock Options Options Available for Grant Number of Options Weighted
Average
Exercise Price
per Option Weighted
Average Grant
Date Fair Value
per Option Weighted
Average
Remaining
Exercise Term
in Months Balance December 31, 2017 4,145,774 3,851,371 3.11 1.84 43 Additional stock reserved - - - - - Granted (340,000 ) 340,000 1.18 0.54 56 Exercised - (52,500 ) 1.24 0.68 - Forfeited - - - - - Expired - (271,250 ) 3.22 1.58 - Balance December 31, 2018 3,805,774 3,867,621 $ 4.05 $ 1.84 64 Additional stock reserved Granted (2,000,000 ) 2,000,000 0.97 0.55 88 Exercised Forfeited 1,359,069 (1,359,069 ) 4.73 1.94 31 Expired Balance March 31, 2019 3,164,843 4,508,552 $ 2.48 $ 1.24 65 Outstanding Stock Options Options Available for Grant Number of Options Outstanding Weighted
Average
Exercise Price
per OptionWeighted
Average Grant
Date Fair Value
per OptionWeighted
Average
Remaining
Exercise Term
in MonthsBalance, December 31, 2017 4,145,774 3,851,371 $ 3.11 $ 1.84 43 Granted (340,000) 340,000 1.18 0.54 56 Exercised — (52,500) 1.24 0.68 — Forfeited and expired — (271,250) 3.22 1.58 — Balance, December 31, 2018 3,805,774 3,867,621 4.05 1.84 64 Additional Shares Authorized under 2019 Plan 8,000,000 — Granted (2,400,000) 2,400,000 0.96 0.53 81 Exercised — (497,552) 0.12 0.97 — Forfeited and expired 1,774,069 (1,774,069) 4.85 1.97 — Balance, September 30, 2019 11,179,843 3,996,000 $ 2.33 $ 1.12 66 7.INCOME TAXES8.EARNINGS PER SHARE Company’s common stock equivalents were anti-dilutive and excluded from the calculation of diluted loss per common share because they were anti-dilutive, due toshare.Company’s net losses.9.RECENT ACCOUNTING DEVELOPMENTSAccounting Guidance Adopted in 2018Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligationscomputation of basic and Licensing, and affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2016-10 clarifies the following two aspects of Topic 606: evaluating whether promised goods and services are separately identifiable and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The Company adopted ASU No. 2016-10, using the modified retrospective approach, which did not have a material impact on the Company’s condensed consolidated financial statements. Additional information is available in Note 4, “Revenue.”Effective January 1, 2018, we adopted FASB ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and affects the guidance in ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” .. When another party is involved in providing goods or services to a customer, ASU No. 2014-09 requires an entity to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). The amendments in ASU No. 2016-08 are intended to improve the operability and understandability of the implementation guidance in ASU No. 2014-09 on principal versus agent considerations by offering additional guidance to be considered in making the determination. The Company adopted ASU No. 2016-08, using the modified retrospective approach, which did not have a material impact on the Company’s condensed consolidated financial statements. Additional information is available in Note 4, “Revenue.”Three Months Ended September 30, Nine Months Ended September 30, 2019 2018 2019 2018 Net loss $ (11,493,587) $ (5,485,553) $ (37,817,959) $ (18,812,656) Deemed dividends — — 86,207 765,179 Net loss attributable to common shareholders $ (11,493,587) $ (5,485,553) $ (37,904,166) $ (19,577,835) Basic weighted average shares outstanding 66,176,921 46,192,471 63,566,295 46,192,471 Dilutive effect of options and warrants — — — — Diluted weighted average shares outstanding 66,176,921 46,192,471 63,566,295 46,192,471 Anti-dilutive options and warrants excluded from diluted average shares outstanding 32,917,619 4,558,927 32,917,619 4,558,927 When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A lessee shall classify a lease as a finance lease if it meets any of five listed criteria: 1) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2) The lease grants the lessee and option to purchase the underlying asset that the lessee is reasonably certain to exercise. 3) The lease term is for the major part of the remaining economic life of the underlying asset. 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. 5) The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in the statement of comprehensive income interest on the lease liability separately from amortization of the right-of-use asset. an operating lease. