UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020


☐			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: 000-53704

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

(Address of principal executive offices, including zip code)

~~(844) 937-9547~~(513) 360-4704

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.001 par value per share

WKHS

The NASDAQ Capital Market

~~Indicate the~~The number of shares ~~outstanding of each~~ of the ~~issuer’s classes of common stock,~~Registrant's Common Stock, $0.001 par value per share, outstanding as of ~~the latest practicable date.~~


~~Common Stock, $0.001 par value per share~~						~~66,857,529~~
~~(Class)~~						~~(Outstanding at October 31, 2019)~~

April 30, 2020, was 70,629,331.

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit	34
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	67

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1517
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21

PART II	OTHER INFORMATION	2322

Item 1.	Legal Proceedings	2322
Item 1A.	Risk Factors	2322
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	2423
Item 4.	Mine Safety Disclosures	2423
Item 5.	Other Information	2423
Item 6.	Exhibits	2524
	SIGNATURES	2625

Forward-Looking Statements

The discussions in this Quarterly Report contain forward-looking statements reflecting our current expectations that involve risks and uncertainties. When used in this Report, the words “anticipate”, 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 subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, market acceptance for our products, our ability to attract and retain customers for existing and new products, our ability to control our expenses, our ability to recruit and retain employees, legislation and government regulation, shifts in technology, global and local business conditions, our ability to effectively maintain and update our product and service portfolio, the strength of competitive offerings, the prices being charged by those competitors and the risks discussed elsewhere herein. These 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.

All references in this Form 10-Q that refer to the “Company”, “Workhorse Group”, “Workhorse”, “we,” “us” or “our” are to Workhorse Group Inc.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Workhorse Group Inc.

Condensed Consolidated Balance Sheets

~~September 30, 2019 (Unaudited) and December 31, 2018~~


							March 31, 2020		December 31, 2019
		September 30, 2019		December 31, 2018			(Unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	9,261,151	$	1,512,750	Cash and cash equivalents	$	16,824,627	$	23,868,416
Restricted cash		900,000		—
Lease receivable		42,860		48,271
Restricted cash held in escrow						Restricted cash held in escrow	—		1,000,000
Accounts receivable, less allowance for doubtful accounts of $0 at March 31, 2020 and December 31, 2019						Accounts receivable, less allowance for doubtful accounts of $0 at March 31, 2020 and December 31, 2019	48,830		7,921
Lease receivable, current						Lease receivable, current	33,100		33,100
Inventory, net	Inventory, net	2,388,988		2,533,616		Inventory, net	2,630,824		1,798,146
Prepaid expenses and deposits		6,355,690		2,274,595
Prepaid expenses						Prepaid expenses	4,756,923		4,812,088
Total current assets	Total current assets	18,948,689		6,369,232		Total current assets	24,294,304		31,519,671

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
Property, plant and equipment, net						Property, plant and equipment, net	6,768,619		6,830,181
Investment in LMC						Investment in LMC	13,059,700		12,194,800
Lease receivable, long-term						Lease receivable, long-term	123,661		129,177

Total Assets	Total Assets	$	28,041,962	$	11,804,773	Total Assets	$	44,246,284	$	50,673,829

Liabilities and Stockholders’ Equity (Deficit)
Liabilities and Stockholders’ Deficit						Liabilities and Stockholders’ Deficit
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	995,510	$	4,340,463	Accounts payable	$	3,061,730	$	1,678,983
Accrued liabilities	Accrued liabilities	3,996,365		3,946,386		Accrued liabilities	3,387,921		3,105,184
Warranty liability	Warranty liability	6,506,971		7,058,769		Warranty liability	5,302,770		6,001,864
Warrant liability	Warrant liability	19,901,139		1,822,819		Warrant liability	7,190,000		16,335,000
Customer deposits	Customer deposits	334,000		406,000		Customer deposits	190,000		303,000
Duke financing obligation		1,340,700		1,340,700
Current portion of long-term debt		6,354,140		—
Current portion of Convertible Note, at fair value						Current portion of Convertible Note, at fair value	20,160,000		19,620,000
Total current liabilities	Total current liabilities	39,428,825		18,915,137		Total current liabilities	39,292,421		47,044,031

Long-term debt		8,205,270		8,312,079
Mandatory redeemable series B preferred stock		18,772,628		—

Convertible Note, at fair value						Convertible Note, at fair value	7,430,000		19,400,000
Mandatorily redeemable Series B preferred stock						Mandatorily redeemable Series B preferred stock	19,520,491		19,142,908

Commitments and contingencies	Commitments and contingencies					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

Stockholders’ deficit:						Stockholders’ deficit:
Series A preferred stock, par value $0.001 per share, 75,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2020 and December 31, 2019						Series A preferred stock, par value $0.001 per share, 75,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2020 and December 31, 2019	—		—
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 69,493,836 shares issued and outstanding at March 31, 2020 and 67,105,000 shares issued and outstanding at December 31, 2019						Common stock, par value $0.001 per share, 250,000,000 shares authorized, 69,493,836 shares issued and outstanding at March 31, 2020 and 67,105,000 shares issued and outstanding at December 31, 2019	69,494		67,105
Additional paid-in capital	Additional paid-in capital	141,030,711		126,076,782		Additional paid-in capital	150,883,717		143,826,315
Accumulated deficit	Accumulated deficit	(179,461,662)		(141,557,496)		Accumulated deficit	(174,049,839)		(178,806,530)
Total stockholders' equity (deficit)		(38,364,761)		(15,422,443)
Total Liabilities and Stockholders' Equity (Deficit)		$	28,041,962	$	11,804,773
Accumulated other comprehensive income						Accumulated other comprehensive income	1,100,000		—
Total stockholders' deficit						Total stockholders' deficit	(21,996,628)		(34,913,110)

Total Liabilities and Stockholders' Deficit						Total Liabilities and Stockholders' Deficit	$	44,246,284	$	50,673,829

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Operations

~~For the Three and Nine Months Ended September 30, 2019 and 2018~~

(Unaudited)

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


	Three Months Ended March 31,
	2020		2019

Net sales	$	84,300	$	364,182

Cost of sales	1,747,975		1,397,606

Gross loss	(1,663,675)		(1,033,424)

Operating expenses
Selling, general and administrative	5,565,787		2,090,890
Research and development	1,902,236		1,362,275
Total operating expenses	7,468,023		3,453,165

Other income	864,900		—

Loss from operations	(8,266,798)		(4,486,589)

Interest (income) expense, net	(13,023,489)		1,777,583

Income (loss) before provision for income taxes	4,756,691		(6,264,172)
Provision for income taxes	—		—

Net income (loss)	$	4,756,691	$	(6,264,172)

Net income (loss) attributable to common stockholders per share - basic	$	0.07	$	(0.11)
Net income (loss) attributable to common stockholders per share - diluted	$	0.06	$	(0.11)

Weighted average number of common shares outstanding - basic	68,465,759		55,260,519
Weighted average number of common shares outstanding - diluted	83,768,820		55,260,519

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


	Three Months Ended March 31,
	2020		2019

Net income (loss)	$	4,756,691	$	(6,264,172)

Other comprehensive income
Credit risk adjustment in fair value of Convertible Note	1,100,000		—

Comprehensive income (loss)	$	5,856,691	$	(6,264,172)

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit

(Unaudited)

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, 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 Stock Additional
Paid-in
Capital Accumulated
Deficit Total
Stockholders’
Equity
(Deficit)
Number
of Shares Amount Number
of Shares Amount
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

~~Workhorse Group Inc.~~

~~Condensed Consolidated Statements of Stockholders’ Equity (Deficit) (Continued)~~

