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~~June 30, ~~2019~~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,~~comp any, 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)~~

August 4, 2020, was 105,134,924.

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 Loss	3
	Condensed Consolidated Statements of Stockholders’ ~~Equity (Deficit)~~Deficit	34
	Condensed Consolidated Statements of Cash Flows	56
	Notes to Condensed Consolidated Financial Statements	68

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1519
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2123
Item 4.	Controls and Procedures	2123

PART II	OTHER INFORMATION	2325

Item 1.	Legal Proceedings	2325
Item 1A.	Risk Factors	2325
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2326
Item 3.	Defaults Upon Senior Securities	2426
Item 4.	Mine Safety Disclosures	2426
Item 5.	Other Information	2426
Item 6.	Exhibits	2527
	SIGNATURES	2628

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~~


							June 30, 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	$	26,197,831	$	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 June 30, 2020 and December 31, 2019						Accounts receivable, less allowance for doubtful accounts of $0 at June 30, 2020 and December 31, 2019	42,577		7,921
Lease receivable, current						Lease receivable, current	33,100		33,100
Inventory, net	Inventory, net	2,388,988		2,533,616		Inventory, net	4,176,289		1,798,146
Prepaid expenses and deposits		6,355,690		2,274,595
Prepaid expenses						Prepaid expenses	4,752,206		4,812,088
Total current assets	Total current assets	18,948,689		6,369,232		Total current assets	35,202,003		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	7,082,138		6,830,181
Investment in LMC						Investment in LMC	13,059,700		12,194,800
Lease receivable, long-term						Lease receivable, long-term	109,869		129,177

Total Assets	Total Assets	$	28,041,962	$	11,804,773	Total Assets	$	55,453,710	$	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	$	2,061,799	$	1,678,983
Accrued liabilities	Accrued liabilities	3,996,365		3,946,386		Accrued liabilities	3,018,415		3,105,184
Warranty liability	Warranty liability	6,506,971		7,058,769		Warranty liability	4,079,769		6,001,864
Warrant liability	Warrant liability	19,901,139		1,822,819		Warrant liability	—		16,335,000
Customer deposits	Customer deposits	334,000		406,000		Customer deposits	124,000		303,000
Duke financing obligation		1,340,700		1,340,700
Current portion of long-term debt	Current portion of long-term debt	6,354,140		—		Current portion of long-term debt	627,111		—
Current portion of Convertible Note, at fair value						Current portion of Convertible Note, at fair value	95,330,000		19,620,000
Total current liabilities	Total current liabilities	39,428,825		18,915,137		Total current liabilities	105,241,094		47,044,031

Long-term debt	Long-term debt	8,205,270		8,312,079		Long-term debt	783,889		—
Mandatory redeemable series B preferred stock		18,772,628		—
Convertible Note, at fair value						Convertible Note, at fair value	—		19,400,000
Mandatorily redeemable Series B preferred stock						Mandatorily redeemable Series B preferred stock	19,905,522		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 June 30, 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 June 30, 2020 and December 31, 2019	—		—
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 89,330,123 shares issued and outstanding at June 30, 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, 89,330,123 shares issued and outstanding at June 30, 2020 and 67,105,000 shares issued and outstanding at December 31, 2019	89,330		67,105
Additional paid-in capital	Additional paid-in capital	141,030,711		126,076,782		Additional paid-in capital	233,715,623		143,826,315
Accumulated deficit	Accumulated deficit	(179,461,662)		(141,557,496)		Accumulated deficit	(305,381,748)		(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	(70,476,795)		(34,913,110)

Total Liabilities and Stockholders' Deficit						Total Liabilities and Stockholders' Deficit	$	55,453,710	$	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 June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Net sales	$	91,942	$	5,508	$	176,242	$	369,690

Cost of sales	1,511,360		930,164		3,259,335		2,327,770

Gross loss	(1,419,418)		(924,656)		(3,083,093)		(1,958,080)

Operating expenses
Selling, general and administrative	3,949,081		1,996,054		9,514,868		4,086,944
Research and development	1,616,604		1,216,727		3,518,840		2,579,002
Total operating expenses	5,565,685		3,212,781		13,033,708		6,665,946

Other income	—		—		864,900		—

Loss from operations	(6,985,103)		(4,137,437)		(15,251,901)		(8,624,026)

Interest expense, net	124,346,806		15,922,763		111,323,317		17,700,346

Loss before provision for income taxes	(131,331,909)		(20,060,200)		(126,575,218)		(26,324,372)
Provision for income taxes	—		—		—		—

Net loss	(131,331,909)		(20,060,200)		(126,575,218)		(26,324,372)

Net loss attributable to common stockholders per share - basic and diluted	$	(1.76)	$	(0.33)	$	(1.77)	$	(0.44)


Weighted average number of common shares outstanding - basic and diluted	74,701,343		60,530,168		71,583,551		60,530,168

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Net loss	$	(131,331,909)	$	(20,060,200)	$	(126,575,218)	$	(26,324,372)

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

Comprehensive loss	$	(131,331,909)	$	(20,060,200)	$	(125,475,218)	$	(26,324,372)

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 March 31, 2019	61,496,990	$	61,497	—	$	—	$	129,764,361	$	(147,821,668)	$	—	$	(17,995,810)
Issuance of common stock	3,957,432	3,958		—	—		2,924,542		—		—		2,928,500
Stock options and warrants exercised	510,894	511		—	—		(511)		—		—		—
Deemed dividend	116,496	116		—	—		86,091		(86,207)		—		—
Stock-based compensation	—	—		—	—		185,848		—		—		185,848
Effect of reclassification of warrants	—	—		—	—		857,072						857,072
Value of warrants issued with preferred stock	—	—		—	—		6,709,961		—		—		6,709,961
Net loss for the three months ended June 30, 2019	—	—		—	—		—		(20,060,200)		—		(20,060,200)
Balance as of June 30, 2019	66,081,812	$	66,082	—	$	—	$	140,527,364	$	(167,968,075)	$	—	$	(27,374,629)