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight-line basis over the lease term. 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 generally on a straight-line basis over the lease term. The amendments in this update were applied using the current period adjustment method as defined, and were effective on January 1, 2019. The adoption of this standard did not have a material impact on the condensed consolidated financial statements.910.STOCK OFFERINGS(the “Cowen Agreement”) with Cowen and Company, LLC (“Cowen”) under which the Company may offer and sell from time to time at its sole discretion, shares of its Common Stock having an aggregate offering price of up to $25.0 million through Cowen as its sales agent. As of March 31,$25 million. For the nine months ended September 30, 2019 and 2018, the Company issued 4,464,7771,609,373 and 1,794,621 shares fromunder this facilityagreement for net proceeds of approximately $8.7 million.September 14, 2017,April 26, 2018, the Company entered into an underwriting agreementclosed Subscription Agreements with accredited investors (the “Underwriting Agreement”“April 2018 Accredited Investors”) with Cowen relating to the public offering and sale (the “Offering”) of 3,749,996who purchased 531,066 shares of the Company’s common stock for a purchase price of $1.4 million or $2.72 per share. Stephen Burns, Benjamin Samuels, Gerald Budde and five-year warrants (exercisable beginning on the date of issuance) to purchase up to an aggregate of 2,812,497 sharesJulio Rodriguez, executive officers and/or directors of the Company’s common stock. Each investor received a warrant to purchase 0.75 sharesCompany at the time of the Company’s common stock at an exercise price of $3.80 per share, for each share of common stock purchased.Pursuant to the Underwriting Agreement, Cowen purchased 3,749,996 shares of the Company’s common stock and accompanying warrants at a price per share of $3.20. The net proceeds to the Company were approximately $10.9 million after deducting underwriting discounts and commissions and offering, expenses. The sale of such shares and accompanying warrants closed on September 18, 2017. The warrants contain full ratchet anti-dilution protection upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then existing exercise price of the warrants, with certain exceptions.separate, privately-negotiated exchange agreements, (the “Exchange Agreements”), pursuant to which the Company issued to such holders an aggregate of 1,968,736 shares of the Company’s common stock in exchange for the Warrants. The closingIn the second quarter of the exchanges contemplated by the Exchange Agreements occurred on June 5, 2018. In addition,2018, the “Down Round” feature of the Warrants was triggered, in the second quarter of 2018, causing the strike price to decrease from $3.80 per share to $2.62 per share. As a result, the Company recorded approximately $765,179 as a deemed dividend of $765,179 which represents the fair value transferred to the Warrant holders due tofrom the Down Round feature being triggered. The deemed dividend was recorded as a reduction of Retained Earnings and increase in Additional Paid-in-Capital and reducedincreased the net income availableloss to common shareholders by the same amount.(the “Underwriting Agreement”) with National Securities Corporation (the “Underwriter”"Underwriter"), relating tofor the public offering and sale (the “2018 Offering”) of 9,000,000 shares of our Common Stock at a price per share of $1.15 for aggregate grossnet proceeds of $10.4$9.6 million. This offering closed on August 13, 2018. Pursuant to the Underwriting Agreement, the Company granted the Underwriter a 45-day option to purchase from the Company up to an additional 1,350,000 shares of Common Stock at the offering price to cover over allotments, if any. On August 14, 2018, the Underwriter exercised its over-allotment option and acquiredsold an additional 1,288,800 shares of Common Stock at a price per share of $1.15 for aggregate grossnet proceeds of $1.4 million. The over-allotment closing occurred on August 14, 2018. The Company used the net proceeds from this offering for working capital, general corporate purposes and repayment of debt and other obligations.Commencing 11, 2019, the Company entered into and closed Subscription Agreements with accreditedsold 1,616,683 shares of common stock to investors (the “February 2019 Accredited Investors”) pursuant to which the Februaryfor