~~(Unaudited)~~

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, 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 Stock						Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income	Total Stockholders’ 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	3,226,056	3,226		—	—		2,996,509		—		—		2,999,735



Stock-based compensation	—	—		—	—		691,070		—		—		691,070
Net loss for 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 Stock Additional
Paid-in
Capital Accumulated
Deficit Total
Stockholders’
Equity
(Deficit)
Number
of Shares Amount Number
of Shares Amount
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)


	Common Stock				Series A Preferred Stock						Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income	Total Stockholders’ Deficit
	Number of Shares	Amount		Number of Shares	Amount
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	432,112	432		—	—		242,568		—		—		243,000
Common stock issued for preferred stock dividends	308,642	309		—	—		499,691		—		—		500,000
Conversion of Convertible Note	1,546,889	1,547		—	—		5,192,005		—		—		5,193,552
Common stock issued for interest on Convertible Note	101,193	101		—	—		264,111		—		—		264,212
Stock-based compensation	—	—		—	—		859,027		—		—		859,027
Net income for the three months ended March 31, 2020	—	—		—	—		—		4,756,691		—		4,756,691
Other comprehensive income	—	—		—	—		—		—		1,100,000		1,100,000
Balance as of March 31, 2020	69,493,836	$	69,494	—	$	—	$	150,883,717	$	(174,049,839)	$	1,100,000	$	(21,996,628)

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Cash Flows

~~For the Nine Months Ended September 30, 2019 and 2018~~

(Unaudited)


							Three Months Ended March 31,
		2019		2018			2020		2019
Cash flows from operating activities:	Cash flows from operating activities:					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:
Net income (loss)						Net income (loss)	$	4,756,691	$	(6,264,172)
Adjustments to reconcile net income (loss) to net cash used in operating activities:						Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation	Depreciation	291,287		251,886		Depreciation	171,761		96,687
Tooling expense						Tooling expense	353,786		—
Amortization of discount and debt issuance costs on long-term debt	Amortization of discount and debt issuance costs on long-term debt	850,800		1,576,005		Amortization of discount and debt issuance costs on long-term debt	—		129,050
Amortization of discount on Series B preferred stock		482,589		—
Amortization of discount on mandatorily redeemable Series B preferred stock						Amortization of discount on mandatorily redeemable Series B preferred stock	377,583		—
Change in fair value of Convertible Note and loss on conversion to common stock						Change in fair value of Convertible Note and loss on conversion to common stock	(5,136,448)		—
Change in fair value of warrant liability						Change in fair value of warrant liability	(9,145,000)		568,066
Change in fair value of investment in LMC						Change in fair value of investment in LMC	(864,900)		—
Dividends for mandatorily redeemable Series B preferred stock paid in common stock						Dividends for mandatorily redeemable Series B preferred stock paid in common stock	500,000		—
Interest on Convertible Note paid in common stock						Interest on Convertible Note paid in common stock	264,212		—
Stock-based compensation						Stock-based compensation	859,027		691,070

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:	Effects of changes in operating assets and liabilities:					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 and lease receivable						Accounts and lease receivable	(35,393)		(351,138)
Inventory						Inventory	(832,678)		42,818
Prepaid expenses						Prepaid expenses	55,165		225,761
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(3,128,203)		(1,065,124)		Accounts payable and accrued liabilities	1,665,484		(747,229)
Warranty liability	Warranty liability	(551,798)		—		Warranty liability	(699,094)		(147,602)

Customer deposits	Customer deposits	(72,000)		309,595		Customer deposits	(113,000)		(12,000)
Net cash used in operating activities	Net cash used in operating activities	(24,137,136)		(17,325,894)		Net cash used in operating activities	(7,822,804)		(5,768,689)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(4,001,838)		(131,318)		Capital expenditures	(463,985)		—
Proceeds on disposition of property, plant and equipment		5,000		4,800

Net cash used in investing activities	Net cash used in investing activities	(3,996,838)		(126,518)		Net cash used in investing activities	(463,985)		—

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Payments on long-term debt		—		(7,841,378)

Proceeds from long-term debt	Proceeds from long-term debt	5,854,140		7,800,000		Proceeds from long-term debt	—		4,104,140
Payment of loan issuance costs		—		(70,047)
Proceeds from issuance of series B preferred stock		25,000,000		—

Issuance of common stock	Issuance of common stock	5,928,235		16,398,662		Issuance of common stock	—		2,999,735
Exercise of warrants and options	Exercise of warrants and options	—		90,066		Exercise of warrants and options	243,000		—
Net cash provided by financing activities	Net cash provided by financing activities	36,782,375		16,377,303		Net cash provided by financing activities	243,000		7,103,875

Change in cash, cash equivalents and restricted cash		8,648,401		(1,075,109)
Change in cash and cash equivalents						Change in cash and cash equivalents	(8,043,789)		1,335,186
Cash, cash equivalents and restricted cash, beginning of the period	Cash, cash equivalents and restricted cash, beginning of the period	1,512,750		4,069,477		Cash, cash equivalents and restricted cash, beginning of the period	24,868,416		1,512,750
Cash, cash equivalents and restricted cash, end of the period		$	10,161,151	$	2,994,368
Cash and cash equivalents, end of the period						Cash and cash equivalents, end of the period	$	16,824,627	$	2,847,936

The following table provides a reconciliation of cash, cash equivalents and restricted cash to the amounts reported within the condensed consolidated balance ~~sheet:~~sheets:

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


	March 31, 2020		December 31, 2019
Cash and cash equivalents	$	16,824,627	$	23,868,416
Restricted cash held in escrow	—		1,000,000
Total cash, cash equivalents and restricted cash	$	16,824,627	$	24,868,416

Supplemental disclosure of non-cash activities:

During the three months ended March 31, 2020, the Company issued 1,546,889 shares of common stock in connection with the conversion of the Convertible Note, which were valued at $4,335,557. The Company recorded additional paid-in capital with the offset as a reduction to the fair value of the Convertible Note.

During the three months ended March 31, 2020, the decrease in fair value of the Convertible Note included a $1,100,000 adjustment attributed to changes in credit risk. The Company recorded other comprehensive income with the offset as a reduction to the fair value of the Convertible Note.

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES

~~The following accounting principles and practices are set forth to facilitate the understanding of information presented in the condensed consolidated financial statements.~~

Nature of operations ~~and principles of consolidation~~

Workhorse Group Inc. (“Workhorse”, the “Company”, “we”, “us” or “our”) is a technology company focused on providing sustainable and cost-effective solutions to the commercial transportation sector. AsWe are an American manufacturer ~~we design~~who designs and ~~build~~builds high performance ~~battery-electric vehicles and aircraft that make movement of people and goods more efficient and less harmful to the environment.~~electric vehicles. As part of our ~~solution,~~solutions, we also develop cloud-based, real-time telematics performance monitoring systems that enable fleet operators to optimize energy and route efficiency. We are currently focused on bringing the ~~N-GEN~~C-Series electric ~~cargo van~~delivery truck 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.

~~On May 3, 2019,~~Principles of consolidation

The condensed consolidated financial statements include the financial statements of the Company ~~filed an amendment to~~and its ~~Articles of Incorporation to increase its authorized shares of common stock from 100,000,000 to 250,000,000.~~wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of presentation

The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has limited revenues and a history of negative working capital and stockholders’ deficits. Our existing capital resources are expected to be sufficient to fund our operations through the ~~end~~second quarter of ~~2019.~~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 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.