		Common Stock				Series A Preferred Stock						Additional Paid-in Capital				Accumulated Deficit			Total Stockholders’ Equity (Deficit)			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											Total Stockholders’ Equity (Deficit)				Number of Shares			Amount				Number of Shares				Amount										Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders’ Deficit
Balance,December 31, 2018		58,270,934	$	58,271	—	$	—	$	126,076,782	$	(141,557,496)	$	(15,422,443)
Balance as of December 31, 2018														Balance as of December 31, 2018	58,270,934				$	58,271			—			$	—			$	126,076,782			$	(141,557,496)		$	—		$	(15,422,443)
Issuance of common stock	Issuance of common stock	7,183,488	7,184		—	—		5,921,051		—		5,928,235		Issuance of common stock	7,183,488			7,184				—			—				5,921,051				—			—			5,928,235
Stock options and warrants exercised	Stock options and warrants exercised	517,224	517		—	—		1,456		—		1,973		Stock options and warrants exercised	510,894			511				—			—				(511)				—			—			—
Deemed dividend	Deemed dividend	116,496	116					86,091		(86,207)		—		Deemed dividend	116,496			116				—			—				86,091				(86,207)			—			—
Stock-based compensation	Stock-based compensation	—	—		—	—		1,211,629		—		1,211,629		Stock-based compensation	—			—				—			—				876,918				—			—			876,918
Effect of reclassification of warrants	Effect of reclassification of warrants	—	—		—	—		857,072		—		857,072		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)
Value of warrants issued with preferred stock														Value of warrants issued with preferred stock	—			—				—			—				6,709,961				—			—			6,709,961
Net loss for the six months ended June 30, 2019														Net loss for the six months ended June 30, 2019	—			—				—			—				—				(26,324,372)			—			(26,324,372)
Balance as of June 30, 2019														Balance as of June 30, 2019	66,081,812			$	66,082			—			$	—			$	140,527,364			$	(167,968,075)		$	—		$	(27,374,629)

~~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~~Stockholders’ Deficit

(Unaudited)

2019 2018
Cash flows from operating activities:
Net loss $ (37,817,959) $ (18,812,656)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 291,287 251,886
Amortization of discount and debt issuance costs on long-term debt 850,800 1,576,005
Amortization of discount on Series B preferred stock 482,589 —
Stock-based compensation 1,213,602 803,226
Other 41,588 28,645
Change in fair value of warrants 18,935,392 (1,527,414)
Effects of changes in operating assets and liabilities:
Lease receivable 33,863 1,016,631
Inventory, net 122,407 (316,411)
Prepaid expenses and deposits (4,538,704) 409,723
Accounts payable and accrued liabilities (3,128,203) (1,065,124)
Warranty liability (551,798) —
Customer deposits (72,000) 309,595
Net cash used in operating activities (24,137,136) (17,325,894)
Cash flows from investing activities:
Capital expenditures (4,001,838) (131,318)
Proceeds on disposition of property, plant and equipment 5,000 4,800
Net cash used in investing activities (3,996,838) (126,518)
Cash flows from financing activities:
Payments on long-term debt — (7,841,378)
Proceeds from long-term debt 5,854,140 7,800,000
Payment of loan issuance costs — (70,047)
Proceeds from issuance of series B preferred stock 25,000,000 —
Issuance of common stock 5,928,235 16,398,662
Exercise of warrants and options — 90,066
Net cash provided by financing activities 36,782,375 16,377,303
Change in cash, cash equivalents and restricted cash 8,648,401 (1,075,109)
Cash, cash equivalents and restricted cash, beginning of the period 1,512,750 4,069,477
Cash, cash equivalents and restricted cash, end of the period $ 10,161,151 $ 2,994,368

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


	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 March 31, 2020	69,493,836	$	69,494	—	$	—	$	150,883,717	$	(174,049,839)	$	1,100,000	$	(21,996,628)
Stock options and warrants exercised, and vesting of restricted shares	12,479,122	12,479		—	—		46,902,920		—		—		46,915,399
Common stock issued for preferred stock dividends	308,642	309		—	—		499,691		—		—		500,000
Conversion of Convertible Note	6,837,381	6,837		—	—		33,534,630		—		—		33,541,467
Common stock issued for interest on Convertible Note	211,142	211		—	—		724,474		—		—		724,685
Stock-based compensation	—	—		—	—		1,170,191		—		—		1,170,191
Net loss for the three months ended June 30, 2020	—	—		—	—		—		(131,331,909)		—		(131,331,909)
Other comprehensive income	—	—		—	—		—		—		—		—
Balance as of June 30, 2020	89,330,123	$	89,330	—	$	—	$	233,715,623	$	(305,381,748)	$	1,100,000	$	(70,476,795)

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


	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	12,911,234	12,911		—	—		47,145,488		—		—		47,158,399
Common stock issued for preferred stock dividends	617,284	618		—	—		999,382		—		—		1,000,000
Conversion of Convertible Note	8,384,270	8,384		—	—		38,726,635		—		—		38,735,019
Common stock issued for interest on Convertible Note	312,335	312		—	—		988,585		—		—		988,897
Stock-based compensation	—	—		—	—		2,029,218		—		—		2,029,218
Net loss for the six months ended June 30, 2020	—	—		—	—		—		(126,575,218)		—		(126,575,218)
Other comprehensive income	—	—		—	—		—		—		1,100,000		1,100,000
Balance as of June 30, 2020	89,330,123	$	89,330	—	$	—	$	233,715,623	$	(305,381,748)	$	1,100,000	$	(70,476,795)

See accompanying notes to the condensed consolidated financial statements.