net proceeds of $1.5 million. Through July 2019, Accredited Investors purchased 1,499,684 shares of the Company’s common stock for a purchase price of $1,365,000. If, prior to the six month anniversary,if the Company issuesissued shares of its common stock for a purchase price per share less than the purchase price paid by the February 2019 Accredited Investors subject to standard carve-outs (a “Down Round”), the Company willwas required to issue additional shares of common stock (for no additional consideration) to the February 2019 Accredited Investors such that the effective purchase price per share is 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. The issuance of the additional shares 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 shareholders by the same amount.thisthe February 2019 offering provided, however, theirat a price per share purchase wasof $0.9501, which was above the closing price the date prior to close and theyclose. 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. The net proceeds to the Company were approximately $2.9 million.11.SUBSEQUENT EVENTSNumber of Warrants Weighted Average Exercise Price per Warrant Weighted Average Remaining Exercise Term in Months Balance, December 31, 2018 17,818,844 $ 1.84 52 Granted, Series B Preferred Stock 9,262,500 1.62 48 Granted, Marathon debt 1,840,275 1.40 60 Exercised — Balance, September 30, 2019 28,921,619 $ 1.74 49 Second Amendment to Credit AgreementAprilOctober 1, 2019, the Company entered into an agreement for the Second Amendment to Credit Agreement (the “Marathon Second Amendment”), amongsale of SureFly™ for $4.0 million. The completion of the Company, as borrower, certain affiliates of Marathon Asset Management, LP, as lenders (collectively, with their permitted successors and assignees,sale is contingent on receiving approval from the “Lenders”), and Wilmington Trust, National Association, as the agent (“Wilmington”) amending certain termsLenders of the Credit Agreement, dated as of DecemberAgreement. 2018 (as amended, restated, amended and restated or otherwise modified prior to the date hereof), between the Company, the Lenders and Wilmington. The Marathon Second Amendment delayed the application of certain financial covenants including:(i)the minimum liquidity, providing that at least $4 million must be maintained at all times on or after April 30, 2019 rather than beginning on March 31, 2019;(ii)the maximum total leverage ratio (ratio of total debt borrowed by the Company and its subsidiaries to EBITDA), providing that the maximum total leverage ratio shall not exceed 4.50:1.00 on the last day of the quarter ending December 31, 2019, rather than beginning with the quarter ending September 30, 2019, which total leverage ratio is adjusted for subsequent quarters as set forth in the Credit Agreement; and(iii)the maximum debt service coverage ratio (ratio of EBITDA (for the four consecutive fiscal quarters most recently ended, subject to certain adjustments set forth in the Credit Agreement) to interest expense and payments for operating leases), providing that the maximum debt service coverage ratio shall not exceed 1.25:1.00 on the last day of the quarter ending December 31, 2019, rather than beginning with the quarter ending September 30, 2019, which debt service coverage ratio is adjusted for subsequent quarters as set forth in the Credit Agreement.Warrant AmendmentsOn April 16, 2019, the Company entered into an Amendment No. 1 to Common Stock Purchase Warrants with Marathon Asset Management LP, on behalf of certain entities it manages, as warrant holders (collectively, the “Holders”) (collectively, the “Marathon Warrant Amendments”), amending certain terms of the existing warrants issued by the Company in favor of each Holder. Pursuant to the Marathon Warrant Amendments, unless the Company has obtained the approval of its shareholders as required by the Nasdaq Capital Market, the number of shares to be issued under warrants held by the Holders shall not exceed 19.99% of the issued and outstanding common stock of the Company as of December 31, 2018. The Marathon Warrant Amendments also provide that the failure to obtain shareholder approval of an increase in the number of authorized shares of common stock of the Company, sufficient to enable the Company to issue common stock upon exercise of the warrants held by each Holder, will constitute an event of default under the existing credit agreement among