00014252872020Q2false--12-3100014252872020-01-012020-06-30xbrli:shares00014252872020-07-31iso4217:USD00014252872020-06-3000014252872019-12-31iso4217:USDxbrli:shares00014252872020-04-012020-06-3000014252872019-04-012019-06-3000014252872019-01-012019-06-300001425287us-gaap:RetainedEarningsMember2019-01-012019-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:CreditRiskMember2020-04-012020-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:CreditRiskMember2019-04-012019-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:CreditRiskMember2020-01-012020-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:CreditRiskMember2019-01-012019-06-300001425287us-gaap:CommonStockMember2019-03-310001425287us-gaap:SeriesAPreferredStockMember2019-03-310001425287us-gaap:AdditionalPaidInCapitalMember2019-03-310001425287us-gaap:RetainedEarningsMember2019-03-310001425287us-gaap:ComprehensiveIncomeMember2019-03-3100014252872019-03-310001425287us-gaap:CommonStockMember2019-04-012019-06-300001425287us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-300001425287us-gaap:RetainedEarningsMember2019-04-012019-06-300001425287us-gaap:CommonStockMember2019-06-300001425287us-gaap:SeriesAPreferredStockMember2019-06-300001425287us-gaap:AdditionalPaidInCapitalMember2019-06-300001425287us-gaap:RetainedEarningsMember2019-06-300001425287us-gaap:ComprehensiveIncomeMember2019-06-3000014252872019-06-300001425287us-gaap:CommonStockMember2018-12-310001425287us-gaap:SeriesAPreferredStockMember2018-12-310001425287us-gaap:AdditionalPaidInCapitalMember2018-12-310001425287us-gaap:RetainedEarningsMember2018-12-310001425287us-gaap:ComprehensiveIncomeMember2018-12-3100014252872018-12-310001425287us-gaap:CommonStockMember2019-01-012019-06-300001425287us-gaap:AdditionalPaidInCapitalMember2019-01-012019-06-300001425287us-gaap:CommonStockMember2020-03-310001425287us-gaap:SeriesAPreferredStockMember2020-03-310001425287us-gaap:AdditionalPaidInCapitalMember2020-03-310001425287us-gaap:RetainedEarningsMember2020-03-310001425287us-gaap:ComprehensiveIncomeMember2020-03-3100014252872020-03-310001425287us-gaap:CommonStockMember2020-04-012020-06-300001425287us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-300001425287us-gaap:RetainedEarningsMember2020-04-012020-06-300001425287us-gaap:CommonStockMember2020-06-300001425287us-gaap:SeriesAPreferredStockMember2020-06-300001425287us-gaap:AdditionalPaidInCapitalMember2020-06-300001425287us-gaap:RetainedEarningsMember2020-06-300001425287us-gaap:ComprehensiveIncomeMember2020-06-300001425287us-gaap:CommonStockMember2019-12-310001425287us-gaap:SeriesAPreferredStockMember2019-12-310001425287us-gaap:AdditionalPaidInCapitalMember2019-12-310001425287us-gaap:RetainedEarningsMember2019-12-310001425287us-gaap:ComprehensiveIncomeMember2019-12-310001425287us-gaap:CommonStockMember2020-01-012020-06-300001425287us-gaap:AdditionalPaidInCapitalMember2020-01-012020-06-300001425287us-gaap:ComprehensiveIncomeMember2020-01-012020-06-300001425287us-gaap:ConvertibleNotesPayableMember2020-01-012020-06-30xbrli:pure0001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2019-12-310001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2020-06-300001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2019-11-070001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMember2019-11-072019-11-07wkhs:vehicle0001425287wkhs:AutomotiveMember2020-04-012020-06-300001425287wkhs:AutomotiveMember2019-04-012019-06-300001425287wkhs:AutomotiveMember2020-01-012020-06-300001425287wkhs:AutomotiveMember2019-01-012019-06-300001425287wkhs:AviationMember2020-04-012020-06-300001425287wkhs:AviationMember2019-04-012019-06-300001425287wkhs:AviationMember2020-01-012020-06-300001425287wkhs:AviationMember2019-01-012019-06-300001425287wkhs:OtherMember2020-04-012020-06-300001425287wkhs:OtherMember2019-04-012019-06-300001425287wkhs:OtherMember2020-01-012020-06-300001425287wkhs:OtherMember2019-01-012019-06-300001425287us-gaap:ConvertibleNotesPayableMember2020-06-300001425287us-gaap:ConvertibleNotesPayableMember2019-12-310001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:InterestExpenseMember2020-01-012020-06-300001425287us-gaap:ConvertibleNotesPayableMember2020-04-012020-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:InterestExpenseMember2020-04-012020-06-300001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:SubsequentEventMember2020-08-100001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:SubsequentEventMember2020-07-012020-08-030001425287us-gaap:ConvertibleNotesPayableMemberus-gaap:InterestExpenseMemberus-gaap:SubsequentEventMember2020-07-012020-08-030001425287us-gaap:ConvertibleNotesPayableMember2019-12-090001425287us-gaap:ConvertibleNotesPayableMember2019-12-092019-12-090001425287wkhs:PaycheckProtectionProgramTermNoteMember2020-04-142020-04-140001425287wkhs:PaycheckProtectionProgramTermNoteMember2020-04-140001425287wkhs:CreditAgreementMember2018-12-310001425287us-gaap:WarrantMember2020-01-012020-06-300001425287us-gaap:SeriesBPreferredStockMember2019-06-050001425287us-gaap:MandatorilyRedeemablePreferredStockMemberus-gaap:SeriesBPreferredStockMember2019-06-050001425287us-gaap:MandatorilyRedeemablePreferredStockMemberus-gaap:SeriesBPreferredStockMember2020-01-012020-06-300001425287us-gaap:MandatorilyRedeemablePreferredStockMember2020-06-3000014252872019-06-050001425287srt:MaximumMemberus-gaap:MandatorilyRedeemablePreferredStockMember2020-01-012020-06-300001425287us-gaap:MandatorilyRedeemablePreferredStockMember2020-01-012020-06-300001425287us-gaap:EmployeeStockOptionMember2020-06-300001425287us-gaap:EmployeeStockOptionMember2020-04-012020-06-300001425287us-gaap:EmployeeStockOptionMember2019-04-012019-06-300001425287us-gaap:EmployeeStockOptionMember2020-01-012020-06-300001425287us-gaap:EmployeeStockOptionMember2019-01-012019-06-300001425287us-gaap:RestrictedStockMember2020-04-012020-06-300001425287us-gaap:RestrictedStockMember2019-04-012019-06-300001425287us-gaap:RestrictedStockMember2020-01-012020-06-300001425287us-gaap:RestrictedStockMember2019-01-012019-06-300001425287wkhs:DirectorsOfficersConsultantsAndEmployeesMemberus-gaap:EmployeeStockOptionMember2019-12-310001425287wkhs:DirectorsOfficersConsultantsAndEmployeesMemberus-gaap:EmployeeStockOptionMember2020-01-012020-06-300001425287wkhs:DirectorsOfficersConsultantsAndEmployeesMemberus-gaap:EmployeeStockOptionMember2020-06-300001425287us-gaap:RestrictedStockMember2019-12-310001425287us-gaap:RestrictedStockMember2020-06-300001425287us-gaap:ConvertibleNotesPayableMember2019-04-012019-06-300001425287us-gaap:ConvertibleNotesPayableMember2019-01-012019-06-300001425287us-gaap:WarrantMemberus-gaap:ConvertibleNotesPayableMember2020-04-012020-06-300001425287us-gaap:WarrantMemberus-gaap:ConvertibleNotesPayableMember2020-01-012020-06-300001425287us-gaap:WarrantMember2019-12