In view of these matters, continuation as a going concern 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, ~~meet its future debt covenant requirements,~~ 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.~~capital and debt. Management believes the proceeds from these offerings, future offerings, 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 stock, preferred stock, and/or convertible debentures.~~financing. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.

The Marathon Credit Facility includes financial covenants that require our compliance beginning in the fourth quarter of 2019. We expect to be able to satisfy the covenant requirements either through results of operations or an available equity cure in the Credit Agreement.

In the opinion of Management, the Unaudited Condensed Consolidated Financial Statements include all adjustments that are necessary for the fair presentation of Workhorse’s 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. These 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.~~

2019.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operation or stockholders’ equity (deficit).

2. INVENTORY, NET

Inventory, net consists of the following:


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Raw materials	Raw materials	$	4,478,201	$	4,319,637	Raw materials	$	4,489,572	$	3,741,097
Work in process	Work in process	422,176		702,079		Work in process	422,176		422,176
Finished goods	Finished goods	—		—		Finished goods	—		—
		4,900,377		5,021,716			4,911,748		4,163,273
Less: Inventory reserve		2,511,389		2,488,100
Less inventory reserve						Less inventory reserve	(2,280,924)		(2,365,127)
Total inventory, net	Total inventory, net	$	2,388,988	$	2,533,616	Total inventory, net	$	2,630,824	$	1,798,146

3.INVESTMENT IN LMC

The Company has a 10 percent ownership interest in Lordstown Motors Corp. ("LMC") with a value of $13.1 million and $12.2 million as of March 31, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below. During the period, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million.

We have elected the measurement alternative allowed under generally accepted accounting principles ("GAAP") for our investment in LMC, which does not have a readily determinable fair value. 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 in LMC.

At each reporting period, we evaluate our investment in LMC to determine if there are any events or circumstances that are likely to have a significant adverse effect on the fair value 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 an impairment loss equal to the difference between the investment’s carrying value and its fair value is recognized under the measurement alternative.

LMC Transaction

On November 7, 2019, the Company entered into a transaction with LMC (the "LMC Transaction") 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. 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”).

Consideration

•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.

•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 1 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 4 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 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.

•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 owed is sold.

4. REVENUE

Revenue Recognition

Net sales include products and shipping and handling charges, net of estimates for customer allowances. 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, with the majority of revenue recognized at the point in time the customer obtains control of the products. We recognize 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.

Revenues related to repair and maintenance services 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 accounts and our historical experience with accounts receivable write-offs.

~~The Company has elected the following practical expedient allowed under ASU 2014-09. Performance~~As performance obligations are satisfied within one year from a given reporting date ~~consequently~~ we omit ~~disclosure~~disclosures of the transaction price apportioned to remaining performance obligations on open orders.

Disaggregation of Revenue

Our revenues related to the following types of business were as follows:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Automotive	Automotive	$	—	$	—	$	240,000	$	523,252	Automotive	$	—	$	240,000
Aviation	Aviation	—		—		—		—		Aviation	60,783		—
Other	Other	4,258		10,997		133,948		218,658		Other	23,517		124,182
Total revenues	Total revenues	$	4,258	$	10,997	$	373,948	$	741,910	Total revenues	$	84,300	$	364,182

5. CONVERTIBLE NOTE AND LONG-TERM DEBT

Convertible Note consists of the following:


	March 31, 2020		December 31, 2019
Convertible Note, at fair value	27,590,000		39,020,000
Less current portion	(20,160,000)		(19,620,000)
Convertible Note, net of current portion	$	7,430,000	$	19,400,000

Convertible Note

On December 9, 2019, the Company issued a $41.0 million par value Convertible Note (the "Convertible Note") due November 2022, with a stated interest rate of 4.50% per annum. The Company has elected to account for the Convertible Note using the

4. ~~LONG-TERM DEBT~~fair value option allowed under GAAP. 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.

~~Long-term debt consists~~The fair value of the ~~following:~~Convertible Note as of March 31, 2020 and December 31, 2019 was $27.6 million and $39.0 million, respectively, and the contractual principal balance as of March 31, 2020 and December 31, 2019 was $36.0 million and $40.5 million, respectively. 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 three months ended March 31, 2020, the fair value of the Convertible Note decreased $11.4 million which included a $1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $5.1 million adjustment to interest expense. The change related to credit risk was primarily caused by an increase in credit rating yield for comparable companies during the period.

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
During the three months ended March 31, 2020, $4.5 million par value of the Convertible Note was converted to 1,546,889 shares of common stock resulting in a loss of $0.9 million, which is included in interest expense.

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 ranks 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 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 15,459,016 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. The initial exercise price was $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.

Purchase Warrants

In December 31, 2018, the Company entered into a Credit Agreement (the ~~“Credit Agreement”~~"Credit Agreement"), with Marathon Asset Management, LP, on behalf of certain entities it manages, as lenders (collectively, the “Lenders”). The Credit Agreement provides the Company with a $10 million term loan (the “Tranche One Loan”) which may not be re-borrowed following repayment and (ii) a $25 million revolving loan which may be re-borrowed following repayment (the “Tranche Two Loan” together with the Tranche One Loan, the “Loans”). 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.

~~The Trance Two Loan has been classified as current, because the agreement includes a lock box and cash sweep feature, which requires current presentation of the debt.~~

~~The Credit Agreement requires the Company to maintain certain financial covenants including:~~

a.~~Maintaining a minimum of $4.0 million of liquidity;~~

b.Maintaining as of December 31, 2019 a total leverage ratio (ratio of total debt to EBITDA for the preceding four quarters) not to exceed 4.50:1.00. The total leverage ratio is adjusted in subsequent quarters as set forth in the Credit Agreement; and

c.The debt service coverage ratio (ratio of EBITDA for the last four quarters, subject to certain adjustments as defined in the Credit Agreement, to interest expense and payments for operating leases), not to exceed 1.25:1.00 as of December 31, 2019. The debt service coverage ratio is adjusted in subsequent quarters as set forth in the Credit Agreement.

~~If the Company is unable to meet its financial covenants the Credit Agreement has an equity cure available which can be used to satisfy the covenants.~~

~~The Tranche Two Loan requires that as long as there are amounts outstanding under the loan, that the Company maintains $0.9 million in a restricted cash account.~~

~~Purchase Warrants~~

LP. In conjunction with entering into the Credit Agreement, the Company issued Common Stock Purchase Warrants (“Initial Warrants”) to purchase 8,053,390 shares of common stock at an exercise price of $1.25 per share. The Credit Agreement was paid in 2019, but the Initial Warrants are ~~exercisable for cash only through~~still outstanding. Until December 31, ~~2021 and then for cash or cashless thereafter. Until the later of the repayment of all amounts outstanding under the Credit Agreement or December 31, 2021,~~2020, the Company must issue additional Warrants to the Lenders equal to 10%, in the aggregate, of any additional equity issuances on substantially the same terms and conditions of the Initial Warrants, except that (i) the expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the warrant on a cashless basis at any time.

On April 16, 2019, the Company entered into Amendment No. 1 to the Common Stock Purchase Warrants with the Lenders (collectively, the “Holders”) (the “Marathon Warrant Amendment”). Pursuant to the Marathon Warrant Amendment, unless the Company has obtained the approval of its shareholders, then 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 Amendment also provides 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 Credit Agreement.

Currently the Initial Warrants are classified as liability financial instruments and required to be marked-to-market at each balance sheet date with a corresponding charge to interest expense. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the warrant liability for the Initial Warrants was ~~$19,901,139~~$7.2 million and ~~$965,747,~~$16.3 million, respectively. Any additional warrants issued in connection with the Credit Agreement have been classified as equity instruments and are not required to be marked-to-market at each balance sheet date.