Workhorse Group Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(126,575,218)	$	(26,324,372)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	368,372		193,786
Tooling expense	353,786		—
Amortization of discount and debt issuance costs on long-term debt	—		260,103
Amortization of discount on mandatorily redeemable Series B preferred stock	762,614		119,471
Change in fair value of Convertible Note and loss on conversion to common stock	96,145,019		—
Change in fair value of warrant liability	12,176,690		14,910,668
Change in fair value of investment in LMC	(864,900)		—
Dividends for mandatorily redeemable Series B preferred stock paid in common stock	1,000,000		—
Interest on Convertible Note paid in common stock	988,897		—
Stock-based compensation	2,029,218		876,918
Write down of inventory	—		22,221
Effects of changes in operating assets and liabilities:
Accounts and lease receivable	(15,348)		24,135
Inventory	(2,378,143)		313,712
Prepaid expenses	59,882		554,276
Accounts payable and accrued liabilities	296,047		(2,228,966)
Warranty liability	(1,922,095)		(485,209)

Customer deposits	(179,000)		(47,000)
Net cash used in operating activities	(17,754,179)		(11,810,257)

Cash flows from investing activities:
Capital expenditures	(974,115)		(2,965,372)

Net cash used in investing activities	(974,115)		(2,965,372)

Cash flows from financing activities:

Proceeds from long-term debt	1,411,000		5,854,140

Proceeds from issuance of Series B preferred stock	—		25,000,000
Issuance of common stock	—		5,928,235
Exercise of warrants and options	18,646,709		—
Net cash provided by financing activities	20,057,709		36,782,375

Change in cash and cash equivalents	1,329,415		22,006,746
Cash, cash equivalents and restricted cash, beginning of the period	24,868,416		1,512,750
Cash and cash equivalents, end of the period	$	26,197,831	$	23,519,496

Supplemental disclosure of non-cash activities:

During the six months ended June 30, 2020, the Company issued 8,384,270 shares of common stock in connection with the conversion of the Convertible Note, which were valued at $38,735,019. The Company recorded additional paid-in capital with the offset as a reduction to the fair value of the Convertible Note.

During the six months ended June 30, 2020, the change 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 of 2019.~~into 2022. 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~~Impact of COVID-19 Pandemic

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and on January 30, 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 ~~prior year financial statements~~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 ~~conform to~~operate. However, the ~~current year presentation. These reclassifications had no effect~~broader implications of COVID-19 on ~~previously reported~~our results of ~~operation~~operations and overall financial performance remain uncertain. We may experience constrained supply or ~~stockholders’ equity (deficit).~~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.

2. INVENTORY, NET

Inventory, net consists of the following:


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
Raw materials	Raw materials	$	4,478,201	$	4,319,637	Raw materials	$	5,412,613	$	3,741,097
Work in process	Work in process	422,176		702,079		Work in process	927,351		422,176
Finished goods	Finished goods	—		—		Finished goods	—		—
		4,900,377		5,021,716			6,339,964		4,163,273
Less: Inventory reserve		2,511,389		2,488,100
Less inventory reserve						Less inventory reserve	(2,163,675)		(2,365,127)
Total inventory, net	Total inventory, net	$	2,388,988	$	2,533,616	Total inventory, net	$	4,176,289	$	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 June 30, 2020 and December 31, 2019, respectively. The investment was obtained pursuant to the transaction with LMC described below. During the six months ended June 30, 2020, the Company received additional shares as part of its anti-dilution feature with LMC, which were valued at approximately $0.9 million. There were 0 additional shares received during the three months ended June 30, 2020.

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 "Royalty Advance"). 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 June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Automotive	Automotive	$	—	$	—	$	240,000	$	523,252	Automotive	$	85,000	$	—	$	85,000	$	240,000
Aviation	Aviation	—		—		—		—		Aviation	—		—		60,783		—
Other	Other	4,258		10,997		133,948		218,658		Other	6,942		5,508		30,459		129,690
Total revenues	Total revenues	$	4,258	$	10,997	$	373,948	$	741,910	Total revenues	$	91,942	$	5,508	$	176,242	$	369,690

5. CONVERTIBLE NOTE AND LONG-TERM DEBT

Convertible Note and long-term debt consist of the following:


	June 30, 2020		December 31, 2019
Convertible Note, at fair value	95,330,000		39,020,000

Long-term debt	1,411,000		—
Less current portion	(95,957,111)		(19,620,000)
Convertible Note and long-term debt, net of current portion	$	783,889	$	19,400,000

Convertible Note

Current Activity

The fair value of the Convertible Note as of June 30, 2020 and December 31, 2019 was $95.3 million and $39.0 million, respectively, and the contractual principal balance as of June 30, 2020 and December 31, 2019 was $18.5 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 six months ended June 30, 2020, the fair value of the Convertible Note increased $56.3 million which included a $1.1 million adjustment to other comprehensive income attributed to changes in credit risk and a $75.2 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 first quarter of 2020.

During the three months ended June 30, 2020, $17.5 million par value of the Convertible Note was converted to 6,837,381 shares of common stock resulting in a loss of $20.1 million, which is recorded in interest expense. During the six months ended June 30, 2020, $22.0 million par value of the Convertible Note was converted to 8,384,270 shares of common stock resulting in a loss of $21.0 million, which is recorded in interest expense.