the Company, as borrower, the Holders, as lenders, and Wilmington Trust, National Association, as the agent.On April 17, 2019, the Company and Arosa Opportunistic Fund LP (“Arosa”ST Engineering Hackney, Inc. ("Seller") entered into Amendment No. 1an Asset Purchase Agreement (the "Purchase Agreement") to Common Stockpurchase certain assets of Seller (the "Acquired Assets") and assume certain liabilities of Seller. The closing under the Purchase Warrant (the “Arosa Warrant Amendment”), amending certain terms of the existing warrants issued by the Company. Pursuant to the Arosa Warrant Amendment, until the Company obtains shareholder approval of an increase in the number of authorized shares of common stock of the Company,Agreement provides that the Company will not be required to reservedeliver shares of its common stock for issuance underto the warrants held by Arosa. IfSeller if it does not make the Second Payment (as defined below) on a timely basis. Accordingly, upon execution of the Purchase Agreement, the Company does not increasedeposited $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 authorized sharesEscrow Shares shall be subject to adjustment if the aggregate value of common stock by June 30, 2019, the amendment willEscrow Shares is less than $5.28 million or greater than $7.92 million on certain dates.nullpayable from the Escrow Account upon satisfaction of certain conditions, and void.Subscriptionthe remaining $6.0 million of which (the “Second Payment”) shall be payable in cash within 45 days if certain additional conditions are attained. The Purchase AgreementApril 30,November 7, 2019, the Company entered into a subscription agreement (the “Subscription Agreement”),transaction with certain investors (the “Investors”Lordstown Motors Corp. (“LMC”) pursuant to which the Company agreed to issuegrant LMC a perpetual and sell,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”) in exchange for royalties, equity interests in LMC, and other consideration (the “LMC Transaction”). LMC was foundedregistered public offering bycurrent stockholder and former Chief Executive Officer and Director of the Company.directlyand LMC (the “License Agreement”);InvestorsCompany, Wilmington Trust, as agent, and the lenders under the Credit Agreement (defined below) (the “Registered Direct Offering”“Consent and Waiver”), 3,957,432 shares of Common Stock. The purchase price per share was $0.74.The closing.Registered Direct Offering occurred on May 1, 2019. The Subscription Agreement contains customary representations, warrantiesLordstown Assembly Complex, and agreements by us and customary conditions to closing. The representations, warranties and covenants contained in the Subscription Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties.The net proceeds to the Companyongoing operating costs, which amounts are expected to be approximately $2.9 million, after deducting estimated expenses payable bysignificant (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”).associatedshould 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 Registered Direct Offering.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.expectsis subject to usecertain restrictions on transferring LMC’s equity for this two-year period. Under the net proceeds from this offering for working capital, general corporate purposes and repayment of debt and other obligations.Third Amendment to CreditVoting Agreement,On April 30, 2019, the Company entered intohas the Third Amendmentright to Credit Agreement (the “Marathon Third Amendment”), among the Company, as borrower,designate 1 director to LMC’s board of directors, subject to certain affiliates of Marathon Asset Management, LP, as lenders (collectively, with their permitted successors and assignees, the “Lenders”), and Wilmington Trust, National Association, as the agent (“Wilmington”) amending certain terms of the Credit Agreement, dated as of December 31, 2018 (as amended, restated, amended and restated or otherwise modified prior to the date hereof), between the Company, the Lenders and Wilmington. The Marathon Third Amendment amended the minimum liquidity covenant, providing that at least $4 million must be maintained at all times at or after May 31, 2019 rather than at all times on or after April 30, 2019. Unless the Company fails to maintain minimum liquidity as of the last day of any calendar month, the Company may cure a failure to maintain minimum liquidity by increasing