The Company has outstanding warrants issued to Arosa for debt issued in 2018. The Arosa debt was subsequently paid off on December 31, 2018, with the proceeds from the Credit Agreement. 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 dilution protection and therefore no longer met the criteria for liability classification and were reclassified to equity. As a result of the reclassification event, the $857,072 warrant liability for the Arosa warrants was reclassified to additional paid-in capital in 2019.

5. ~~DUKE FINANCING OBLIGATION~~

On November 28, 2018, the Company entered into a Sales Agreement with Duke Energy One, Inc (“Duke”) pursuant to which the Company sold Duke 615,000 battery cells (the “615,000 Cells”) for $1,340,700. The Company will continue to use the cells in the near term for the delivery of trucks to customers. Until 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.

~~On October 14, 2019, the Company exercised its option to purchase the 615,000 Cells at a price of $2.18 per cell which will close on December 1, 2019.~~

~~The Duke transaction was accounted for as a financing obligation and the Company has recorded a $1,340,700 liability.~~

On November 28, 2018, in consideration for consenting to the Company selling the 615,000 Cells to Duke, which served as collateral for Arosa for their Loan Agreement, the Company issued Arosa 2,000,000 shares of common stock and restruck the exercise price of warrants previously issued to $1.25 per share.

6. ~~MANDATORY~~MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK

On June 5, 2019, ~~(the “Closing Date”),~~ the Company closed ~~Subscription Agreements with institutional investors~~agreements for the ~~purchase~~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 hold 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~~are 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 share ~~which was in excess of the closing price of $1.60 on May 30, 2019. They are immediately exercisable~~ and ~~will~~ expire seven years from the date of issuance.

In June 2023, the Company is required to redeem all the outstanding shares of the Preferred Stock at the Stated Value, plus accrued and unpaid dividends. At any time prior to such date, the Company ~~subject to the repayment and retirement of the Credit Agreement,~~ may redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid dividends (“Optional Redemption”). Notwithstanding the foregoing, the Company may elect an Optional Redemption prior to the fourth anniversary of the Closing Date so long as it obtains from the lenders to the Credit Agreement consent to such Optional Redemption.

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 is mandatorily redeemable, it is classified as a liability on the condensed consolidated balance ~~sheet.~~sheets. All dividends payable on the Preferred Stock are classified as interest expense.

The Preferred Stock and Warrants ~~have been determined to be~~are considered freestanding financial instruments and have been accounted for separately. The Warrants are considered equity instruments and ~~are~~ not ~~required to be recorded as a liability and~~ 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~~Warrants was recorded as an increase to ~~Additional Paid-In Capital~~additional paid-in capital and a discount of the Preferred Stock. The discount ~~will be~~is being amortized to interest expense using the effective interest method through May 2023. Amortization of the discount was for the three months ended March 31, 2020 was $0.4 million.

7. STOCK-BASED COMPENSATION

The Company maintains, as ~~adopted~~approved by the board of directors, the 2019 Stock Incentive Plan ~~as well as previous years plans~~ (the ~~“Plans”~~"Plan") providing for the issuance of ~~equity~~stock-based 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.~~grant date. Awards under the ~~plans~~Plan may be either vested or unvested ~~options.~~

~~In addition to the~~options, or unvested restricted stock. The Plan has authorized 8,000,000 shares for issuance of stock-based awards. As of March 31, 2020, there were shares available for issuance of future stock awards, ~~issued~~which includes 8,042,278 shares available under the ~~Plans, the Company has granted, on various dates, stock~~2019 and 2017 incentive plans.

Stock-based compensation expense

The following table summarizes stock-based compensation expense:


	Three Months Ended March 31,
	2020		2019
Stock options	$	80,430	$	691,070
Restricted stock	778,597		—
Total stock-based compensation	$	859,027	$	691,070

Stock options ~~to directors, officers, consultants and employees to purchase common stock of the Company. The terms, exercise prices and vesting of these awards vary.~~

The following table summarizes option activity for directors, officers, consultants and employees:

Outstanding Stock Options
Options Available for Grant Number of Options Outstanding 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
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


	Number of Options	Weighted Average Exercise Price per Option		Weighted Average Grant Date Fair Value per Option	Weighted Average Remaining Contractual Life (Years)
Balance, December 31, 2019	3,725,000	$	2.32
Granted	—
Exercised	—

Forfeited	—
Expired	(12,500)	2.74
Balance, March 31, 2020	3,712,500	$	2.31

Number of options exercisable at March 31, 2020	3,128,500	$	2.38		5.4

As of March 31, 2020, unrecognized compensation expense was $0.4 million for unvested options which is expected to be recognized over the next 2.0 years.

Restricted stock

The following table summarizes restricted stock activity:


	Number of Unvested Shares	Weighted Average Grant Date Fair Value per Share
Balance, December 31, 2019	1,768,726	$	2.57
Granted	—	—
Vested	(282,112)	2.54
Forfeited	—	—
Balance, March 31, 2020	1,486,614	$	2.57

As of March 31, 2020, unrecognized compensation expense was $3.4 million for unvested restricted stock awards which is expected to be recognized over the next 2.2 years.

8. INCOME TAXES

As the Company has not generated taxable income since inception, the cumulative deferred tax assets remain fully reserved, and no provision or liability for federal or state income taxes has been included in the financial statements.

9. EARNINGS PER SHARE

Basic ~~loss~~earnings per share is computed by dividing net ~~loss~~income (loss) available to common ~~shareholders~~stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted earnings per share ~~are~~is 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. ~~For all periods presented, due to~~The if converted method is used for determining the ~~Company’s net losses, all~~impact of the ~~common stock equivalents were anti-dilutive and excluded from the calculation of diluted loss per share.~~Convertible Note.

The following table shows the computation of basic and diluted earnings per share:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
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)
Net income (loss)										Net income (loss)	$	4,756,691	$	(6,264,172)

Net income (loss) attributable to common stockholders										Net income (loss) attributable to common stockholders	$	4,756,691	$	(6,264,172)

Basic weighted average shares outstanding	Basic weighted average shares outstanding	66,176,921		46,192,471		63,566,295		46,192,471		Basic weighted average shares outstanding	68,465,759		55,260,519
Dilutive effect of options and warrants	Dilutive effect of options and warrants	—		—		—		—		Dilutive effect of options and warrants	15,303,061		—

Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	66,176,921		46,192,471		63,566,295		46,192,471		Diluted weighted average shares outstanding	83,768,820		55,260,519

Anti-dilutive options and warrants excluded from diluted average shares outstanding	Anti-dilutive options and warrants excluded from diluted average shares outstanding	32,917,619		4,558,927		32,917,619		4,558,927		Anti-dilutive options and warrants excluded from diluted average shares outstanding	5,066,931		22,752,782

Excluded from the table above are the warrant shares related to the Convertible Note, which represent 13,278,689 warrants calculated using the if converted method. The warrants are issuable at the option of the Company following the full or partial redemption of the Convertible Note. In the event the Convertible Note is redeemed, the percentage of the warrants that will be issued upon such redemption will be equal to the percentage of the principal amount at such time. Therefore, as the principal balance of the Convertible Note decreases, the number of potential warrants to be issued decreases proportionally.

Also excluded from the table above are the shares on the conversion of the Convertible Note, which represent 14,137,319 shares of common stock calculated using the if converted method. The Convertible Note is convertible into shares of the Company's common stock.