Based on the contractual principal balance as of June 30, 2020, the number of warrants exercisable following the full or partial redemption of the Convertible Note is 6,975,410. 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.

Subsequent Activity

The fair value of the Convertible Note as of the date of this filing is 0. During the period July 1, 2020 through August 3, 2020, the remaining $18.5 million par value of the Convertible Note was converted to 6,065,576 shares of common stock resulting in a loss of $14.9 million, which is recorded in interest expense. Based on the contractual principal balance, the number of warrants exercisable following the full redemption of the Convertible Note is zero.

Background

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 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.

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.

711

4. ~~LONG-TERM DEBT~~

~~Long-term debt consists~~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 ~~following:~~

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
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 at an initial exercise price of $3.05. The warrants are only exercisable at the option of the Company following the full or partial redemption of the Convertible Note. In the event the Convertible Note is redeemed in part, the percentage of the warrants that will become exercisable upon such redemption will be equal to a percentage of the original principal amount of the Note redeemed at such time. Each exercise of the warrants entitles the holder to common shares equal to 115% of the total principal amount redeemed at such time divided by the conversion price. The Convertible Note and the warrants were determined to be freestanding instruments and were accounted for separately.

Paycheck Protection Program Term Note

On April 14, 2020, the Company entered into a Paycheck Protection Program Term Note (“PPP Term Note” or the “Note”) with PNC Bank, N.A. (“PNC”) under the Paycheck Protection Program of the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The Company received total proceeds of $1.4 million from the PPP Term Note, which is due on April 13, 2022. In accordance with the requirements of the CARES Act, the Company will use the proceeds primarily for payroll costs. Interest accrues on the Note at the rate of 1.0% per annum. The Company may apply to PNC for forgiveness of the amount due on the Note which shall be an amount equal to the sum of payroll costs, mortgage interest, rent obligations and covered utility payments incurred during the eight weeks following disbursement on the Note.

Neither principal nor interest shall be due or payable during the period from April 14, 2020 through the six-month anniversary of the date of the Note. On November 15, 2020, the outstanding principal of the Note that is not forgiven shall convert to an amortizing term loan and shall be due and payable in equal monthly installments until April 13, 2022. Additionally on November 15, 2020, all accrued interest that is not forgiven shall be due and payable.

The Company has elected to account for the PPP Term Note as debt and will accrue interest over the term of the Note. During the six months ended June 30, 2020, the Company did not make any repayments or apply for forgiveness of any amount due on the Note.

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 ~~Initial Warrants are exercisable for cash only through~~Credit Agreement was paid in 2019. 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. The Initial Warrants were exercised during the six months ended June 30, 2020, resulting in the issuance of 8,053,390 shares of common stock. The Initial Warrants were marked-to-market at each exercise date, which resulted in a charge to interest expense of $12.2 million for the six months ended June 30, 2020. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the warrant liability for the Initial Warrants was ~~$19,901,139~~0 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. The Warrants have an exercise price of $1.62 per share and expire seven years from the date of issuance. 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~~During the three and six months ended June 30, 2020, the Company issued 308,642 and 617,284 shares of ~~$1.62 per share, which was in excess~~common stock to the holders 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.~~Preferred Stock, respectively.

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 for the three and six months ended June 30, 2020 was $0.4 million and $0.8 million, respectively.

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 June 30, 2020, there were shares available for issuance of future stock awards, ~~issued~~which includes 6,641,577 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 June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Stock options	$	347,328	$	185,848	$	427,758	$	876,918
Restricted stock	822,863		—		1,601,460		—
Total stock-based compensation	$	1,170,191	$	185,848	$	2,029,218	$	876,918

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	875,075	1.81		0.61
Exercised	(22,500)	2.75

Forfeited	(117,594)	4.42
Expired	(12,500)	2.74
Balance, June 30, 2020	4,447,481	$	2.16

Number of options exercisable at June 30, 2020	3,117,500	$	2.39		5.4

As of June 30, 2020, unrecognized compensation expense was $0.6 million for unvested options which is expected to be recognized over the next 1.2 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	643,220	2.67
Vested	(467,368)	2.53
Forfeited	—	—
Balance, June 30, 2020	1,944,578	$	2.61

As of June 30, 2020, unrecognized compensation expense was $4.3 million for unvested restricted stock awards which is expected to be recognized over the next 2.1 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 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,
2019 2018 2019 2018
Net loss $ (11,493,587) $ (5,485,553) $ (37,817,959) $ (18,812,656)
Deemed dividends — — 86,207 765,179
Net loss attributable to common shareholders $ (11,493,587) $ (5,485,553) $ (37,904,166) $ (19,577,835)
Basic weighted average shares outstanding 66,176,921 46,192,471 63,566,295 46,192,471
Dilutive effect of options and warrants — — — —
Diluted weighted average shares outstanding 66,176,921 46,192,471 63,566,295 46,192,471
Anti-dilutive options and warrants excluded from diluted average shares outstanding 32,917,619 4,558,927 32,917,619 4,558,927


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net loss	$	(131,331,909)	$	(20,060,200)	$	(126,575,218)	$	(26,324,372)
Deemed dividends	—		86,207		—		86,207
Net income loss attributable to common stockholders	$	(131,331,909)	$	(20,146,407)	$	(126,575,218)	$	(26,410,579)

Basic weighted average shares outstanding	74,701,343		60,530,168		71,583,551		60,530,168
Dilutive effect of options and warrants	—		—		—		—
Dilutive effect of Convertible Note	—		—		—		—
Diluted weighted average shares outstanding	74,701,343		60,530,168		71,583,551		60,530,168