-310001425287us-gaap:WarrantMember2020-01-012020-06-300001425287us-gaap:WarrantMember2020-04-012020-06-300001425287us-gaap:WarrantMember2020-06-300001425287wkhs:SubscriptionAgreementsMember2019-02-012019-02-280001425287wkhs:SubscriptionAgreementsMember2019-05-010001425287wkhs:SubscriptionAgreementsMember2019-05-012019-05-010001425287wkhs:BenjaminSamuelsMemberus-gaap:PrivatePlacementMember2019-02-012019-02-280001425287wkhs:GeraldBuddeMemberus-gaap:PrivatePlacementMember2019-02-012019-02-280001425287us-gaap:PrivatePlacementMember2019-02-280001425287wkhs:CowenAgreementMember2017-06-222017-06-220001425287wkhs:CowenAgreementMember2019-03-310001425287wkhs:CowenAgreementMember2019-01-012019-03-310001425287wkhs:STEngineeringHackneyIncMember2019-10-310001425287wkhs:STEngineeringHackneyIncMembersrt:MinimumMember2019-10-310001425287srt:MaximumMemberwkhs:STEngineeringHackneyIncMember2019-10-310001425287wkhs:STEngineeringHackneyIncMemberwkhs:FirstPaymentMember2019-10-310001425287wkhs:STEngineeringHackneyIncMemberwkhs:SecondPaymentMember2019-10-310001425287wkhs:STEngineeringHackneyIncMemberwkhs:SecondPaymentMember2019-10-312019-10-310001425287srt:MaximumMemberwkhs:STEngineeringHackneyIncMemberwkhs:SecondPaymentMember2019-10-312019-10-310001425287us-gaap:ConvertibleDebtMemberus-gaap:SubsequentEventMember2020-07-160001425287us-gaap:SubsequentEventMember2020-07-162020-07-160001425287us-gaap:ConvertibleDebtMemberus-gaap:SubsequentEventMember2020-07-162020-07-160001425287srt:ScenarioForecastMemberus-gaap:ConvertibleDebtMember2020-10-012023-07-010001425287us-gaap:ConvertibleDebtMemberus-gaap:SubsequentEventMembersrt:MinimumMember2020-07-160001425287us-gaap:ConvertibleDebtMemberus-gaap:SubsequentEventMemberwkhs:DebtInstrumentRedemptionPercentageOption1Member2020-07-162020-07-160001425287us-gaap:ConvertibleDebtMemberwkhs:DebtInstrumentRedemptionPercentageOption2Memberus-gaap:SubsequentEventMember2020-07-162020-07-160001425287srt:ScenarioForecastMemberwkhs:CreditAgreementMember2019-01-012020-12-310001425287wkhs:CreditAgreementMemberus-gaap:SubsequentEventMember2020-08-100001425287wkhs:CreditAgreementMemberus-gaap:SubsequentEventMember2020-07-012020-08-100001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMemberus-gaap:SubsequentEventMember2020-08-010001425287wkhs:LordstownMotorsCorpMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMemberus-gaap:SubsequentEventMember2020-08-012020-08-010001425287us-gaap:PrivatePlacementMemberwkhs:DiamondPeakMemberus-gaap:SubsequentEventMember2020-08-012020-08-010001425287wkhs:DiamondPeakMemberus-gaap:SubsequentEventMember2020-08-010001425287wkhs:DiamondPeakMemberus-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMemberus-gaap:SubsequentEventMember2020-08-010001425287us-gaap:CollaborativeArrangementTransactionWithPartyToCollaborativeArrangementMemberwkhs:DiamondPeakMemberus-gaap:SubsequentEventMember2020-08-010001425287wkhs:DiamondPeakMemberus-gaap:SubsequentEventMember2020-07-012020-08-10
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 June 30, 2020
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number: 000-53704
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)
(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 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 |
The number of shares of the Registrant's Common Stock, $0.001 par value per share, outstanding as of August 4, 2020, was 105,134,924.