10. RECENT ACCOUNTING DEVELOPMENTS

Accounting Guidance Not Yet Adopted ~~in 2019~~

In ~~February~~June 2016, the FASB issued ~~ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize in~~an accounting standard update that revises the ~~statement~~methodology for measuring credit losses on financial instruments and the timing of ~~financial position a liability to make lease payments (“the lease liability”) and a right-of-use asset representing its right to use the underlying asset~~when such losses are recorded. The guidance is effective for the ~~lease term, initially measured at the present value 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 methodCompany on January 1, ~~2019.~~2023, including interim periods and should be applied on a modified retrospective basis. The Company expects that the adoption of this ~~standard did~~guidance will not have a material impact on the ~~condensed consolidated~~Company's financial ~~statements.~~condition and operations.

11. ~~SHARE HOLDERS~~STOCKHOLDERS' EQUITY ~~(DEFICIT)~~

~~2018 Stock Offerings~~

On June 22, 2017, the Company entered into an at the market issuance sales agreement with Cowen and Company, LLC (“Cowen”) under which the Company may offer and sell shares of its Common Stock having an aggregate offering price of up to $25 million. For the nine months ended September 30, 2019 and 2018, the Company issued 1,609,373 and 1,794,621 shares under this agreement for net proceeds of approximately $1.5 million and $3.7 million, respectively. This agreement was canceled in the first quarter of 2019.

On April 26, 2018, the Company closed Subscription Agreements with accredited investors (the “April 2018 Accredited Investors”) who 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 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 all outstanding Warrants to Purchase Common Stock of the Company issued on September 18, 2017 (collectively, the “Warrants”) entered into exchange agreements, pursuant to which the Company issued 1,968,736 shares of the Company’s 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 deemed dividend of $765,179 which represents the fair value transferred to the Warrant holders from 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 increased the net loss to common shareholders by the same amount.

On August 9, 2018, the Company entered into an Underwriting Agreement with National Securities Corporation (the "Underwriter"), for the public offering of 9,000,000 shares of our Common Stock at a price per share of $1.15 for net proceeds of $9.6 million. On August 14, 2018, the Underwriter exercised its over-allotment option and sold an additional 1,288,800 shares of Common Stock at a price per share of $1.15 for net proceeds of $1.4 million.

2019 Stock Offerings

In February 2019, 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 ~~less~~ 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) ~~such that~~resulting in the effective purchase price per share isbeing 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~~Investors which was accounted for as a $86,207 deemed dividend. The deemed dividend was recorded as a reduction of ~~Retained Earnings~~retained earnings and increase in ~~Additional Paid-in-Capital~~additional paid-in-capital and increased the net loss to common shareholders 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 ~~$0.9501,~~$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,~~June 22, 2017, the Company ~~closed a registered public offering for~~entered into an at the ~~sale of 3,957,432~~market issuance sales agreement with Cowen and Company, LLC under which the Company may offer and sell shares of ~~Common Stock for a purchase~~its common stock having an aggregate offering price of ~~$0.74 per share. The net proceeds~~up to ~~the Company were approximately $2.9~~$25.0 million.

1213

For the three months ended March 31, 2019, the Company issued 1,609,373 shares under this agreement for net proceeds of approximately $1.5 million. This agreement was canceled in the first quarter of 2019.

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.~~common stock. The following table summarizes warrant ~~activity for~~activity:


	Number of Warrants	Weighted Average Exercise Price per Warrant
Balance, December 31, 2019	30,527,776	$	1.82
Granted, Marathon debt	34,293	1.78
Exercised	(173,809)	1.59
Expired	(43,157)	1.40
Balance, March 31, 2020	30,345,103	$	1.82

The above table excludes 15,459,016 warrants issued with the ~~period:~~

Number 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
Convertible Note. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note.

12. OTHER TRANSACTION

On October 31, 2019, the Company and ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement ("Purchase Agreement") to purchase certain assets of Seller ("Acquired Assets") and assume certain liabilities of Seller. Upon execution 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 subject to adjustment if the value of the Escrow Shares is less than $5.3 million or greater than $7.9 million on certain dates. In January 2020, the transaction closed and the initial payment of $1.0 million was released from the Escrow Account and recorded as a selling expense. The transaction will be accounted for as customer acquisition costs as the primary asset acquired is the right to bid on 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.

The purchase price for the Acquired Assets was $7.0 million, $1.0 million of 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.

13. 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.

The Company's warrant liability was 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:


	March 31, 2020
Warrant liability, beginning of year	$	16,335,000
Fair value of new warrants issued	—
Change in fair value for the period	(9,145,000)

Warrant liability, end of period	$	7,190,000

The Company's Convertible Note was 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 model includes: the estimates of the redemption dates; credit 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:


	March 31, 2020
Convertible Note, beginning of year	$	39,020,000

Conversion of Convertible Note into common stock	(4,335,557)
Change in fair value for the period	(5,994,443)
Change in fair value for the period, attributed to changes in credit risk	(1,100,000)
Convertible Note, end of period	$	27,590,000

~~12.~~14. SUBSEQUENT EVENTS

The Company evaluates events and transactions occurring subsequent to the date of the condensed consolidated financial statements for matters requiring recognition or disclosure in the condensed consolidated financial statements. The accompanying condensed consolidated financial statements consider events through the date on which the condensed consolidated financial statements were available to be issued.

~~SureFly~~Paycheck Protection Program Term Note

On October 1, 2019, the Company entered into an agreement for the sale of SureFly™ for $4.0 million. The completion of the sale is contingent on receiving approval from the Lenders of the Credit Agreement.

~~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 shall be payable from the Escrow Account upon satisfaction of certain conditions, and the 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 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.

~~Lordstown Motors~~

~~On November 7, 2019,~~April 14, 2020, the Company entered into a ~~transaction~~Paycheck Protection Program Term Note (“PNC Note”) with ~~Lordstown Motors Corp.~~PNC Bank, N.A. (“~~LMC”~~PNC”) ~~pursuant to which~~under the Paycheck Protection Program (the "Program") of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by the U.S. Small Business Administration. The Company received total proceeds of $1.4 million from the PNC Note. In accordance with the requirements of the CARES Act, the Company ~~agreed~~will use proceeds from the PNC Note primarily for payroll costs. Interest accrues on the PNC Note at the rate per annum of 1.00%. The Company may apply to ~~grant LMC a perpetual and worldwide license to certain intellectual property relating~~PNC for forgiveness of the amount due on the PNC Note which shall be an amount equal to the ~~Company’s W-15 electric pickup truck platform~~sum of payroll costs, mortgage interest, rent obligations and ~~its related technology~~covered utility payments incurred during the eight weeks following disbursement under the PNC Note.

During the period from April 14, 2020 through the six-month anniversary of the date of the PNC Note (the ~~“Licensed Intellectual Property”~~“Deferral Expiration Date”), neither principal nor interest shall be due and payable during this deferral period. On the Deferral Expiration Date, the outstanding principal of the PNC Note that is not forgiven under the Program (the “Conversion Balance”) shall convert to an amortizing term loan. On November 15, 2020, all accrued interest that is not forgiven under the Program shall be due and payable. Additionally, on November 15, 2020 and continuing on the 15th day of each month thereafter until April 13, 2022 equal installments of principal shall be due and payable, each in ~~exchange for royalties, equity interests in LMC, and other consideration~~an amount determined by dividing the Conversion Balance by 18 (the ~~“LMC Transaction”~~“Monthly Principal Amount”). ~~LMC~~Interest shall be payable at the same time as the Monthly Principal Amount. Any outstanding principal and accrued interest shall be due and payable in full on April 13, 2022.