Anti-dilutive options and warrants excluded from diluted average shares outstanding	24,294,118		33,315,619		24,294,118		33,315,619

Excluded from the table above are the warrant shares related to the Convertible Note, which represent 11,803,279 and 13,278,689 warrants calculated using the if converted method for the three and six months ended June 30, 2020, respectively. 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 9,958,506 and 12,488,899 shares of common stock calculated using the if converted method for the three and six months ended June 30, 2020, respectively. 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. STOCKHOLDERS' EQUITY

Warrants

In connection with the issuance of debt, common stock and preferred stock, the Company issued warrants to purchase shares of the Company's common stock. The following table summarizes warrant activity:


	Number of Warrants	Weighted Average Exercise Price per Warrant
Balance, December 31, 2019	30,527,776	$	1.82
Granted, Marathon debt	68,586	1.78
Exercised	(12,651,146)	1.48
Expired	(43,157)	1.40
Balance, June 30, 2020	17,902,059	$	2.06

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

~~2018 Stock Offerings~~

~~On June 22, 2017,~~The above table excludes 6,975,410 warrants issued with the ~~Company entered into an~~Convertible Note. The warrants are only exercisable 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 directorsoption of the Company atfollowing the ~~time~~full or partial redemption 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.Convertible Note.

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,~~June 22, 2017, the Company entered into an at the market issuance sales agreement with Cowen and Company, LLC under which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $25.0 million. For the three months ended March 31, 2019, the Company ~~closed a registered public offering~~issued 1,609,373 shares under this agreement for ~~the sale of 3,957,432 shares of Common Stock for a purchase price of $0.74 per share. The~~ net proceeds toof approximately $1.5 million. This agreement was canceled in the ~~Company were approximately $2.9 million.~~first quarter of 2019.

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.

~~Warrants~~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.

~~In connection with~~

The Company's warrant liability is 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 ~~issuance~~estimates of ~~debt and preferred stock,~~fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, ~~has issued warrants to purchase shares~~or holders of the ~~Company's Common Stock.~~ 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 ~~summarizes~~sets forth a reconciliation of the warrant ~~activity for 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
liability:


	June 30, 2020
Warrant liability, beginning of year	$	16,335,000
Exercise of warrants	(28,511,690)
Change in fair value for the period	12,176,690
Warrant liability, end of period	$	—

The Company's Convertible Note is 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:


	June 30, 2020
Convertible Note, beginning of year	$	39,020,000

Conversion of Convertible Note into common stock	(38,735,019)
Change in fair value for the period and loss on conversion to common stock	96,145,019
Change in fair value for the period, attributed to changes in credit risk	(1,100,000)
Convertible Note, end of period	$	95,330,000

~~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~~High Trail Convertible Note

~~On October 1, 2019, the~~The Company entered into ana securities purchase agreement, with HT Investments MA LLC pursuant to which the Company agreed to issue and sell a senior secured convertible note for the ~~sale~~principal amount of ~~SureFly™ for $4.0~~$70.0 million (the “Note”). The closing of the offering took place on July 16, 2020.

The Company did not pay underwriting discounts or commissions. However, after discounts the proceeds before expenses were $69.0 million. The ~~completion~~Company expects to use the net proceeds from this offering for working capital to finance the production of its trucks and for general corporate purposes.

The Note ranks equal with the ~~sale is contingent on receiving approval from the Lenders~~Company’s outstanding senior secured note and senior to all unsecured debt of ~~the Credit Agreement.~~

~~Hackney~~

~~On October 31, 2019,~~ the Company, and ~~ST Engineering Hackney, Inc. ("Seller") entered into an Asset Purchase Agreement~~will be due on July 1, 2023. Interest is payable quarterly beginning October 1, 2020 at a rate of 4.5% per annum. The Note is initially convertible at a rate of $19.00 per share, subject to customary anti-dilution adjustments and adjustments for certain corporate events.

Any principal repayment of the Note is at 110% of the par value (the ~~"Purchase Agreement"~~“Repayment Price”) ~~to purchase certain assets~~. Beginning October 1, 2020, the holder of ~~Seller (the "Acquired Assets") and assume certain liabilities of Seller. The closing under~~ the ~~Purchase Agreement provides that~~Note may require the Company ~~will be required~~ to ~~deliver~~redeem up to $3.5 million of the par value (“Redemption Payment”). Subject to certain limitations, the Company, at its discretion, can pay some or all of the Redemption Payment in cash or 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~~stock. The Company may redeem all (or any portion in excess of $8.0 million) of the ~~Purchase Agreement,~~Note at any time at the ~~Company deposited $1.0 million in cash and shares~~greater of ~~its common stock having an aggregate~~(a) 115% of the conversion value, ~~of $6.6 million~~calculated based on the ~~closing~~highest volume weighted average price asduring the period beginning 30 days prior to such redemption and ending the day prior to the redemption date, or (b) 105% of the ~~day immediately preceding~~Repayment Price, in each case plus accrued and unpaid interest.

Pursuant to the ~~date~~credit agreement entered into between the Company and Marathon Asset Management, LP, on behalf of certain entities it manages (the "Marathon Lenders") dated December 31, 2018, until December 31, 2020, the Company must issue additional warrants to the Marathon Lenders when the Company makes certain equity issuances, in amount equal to approximately 10% of the ~~Purchase Agreement (the "Escrow Shares") into an escrow account (the "Escrow Account"). The number~~Company’s fully diluted equity interests, and on substantially the same terms and conditions of ~~Escrow Shares~~the initial warrants issued, except that (i) the expiration date shall be ~~subject~~five years from the issuance date, (ii) the exercise price shall be equal to ~~adjustment if the aggregate value~~110% 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~~issuance price per share in the ~~purchase of~~relevant issuance, and (iii) the ~~Acquired Assets, $1.0 million of which~~holder shall be ~~payable from~~entitled to exercise 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 thatwarrant on a cashless basis at any time. Accordingly, the Company ~~shall make additional payments~~issued the Marathon Lenders warrants to ~~Seller in the event the Second Payment is not made within 45 days~~acquire an aggregate 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,~~409,356 shares of common stock exercisable 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.~~

$20.90 per share.