liquidity to $4,000,000 within five business days of the occurrence. are currently in production and 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.All Workhorse last mile delivery vans are assembled in the Union City assembly facility.Due to the positive return-on-investment, we place a premium price for our vehicles when selling to major fleet buyers. We expect that fleet buyers will be able to achieve a four-year or better return-on-investmentreturn-of-investment (without government incentives), which we believe justifies the higher acquisition cost of our vehicles.efforts on the USPS Next Generation Delivery Vehicle (“NGDV”) program.efforts.700650 and 1,000 cubic feet. We intend to initiate the launch with the 450 cubic foot configuration where it is designed to compete with the Sprinter, Transit and RAM ProMaster gasoline/diesel trucks in the commercial sector with an emphasis on last-mile delivery and other service-oriented businesses, such as telecom. This ultra-low floor platform incorporates state-of-the-art safety features, economy and performance. 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 OEM to market a U.S. built electric cargo van, and early indications of fleet interest are significant. We expect the N-GEN trucks will be supported by our Ryder Systems partnership. Using N-GEN light duty prototypes, we delivered over 100,000 packages in San Francisco and Ohio during our testing. During the period we achieved 50 MPGe and successfully demonstrated the role the vehicle can have in last mile delivery.powertrain, and will have two purpose-built variants, apowertrain. Workhorse is currently evaluating licensing opportunities with respect to its W-15 worklight duty pickup truck (pickup) and an N-GEN cargo van. Either of these two variants will appeal to delivery fleets, utility companies, telecom companies, municipalities and more.The FAA to-date has granted 14 separate Experimental Airworthiness Certifications, registered as N834LW,aircraft. These certifications come after an extensive design review and inspectionsale of SureFly™ for $4.0 million. The completion of the aircraft with each renewed certificate.November 2018, Workhorse signed cooperative research and development agreementthe 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 branchvalue (based on the then-current market price of the U.S. Militaryshares) equal to test SureFly$6,000,000 in satisfaction of the Second Payment.specific focus on military applications. This further expandsperpetual and worldwide license to certain intellectual property relating to the potential marketCompany’s W-15 electric pickup truck platform and its related technology (the “Licensed Intellectual Property”) in exchange for royalties, equity interests in LMC, and other consideration (the “LMC Transaction”). LMC was founded by Stephen S. Burns (“Mr. Burns”), a current stockholder and former Chief Executive Officer and Director of the Company.aircraft.We are continuing with our efforts to consummate a saleacquisition, retrofitting, and restart of the SureFly business although weLordstown 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 (GVW) using the Licensed Intellectual Property (the “Vehicles”).guaranteeprovide assurance that weit will be successfulreceive the Royalty Advance or receive the projected underlying royalty from the production of Vehicles.such efforts.13statementstatements of operations data for the period presentedis as follows: Three Months Ended
March 31, 2019 2018 Sales $ 364,182 $ 560,229 Cost of sales 1,397,606 1,698,280 Warranty expense - 16,090 Gross loss (1,033,424 ) (1,154,141 ) Operating expenses Selling, general and administrative 2,090,890 2,400,147 Research and development 1,362,275 2,337,631 Total operating expenses 3,453,165 4,737,778 Interest expense, net 1,777,583 525,887 Net loss $ (6,264,172 ) $ (6,417,806 ) Three Months Ended
September 30,Nine Months Ended