Impact of COVID-19 Pandemic

In December 2019, a novel coronavirus disease (“COVID-19”) was ~~founded~~reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

As of the date of this filing, our locations and primary suppliers continue to be operating. However, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We may experience constrained supply or other business disruptions that could materially impact our business, results of operations and overall financial performance in future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

1316

~~by Stephen S. Burns (“Mr. 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 (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 cargo vans 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 1 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 1 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 exceed the amount paid as the Royalty Advance. Upon completion 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 Company 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 agreed to issue 10 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 two years. The Company is subject to certain restrictions on transferring LMC’s equity for this ~~two-year period. Under the Voting Agreement, the Company has the right to designate 1 director to LMC’s board of directors, subject to certain limitations.~~

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Quarter Highlights

We are 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~~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~~C-Series electric ~~cargo van~~delivery truck 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.~~

Workhorse electric delivery ~~vans~~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 ~~50%~~60% as compared to fossil-fueled trucks.

We are an OEM capable of manufacturing Class 3-6 commercial-grade, medium-duty ~~truck chassis~~trucks at our Union City, Indiana facility, marketed under the Workhorse® brand. Workhorse last mile delivery ~~vans~~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 ~~E-GEN Range-Extended Electric~~C-Series delivery ~~vans~~trucks will save over ~~$150,000~~$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 ~~four-year~~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 ~~van~~truck platform. As a key strategy, we have developed the Workhorse ~~N-GEN~~C-Series platform, which has been accelerated from our previous development efforts.

The Workhorse ~~N-GEN~~C-Series electric ~~cargo van~~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. 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,~~delivery truck, and early indications of fleet interest are significant. We expect the ~~N-GEN~~C-Series trucks will be supported by our Ryder Systems partnership. Using ~~N-GEN~~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.

As a direct result of the USPS award and development efforts, Workhorse has begun development on the Workhorse W-15, a medium- and light-duty pickup truck platform aimed at commercial fleets. The W-15 pickup truck powertrain is a smaller version of its sister vehicle, the medium-duty battery electric powertrain. Workhorse is currently evaluating licensing opportunities with respect to its W-15 light duty pickup truck platform.

Our HorseFly™ delivery drone is a custom designed, purpose-built drone that is fully integrated in our electric trucks. HorseFly is ~~an octocopter~~ 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.

~~SureFly™ is our entry into~~ As part of the ~~emerging VTOL market. It is designed to be a two-person, 400-pound payload aircraft with a hybrid internal combustion/electric power generation system. Our approach~~divestiture of SureFly in the design is to build the safest and simplest way to fly rotary wing aircraft in the world. We believe it is a practical answer to personal flight, as well as, commercial transportation segments, including air taxi series, agriculture and beyond.

~~SureFly~~

~~On October 1,~~November 2019, the Company ~~entered into an agreement for the sale of SureFly™ for $4.0 million. The completion of the sale is contingent on receiving approval from the Lenders of the Credit Agreement.~~

~~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) onformed 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.

~~Lordstown Motors~~

~~On November 7, 2019, the Company entered into a transaction with Lordstown Motors Corp. (“LMC”) pursuant~~50/50 joint venture to which the Company agreed to grant 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”) 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.

~~In connection with the LMC Transaction, the following agreements (collectively, the “Agreements”) were entered into:~~we contributed our HorseFly technology.

•~~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 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 sales price of the first 200,000 Vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceed the amount paid as the

Royalty Advance. Upon completion 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 Company 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 agreed to issue 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 two years. The Company is subject to certain restrictions on transferring LMC’s equity for this two-year period. Under the Voting Agreement, the Company has the right to designate one director to LMC’s board of directors, subject to certain limitations.

Results of Operations

Our condensed consolidated statements of operations data is as follows:


											Three Months Ended March 31,
		Three Months Ended September 30,						Nine Months Ended September 30,							2020	2019
		2019		2018		2019		2018
Net sales	Net sales	$	4,258	$	10,997	$	373,948	$	741,910	Net sales	$	84,300	$	364,182

Cost of sales	Cost of sales	1,423,904		1,476,822		3,751,674		4,847,097		Cost of sales	1,747,975		1,397,606
Gross loss	Gross loss	(1,419,646)		(1,465,825)		(3,377,726)		(4,105,187)		Gross loss	(1,663,675)		(1,033,424)

Operating expenses:
Operating expenses										Operating expenses
Selling, general and administrative	Selling, general and administrative	2,551,406		3,363,103		6,638,350		8,766,452		Selling, general and administrative	5,565,787		2,090,890
Research and development	Research and development	1,640,454		1,449,497		4,219,456		5,681,840		Research and development	1,902,236		1,362,275
Total operating expenses	Total operating expenses	4,191,860		4,812,600		10,857,806		14,448,292		Total operating expenses	7,468,023		3,453,165

Other income										Other income	864,900		—

Loss from operations	Loss from operations	(5,611,506)		(6,278,425)		(14,235,532)		(18,553,479)		Loss from operations	(8,266,798)		(4,486,589)

Interest expense, net		5,882,081		(792,872)		23,582,427		259,177
Interest (income) expense, net										Interest (income) expense, net	(13,023,489)		1,777,583

Net loss		$	(11,493,587)	$	(5,485,553)	$	(37,817,959)	$	(18,812,656)
Income (loss) before provision for income taxes										Income (loss) before provision for income taxes	4,756,691		(6,264,172)
Provision for income taxes										Provision for income taxes	—		—

Net (income) loss										Net (income) loss	$	4,756,691	$	(6,264,172)

Net Sales

Net sales for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$4,258 and $10,997, respectively.~~

~~Net sales for the nine months ended September 30, 2019 and 2018 were $0.4~~$0.1 million and ~~$0.7~~$0.4 million, respectively. The decrease in net sales was primarily due to a strategic shift to development of the C-Series, which resulted in a decrease in volume of trucks ~~sold partially offset by improved pricing in 2019.~~sold.

Cost of Sales

Cost of sales for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$1.4~~$1.7 million and ~~$1.5~~$1.4 million, respectively. The cost of sales ~~decrease~~increase was primarily due to ~~lower employee-related~~an increase in tooling costs ~~due to a reduction in headcount.~~

~~Cost of sales~~incurred for the nine months ended September 30, 2019 and 2018 were $3.8 million and $4.8 million, respectively. The cost of sales decrease was primarily due to a decrease in volume of trucks sold due to strategic shift to the developmentproduction of the ~~N-GEN platform.~~C-Series.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses during the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$2.6~~$5.6 million and ~~$3.4~~$2.1 million, respectively. The ~~decrease is~~increase in SG&A expenses was primarily due to ~~lower spending for marketing~~recognition of $1.0 million of selling expense, higher employee-related costs and ~~employee-related costs.~~

~~SG&A expenses during the nine months ended September 30, 2019 and 2018 were $6.6 million and $8.8 million, respectively. The decrease related primarily to lower~~higher spending in areas such as ~~marketing and employee-related costs.~~

contract labor.

Research and Development Expenses

Research and development (“R&D”) expenses during the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$1.6~~$1.9 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.~~

~~R&D expenses during the nine months ended September 30, 2019 and 2018 were $4.2 million and $5.7 million, respectively. The decrease in R&D expenses is~~primarily due to the ~~decrease in prototype and product~~finalization of the design ~~expenses for our bid for a governmental contract and SureFly.~~of the C-Series.