Lordstown Motors

Corp. Merger

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

•~~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~~it expects to ~~be significant~~incur (the “Capital Raise”). ~~The Agreements provide that~~Among other consideration, 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~~is required 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~~vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceed the amount paid as the Royalty Advance. ~~Upon~~

In order to fully implement its business plan and close on the Capital Raise, on August 1, 2020, LMC entered into an Agreement and Plan of Merger (the “LMC Merger Agreement”) with DiamondPeak Holdings Corp., pursuant to which LMC agreed to merge with and into a subsidiary of DiamondPeak (the “LMC Merger”). The LMC Merger Agreement may be terminated under certain circumstance, including, termination at the option of either party if the LMC Merger is not consummated by February 1, 2021, and conditions precedent including no Material Adverse Effect (as defined in the Merger Agreement), the retention by LMC of certain key employees and LMC having cash on hand equal to or in excess of $300 million. The shareholders of LMC will receive in the aggregate 58% of the issued and outstanding shares of Class A Common Stock of DiamondPeak as of the closing of the LMC Merger. Further, on August 1, 2020, DiamondPeak entered into subscription agreements with certain investors, pursuant to which, DiamondPeak agreed to issue and sell, in private placements to close immediately prior to the closing of the LMC Merger, an aggregate of 50 million shares of Class A Common Stock for $10.00 per share.

In order to further define the Company’s rights with respect to LMC, the Company and LMC entered into an Agreement on August 1, 2020 pursuant to which the parties confirmed that the Company will own 9.99% of DiamondPeak following the closing of the LMC Merger and the Royalty Advance was defined as $4,750,000. Further, the Company has entered into a Registration Rights and Lock Up Agreement with DiamondPeak, which will become effective upon completion of the ~~Capital Raise,~~LMC Merger pursuant to which DiamondPeak has agreed to file a registration statement with the ~~Company intends to transfer its approximately 6,000 existing orders for Vehicles to LMC, subject to customer consent. LMC will pay~~Securities and Exchange Commission, registering the ~~Company a four percent commission on the gross sales price~~Company’s shares of ~~any transferred existing orders fulfilled by LMC. The success~~Class A Common Stock held in DiamondPeak within 45 days of the ~~Capital Raise is not~~closing of the LMC Merger (the “Filing Deadline”) and to use reasonable efforts to have such registration statement declared effective within 60 days of the ~~Company’s control,~~Filing Deadline, which may be extended up to 120 days in the event the Securities 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~~Exchange Commission elects 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.review such registration statement. The Company ishas agreed, subject to certain ~~restrictions on transferring LMC’s equity~~exceptions, to not sell any of its shares of Class A Common Stock for ~~this~~ ~~two-year period. Under~~a period of six months following the ~~Voting Agreement,~~closing of the ~~Company has the right to designate 1 director to LMC’s board of directors, subject to certain limitations.~~

LMC Merger.

1418

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.

AsWe are also in compliance with the Federal Motor Vehicle Safety Standards. The Environmental Protection Agency ("EPA") issued Workhorse a ~~direct result~~Certificate of Conformity ("COC") for our three C-Series trucks and this Certificate gives us permission to sell our vehicles in all 50 states. In addition to the ~~USPS award~~EPA, we applied for and ~~development efforts, Workhorse has begun development~~received an Executive Order that enables us to sell our vehicles in California and 13 other states that follow the California Air Resources Board standards. This allows us to have our vehicles on the ~~Workhorse W-15,~~California Hybrid Incentive Program, which provides 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.$50,000 incentive per truck.

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~~ As part of the divestiture of SureFly in November 2019, the Company formed a 50/50 joint venture to which we contributed our entry into 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 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.HorseFly technology.

1519

~~SureFly~~

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, the Company entered into a transaction with Lordstown Motors Corp. (“LMC”) pursuant 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:~~

•~~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 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
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)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019

Net sales	$	91,942	$	5,508	$	176,242	$	369,690

Cost of sales	1,511,360		930,164		3,259,335		2,327,770
Gross loss	(1,419,418)		(924,656)		(3,083,093)		(1,958,080)

Operating expenses
Selling, general and administrative	3,949,081		1,996,054		9,514,868		4,086,944
Research and development	1,616,604		1,216,727		3,518,840		2,579,002
Total operating expenses	5,565,685		3,212,781		13,033,708		6,665,946

Other income	—		—		864,900		—

Loss from operations	(6,985,103)		(4,137,437)		(15,251,901)		(8,624,026)

Interest expense, net	124,346,806		15,922,763		111,323,317		17,700,346

Loss before provision for income taxes	(131,331,909)		(20,060,200)		(126,575,218)		(26,324,372)
Provision for income taxes	—		—		—		—

Net loss	$	(131,331,909)	$	(20,060,200)	$	(126,575,218)	$	(26,324,372)

Net Sales

Net sales for the three months ended ~~September~~June 30, 2020 and 2019 were $92 thousand and ~~2018 were $4,258 and $10,997,~~$6 thousand, respectively. The increase in net sales is due to an increase in volume related to our initial production of the C-Series.