TABLE OF CONTENTS
| | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| Condensed Consolidated Statements of Comprehensive Loss | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| (Unaudited) | | |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 26,197,831 | | | $ | 23,868,416 | |
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 | 42,577 | | | 7,921 | |
Lease receivable, current | 33,100 | | | 33,100 | |
Inventory, net | 4,176,289 | | | 1,798,146 | |
Prepaid expenses | 4,752,206 | | | 4,812,088 | |
Total current assets | 35,202,003 | | | 31,519,671 | |
| | | |
Property, plant and equipment, net | 7,082,138 | | | 6,830,181 | |
Investment in LMC | 13,059,700 | | | 12,194,800 | |
Lease receivable, long-term | 109,869 | | | 129,177 | |
| | | |
Total Assets | $ | 55,453,710 | | | $ | 50,673,829 | |
| | | |
Liabilities and Stockholders’ Deficit | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,061,799 | | | $ | 1,678,983 | |
Accrued liabilities | 3,018,415 | | | 3,105,184 | |
Warranty liability | 4,079,769 | | | 6,001,864 | |
Warrant liability | — | | | 16,335,000 | |
Customer deposits | 124,000 | | | 303,000 | |
Current portion of long-term debt | 627,111 | | | — | |
Current portion of Convertible Note, at fair value | 95,330,000 | | | 19,620,000 | |
Total current liabilities | 105,241,094 | | | 47,044,031 | |
| | | |
Long-term debt | 783,889 | | | — | |
Convertible Note, at fair value | — | | | 19,400,000 | |
Mandatorily redeemable Series B preferred stock | 19,905,522 | | | 19,142,908 | |
| | | |
Commitments and contingencies | | | |
| | | |
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 | — | | | — | |
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 | 233,715,623 | | | 143,826,315 | |
Accumulated deficit | (305,381,748) | | | (178,806,530) | |
Accumulated other comprehensive income | 1,100,000 | | | — | |
Total stockholders' deficit | (70,476,795) | | | (34,913,110) | |
| | | |
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
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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’ Deficit
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | Accumulated Other Comprehensive Income | | Total Stockholders’ Deficit |
| Number of Shares | | Amount | | Number of Shares | | Amount | | | | | | | | |
Balance as of December 31, 2018 | 58,270,934 | | | $ | 58,271 | | | — | | | $ | — | | | $ | 126,076,782 | | | $ | (141,557,496) | | | $ | — | | | $ | (15,422,443) | |
Issuance of common stock | 7,183,488 | | | 7,184 | | | — | | | — | | | 5,921,051 | | | — | | | — | | | 5,928,235 | |
Stock options and warrants exercised | 510,894 | | | 511 | | | — | | | — | | | (511) | | | — | | | — | | | — | |
Deemed dividend | 116,496 | | | 116 | | | — | | | — | | | 86,091 | | | (86,207) | | | — | | | — | |
Stock-based compensation | — | | | — | | | — | | | — | | | 876,918 | | | — | | | — | | | 876,918 | |
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 six months ended June 30, 2019 | — | | | — | | | — | | | — | | | — | | | (26,324,372) | | | — | | | (26,324,372) | |
Balance as of June 30, 2019 | 66,081,812 | | | $ | 66,082 | | | — | | | $ | — | | | $ | 140,527,364 | | | $ | (167,968,075) | | | $ | — | | | $ | (27,374,629) | |
Workhorse Group Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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
Nature of operations
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. We are an American manufacturer who designs and builds high performance electric vehicles. As part of our 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 C-Series electric 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.
Principles of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its 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 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, and successfully carry out its future operations. The financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary, should the Company not continue as a going concern.
The Company has continued to raise capital and debt. Management believes the 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. Obtaining such working capital is not assured. The Company is currently in a production ramp up mode and placing greater emphasis on manufacturing capability.
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. 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, 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.
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 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 operate. However, the broader implications of COVID-19 on our results of operations and overall financial performance remain uncertain. We may experience constrained supply or other business disruptions that could materially impact our business, results of operations and overall financial performance in future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.
2. INVENTORY, NET
Inventory, net consists of the following:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Raw materials | $ | 5,412,613 | | | $ | 3,741,097 | |
Work in process | 927,351 | | | 422,176 | |
Finished goods | — | | | — | |
| 6,339,964 | | | 4,163,273 | |
Less inventory reserve | (2,163,675) | | | (2,365,127) | |
Total inventory, net | $ | 4,176,289 | | | $ | 1,798,146 | |
3. INVESTMENT IN LMC
The Company has a ten 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 no 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 ten 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.