September 30,2019 2018 2019 2018 Net sales $ 4,258 $ 10,997 $ 373,948 $ 741,910 Cost of sales 1,423,904 1,476,822 3,751,674 4,847,097 Gross loss (1,419,646) (1,465,825) (3,377,726) (4,105,187) Operating expenses: Selling, general and administrative 2,551,406 3,363,103 6,638,350 8,766,452 Research and development 1,640,454 1,449,497 4,219,456 5,681,840 Total operating expenses 4,191,860 4,812,600 10,857,806 14,448,292 Loss from operations (5,611,506) (6,278,425) (14,235,532) (18,553,479) Interest expense, net 5,882,081 (792,872) 23,582,427 259,177 Net loss $ (11,493,587) $ (5,485,553) $ (37,817,959) $ (18,812,656) March 31,September 30, 2019 and 2018 were approximately$4,258 and $10,997, respectively.$0.6$0.7 million, respectively. The decrease was primarily due to a decrease in volume of trucks sold partially offset by improved pricing in 2019.March 31,September 30, 2019 and 2018 were $1.4 million and $1.7$1.5 million, respectively. The cost of sales decrease was primarily due to lower employee-related costs due to a reduction in headcount.March 31,September 30, 2019 and 2018 were $2.1$2.6 million and $2.4$3.4 million, respectively. The decrease is primarily due to lower spending for marketing and employee-related costs.costs partially offset by an increase in stock compensation expense of approximately $0.7 million.March 31,September 30, 2019 and 2018 were $1.6 million and $1.4 million, respectively. The increase in R&D expenses is due to increased spending on prototype development partially offset by lower consulting costs.$2.42018 were $4.2 million and $5.7 million, respectively. The decrease in R&D expenses is due to the decrease in prototype and product design expenses for the USPS NGDVour bid for a governmental contract and SureFly.duringfor the three months ended March 31,September 30, 2019 and 2018 was $1.8$5.9 million and $0.5$(0.8) million, respectively. The increase was primarily attributable a $4.0 million mark-to-market adjustment in 2019 and a $1.5 million negative mark-to-market adjustment in 2018 for warrants issued to thelenders. In addition there were higher levels of debt associated withyear-over-year. Marathon Credit Facility.14securities.securities and borrowings. We have consumed substantial amounts of capital to date as we continue our R&D activities and manufacturing our vehicles.March 31,September 30, 2019, we had approximately $2.8$9.3 million in cash and cash equivalents, and short-term investments, as compared to approximately $1.5 million as of December 31, 2018, an increase of approximately $1.3$7.7 million. The increase was primarily attributable to the $25.0 million sale of Series B Preferred stock, the amount drawn on the Marathon Tranche Two debt and sales of our common stock. These cash inflows were partially offset by the operating loss for the period. not be sufficient to support our current and projected funding requirements and we will need additional funding.through the end of 2019. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our business and research and development activities, including risks and uncertainties that could impact the rate of progress of our development activities, we are unable to estimate with certainty the amounts of increased capital outlays and operating expenditures. significant additional funding for the foreseeable future. Unless and until we are able to generate a sufficient amount of revenue and reduce our costs, we expect to finance future cash needs through public and/or private offerings of equity securities, debt financings and/or monetization of existing assets. 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 we are able to obtain may involve operating covenants that restrict our business.●our ability to acquire or license other technologies or compounds 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.threenine months ended March 31,September 30, 2019, we maintained an investment portfolio primarily in money market funds. 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 Three Months Ended
March 31, 2019 2018 Net cash used in operating activities $ (5,768,689 ) $ (4,581,620 ) Net cash used in investing activities $ - $ - Net cash provided by financing activities $ 7,103,875 $ 1,265,706 Nine Months Ended September 30, 2019 2018 Net cash used in operating activities $ (24,137,136) $ (17,325,894) Net cash used in investing activities $ (3,996,838) $ (126,518) Net cash provided by financing activities $ 36,782,375 $ 16,377,303 theour business in research and development, manufacturing, selling, general and administration and interest expense. 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.threenine months ended March 31,September 30, 2019 and 2018, cash used byin operating activities was $5.8$24.1 million and $4.6$17.3 million, respectively. The increase in net cash used in operations in 2019 as compared to 2018 was mainly due to changes in accounts receivable,prepaid expenses and deposits, accounts payable and accrued liabilities.