Net sales for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$0.4~~$0.2 million and ~~$0.7~~$0.4 million, respectively. The decrease ~~was~~in net sales is 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~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$1.4~~$1.5 million and ~~$1.5~~$0.9 million, respectively. The ~~cost of sales decrease was~~increase is primarily ~~due~~driven by increases in labor and materials relating to ~~lower employee-related~~ costs ~~due to a reduction in headcount.~~for the C-Series production.

Cost of sales for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$3.8~~$3.3 million and ~~$4.8~~$2.3 million, respectively. The ~~cost of sales decrease was~~increase is primarily ~~due~~driven by increases in labor and materials relating to ~~a decrease in volume of trucks sold due to strategic shift to~~costs for the ~~development of the N-GEN platform.~~C-Series production.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses during the three months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$2.6~~$3.9 million and ~~$3.4~~$2.0 million, respectively. The ~~decrease~~increase in SG&A expenses is primarily due to ~~lower spending for marketing~~increases in consulting expenses, higher employee-related costs and ~~employee-related costs.~~incentive stock expenses.

Selling, general and administrative (“SG&A&A”) expenses during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$6.6~~$9.5 million and ~~$8.8~~$4.1 million, respectively. The ~~decrease related~~increase in SG&A expenses is primarily due to ~~lower~~recognition of $1.0 million of selling expense, higher employee-related costs and higher spending ~~in areas such as marketing and employee-related costs.~~

on consulting.

Research and Development Expenses

Research and development (“R&D”) expenses during the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 were $1.6 million and ~~$1.4~~$1.2 million, respectively. The increase in R&D expenses is primarily due to ~~increased spending on prototype~~the finalization of the design of the C-Series.

Research and development ~~partially offset by lower consulting costs.~~

(“R&D&D”) expenses during the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ were ~~$4.2~~$3.5 million and ~~$5.7~~$2.6 million, respectively. The ~~decrease~~increase 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 Expense, Net

Interest expense, net is comprised of the following:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Adjustment to fair value of Convertible Note and loss on conversion to common stock	$	101,343,165	$	—	$	96,206,717	$	—
Adjustment to fair value of warrant liability and loss on exercise of warrants	21,321,690		14,342,602		12,176,690		14,910,668
Contractual interest expense	1,031,737		1,205,894		1,954,575		2,139,619
Amortization of discount and debt issuance costs	385,031		403,061		762,615		684,647

Other	265,183		(28,794)		222,720		(34,588)
Total interest expense, net	$	124,346,806	$	15,922,763	$	111,323,317	$	17,700,346

Interest expense, net for the three months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ was ~~$5.9~~$124.3 million and ~~$(0.8)~~$15.9 million, respectively. The ~~increase was~~change is primarily attributable ~~a $4.0~~to the fair value adjustment to our Convertible Note and loss on conversion to common stock of approximately $101.3 million and an increase in mark-to-market ~~adjustment~~adjustments of approximately $7.0 million in 2020 compared to 2019 ~~and a $1.5 million negative mark-to-market adjustment in 2018~~ for warrants issued to lenders. ~~In addition there~~Both changes were ~~higher levels of debt year-over-year.~~ due to changes in the Company's stock price for the period.

Interest expense, net for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ was ~~$23.6~~$111.3 million and ~~$0.3~~$17.7 million, respectively. The ~~increase was~~change is primarily attributable to the fair value adjustment to our Convertible note of approximately $96.2 million partially offset by a ~~$19.1~~$2.7 million decrease in our mark-to-market ~~adjustment in 2019 and a $1.5 million negative mark-to-market adjustment in 2018~~adjustments for warrants issued to lenders. ~~In addition there~~Both changes were ~~higher levels of debt year-over-year.~~ due to changes in the Company's stock price for the period.

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~~June 30, ~~2019,~~2020, we had approximately ~~$9.3~~$26.2 million in cash and cash equivalents, as compared to approximately ~~$1.5~~$23.9 million as of December 31, ~~2018,~~2019, an increase of ~~$7.7~~$2.3 million. The increase ~~was~~in cash and cash equivalents is primarily attributable to funds received from the ~~$25.0 million sale~~exercise of ~~Series B Preferred stock, the amount drawn on the Marathon Tranche Two debt and sales of our common stock. These cash inflows were~~existing warrants partially offset by ~~the operating loss for the period.~~spend related to C-Series production ramp up.

We believe our existing capital resources, ~~($9.3~~including additional funds received from warrant exercises and the $70 million ~~of cash and cash equivalents at September 30, 2019) and our Marathon revolving credit facility~~senior secured convertible note issued in July 2020, will be sufficient to support our current and projected funding requirements through the end of 2019. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our business and research and development activities, including risks and uncertainties that could impact the rate of progress of our development activities, we are unable to estimate with certainty the amounts of increased capital outlays and operating expenditures.

~~Our operations will require~~into 2022 at which time additional funding ~~for the foreseeable future.~~ will be required.

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 and six months ended ~~September~~June 30, ~~2019,~~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,							Six Months Ended June 30,
		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	$	(17,754,179)	$	(11,810,257)
Net cash used in investing activities	Net cash used in investing activities	$	(3,996,838)	$	(126,518)	Net cash used in investing activities	$	(974,115)	$	(2,965,372)
Net cash provided by financing activities	Net cash provided by financing activities	$	36,782,375	$	16,377,303	Net cash provided by financing activities	$	20,057,709	$	36,782,375

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~~six months ended ~~September~~June 30, 2020 and 2019, ~~and 2018,~~net cash used in operating activities was ~~$24.1~~$17.8 million and ~~$17.3~~$11.8 million, respectively. The increase in net cash used in operations ~~in 2019~~during the six months ended June 30, 2020 as compared to ~~2018 was mainly due~~2019 is 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~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, net cash used in investing activities was ~~$4.0~~$1.0 million and ~~$0.1~~$3.0 million, respectively. The ~~increase~~decrease in net cash ~~flows~~ used in investing activities ~~in 2019 was~~is primarily driven by ~~investing in tooling for new products in 2019.~~less capital expenditures during the current year than prior year.