Interest (Income) Expense, Net

Interest (income) expense, net is comprised of the following:


	Three Months Ended March 31,
	2020		2019

Contractual interest expense	$	922,838	$	933,725
Amortization of discount and debt issuance costs	377,584		281,586

Adjustment to fair value of warrant liability	(9,145,000)		568,066
Adjustment to fair value of Convertible Note	(5,136,448)		—
Other	(42,463)		(5,794)
Total interest (income) expense, net	$	(13,023,489)	$	1,777,583

Interest (income) expense, net for the three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was ~~$5.9~~$(13.0) million and ~~$(0.8)~~$1.8 million, respectively. The ~~increase~~change was primarily attributable to a ~~$4.0~~$9.1 million mark-to-market adjustment in ~~2019 and a $1.5 million negative mark-to-market adjustment in 2018~~2020 for warrants issued to ~~lenders.~~lenders due to the change in the stock price during the first quarter. In addition there ~~were higher levels~~was a change in the fair value of ~~debt year-over-year.~~

~~Interest expense, net~~the Convertible Note of approximately $5.1 million for the ~~nine~~three months ended September 30, 2019 and 2018 was $23.6 million and $0.3 million, respectively. The increase was primarily attributable a $19.1 million mark-to-market adjustment in 2019 and a $1.5 million negative mark-to-market adjustment in 2018 for warrants issued to lenders. In addition there were higher levels of debt year-over-year.March 31, 2020.

Liquidity and Capital Resources

Cash Requirements

From inception, we have financed our operations primarily through sales of equity securities and ~~borrowings.~~issuance of debt. We have ~~consumed substantial amounts of~~utilized this capital for research and development and to ~~date as we continue our R&D activities~~fund designing, building and ~~manufacturing our vehicles.~~delivering vehicles to customers and for working capital purposes.

As of ~~September 30, 2019,~~March 31, 2020, we had approximately ~~$9.3~~$16.8 million in cash and cash equivalents, as compared to approximately ~~$1.5~~$23.9 million as of December 31, ~~2018, an increase~~2019, a decrease of ~~$7.7~~$7.1 million. The ~~increase~~decrease in cash and cash equivalents was primarily attributable to spend related to our ramp-up of the ~~$25.0 million sale of Series B Preferred stock, the amount drawn on the Marathon Tranche Two debt~~C-Series, including contract labor, employee-related costs and ~~sales of our common stock. These cash inflows were partially offset by the operating loss for the period.~~

We believe our existing capital resources ~~($9.3 million of cash and cash equivalents at September 30, 2019) and our Marathon revolving credit facility~~ will be sufficient to support our current and projected funding requirements through the ~~end~~second quarter of ~~2019. We have based this estimate on assumptions that may prove to~~2020 at which time additional funding will 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.required.

Our operations will require 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.~~debt financings. 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 to 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 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.

Insufficient funds have required and may continue to cause us to delay, scale back or eliminate some or all of our research or development programs, limit our sales activities, limit or cease production or negatively impact our operations.

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we maintained an investment ~~portfolio primarily~~ in a bank money market ~~funds.~~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


		Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018			2020		2019
Net cash used in operating activities	Net cash used in operating activities	$	(24,137,136)	$	(17,325,894)	Net cash used in operating activities	$	(7,822,804)	$	(5,768,689)
Net cash used in investing activities	Net cash used in investing activities	$	(3,996,838)	$	(126,518)	Net cash used in investing activities	$	(463,985)	$	—
Net cash provided by financing activities	Net cash provided by financing activities	$	36,782,375	$	16,377,303	Net cash provided by financing activities	$	243,000	$	7,103,875

Cash Flows from Operating Activities

Our cash flows from operating activities are affected by our cash investments to support ~~our~~the business in research and development, manufacturing, selling, general and ~~administration and interest expense.~~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 ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~net cash used in operating activities was ~~$24.1~~$7.8 million and ~~$17.3~~$5.8 million, respectively. The increase in net cash used in operations ~~in 2019~~during the three months ended March 31, 2020 as compared to ~~2018~~2019 was ~~mainly due~~primarily attributable to ~~changes in prepaid expenses~~spend related to our ramp-up of the C-Series, including contract labor, employee-related costs and ~~deposits, accounts payable and accrued liabilities.~~inventory build.

Cash Flows from Investing Activities

During the ~~nine~~three months ended ~~September 30, 2019 and 2018,~~March 31, 2020, net cash used in investing activities was ~~$4.0~~$0.5 million, ~~and $0.1 million, respectively. The increase in cash flows used in investing activities~~while in 2019 it was ~~primarily driven by investing in~~negligible. The Company had capital expenditures of $0.5 million for tooling for ~~new products in 2019.~~the production of the C-Series truck.

Cash Flows from Financing Activities

During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ net cash provided by financing activities was ~~$36.8~~$0.2 million and ~~$16.4~~$7.1 million, respectively.

The ~~following significant~~decrease in net cash provided by financing activities ~~took place in 2019 and 2018:~~

~~2019~~

•~~Sale of Series B Preferred Stock with $25.0 million of proceeds~~

•~~$5.8 million drawn on the Marathon Tranche Two loan~~

•~~$5.9~~was primarily driven by $4.1 million of proceeds ~~received~~ from ~~the sale~~revolving loans and $3.0 million of proceeds from issuance of common stock

~~2018~~

•~~$16.3 million of proceeds received from~~ during the ~~sale of common stock~~three months ended March 31, 2019.

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 Policies

Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations. Our Unaudited Condensed Consolidated Financial Statements are prepared in conformity with GAAP and follow general practices within the industry in which we operate. The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates. Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” ~~We have made no significant changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2018, except as follows:~~

~~Warrant Liability~~

We account for certain common stock warrants that are outstanding as a liability at fair value which is marked to market at the end of each reporting period. The liability is subject to remeasurement at each balance sheet date until the warrants are exercised or expire and 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 model which includes various inputs, including the market price of our common stock on the balance sheet date and estimated volatility of our common stock. Any significant change in the market price of our common stock may significantly change the value of the liability and impact our results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of our quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risks” included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no material changes to the information provided in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

~~The Company’s~~Our management, with the participation of ~~the Company’s Chief~~our Principal Executive Officer and ~~Chief~~Principal Financial Officer, has evaluated the effectiveness of ~~the Company’s~~our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on ~~that~~such evaluation, our ~~management, including our Chief~~Principal Executive Officer and ~~Chief~~Principal Financial Officer have concluded that, as of the end of the covered by this Quarterly Report, our disclosure controls and procedures were ~~not effective due to material weaknesses in our internal control over financial reporting that existed as of September 30, 2019, as discussed below.~~

~~As previously disclosed in our Annual Report on Form 10-K for the 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.~~

With respect to our internal control over financial reporting, these material weaknesses have been and continue to be discussed among management and our Audit Committee. Management has moved forward and is revising and improving our internal control over financial reporting until the material weaknesses in internal control over financial reporting are remediated.

~~Management’s specific remediation to address these material weaknesses will and has included among other items:~~

•~~Complete implementation of the ERP system modules covering purchase orders and inventory.~~

•Hire an international accounting firm to assist the company to perform a broad-based review of our internal control environment including the identification of controls gaps and implementation of controls to remediate those gaps.

•~~Adding additional resources to strengthen our accounting and finance function~~

As of September 30, 2019, the Company has substantially completed its review of the design of internal controls and is in process of implementing enhancements to its internal controls over financial reporting to address any gaps identified during the review of design. In addition, the Company has evaluated the design and operation of control activities and procedures associated with user and administrator access to our Information Technology (“IT”) systems, including removing all inappropriate IT system access associated with information technology general controls ("ITGCs"). We have evaluated and improved change management and computer operation control activities that contributed to the material weakness.

We believe the 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 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.