•One 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 one percent royalty on the gross sales price of the first 200,000 vehicles sold, but only to the extent that the aggregate amount of such royalty fees exceeds the amount paid as the Royalty Advance.
•Upon completion of the Capital Raise, the Company intends to transfer approximately 6,000 existing vehicles orders to LMC. LMC will pay a four percent commission on the gross sales price of any transferred orders fulfilled by LMC. The success of the Capital Raise is not within the Company’s control, and it therefore cannot provide assurance that it will receive the Royalty Advance or receive the projected underlying royalty from the production of vehicles.
The consideration includes a fixed and variable component:
•The fixed component consists of the ten percent ownership interest in LMC and any amounts received under the Minimum Royalty. The fair value of the LMC ownership interest received was $12.2 million.
•The variable component consists of the four percent commission and the one 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.
As performance obligations are satisfied within one year from a given reporting date we omit 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 June 30, | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Automotive | $ | 85,000 | | | $ | — | | | $ | 85,000 | | | $ | 240,000 | | | | | |
Aviation | — | | | — | | | 60,783 | | | — | | | | | |
Other | 6,942 | | | 5,508 | | | 30,459 | | | 129,690 | | | | | |
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 zero. 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.
The primary reason for electing the fair value option is for simplification and cost-benefit considerations of accounting for the Convertible Note (the hybrid financial instrument) at fair value in its entirety versus bifurcation of the embedded derivatives. The significant inputs to the valuation of the Convertible Note at fair value are Level 3 inputs since they are not observable directly. The fair value was determined using a binomial lattice valuation model, which is widely used for valuing convertible notes. The significant assumptions used in the model are the credit spread and volatility of the Company's common stock.
The Convertible Note was issued with 15,459,016 warrants to purchase common stock of the Company 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"), with Marathon Asset Management, LP. In conjunction with entering into the Credit Agreement, the Company issued Common Stock Purchase Warrants (“Initial Warrants”) to purchase 8,053,390 shares of common stock at an exercise price of $1.25 per share. The Credit Agreement was paid in 2019. Until December 31, 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.
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 June 30, 2020 and December 31, 2019, the warrant liability for the Initial Warrants was zero and $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.
6. MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK
On June 5, 2019, the Company closed agreements for the sale of 1,250,000 units consisting of one share of Series B Preferred Stock (the “Preferred Stock”), with a stated value of $20.00 per share (the “Stated Value”) and a common stock purchase
warrant to purchase 7.41 shares of the common stock (the “Warrants”) for an aggregate purchase price of $25.0 million. The Preferred Stock is not convertible and does not 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 are payable quarterly in shares of common stock of the Company based on a fixed share price of $1.62. During the three and six months ended June 30, 2020, the Company issued 308,642 and 617,284 shares of common stock to the holders of the 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 may redeem any outstanding shares of Preferred Stock at the Stated Value, plus accrued and unpaid dividends.
The aggregate number of shares of common stock issued in payment of dividends on the Preferred Stock when added to the number of shares of common stock issued upon exercise of any warrants shall not exceed 19.9% of either (a) the total number of shares of common stock outstanding on the date hereof; or (b) the total voting power of the Company’s securities outstanding on the date hereof that are entitled to vote on a matter being voted on by holders of the common stock, unless and until the Company obtains stockholder approval permitting such issuances.
As the Preferred Stock is mandatorily redeemable, it is classified as a liability on the condensed consolidated balance sheets. All dividends payable on the Preferred Stock are classified as interest expense.
The Preferred Stock and Warrants are considered freestanding financial instruments and have been accounted for separately. The Warrants are considered equity instruments and not marked-to-market at each reporting period. On the date of issuance, the value of the Warrants was $6.7 million, which was determined using the Black-Scholes valuation model. The fair value of the Warrants was recorded as an increase to additional paid-in capital and a discount of the Preferred Stock. The discount is 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 approved by the board of directors, the 2019 Stock Incentive Plan (the "Plan") providing for the issuance of stock-based based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. Awards under the Plan may be either vested or unvested 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, which includes 6,641,577 shares available under the 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 | | | $ | |