Cash Flows from Financing Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, net cash provided by financing activities was ~~$36.8~~$20.1 million and ~~$16.4~~$36.8 million, respectively.

The ~~following~~ significant financing activities ~~took place~~that occurred in 2020 and 2019 include:

2020

•$18.6 million proceeds from exercise of warrants and ~~2018:~~options; and

•$1.4 million proceeds from PPP Term Note.

2019

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

•Sale of common stock with net proceeds of $5.9 million; and

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

•~~$5.9 million~~ which was paid off at the end of ~~proceeds received from the sale of common stock~~

~~2018~~

•~~$16.3 million of proceeds received from the sale of common stock~~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. There have been no material changes to the information provided in our Annual Report on Form 10-K for the year ended December 31, 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~~six months ended ~~September~~June 30, ~~2019~~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 six months ended June 30, 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 February 28, 2020, the Court ordered a Settlement Conference between the parties for May 22, 2020 before the Magistrate Judge assigned to the case. On June 30, 2020, the Company and All Cell Technologies, LLC and Illinois Institute of Technology entered into a Settlement Agreement pursuant to which the Company was released from all claims by the parties in consideration of a payment of $250,000. The settlement payment was made in July 2020.

On October ~~28,~~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 ~~its Answer, Affirmative Defenses~~a motion to dismiss for lack of personal jurisdiction and ~~Counterclaims. Management~~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 ~~believes this lawsuit~~opposed the motion for leave to amend with respect to Workhorse Trucks, Inc. on the grounds that the proposed amendments would be futile, because Georgia courts do not have jurisdiction over either the Company or Workhorse Trucks, Inc. The motions are fully briefed and pending before the Court. In the event that the motion to dismiss is ~~baseless~~not granted, the Company will vigorously defend themselves and, ~~intends~~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 products at issue are the battery bricks that the Company is being accused of patent infringement over in the All Cell litigation described above. Following the settlement with All Cell Technologies, LLC, the Company elected to ~~defend itself vigorously.~~withdraw the Complaint filed against Outlast Technologies LLC.

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~~are 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 31, 2019~~three and ~~in excess of the closing price of $1.60 on May~~six months ended June 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 and 617,284 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~~respectively.

Warrant Exercise

During the six months ended June 30, 2020, the Company issued 12,651,146 shares of common stock in connection with ~~respect to each share~~the exercise of ~~the Preferred Stock’s Stated Value plus any accrued but unpaid dividends thereon; and (c) third, payment~~Common Stock Purchase Warrants in consideration of $18.6 million.

Marathon Warrants

Pursuant to the ~~holders of common stock.~~

~~On the fourth anniversary of the Closing Date,~~credit agreement entered into between the Company ~~shall redeem all the outstanding shares~~and Marathon Asset Management, LP, on behalf 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 Agreementcertain entities it manages (the “Marathon Lenders”), dated ~~as of~~ December 31, 2018 (the ~~“Credit~~“Marathon Agreement”), ~~among~~until December 31, 2020, the Company asmust issue additional warrants to the ~~borrower, the lenders thereto and Wilmington Trust, National Association, as Agent,~~Marathon Lenders when the Company ~~may,~~makes certain equity issuances, in ~~its sole discretion, redeem any outstanding shares~~amount equal to approximately 10% of ~~Preferred Stock at~~ the ~~Stated Value, plus accrued~~Company’s fully diluted equity interests, and ~~unpaid~~

~~dividends (“Optional Redemption”). Notwithstanding~~on substantially the ~~foregoing,~~same terms and conditions of the ~~Company may effect an Optional Redemption prior~~initial warrants issued to the ~~fourth anniversary of~~Marathon Lenders, except that (i) 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~~expiration date shall be five years from the issuance date, (ii) the exercise price shall be equal to 110% of ~~issuance.~~

~~Notwithstanding anything herein~~the issuance price per share in the relevant issuance, and (iii) the holder shall be entitled to exercise the ~~contrary,~~warrant on a cashless basis at any time. Accordingly, the Company issued the Marathon Lenders warrants to acquire an aggregate ~~number~~ of 409,356 shares of Common Stock exercisable at a price of $20.90 per share (the “Additional Warrants”) following the issuance of a senior secured convertible note in the principal amount of $70 million to HT Investments MA LLC. Further, following the issuance of the dividends in connection with the Preferred Stock, the Company issued the Marathon Lenders warrants to acquire 68,586 shares of common stock ~~issued in payment~~exercisable at a price 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 in accordance with applicable rules of the NASDAQ Capital Market.$1.782 per share.

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~~August 10, 2020	By:	/s/ Duane A. Hughes
		Name: Duane A. Hughes Title: Chief Executive Officer (Principal Executive Officer)


Dated: ~~November 8, 2019~~August 10, 2020	By:	/s/ ~~Paul Gaitan~~Steve Schrader
		Name: ~~Paul Gaitan~~Steve Schrader Title: Chief Financial Officer (Principal Financial ~~and~~Officer)


Dated: August 10, 2020	By:	/s/ Gregory T. Ackerson
		Name: Gregory T. Ackerson Title: Corporate Controller (Principal Accounting Officer)

2628


	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


	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)