We assessed the material weaknesses’ impact to the condensed consolidated financial statements to ensure they were prepared in accordance with GAAP and present fairly the condensed consolidated financial position, financial results of operations and cash flows as of and for the three months ended 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.effective.

Changes in Internal Control over Financial Reporting

There 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) during the quarter ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in legal proceedings incidental to the conduct of our business. ~~We do not believe that any liability that may result from these~~Material legal proceedings ~~will have a~~which arose, or in which there were material ~~adverse effect on our Unaudited Condensed Consolidated Financial Statements.~~ developments, during the three months ended March 31, 2020 are discussed below.

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~~6,942,944 and, 8,273,474. On ~~October~~February 28, ~~2019,~~2020, the ~~Company filed its Answer, Affirmative Defenses and Counterclaims.~~Court ordered a Settlement Conference between the parties for May 22, 2020 before the Magistrate Judge assigned to the case. Management intends to defend vigorously, but is also pursuing whether the lawsuit can be settled. Management of the Company believes this lawsuit is baseless and, ~~intends~~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 ~~itself vigorously.~~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.

On March 20, 2020, the Company filed a Complaint against Outlast Technologies LLC, a manufacturer of battery thermal management matrix products, in the United States District Court for the District of Colorado (Case No. 1:20-cv-00774-NRN) claiming breaches of the implied warranty against infringement and implied warranty for a particular purpose. The Company is seeking damages to be assessed at trial. The products at issue are the battery bricks that the Company is being accused of patent infringement over in the All Cell litigation described above.

ITEM 1A. RISK FACTORS

For a detailed discussion of risk factors affecting us, see “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. There have been no material changes in the current period regarding our risk factors, other than the addition of the following:

We face various risks related to health epidemics such as the global COVID-19 pandemic, which may have material adverse consequences on our operations, financial position, cash flows, and those of our customers and suppliers.

We face adverse effects related to the global COVID-19 pandemic, including disruption and volatility in the global capital markets, disruption in our global supply chain and delays in our overall manufacturing activities. We would expect the COVID-19 pandemic to adversely affect our operations if significant portions of our workforce are unable to work effectively due to illness, quarantines, government actions, facility closures, or other restrictions in connection with the COVID-19 pandemic. Additionally, our financial position, supply chain, liquidity, cash flow and customer orders would also face pressures for at least the balance of this fiscal year.

Substantially all of our operations and production activities have remained operational during the COVID-19 pandemic. We believe our facilities are considered essential activities exempt from closure directives. However, they are subject to various local and national directives curtailing operations, requiring work from home and social distancing which otherwise could impact the efficiency of our operations. Such directives could change at any time.

We continue to monitor the situation, assess further possible implications to our operations, supply chain, liquidity, cash flow and customer orders, and take actions in an effort to mitigate adverse consequences.

Recognizing the unprecedented nature, scale and uncertainty associated with this global health crisis, the duration and extent of the on-going impact cannot be reasonably estimated at this time.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~February 2019 Private Placement~~Preferred Dividends

Commencing February 11, 2019, the Company entered into and closed Subscription Agreements with accredited investors (the “February 2019 Accredited Investors”) pursuant to which the February 2019 Accredited Investors purchased 1,616,683 shares of the Company’s common stock for a purchase price of $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 at a per share purchase was $0.9501, which was above the closing price the date prior to close. They did not receive the Down Round protection.

~~Series B Preferred Stock Placement~~

~~Commencing May 31, 2019 through~~On June 5, 2019, the Company ~~entered into Subscription Agreements with institutional investors pursuant to which~~closed agreements for the ~~investors for an aggregate purchase price~~sale of ~~$25,000,000 purchased~~ 1,250,000 units consisting of ~~(i)~~ one ~~newly-issued~~ share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a ~~par value of $0.001 per share (the “Preferred Stock”), and (ii) a~~ common stock purchase warrant to purchase 7.41 shares of the common stock ~~par value $0.001 per share, of the Company.~~ (the “Warrants”). for an aggregate purchase price of $25.0 million. The ~~closing with respect to approximately $15,000,000 occurred on May 31, 2019 and the balance of approximately $10,000,000 will close on June 10, 2019.~~

~~The rights, preferences, privileges and limitations of the~~ Preferred Stock ~~are set forth in a certificate of designation filed by the Company with the Secretary of State of the State of Nevada (the “Certificate of Designation”).~~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% ~~simple interest~~ per annum on the Stated ~~Value of the Preferred Stock.~~Value. Accrued dividends will be payable quarterly in shares of common stock of the Company based on a fixed share price of ~~$1.62, which was~~$1.62. During the ~~average closing price of the Company’s common stock on the five trading days immediately preceding May~~quarter ended March 31, ~~2019 and in excess of the closing price of $1.60 on May 30, 2019.~~

~~The Preferred Stock is not convertible and does not hold voting rights. Upon any liquidation, dissolution or winding up of~~2020, the Company ~~liquidation~~issued 308,642 shares of ~~the Company’s assets will be made in the following order of priority: (a) first, payment or provision for payment of debts and other liabilities; (b) second, payment~~common stock to the holders of the Preferred ~~Stock an amount with respect to each share of~~Stock.

Warrant Exercise

During the ~~Preferred Stock’s Stated Value plus any accrued but unpaid dividends thereon; and (c) third, payment to the holders of common stock.~~

~~On the fourth anniversary of the Closing Date,~~first quarter ended March 31, 2020, the Company shall redeem all the outstanding shares of the Preferred Stock at the Stated Value, plus accrued and unpaid dividends. At any time prior to such date, the Company subject to the repayment and retirement, in accordance with its terms, of the Credit Agreement dated as of December 31, 2018 (the “Credit Agreement”), among the Company, as the borrower, the lenders thereto and Wilmington Trust, National Association, as Agent, the Company may, in its sole discretion, redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid

dividends (“Optional Redemption”). Notwithstanding the foregoing, the Company may effect an Optional Redemption prior to the fourth anniversary of the Closing Date so long as it obtains from the lenders to the Credit Agreement their prior written consent to such Optional Redemption.

The Warrants have an exercise price of $1.62 per share, which was in excess of the closing price of $1.60 on May 30, 2019, are immediately exercisable and will expire seven years from the date of issuance.

~~Notwithstanding anything herein to the contrary, the aggregate number of~~issued 23,809 shares of common stock ~~issued~~ in ~~payment of dividends on~~connection with the ~~Preferred Stock when added to the number of shares of common stock issued upon~~ exercise of ~~any warrants shall not exceed 19.9%~~Common Stock Purchase Warrants in consideration 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 in accordance with applicable rules of the NASDAQ Capital Market.$33,333.

The offer, sale and issuance of the above securities was made to accredited investors and the Company relied upon the exemptions contained in Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D promulgated thereunder 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit No.						Description
31.1*						Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*						Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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)

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	WORKHORSE GROUP INC.

Dated: ~~November 8, 2019~~May 6, 2020	By:	/s/ Duane A. Hughes
		Name: Duane A. Hughes Title: Chief Executive Officer (Principal Executive Officer)


Dated: ~~November 8, 2019~~May 6, 2020	By:	/s/ ~~Paul Gaitan~~Steve Schrader
		Name: ~~Paul Gaitan~~Steve Schrader Title: Chief Financial Officer (Principal Financial ~~and~~Officer)


Dated: May 6, 2020	By:	/s/ Gregory T. Ackerson
		Name: Gregory T. Ackerson Title: Corporate Controller (Principal Accounting Officer)

2625


	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


	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


		Outstanding Stock Options
	Options Available for Grant	Number of Options Outstanding	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
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


	Number 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