Cash Flows from Investing Activitiesthreenine months ended March 31,September 30, 2019 and 2018, net cash provided by financing activities was $7.1$36.8 million and $1.3$16.4 million, respectively.increase in cash flows fromfollowing significant financing activities was primarily driven by the $4.1took place in 2019 and 2018:debt.2018.March 31,September 30, 2019, as discussed below.fiscal year ended December 31, 2018, we identified the following material weaknesses:●The Company has 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.intends to review, revisehas moved forward and improveis revising and improving our internal control over financial reporting until the material weaknesses in internal control over financial reporting are remediated.●Complete implementation of the ERP system modules covering purchase orders and inventory.●Hire an international accounting firm to assist the company with a broad-based review of our internal control environment including the identification of controls gaps and implementation of controls to remediate those gaps.initiated remediation measures described above will strengthen our internal control over financial reporting and should eventually remediate the material weaknesses identified. However, because we are still assessing the design and operating effectiveness of these measures and need to put more controls in place, the identified material weaknesses have not been remediated as of March 31,September 30, 2019. We will continue to monitor the effectiveness of these remediation measures and will make any changes and take such other actions that we deem appropriate.March 31,September 30, 2019. Based on these additional procedures and assessment, we concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material aspects, our financial position, results of operations and cash flows for the periods presented.March 31,September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.In connection with Mr. Hughes appointment as Chief Executive Officer, the Company entered into an amended and restated retention agreement (the “Retention Agreement”) with Mr. Hughes effective 4, 2019. Pursuant to the Retention Agreement, Mr. Hughes was granted an option to purchase 1,000,000 shares of the Company’s common stock that will vest over a three-year period. The stock option award was granted under the Company’s 2017 Incentive Stock Plan with an exercise price equal to $0.97. The shares subject to such options will vest over three years in equal quarterly installments commencing March 31, 2019. In connection with his appointment as Chief Executive Officer, on February 4, 2019 the Company entered into a letter agreement (the “Director Agreement”) with Mr. Hughes setting forth certain terms of his appointment as director of the Company. The Director Agreement provides that Mr. Hughes will be granted an option to purchase 50,000 shares of the Company’s common stock at $0.97 per share. The options will expire ten years from the vesting period with 10,000 options vesting immediately and 4,000 every June 30 and December 31 thereafter.Under the Services Agreement entered with Stephen Burns, the Company granted Mr. Burns an option to purchase 1,000,000 shares of the Company’s common stock which vested immediately. The stock option award was granted under the Company’s 2017 Incentive Stock Plan with an exercise price equal to $0.97.In connection with the appointment of Mr. Willison as Chief Operating Officer, the Company entered into a retention agreement with Mr. Willison effective February 18, 2019. Pursuant to the Retention Agreement, the Company. subject to the approval by the Company’s shareholders of the Company’s 2019 Stock Incentive Plan, will grant an option to purchase 400,000 shares of the Company’s common stock that will vest over a four-year period. The stock option award will be granted under the Company’s 2019 Incentive Stock Plan with an exercise price equal to the closing price of the Company’s common stock on the date of shareholder approval of the 2019 Incentive Stock Plan. The shares subject to such options will vest over four years in equal quarterly installments commencing at the end of the calendar quarter in which the 2019 Incentive Stock Plan is approved.1,499,6841,616,683 shares of the Company’s common stock for a purchase price of $1,365,000. The Company used the proceeds for general working capital.$1,465,056. If, prior to the six month anniversary, the Company issues shares of its common stock for a purchase price per share less than the purchase price paid by the February 2019 Accredited Investors subject to standard carve-outs (a “Down Round”), the Company will issue additional shares of common stock (for no additional consideration) to the February 2019 Accredited Investors such that the effective purchase price per share is equal to the purchase price per share paid in the Down Round. Benjamin Samuels and Gerald Budde, directors of the Company, acquired 841,928 and 26,310 shares of common stock, respectively, as part of this offering provided, however, theirat a per share purchase was $0.9501, which was above the closing price the date prior to close and theyclose. They did not receive the Down Round protection.there underthereunder with regard to the sale. No advertising or general solicitation was employed in offering the securities. The offer and sales were made to accredited investors and transfer of the common stock will be restricted by the Company in accordance with the requirements of the Securities Act of 1933, as amended.Special MeetingThe Company held a Special Meeting on May 2, 2019 in Loveland, Ohio. Of the 61,496,990 shares of Common Stock outstanding on March 25, 2019, the record date, 51,319,811 shares were represented at the Annual Meeting, in person or by proxy, constituting a quorum. The proposals considered at the Special Meeting are described in detail in the Proxy Statement. The proposals described below were voted upon at the Special Meeting and the number of votes cast with respect to each proposal was as set forth below: (1) Approve the 2019 Incentive Stock Plan and to authorize 8,000,000 shares of Common Stock for issuance thereunder. This matter was determined based on majority of the shares cast. For Against Abstain 22,014,450 3,819,294 84,613 (2) Approvean amendment of the Company’s articles of incorporation to increase the number of authorized shares of common stock from 100,000,000 to 250,000,000. This matter was determined based on majority of the shares outstanding.For Against Abstain 42,833,121 7,870,553 616,137 Amendment to the Company’s Articles of IncorporationOn May 3, 2019, the Company filed an amendment to its Articles of Incorporation with the State of Nevada to increase its authorized shares of common stock from 100,000,000 to 250,000,000.* Filed herewith.(1)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 4, 2010.Taxonomy Extension Presentation Linkbase Document(2)104Incorporated by reference to the Form 8-K Current Report filed with the SecuritiesInline XBRL Cover Page Interactive Data File (formatted as Inline XBRL and Exchange Commission on May 25, 2010.(3)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 25, 2010.(4)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 10, 2010.(5)Incorporated by referenced to the Form SB-2 Registration Statement filed with the Securities and Exchange Commission on February 4, 2008.(6)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on April 16, 2015.(7)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 10, 2015.(8)Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities and Exchange Commission on August 9, 2017.(9)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 21, 2015.contained in Exhibit 101)
*Filed herewith.(10)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on March 13, 2013.(11)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 16, 2016.(12)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 12, 2017.(13)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on September 14, 2017.(14)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 27, 2017.(15)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on October 30, 2013.(16)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on June 12, 2018.(17)Incorporated by reference to the Form 10-Q Quarterly Report filed with the Securities and Exchange Commission on August 6, 2018.(18)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on July 10, 2018.(19)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on October 1, 2018.(20)Incorporated by reference to the Form S-3/A Registration Statement filed with the Securities and Exchange Commission on December 12, 2016.(21)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 27, 2017.(22)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 3, 2017.(23)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on May 19, 2017.(24)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on June 22, 2017.(25)Intentionally left blank.(26)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on August 11, 2017.(27)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on June 4, 2018.(28)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on June 29, 2018.(29)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on December 3, 2018.(30)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on January 2, 2019.(31)Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange Commission on February 5, 2019.(32)Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 15, 2019.(33)Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on February 19, 2019.(34)Incorporated by reference to the Form 10-K Annual Report filed with the Securities Exchange Commission on March 18, 2019.(35)Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 2, 2019.(36)Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 22, 2019.(37)Incorporated by reference to the Form 8-K Current Report filed with the Securities Exchange Commission on April 30, 2019.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 hereuntothereunto duly authorized.WORKHORSE GROUP INC. Dated: May 7,November 8, 2019By: /s/ Duane A. Hughes Name: Duane A. Hughes
Title: Chief Executive Officer
(Principal Executive Officer)Dated: May 7,November 8, 2019By: /s/ Paul Gaitan Name: Paul Gaitan
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)23